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Understanding Construction Contracts - December 2017
Construction contracts can contain terms that impact your
company’s bottom line. Reviewing them carefully prior to signing is indispensable,
and can save your company time and money. This contract review guide is meant
to be a starting point for reviewing contracts in general. It highlights some
common contract terms and their potential impact. You can begin to understand which
terms are most often negotiated in contracts generally. Then, with the help of
licensed inside or outside counsel, analyze the commercial risks associated with
construction contracts in depth and understand terms and conditions to protect
your company’s assets.
Scope of the
Examine the definition of services to be provided to ensure
the language is clear enough for an unrelated third party to understand the
scope. The contract should include a time frame for completion of services. The
rights and obligations of both parties should be clearly outlined. Any mechanism
for changing the scope of the contract, as well as any of the terms, if allowed,
should also be outlined within the contract.
Terms of Payment
Terms of payment should be clearly listed within the contract
so that the expectations of both parties are clear. The contract should specify
the agreed payment schedule for goods received.
There are two types of warranties: express and implied. Both
types are assurances regarding particular issues, such as performance.
Express warranties are those that are defined specifically in
the contract. Implied warranties are based in statutory and/or common law, depending
upon your jurisdiction. They are two-fold: a warranty of merchantability, which
requires that goods/services must reasonably conform to an ordinary buyer’s
standards, and a warranty of fitness for a particular purpose, which states
that if a seller knows the intended purpose for the product or service, the act
of selling the product to that customer implies that it is fit for that
Be aware of warranty disclaimers and understand how the disclaimer
limits your statutory rights. If it disclaims all warranties, express and implied,
then you will likely be limited to the remedies in the contract for issues
related to things like performance. You should also examine any disclaimer in
the context of the contract. While it may require you to disclaim your
statutory rights, other contract language may give you adequate rights and remedies
regarding the points about which you are most concerned.
Damages, Limits of
Liability and Indemnification
These three items are often in close proximity to one another
in a contract, as they are interrelated. Damages may be defined as certain
types of losses that could create liability under the contract. A limit on
liability would restrict the amount of damages that a party would be required
to pay if found liable for such damages. Sometimes this may also include a limit
Indemnification provisions allocate risk and cost between the
parties. It is important to examine whether the party assuming the risk is the
party with the most control over that risk. For instance, when a company’s
employees are required to work at a customer’s location, the company is often
asked to release the customer from all liability relating to the employees
presence at the customer’s location.
In some cases, indemnification is limited to negligence or to
a specific dollar amount, under a heading of “limits of liability.”
Some contracts will contain minimum bodily injury and property
damage liability coverage amounts that the party must possess and also may
require that the customer is added as an additional insured on those coverages.
Prior to consenting to any contract, it is prudent to examine
insurance coverage against the amount of liability exposure in a particular
Terms and Conditions
It is also vital to examine any terms and conditions contained
in the contract:
- Governing Law & Jurisdiction – Look at the
governing law provision to make sure that you are comfortable with the
implications of the state law chosen by the drafter. This can impact the
interpretation of the contract from warranties to indemnification. Additionally, when specific statutes or
regulations are referenced in the body of a contract, it is as though that
statute or regulation is wholly contained within the contract itself. It is vital
to read and understand that language prior to giving your consent. This happens
regularly in government contracting situations.
- Dispute Resolution – This is another clause with
which you must be comfortable with the laws of the state or forum chosen by the
drafter. The rules chosen to govern dispute resolution can impact the outcome.
Additionally, you should consider whether dispute resolution is right for your
- Intellectual Property – When you are disclosing and/or
licensing your company’s intellectual property, be it trademarks, copyrights or
patents, it is important to include a clause that recognizes the owner of such
intellectual property and affirmatively states that the agreement does not
transfer any rights.
- Standard of Care – A standard of care clause may
appear in certain types of contracts. The standard of care that is provided by
the law should provide the minimum standard of care for the provision of services
under the contract.
- Term/Termination – The contract should provide both
parties with the right to terminate the contract. The situations in which
termination is allowed will vary from contract to contract. Some contracts will
allow the right to terminate in cases of dissatisfaction; others will allow it
with a specific notice, for no cause. It is important that you contemplate in
what cases you would want the right to terminate the contract. There should
also be language defining the term of the contract. Does it have a finite term?
Does it automatically renew each period?
- Right to Cure – Related to termination, some contracts
will contain a right to cure clause. This would give the defaulting party
notice of a breach and a finite period of time in which to remedy such a breach.
Unlike other industries, construction lacks a consistent set
of laws like the Uniform Commercial Code or a federal statutory scheme.
Contracts produced by professional and trade associations for architects (American
Institute of Architects), engineers (Engineers Joint Contract Documents
Committee) and commercial contractors (Associated General Contractors of
America) can serve as important references and benchmarks when drafting a new
contract. They are a good source of industry best practices, and using them can
greatly reduce drafting and review time, meaning lower overall transaction
costs for your company.
For all of their advantages, there are several things that you
should be cautious about when using standard form contracts. Note the following
cautions about standard forms before using them:
- Standard forms, which are written broadly to encompass
many different contexts, require transaction-specific and jurisdiction-specific
modifications. For example, certain states require that indemnities be written
in a certain way.
- Changes made to one part of the document, such
as definitions of words or terms, may affect other parts that make reference to
- Custom-drafted and industry-drafted forms are often
incompatible. Even industry-drafted forms from different publishers can be
- Standard forms always contain the bias of the drafter.
Use this bias; know when to use various standard forms published by different
Reviewing general terms and features of construction contracts
will help you grasp the consequences of its terms and conditions for your
business. In any case, to ensure its completeness and accuracy, it is necessary
to submit each contract you must sign to legal review.