Construction Contract Clauses

Hey guys! If you're collaborating with a general contractor, make sure to establish your working terms right off the bat! Typically, you'd enter into a construction contract of sorts.

Let's talk about project contracts! There are so many different forms a project contract can take! Did you know that some companies prefer using standardized forms from associations like AIA (American Institute of Architects) while others opt for their own custom versions? If you're embarking on a construction project, it's crucial to pay attention to some key contract clauses that will set the tone for your working relationship. These clauses will help establish expectations and ensure a smooth project journey.

  1. Contract Sum
  2. It is important to pay attention to the contract sum, which is the first clause. The contract price or guaranteed maximum price is specified in this section, depending on the project delivery method being utilized. Assuming that you have already reached a mutual understanding regarding the cost of the work, it should not come as a surprise.

    Contract in Construction

    The clause becomes more complex when it includes terms like alternates, allowances, and unit prices. Certain items have the potential to increase the contract value and should be taken into account when budgeting for the project prior to commencing work.

    Alternatives are additional options that may have been discussed during the design phase or presented by the contractor during the pricing process. They may also be introduced by the contractor at a later stage. As an illustration, you might have considered two distinct flooring alternatives. One of them is deemed as a fundamental component of the contract and will be encompassed in the contract amount, while the other is an alternative. Alternates included in a contract can either be considered as a part of the agreed contract amount or added later through a change order. It is important to ensure that the language in the contract is clear regarding the inclusion of alternates in the base contract. This clarity is necessary as it could potentially impact the actual cost of the work, either increasing or decreasing it.

    Allowances refer to specific amounts that are included in a contract as temporary placeholders for items or services that have not yet been fully defined or decided upon in the final scope of work. If you have not yet chosen a particular brand of carpet, the contractor may include a placeholder allowance of $30 per square yard in the contract. After you have chosen the specific carpet you desire, the price will be adjusted either up or down based on how your selection compares with the allowance. The contractor is responsible for providing a reconciliation of the allowances upon completion of the project. Typically, during that period, a change order is issued to adjust the budgeted allowances to reflect the actual costs.

    Unit prices are used when work is contracted on a per unit basis. To calculate the total contract amount due, you need to multiply the unit price by the number of units completed. The method of pricing commonly employed in road construction and other infrastructure projects involves a fixed rate for every unit of measurement accomplished.

  3. Payments
  4. The payment terms clause is another crucial aspect of a construction contract. Including a detailed description of the payment process in the contract is crucial. This should cover important aspects such as the timeline for payments, the necessary documents required, the approval process, and the terms and conditions for the final payment.

    Payment in Construction

    This clause needs to specify the frequency of payments for a project that is ongoing. This clause should also include significant dates, such as the due date of the invoice and the deadline for payment. It is crucial for all parties to be aware of these dates since penalties, such as interest and lien rights, are contingent upon them.

    Each project will have specific documentation requirements regarding payments. The necessary documents may comprise of substantiated costs, invoices from subcontractors, as well as lien waivers from suppliers and subcontractors. Additionally, payroll reports and a comprehensive list of subcontractors and suppliers along with the amount owed to each may also be required.

    Including the payment approval process in the payment terms would be beneficial. This section will specify the individuals responsible for reviewing and approving the payment request, as well as the duration allotted for their review. This process will be linked to the dates mentioned in the timing section of the payment clause.

    Releasing the final payment for a project can be a complex process that involves a significant amount of paperwork. This section should include all requirements from the owner, lender, insurance company, and any other parties involved in the agreement. Typically, the necessary documents consist of a certificate of project completion, construction lien waivers (which are waivers of liens in construction) from subcontractors and suppliers, operations manuals, warranties, as-built drawings, and a roster of subcontractors and suppliers along with their contact details. Timing is crucial in this matter, as the expiration date of lien rights is determined by the last day the workers were on the job and the date when the job was substantially completed, meaning all work was finished except for punch list items.

  5. Changes in the Work
  6. Every construction project undergoes changes, whether they are anticipated or not. It is necessary to specify in the contract how these changes will be managed. The terms will encompass information regarding the mark-up that general contractors and subcontractors can add to changes, the duration within which the contractor must inform the owner of any changes, the method of notification, and the course of action to be taken in case of a dispute.

    Change order in Construction

    In a project, there are typically two types of changes that may take place: change orders and change directives. A change order can be initiated by the architect, owner, construction manager, or contractor. It may involve a modification to the scope of work or a change in materials. After determining the pricing and reaching an agreement, the project's scope is adjusted by adding or subtracting as necessary.

    In case of a disagreement regarding the change and its cost, the architect or construction manager has the authority to intervene and provide a change directive. This document instructs the contractor to proceed with the requested change in the work, and specifies that the pricing for this change will be determined at a later time. A change directive is a useful tool to avoid any disagreement regarding the pricing of change orders that could potentially delay the completion of the work.

  7. Claims
  8. If the owner and the construction manager or contractor are unable to resolve a dispute, it may result in a claim. In simple terms, a claim refers to a formal request for additional time or funds related to a project. The contract will provide a comprehensive explanation of the claims process, including the timeline and notice requirements. In addition, it might specify the favored approach for resolving claims, which we will cover in the following section.

    Most contracts have a specified time limit within which a claim must be made. Typically, a certain number of calendar days must pass from the time the issue is noticed or from the completion of any extra work related to pricing, unless it is an emergency situation. Understanding the significance of this timeline is crucial, as any claims submitted after its expiration will be deemed invalid and subsequently dismissed.

    Typically, notices of claims are sent in written format through both regular and certified mail. If your contract permits, email correspondence may be an acceptable means of communication. However, it is advisable to supplement it with a formal notice of a claim for added formality and clarity.

    Typically, the construction manager or architect is the initial party responsible for reviewing a claim. Their role is to act as an impartial mediator and facilitate a resolution between the owner and contractor. If there is no construction manager or architect involved in the project, or if they are unable to reach a resolution, the claim will proceed to the next level of dispute resolution.

    The subsequent section of the claims clause will specify the procedure for resolving disputes that cannot be resolved by the involved parties. There are three primary alternatives available: arbitration, mediation, and litigation.

  9. Dispute Resolution
  10. The clause for resolving disputes will establish the process for resolving conflicts in case the parties fail to reach an agreement and the architect is unable to settle the dispute. In construction contracts, the three primary methods of resolving disputes are arbitration, mediation, and litigation.

    Dispute in Construction

    Arbitration is similar to a court hearing, as it involves one or more decision makers who listen to both sides of the claim and aim to resolve the dispute by ruling in favor of one of the parties. Although less formal than a courtroom, the process is still highly judicial. Typically, the arbitrator for a construction dispute is chosen by both parties from a group of experienced arbitrators who specialize in construction.

    Mediation is typically less formal and not binding. It is often required before litigation, if specified in the contract. During the mediation process, the parties involved are assisted by a neutral mediator who facilitates their discussion and helps them reach a mutually acceptable agreement. A mediator's role is not to make a decision, but rather to facilitate a compromise between the parties involved. Meditation can be a successful method in resolving claims in construction without incurring the expenses of arbitration or litigation, especially when all parties involved are motivated to reach a settlement.

    Litigation is a highly formal process for resolving disputes, wherein the party making a claim files a lawsuit against the other party. Both parties will present evidence and testimony during a formal hearing with a judge. The decision made by the judge or jury will be legally binding for both parties involved.

    Mediation and arbitration have become increasingly popular as preferred methods for settling construction disputes due to the high cost of litigation. Despite its advantages, some construction attorneys argue that arbitration is not significantly less expensive than litigation and also has other drawbacks. Based on our experience, approximately 50% of the attorneys have a preference for either option, but always with the requirement of mediation as a prerequisite to either course of action.