I am frequently asked to review construction contracts both before a project starts and after a dispute arises. Unfortunately , the later is much more common. Contractors are often disappointed to hear that certain contract language limits or even prohibits their right to recover an otherwise justified claim or that the contract shifts risk to them in a manner that “just does not seem fair.” Moreover, arguments over the application of contractual language typically ends up in expensive litigation; and attorney fees and cost diminish any recovery a contractor ultimately receives.
Contractors can save themselves disappointment, time, and money by paying close attention to what the contract they are signing says and what the language means. Of course, any lawyer will tell you that every clause of a contract matters. However, certain clauses in a construction contract are more likely to lead to disputes than others.
Based upon my experience litigating construction cases, the following are 7 typical construction contract clauses that are commonly the source of contractual disputes: (1) scope, price, and time provisions; (2) flow down clauses; (3) pay-when-paid/pay-if-paid provisions; (4) termination for convenience clauses; (5) no damage for delay clauses; (6) change order clauses; and (7) whether the specifications are performance or design specifications.
In part 1 of this 7 part series we will exam the importance of understanding the scope, price, and time provisions of the contract and why contractors commonly overlook them.
SCOPE, PRICE, AND TIME.
Contract language that states what work you will be required to perform; what you will be paid for it; and how long you have to do it seems so fundamental to the basis of a construction contract it would hardly seem possible to overlook. However, it is more prevalent than one thinks. Moreover, sometimes vague language concerning scope, price, and time is just as bad as no language at all.
You think you know what work you agreed to perform. You discussed it with the party with your client. You also stated it in your proposal or bid. However, have you carefully reviewed your contract to see what the contract says what you have agreed to do?
A common mistake contractors make concerning the contract’s scope is the attaching a copy of the contractor’s proposal to the contract under the mistaken belief that it controls what the scope of the contractor’s work is. Unless, the contract contains language specifically incorporating or referencing the attached scope, then the proposal is meaningless if the contract’s definition of scope defers from what your proposal says – most likely it does.
Review one of your contract’s definition of scope. The contract’s definition of scope is probably much broader than what is set forth in your proposal. Often contracts will require a contractor not only to perform the work specifically listed on its proposal but also any work that is necessary and is merely “implied” by the drawings.
If your proposal’s scope conflicts with the contract’s definition of scope, this could create the potential for disputes over scope related change orders. Disputes over scope related change orders are a common source of construction litigation. Moreover, because a contractor will not be compensated for the change order work until after the dispute is resolved they have a major financial impact on the contractor as well.
Closely related to the scope of the work is the price of the work. Just as you need to make sure the contract’s definition of scope is consistent with what you agreed to perform so must you confirm that the contract says what is included in your price.
Is your price for labor, material, and supervision only? Or, have you included in your price charges for taxes, bonds, insurance, permits, and fees? Typically, contracts will require that these items be included in your price. While you may have stated that these items are excluded from your price in your proposal, you need to make sure that the final contract incorporates those exclusions. Otherwise, you could end up on the wrong end of an unprofitable job.
Does the contract say how long you are expected to be on the job? If the contract does not clearly state an anticipated completion date, you could be required to stand ready to perform indefinitely because of delays that have nothing to do with your work. In fact, most construction contracts for smaller projects do not contain an estimated completion date or schedule. Do not assume that there is an understanding as to when your work is expected to be complete. Obviously, more time on the job equals more man hours. More man hours equals more money. Also, if you are on a job longer than expected your resources are diverted from other work you could be performing. Finally, if your work includes the ordering of material or equipment with long lead times you could end up unwittingly financing the owner’s project.
Next, week I will review flow down clauses and what they mean subcontractors.