Construction Contracts / Best Practice


The development of the proper construction contract is a never ending saga of updates, additions, addendums and attachments. I have personally been involved in the quest for the proper construction contract for the last 40 years, and have yet to develop the perfect format.

The problem with any construction contract is that it is only as good as the latest issue or problem. It seems that once you are satisfied that a construction contract has been developed that addresses all the issues and potential problems, a new one develops. Construction contracts are dissected and criticized when there are problems. This is why the development of a construction contract, that will resolve as many issues as possible, as the construction project is built, will benefit the parties involved in the contract both financially and legally.

The following is a summary of my interpretation of the best practice for construction contracts. This best practice is based upon my experience with several different types of contracts involving several different points of view.

The basic requirements of a good construction contract.

1.) Fairness to both parties. The development of one sided contracts will only lead to issues and problems throughout the construction project. There are contractors that believe that the contract they develop should be customized to accommodate themselves only. They feel that the contract should be clearly bias and self serving, with the idea that, if the opposite party is in disagreement, then they can always force a change or revision. In my opinion and experience, this is not a good approach to starting a contractual relationship with another party. The contract should be interpreted from the onset by both parties, as honest and fair, realizing that, what is good for one side, should be good for the other.

2.) Clear and concise. So many contacts use all the legal terms and conditions, making the understanding and the readability of the contract almost impossible. The contract has been clearly prepared for the courtroom and by the legal profession. There is no possible way that there is any understanding of the contract by the parties involved, without the help of a professional construction lawyer. This is NOT the way to start a relationship, and will not create a workable environment. The contract should be extremely clear, concise and almost elementary. There should be minimal legal ease and minimal self serving language. If the contract can be understood by both parties without the need for professional legal advice, then resolutions of issues throughout the project will be more easily discussed and resolved.

3.) No hidden agendas. As with the necessity for a clear and concise contact, the lack of hidden meanings, clauses and legal phrases, should be kept to a minimum or not used at all. There is nothing more detrimental to a relationship, than a hidden message or legal clause within the signed contract that neither party understands. All information should be clearly noted, and this information should be easily interpreted and understood.

4.) Minimize the legal phrases and terms . Although the lawyers seem to insist on it, the amount of legal qualifications and statements within a construction contract will have a negative effect on the relationship of the two parties. Many construction firms that are on the larger corporate side of the spectrum will insist on the use of all the proper legal qualifications and caveats. The opposite should occur with the smaller more intimate firms, who will judge the relationship based upon the contents of the contract, and the simpler the better, for that type of situation. Remember the larger firms all have on staff legal advisors to continually monitor the construction contracts, most smaller firms cannot afford this luxury.

5.) Timely issuance of the contract. It is important that the construction contract be issued immediately upon resolution of the terms between the two parties. The timing of the paperwork needs to be, when the recollection of the ” deal ” is fresh in the minds of both parties. Delays in the issuance of the formal contract will only cause negative issues to develop that could have been solved by a well written and detailed contract. Get the contract out and signed!

A construction contract is the formal agreement of work between two parties;

1.) General Contractor and Subcontractor / in this case the contract details the agreement between a General Contractor who is responsible for the entire project, and the various subcontractors that make up the team of contractors required to complete the project. In most cases there will be a need for a contractual relationship for all divisions of the specifications.

2.) General Contractor and the Owner / this contract will be the total overall agreement for the entire project, that legally binds the General Contractor to the owner. In most cases this contract should be generated by the Owner’s lawyers and not the General Contractor. This contract will set the entire atmosphere contractually for all other contracts on the project. The attachments included within this contract should be also included, for the most part, in all the other contracts on the project.

3.) Subcontractor and other subcontractors / in many cases a subcontractor may agree to a contract that incorporates many different disciplines on the project. This subcontractor, may not have the skills, nor the manpower required to perform the entire scope of work. If this is the case, the subcontractor may need to hire another subcontractor with the appropriate skills to perform the work. The same attachments that the contractor has with the owner should also be included within these contracts. It is important that the legal requirements required by the owner of the general contractor, then the general contractor to the subcontractor, should all be transferred down the line to the contract between the subcontractors. Failure to include all the same legal terms and conditions will cause legal issues as the project is constructed.

4.) Architect / Engineering disciplines to the Owner, or whoever is the financial party financing the construction agreement. Most construction projects will require various professional disciplines to join the team. This may involve an architect, engineers of various disciplines, site landscapers, etc. If this is the case, there will be contracts necessary to formally bind the various entities legally to the project. In some cases all the requirements of the physical labor contracts on the project may not be necessary to be included within this type of contract. Care should be taken to ensure that each legal requirement within the contract specifications and conditions are included in, even, the professional legal agreements.

What elements are most important in a construction contract?

a.) Formal names and addresses of the owner, architect, general contractor and subcontractor involved.

b.) Formal name of the project as well as address of the project.

c.) The price for the work involved with this particular contract. This value should be both written out and identified as a number.

d.) The schedule / start and finish dates for the work. Normally a simple bar chart with an indication, if necessary , that a more detailed critical path schedule will be issued.

d.) Insurance requirements / this would include professional liability, workmen’s compensation, property liability, automobile liability and in most cases an umbrella clause of substantial value.

e.) Bond requirements / this would include the identification of type of bond as well as the value of the bond or bonds.

f.) Payment schedule and procedures, inclusive of dates. The requirement for the receiving party to present a schedule of values should also be considered.

g.) Final payment and procedures, inclusive of dates. This clause should have the timing of monthly invoice payments as well as a description of the final payment dates.

h.) Retainage values, release of retainage or any information regarding the retainage to be held on the project.

i.) Arbitration or legal resolution of disputes. This would include the termination agreements within the contract, whether the termination would be of convenience or due to other issues.

j.) Scope of work, this is the total and complete listing of all the work required to be performed within this construction contract.

j.) Any special conditions for this construction contract, such as Davis Bacon act, special hours of operation, special safety concerns, etc.

k.) List of the documents and the specification for the construction project.

l.) Additional work requirements such as notification requirements as well as allowed markups on change order work.

m.) Identification of the hourly value for manpower and equipment, to be charged for additional work as well as deductions in the scope of work.

What attachments are normally incorporated in a standard construction contract?

The use of attachments will allow the actual construction contract, to simply reference attachments, allowing a more concise and easier formal document to be presented. In addition, this will allow each contract on the same project to be consistent and include all the standard, project related construction clauses, specific to that particular project.

Attachment A / Construction Schedule / this is normally a simple bar chart to allow the parties to clearly understand the agreement in reference to the project schedule.

Attachment B / Construction Scope of work / this will be a detailed list of all the work required within this contract. In some cases, contractors do not like the fact that there is a list of activities describing the exact contract scope of work. However, it is my opinion that the more detail the better, if you are willing to devote the time and the energy into establishing an exact listing of work scope.

Attachment C / Schedule of Values / if the contractor has enough information to provide a detailed Schedule of Values, it is suggested that this be added as an attachment to the contract. The Schedule of Values will identify the amount of money each line item of the scope of work is worth, and will allow a better cost control on the project.

Attachment D / Sample Insurance Certificate / if a sample insurance certificate is attached to the contract, there will be no discussion required once the project begins, regarding insurance coverage.

Attachment E / Special Safety Requirements / any special safety requirements that are to be implemented on the project, should be identified as an attachment to the contract. This will clearly instruct the contractors regarding safety.

Attachment F / Special Conditions / this attachment would include information on any special conditions required to perform work on the project. Such items as Davis Bacon requirements, special work times, overtime issues, etc. can be noted on this attachment to the contract.

Attachment G / Documents and Specifications / this attachment should list all the documents for the project, including the drawings and the specifications. Any special documents representing the project should also be listed within this attachment.

Attachment H / Change Order Management / this attachment will verify all change order requirements by indicating the notification requirements, the timing of the notification, the necessary notification to proceed, as well as the allowed markups for change order work.

Attachment I / Hourly rate sheet for manpower and equipment / this attachment comes from the receiving party of the construction contract. This would be the contractors rate sheet, identifying the hourly value for manpower as well as equipment. This attachment will provide the values to be charged for additional work on the project.

One method that is extremely functional and efficient, is the use of detailed attachments, which are attached to all the contracts. In lieu of customizing each separate construction contract with the specifics of the project, a standard construction contract can be developed. This standard contract can then be customized to the individual project by the use of attachments. This practice allows a busy contractor to easily produce formal contracts for any number of projects by use of the standard format, and customize this standard format with the appropriate attachments.

Another efficient method of contract management, is the use of a change order system, to officially contract the same contractor on various projects. If the standard contract clauses are used consistently, and only the attachments are customized for each project, the use of a simple change order to identify a new project, and contract value can be used. In this manner, once the formal and legal language is approved and signed, the approval of a change order to add work to this contractual agreement makes the process much more efficient. Many contractors that perform several projects with the same subcontractors, use this process to manage their construction contracts. A yearly update of the legal format is then reviewed and signed by both parties to ensure that the language is up to date. The most time consuming task of any construction contract is the first review of all the legalities and general conditions of the contract. Usually, the actual pricing and scope of work agreement, is resolved relatively quickly. By using this method of initial approval of legal terms as a constant, the signing up of the same sub, or receiving party, for many different projects, as well as new scopes of work, will save time and provide a more efficient contract management system.

How should the construction contract by managed regarding approval and signature?

1.) The party issuing the construction contract should verify the proper information has been included on the construction contract. ( strongly suggest that a typical format be placed into template status ) for the development of the contract.

2.) The party issuing the construction contract should verify all attachments and include them in the contract package to be issued.

3.) ( 2 ) copies of the contract plus all attachments, are then issued to the receiving party, via certified mail, FEDEX etc. It is important that the date of the issuance of the unsigned contract is clearly identified for future reference. The initiation of the contract is an important legal entity and must be clearly identified.

4.) A letter of clarification should be included within the package being sent out. The letter should clearly indentify the project, the intent of the contract, as well as the necessary return date. In addition the formal contact for the party issuing the contract should be clearly noted, for comments and discussion purposes.

5.) No signatures or acceptance on either copy should be included. The contracts should be issued without any type of approvals or formal acceptance at this time.

6.) The receiving party, will then review the contract as issued by the initiator of this contract. They will review the contract for any concerns or discrepancies regarding the legal language, the schedule, the scope and all the attachments.

7.) The receiving party will clearly communicate any concerns, or comments to the issuing party, via formal communication, normally an email.

8.) Upon resolution of all concerns, the receiving party will sign both copies of the contract, and return the contract together with any required attachments, such as their insurance certificate.

9.) Upon receipt of both signed copies of the contract, by the initiating party, they will then sign both copies for full recognition of the agreement and forward one fully signed agreement to the receiving party.

10.) Once the contract is finalized, all revisions made, and both parties have fully signed agreements, both parties should file for reference, this formal legally signed document, for use during the construction project.

The Letter of Intent or LOI

The letter of intent, or LOI, is a formal, brief notification that one contractual party would like another party to enter into a formal contract for construction. The LOI was intended to be a streamlined method of establishing a formal legal relationship to stimulate activity, to be followed by the more involved and detailed construction contract.

In today’s day of computerization, the LOI is being phased out. The ability to develop contract templates and standard attachments, via the computer, has taken the tedious managerial function of contract creation and issuance, and modified it into a more easily presented format. There is really no reason that a contractor, or an owner, should have to issue an LOI in lieu of the full contract with attachments. However, if, for some reason the LOI is required, the minimum information to be included within the LOI is the following;

a.) Formal name, address and contact for the issuing party as well as the receiving party.

b.) Name of the project

c.) Scope of the work

d.) Insurance requirements, bonding requirements.

e.) Special conditions, such as Davis Bacon, limited hours, etc.

f.) Legal language of an LOI, namely we ( the issuing party ) intend to offer you ( receiving party ) the contract for the noted project.

g.) In some cases, the LOI will have the receiving parties scope of work attached. This is not recommended. The documents involved as well as the specifications should be noted, without the receiving parties quotation. This will keep the agreement open until a full and formal legal contract is issued.

Again, it should be stressed that the issuance of the LOI was a needed efficiency, that is not required at the current time. The ability to properly issue formal contracts, with all the proper attachments, has been made efficient and practical by computerized forms. There is NO reason that the LOI should be used to formally and legally bind contractors to a project. If the LOI is used, the tendency to never issue the formal contract is strong. The office, project manager, or whatever entity is responsible for the contractual obligations of the company, will use the excuse that the LOI was already issued.

A construction contract with the appropriate attachments is a management tool that is important to the proper management of the project. Lack of formal contracts will lead to constant disputes and issues as the project advances. It is much better to formalize the agreements on the project, and diligently pursue the proper execution of all construction contracts on a project, to ensure that there is a formal and legal record clearly identifying all parties responsibilities.

 

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