Key Elements of a Construction Contract Agreement
Top 5 Key Elements of a Contract
It’s nearing the end of a hectic workday, and you’ve been handed an intimidatingly long construction contract agreement to review and analyze before end of the workday. With next to no window for completion, efficiently determining which parts should be reviewed first is vital. But where do you start?
Divide and Conquer
Drafting a contract is an intricate task, including crucial components such as commercial conditions (e.g., the extent of work and payment schedules) and structural stipulations (change order regulations or progress notices for substantial completion). However, if time is limited, there are some essential areas you should consider always including! This article provides five key elements that will not go unnoticed!
The Top 5 List
1. Dispute Resolution
Establishing dispute resolution terms is extremely important so that the parties know how disputes will be resolved and handled. Many contractors prefer to utilize construction lawyers as adjudicators. When deciding to include an arbitration provision in a contract, ensure that both “joinder” and “consolidation” are included so all relevant parties can be brought together in one unified proceeding instead of having multiple hearings through the court or via arbitration. To ensure a fair dispute resolution process while saving time, it is essential to synchronize the arbitration terms of various stakeholder contracts. Without any requirement for a joinder in litigation stated in the contract, you can end up with lawsuits and arbitrations, which defeats the whole purpose of trying to make the process more efficient.
Indemnity can be wide-ranging and broad; many books have been created on the subject alone. Here are some of its most significant aspects that you should be aware of. Generally, parties want to and try to abstain from having to assume “defense” responsibility or from having to procure an insurance policy beforehand. You need to think about how extensive your indemnification commitment will be; does it only limit liability when your negligence directly caused losses? Are lien claims also included in this scope? Any indemnity agreements should take all of the following into consideration. Many states have regulations restricting wide-ranging “broad form” indemnities brought about by either your or the other party’s action or inaction. Still, it would be preferrable to cover this in the agreement itself. Doing so will ensure a clear understanding and provide both sides peace of mind.
3. Consequences for Schedule Delays
Contracts will often contain a clause that stipulates that there can be no damages for delays. This typically implies that the contractor is eligible to receive an extension of time if elements beyond their control impede them, yet they won’t obtain any additional funds from this. Such provisions are common and could help shield owners from significant losses due to holdups and impose them on contractors instead.
It can be hard to calculate the potential losses from delays that a building owner could suffer when entering into an agreement with a contractor. To protect both parties, the contracting parties may agree on pre-negotiated “liquidated damages” rates in case of any delay caused by the contractor’s fault. Regarding critical deadlines, such as substantial completion, the damage costs are usually stated in dollars per day of delay. The estimated amount of damages must be hard to calculate and/or quantify, and there must be a rational basis for the “liquidated amount” at the time of contract signing. Thus, both parties must come up with a reasonable estimate when they agree on these liquidation damages.
4. Force Majeure
A force majeure is a significant factor, particularly in connection with delays. It’s an event that neither of the parties could have predicted or managed — for instance, a major hurricane or “an Act of God”. This concept means that when it comes to honoring contractual commitments, both sides should not be held responsible if affected by a force majeure event. When specifying what constitutes as a force majeure event in your contract, you must pay careful attention; popularly added ones include pandemics and disruptions/delays from supply chain issues. The question then arises: who will bear the risk associated with any delay caused by these events?
5. Limitations on Damages
A waiver of “consequential” damages is a common and far-reaching term. If something is built incorrectly, the costs to fix the problem are classified as “actual” or “direct” damages. These are the direct costs that result from not being able to meet contract requirements. This might be exemplified by needing to replace or repair a defective pump system. On the other hand, consequential damages aren’t caused directly by breaching the contract but may still be incurred as a result. Consequences of faulty construction could include lost revenue and inability to use the project. For owners, these costs can be devastatingly high as they are unable to access their own property due to defective development. It is therefore extremely unlikely that an owner would waive consequential damages; however, contractors often try and do so in order to escape liability for such losses.
In order to ensure that it can maximize its gains from the project, a contractor often stipulates a general limitation of liability if any mistakes are made. This may be expressed as either an exact dollar amount or even a percentage of the contract price. It is important for both parties to carefully weigh and assess potential risks associated with high-cost damages so they understand their exposure levels in advance.
The above terms are of the utmost importance and should be thoughtfully examined in the context of drafting or reviewing any construction contract. This list of five main topics to cover in any contract offers a convenient summary of some of the most significant details that you can review when time is scarce. These particular components deserve special consideration due to their influence on protecting against hefty losses.