Building a Strong Construction Contract

drafting a strong construction contract

There is no getting around it: construction contracts are often long and complicated because construction projects are often long and complicated. The attorneys at Rosenbaum & Taylor, P.C. are experienced in construction law and contract law and represent and advise owners, developers, construction managers, general contractors, and subcontractors on issues related to commercial and residential construction projects.

Why Does Contract Language Matter In Construction Contracts?

Owners, developers, construction managers, and contractors alike need strong construction and contract attorneys who can offer explanations, advice, and negotiating tools with respect to construction contract matters. Confusing or misleading language in a contract can cause challenges with the construction project, or even future legal problems. Having the right contract in place, which reflects the carefully considered needs and wants of the parties (and of the project), clearly defines the parties’ duties and responsibilities, and sets proper expectations for all parties involved in a construction project. Taking the right steps in the contract negotiation and drafting stages helps to assure that the completed project meets the parties’ expectations and can also help minimize disputes and delays, which saves money.

Too often, we see parties to construction contracts who have relied on oral agreements, or assurances, and have found themselves in a business dispute with the other party, or parties. “My word is my bond” does not have any meaning when it comes to mediation, arbitration or litigation, although we may wish it did. In our experience as construction and contract attorneys, the parties to a construction agreement need a proper, well-considered, written, formal contract that addresses and details all of the relevant aspects of the particular construction project at issue. Owners and contractors always need to be informed about the ways in which the project’s costs and risks are allocated by the construction contract. The experienced construction and contract attorneys at Rosenbaum & Taylor, P.C., help clients understand the construction contract provisions, help parties to construction contracts negotiate more favorable terms that will better allocate risks, balance financial burdens, and decrease the likelihood of future litigation.

We always strongly recommend that parties do not attempt to use an online sample commercial construction contract or to adopt someone else’s form. Such forms and templates are, by necessity, general and do not take into account the specific circumstances and issues involved with a given project. Also, an online same contract may not be written with New York law in mind, which can have significant implications if a dispute arises in the future. The experienced construction and contract attorneys at Rosenbaum & Taylor, P.C. assure that each construction contract we draft or negotiate is specifically tailored to meet our client’s needs and that it protects our client’s as well as it possibly can.

Here, we will address certain contract provisions that time and time again we are asked by clients involved in construction projects to draft, read, explain and/or negotiate. The particular provisions we will focus on here are the provisions that tend to have the greatest impact on the rights of owners and contractors who are parties to construction contracts.

The Scope of Work Provision

In a broad sense, the scope of work provision outlines the work to be done, how that work is to be performed, and what materials are to be used. The scope of work generally addresses the construction project requirements (like regulations, standards, and special job site conditions), the contract objectives, the builder, contractor, or subcontractor’s, responsibilities, and the construction means and methods to be used.

The scope of work is a very important provision because an improperly written scope of work provision can impact the construction project in significant ways. The failure to set forth a contractor’s scope of work adequately affects the construction project and leads to problems for owners, construction managers, contractors, and subcontractors.

Incomplete scope of work descriptions can cause confusion as to what each contractor, or subcontractor, is responsible for, which can cause delays, quality issues, and defective work. These types of issues sometimes lead to litigation, which delays or even jeopardizes the construction project. Inadequate, or unclear scope of work provisions allow for the parties to a construction contract to interpret the agreement provisions differently. These differing interpretations lead to confusion and generally lead to a party arguing for an interpretation that is favorable to that party, but which may be detrimental to other parties, and detrimental to the construction project itself. An inadequate scope of work also leads to “scope creep.” It’s a common problem that many of our clients complain about, but one that can be minimized by proper contract language which outlines procedures for changes in the scope of work. We address the change order provision below and will address “scope creep” in a future article.

At Rosenbaum & Taylor, P.C. we commonly see the scope of work issues arising between owners and general contractors, between owners and general contractors, and between general contractors and subcontractors. One issue we see often is when general contractors solicit bids from potential subcontractors, they identify only a subtrade for the work to be done, without providing a detailed scope of work for the prospective subcontractors and without detailing, or providing, the relevant plans and specifications. This practice, while common, can lead to confusion and disputes, because subcontractors will bid on the work without the opportunity to fully understand and appreciate the scope of work they will be expected to perform. We generally see disputes in which the parties all honorably wanted the scope of work to be fair and achievable, but in which the parties faced conflict because of misunderstandings, misinterpretations, and missed opportunities for expectations to be clear.

The experienced construction and contract attorneys at Rosenbaum & Taylor, P.C. represent owners, construction managers, general contractors, and subcontractors and assist them with the drafting, negotiation, interpretation, enforcement, and litigation of construction contract issues. We have found that the parties to construction contracts can best prevent, or minimize, contractual disputes by having knowledgeable attorneys participate in the contract drafting and negotiation phase of the construction project, to help develop a proper scope of work provision.

construction workers on a scaffold

The Change Orders Provision

Put simply, change orders modify the scope of work. When the construction contract does not outline the process for addressing change orders and when the parties to a construction contract do not fully understand how the agreement reads, and operates, with respect to change orders, disputes can arise over the work to be done and the payment to be received. These types of construction disputes can increase project costs and disrupt the progress of the work and the construction project schedule. The change orders provision addresses how any changes to the scope of work, or to the plans and specifications, will be handled. It details how a party requesting a change to the scope of work, specifications, or plans, will be advised of the requested change and of how the requested change will impact the construction project, both from a time and from a financial perspective.

When the parties to a construction project do not include a properly worded change order provision in their agreement, we often see that the builders, general contractors, or subcontractors, who are to perform work under the contract may inflate their contract price to cover any possible future project changes. We have also handled disputes that have arisen when a builder, contractor or subcontractor underestimated the cost of possible project changes. Such disputes often delay or even stop, construction, which generally hurts all parties involved. Having a proper construction contract, with a well-reasoned and detailed change orders provision, helps decrease bid inflation by providing a system by which costs incurred as a result of changes are addressed and helps prevent, or minimize delays related to changes in the scope of work, or to the plans, and specifications.

The Payment Provision

The Payment Provision addresses how the builder, general contractor, or subcontractor, will be paid. This provision usually includes a schedule by which the contractor, or subcontractor, will be paid, which is generally based on the progress of, or milestones in, the construction project. As the construction project proceeds, the party seeking payment will certify what amount of work has been completed, or what milestones have been reached, to trigger the payment requirement.

To avoid confusion, misinterpretation, financial uncertainty, and project delays, the experienced construction and contract attorneys at Rosenbaum & Taylor, P.C. recommend that the payment provision in construction agreements include that requests for payment include the specific work completed, the contractor’s, or subcontractor’s, percentage of completion and the monetary value of that percentage of completion. We also recommend that the payment provision be as specific as necessary for the specific work covered by the construction contract. Often, it is to the benefit of the parties to the construction agreement that the payment provision includes how the contractor, or subcontractor, will certify how much work it has completed. Ambiguity on this issue can lead to the withholding of payment, if the party obligated to pay does not understand, or accept, the description of what work has been completed. That withholding may be viewed as a breach of contract, which can lead to construction project delays and possibly, litigation, and often damages the relationship between the parties, jeopardizing reputations and future work.

To minimize, or avoid, issues related to the payment provision, the provision should address how the party obligated to pay for the work will determine that a line item is complete. It should also provide for inspection procedures and protocols and for ways in which any disputes over the completion of given line items, percentage of completion or the monetary value of the completed work can be addressed without the parties resorting to litigation.

The Delays Provision

The delays provision in a construction contract describes the way in which time extensions and/or damages for unforeseen events outside of the builder’s, general contractor’s, or subcontractor’s control, for which the contractor bears no responsibility, will be handled. Under the delays provision, builders, general contractors, and subcontractors are generally compensated in connection with certain events that delay work on the project. These compensable events are often referred to as “force majeure” and “Acts of God” events, which include circumstances such as governmental action that delays work on the project, strikes, labor disputes, or material shortages. The delays provision also may entitle a builder, general contractor, subcontractor to compensation for extra expenses incurred as a result of the delay.

The attorneys at Rosenbaum & Taylor, P.C., who are experienced in drafting and negotiating construction contracts work with construction industry clients to develop a list of events that are compensable and events that are not compensable. We recommend including that list of events in the delays provision to avoid confusion over which delays or damages are compensable.

The Indemnification Provision

Indemnification is a large topic for another time, but we do want to identify here why indemnification provisions in construction contracts are so critical. Broadly, indemnification provisions address responsibility for third-party claims, liabilities or judgments. The indemnification provision in a contract can impact a contractor’s costs because, in many instances, the indemnification provision can require the contractor to incur additional insurance expenses. The language used in the provision is critical and key to the enforcement of the provision, should that become necessary.

Too often, we see construction contracts with indemnification provisions that do not properly take into account New York state law, applicable case law and the realities of the construction project. These issues lead to business disputes and often litigation. To minimize issues related to indemnification provisions, we always recommend that our clients have us negotiate and draft their indemnification provisions and that they have us review their own insurance policies and the insurance policies of any parties from which they may be seeking indemnification, in the event of damages, or a loss.

Contact Rosenbaum & Taylor, P.C. Today for Help Drafting or Enforcing Your Construction Contracts

Construction projects require a team of professionals for the project to be a success. The experienced construction and contract attorneys at Rosenbaum & Taylor, P.C. are vital members of that team, helping to protect and represent parties to construction agreements. Reach out today to see how we can work together.

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