Creating a construction contract requires careful consideration to ensure all aspects of the project are clearly defined and agreed upon by all parties. One place to start is using an industry-standard form. Check resources such as the American Institute of Architecture. On the internet, several law firms have templates available.
Key Considerations
Parties Involved: Clearly identify all parties involved, including names, addresses, and roles (e.g., owner, contractor, subcontractor).
Project Description: Provide a detailed description of the project, including location, scope of work, and specific objectives. Articulate specific and measurable objectives and goals.
Contract Price and Payment Terms:
- Total contract price or method for determining the price.
- Payment schedule, including advance payments, progress payments, and final payments.
- Terms for changing the contract price due to alterations in scope.
Scope of Work:
- Detailed specifications and drawings.
- Develop and share with the customer the procedures for changes in work scope, including the change order process.
Project Schedule:
- Start and completion dates.
- Milestones and critical paths.
- Penalties for delays and provisions for extensions of time.
Quality of Materials and Workmanship: Cite standards for materials and workmanship, including references to industry standards or specific brands/models where necessary.
Permits and Licenses: Responsibility for obtaining necessary permits and licenses .
Insurance and bonds:
- Types and amounts of insurance required (liability, workers' compensation, etc.).
- Bonding requirements, if any.
Warranties: Details on any warranties provided for materials and labor.
Dispute Resolution:
- Procedures for handling disputes, including mediation, arbitration, or litigation.
- Governing law and jurisdiction.
Termination Clause: Conditions under which either party may terminate the contract and the consequences of such termination.
Liens: Provisions regarding mechanic's liens and waiver of liens.
Safety and Environmental Regulations: Compliance with OSHA standards and environmental regulations.
Subcontracting: Conditions under which subcontractors may be used and how they will be managed.
Force Majeure: Provisions for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations.
Documentation and Reporting: Requirements for documentation, reports, and meetings throughout the project duration.
Indemnification: Clauses outlining the indemnification process protect one party against certain losses or liabilities.
Confidentiality: Provisions to protect any sensitive information exchanged during the project.
Process Speed Bumps
All the items listed above should be included or addressed in a construction contract. Some items slow down the review and approval process; the watch-out areas are below. The contract writer should be evident and specific when drafting these areas. What is provided are questions to ask all parties.
Contract Price and Payment Terms:
- What are the specific items that advanced payments cover? What can or can’t be included?
- Are progress payments based on schedule dates or percent complete? What does “percent complete” look like?
- Are existing Terms and Conditions applicable and agreeable to all parties? Or are special Terms and Conditions required?
- Is there a robust change order/request process in place?
- How are ‘left over’ materials to be handled?
Scope of Work:
- Any specific deliverables as part of project close-out?
- Is there a robust change order/request process in place?
- Call out specific applicable standards to which the end result will be compared? This includes metrics and how the data will be collected.
Project Schedule:
- What are the triggers for penalties for delays?
- What are the penalties for missed critical milestones?
Quality of Materials and Workmanship:
- Are there specific responses to failure to meet quality specifications?
Dispute Resolution:
- Are there clear procedures for handling disputes, including mediation, arbitration, or litigation? (escalation plan)
- Have the governing law and jurisdiction been clearly documented?
- Identify specific performance metrics during the project to compare actual performance to. When the difference is significant, see the escalation plan.
Subcontracting:
- Does the owner have any input or review of proposed subcontractors? One contract experienced is the owner requesting to review at least three subcontractors per Specification Division. What is legally in place to protect the owner from the actions of any subcontractor?
Force Majeure:
- What provisions for natural and unavoidable catastrophes could interrupt the expected course of events and restrict participants from fulfilling obligations? A thought about some major construction projects a decade ago: all parties can be irrevocably hurt in an economic downturn.
Indemnification:
- What clauses outline the indemnification process, protecting one party against certain losses or liabilities, are in place?
Conclusion
Many construction contracts are written to protect the owner efficiently. As an Owner’s Representative, I found that it made for a much more amicable environment if the owner protected the contractor from possible action to take advantage of the contractor.
A construction contract is the foundation for the project's management and execution, aiming to minimize misunderstandings and disputes. It's advisable to consult with legal and industry professionals when drafting and reviewing construction contracts to ensure they meet all legal requirements and adequately protect the interests of all parties involved. In addition, it is advisable to have each party’s financial professionals review the contract to protect the economic interests. It is not underheard of that contractors go out of business due to poorly written contracts.