Construction contracts are often massive, complex and confusing documents. But you need to carefully review them to ensure performance, payment, and compliance. So, what should you look for and what do you need to know to minimize your risk? While there is no “one size fits all” approach to reviewing construction contracts, and perspectives may be very different based on the position of the party in relation to the contract, below we have identified five key clauses that appear (or should appear) in every construction contract and always merit specific attention, in addition to questions to consider. Take the time to review these elements to set yourself up for success – and to avoid common contractual pitfalls.
- Design Risk
Does the contract contain a clause addressing conflicts, errors or omissions in the design documents? How does it handle resolving such issues, and more importantly what obligation does the construction contract place on others (the owner, the contractor or the subcontractor) to identify such conflicts, errors or omissions? What does it say about overcoming such conflicts, errors and omissions?
- Payment
Certainly the concept of when payment is to be made is front and center, and we are all familiar with “pay-if-paid” and condition precedent clauses, but don’t stop there. What else does the construction contract require in order to entitle you to receive payment? Do you have to submit an invoice, a schedule update, a status report, a release, releases from your subcontractors and suppliers, insurance information, a change order log, a pending change order log? Unfortunately, many people overlook the paperwork aspect of the payment clause and find themselves struggling to compile a large volume of material each month in order to provide a proper request for payment.
- Changes
Most in the construction industry are familiar with the change order process and change order clauses, but investing the time to dig deeper into the clause is a good strategic practice. Does the changes clause require you to continue work even if agreement on the change is not in place? Should there be a limit on that concept? If you have $500,000 in completed, pending change work without executed change orders to bill against and more change work to come, should you be able to halt further change order work? What would be an appropriate threshold for such a limit?
- Indemnification
This should appear in all construction contracts (and is appropriate). Look closer at this common clause – what are you being asked to do? Is there a defense obligation or just “end of the day” indemnification? Are you providing indemnity for claims arising due to your negligent acts or omissions, or does your indemnity obligation stretch to cover your breaches or contract? Does it stretch all the way to any claim arising in connection with your performance of work? Are you obligated to provide indemnity that is only proportionate to your fault or failure, or is it more broad?
- Claims and Disputes
Two for the price of one under this category. First, always be mindful of your obligation when circumstances produce a claim you wish to advance. What does the construction contract say about notice of that claim? Who receives it? What form must it take? What must it contain? And, of course, what is the deadline to provide it? Be especially careful of what the construction contract says is the consequence of late or missed notice. Second, assuming you have a claim and have complied with the requirements, what does the disputes clause allow you to do? Can you bring suit against the other party? Does that suit have to be brought in California? What steps must first be taken before you can file the suit?
The construction contract is an intricate and critical document. Even more important is the role it serves in legal scenarios. The construction contract becomes the “Law of the Case” for the parties’ relationship and governs, controls and determines the outcome of nearly every aspect of performance. Consequently, careful review, consideration and drafting are essential to ensure you have the best chance of successful performance.
To learn more about how our attorneys can assist you with construction-related matters, contact the Davis, Agnor, Rapaport & Skalny attorney with whom you typically work, or contact an attorney in our Commercial Litigation Practice Group.
