Top considerations for negotiating construction contracts

Contracts in the construction context serve multiple purposes. Foremost are establishing the parameters of the parties’ agreement, allocating and mitigating risk and avoiding disputes. The discussion below covers some of the more important provisions that owners, developers, designers, and contractors should consider in drafting and negotiating their agreements.

Top considerations for negotiating construction contracts

Price, Time and Scope - These might sound obvious, but a surprising number of construction contracts do not adequately address these basic elements. A thorough contract also should include provisions governing when and why payment can properly be withheld, as well as consequences for improper non-payment. Contracts should include provisions establishing the relevant dates or periods for work and services, and address the consequences for late performance.

Before they are built, most projects exist only on paper in the form of specifications, drawings, narratives and other documents, which can be voluminous.

Changes - Verbal changes might sound like a good idea when the project is running smoothly and the parties are satisfied, but this often leads to misunderstandings and disputes. All contracts should require change orders to be in writing signed by the parties, and state that no changes will be performed or paid for without a written and signed change order.

Warranties - This might sound like an issue primarily for owners, but if not adequately addressed, warranty and correction provisions (or the lack thereof) can have unanticipated consequences for contractors. The parties also should consider any separate manufacturer and supplier warranties, and how those benefits will be passed along to the appropriate party.

Indemnification - which deals primarily with allocation of risk for claims made by third parties. If not addressed, such claims might be governed by the laws of comparative fault and contributory negligence in the applicable jurisdiction.

Insurance - One of the more common and important methods of managing and allocating risk on construction projects is through insurance. Whenever feasible, insurance provisions should always be reviewed by a qualified risk management advisor.

Dispute Resolution - While one goal of contracts is to avoid disputes, a well-drafted contract should address what happens in the event of a dispute. It is a good idea to include a requirement for some level of informal or non-binding resolution, such as negotiation or mediation.

Termination - Contracts should identify the possible grounds for termination, as well as the procedures to be followed in the event of termination (this should include notice requirements and an opportunity to cure).

While it is not always possible to avoid disputes, thoughtful contract drafting can reduce the likelihood of disputes, establish party expectations and give the parties more control over disputes when they arise.

 

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