You won't be an expert in contract law after reading this, but you will have a better idea of the various clauses you, as a contractor, should be sure to get into the contract.
If you need legal advice, please get a lawyer experienced with construction and contract law, don’t just go by this post. We just want to introduce you to some of the elements that can protect you on your next project.
A word on owners vs. contractors
In a perfect world, owners and contractors would be a team, partnering to produce a successful project. Sometimes, you can get close to that. However, you know you and the owner have differing perspectives on what the contract should say.
The owner, of course, wants the project completed and fully functional, on time, and under budget. The owner will want you to shoulder as much of the construction risk as possible, imposing high levels of accountability and indemnity responsibility to you whenever possible.
Your major concern is exposure to risk, but during the Great Recession, maybe you or some of your cohort were willing to take on more risk and liability just to get some work. Now owners expect you to continue doing that so they can leverage more control over change orders, payment, and warranty procedures, and to expand the circumstances in which they have the right to terminate the contract for convenience.
Contractors and subs should go over their risk management policies and approach new deals with a little more caution. Watch for these clauses and make sure the contract is fair to you as well as the owner.
Finally, insist on clearly defined terms within the contract. If you don’t understand every word or phrase, bring in your lawyer or request changes until you understand everything you are being asked to do.
Work expectation clauses
Scope of work/description of work clause
It is critical to have the scope or description of work to be completely defined. If you set out the expectations from the start, you will have a lot less trouble later. Make sure each party understands and is satisfied with the terms.
Defining “reasonably inferable” within the scope of work
No set of plans is perfect. The contract should provide for non-material additional costs and minor changes in sequencing as they come up. However, “reasonably inferable” should not relate to documents required versus minor change submittals.
That being said, you should build exactly what is drawn and specified; you cannot be held responsible for inferring what someone else meant.
Termination for convenience clause
This clause establishes a process for stopping work and transitioning it to another contractor, whatever the reason. The clause should specify that you receive compensation for completed work, materials purchased, overhead, and general conditions through the date of termination.
If there is a penalty for early termination, the owner or contract holder should pay that as well. If warranty obligations are requested, make the case you should not be responsible for warranty work unless the owner can illustrate the defect was your fault. Otherwise, you no longer have control over the jobsite or any work in place and therefore cannot take responsibility for anything that happens after the termination.
You want to know when you will get paid and exactly what you are getting paid for. Within this clause, you can protect yourself by including a cost breakdown of the entire project as part of your negotiation process.
Escrow and right to withhold payment
This clause tells the owner that if you do not finish the entire contract, you will not expect to be paid for the incomplete portion. This acts as a guarantee of sorts for the owner and an incentive for you to finish the work.
Make sure the clause is written to limit the owner’s right to withhold payment to a very narrow and specific set of circumstances.
Always, always, always make sure the contract has a procedure for adjusting the contract payment and schedule. It should state that there must be full agreement between the owner, the architect, and the contractor before the change order will be implemented.
There may be a circumstance in which you feel you cannot agree with a change. To cover this, the contract should also provide for a construction change directive. You will no longer have a say in whether or not the change is made but you will have some protections for payment.
Include a provision reserving your right to seek additional time under a change order if you are unable to evaluate the work in time to submit or approve the documentation.
Clauses for claims and loss response
This clause obligates one party to compensate the other party for losses or damages resulting from a third party claim. This protects you against future liability and certain claims.
Indemnification is subject to local laws, and there are differences from state to state.
Include a warranty that defines specifically which repairs you will make and limit the time. You should not agree to any warranty obligations over and above the statutory and implied warranty obligations you already owe the owner.
Usually, a one-year warranty on workmanship is acceptable. All subcontractor warranties should be signed over to the owners by contract, as well.
A liquidation damage clause protects both you and the owner if there is a delay in the project. You will also want to negotiate a provision that reasonably ties damages to the owner's potential losses. Include a grace period of at least 30 days and negotiate a cap for your total liability for liquidated damages. Insist on a waiver option if the owner causes the delays.
Consequential damages and limits on liability
This is an extremely critical clause for a contractor's liability protection because it allows you to control your risk exposure. It is a mutual waiver of consequential damages, and if the owner reduces to do this, you need to either negotiate a narrow clause to exclude specific damages or ask yourself if this contract is worth it.
Clauses for legal stuff
This clause spells out whether you can settle a dispute through arbitration instead of the courts. It can cut the cost of litigation significantly. However, consult an attorney to figure out what version of arbitration should be put into the contract.
Choice of law and jurisdiction
If you work across state lines, you want to be able to choose which set of laws will govern this contract. This clause will tell you where you can go to court if needed and can save time and the costs of travel in future litigation.
These are some critical pieces of protection for you and your contracting business. Take a close look at your next contract and review your current ones. A contract is a legally binding document and should be fair to all signatories. You are the only one watching out for your interests, so make it count.