Four fundamental construction contract rules

Published · 3 min read

Contracts, preferably in writing, are critical to assure participating parties in a construction project meet their obligations and legal responsibilities. Without a contract, you put your company at risk for disputes and potential legal action. Contracts are also required in order to file a lien or to obtain surety bonding.

I’ve worked with many contractors and subcontractors to prepare, review, and defend construction contracts. At a high level, I tell my clients there are four basic contracting rules they should be aware of:

Rule #1: There is no such thing as a standard contract.

Every contract situation is unique. A $50,000 contract is different than a $500,000 contract, a residential contract is different from a commercial contract, and the bargaining positions of each party are very different.

While there is no “standard construction contract,” you can standardize the process. If you perform service work, for example, you can put together a contract that applies to all of the service work you do. You can also have your lawyer prepare contract forms for small commercial projects or large residential work. Don’t forget about creating the contracts you want your vendors and subcontractors to sign. Grouping the documents this way will give you a selection of form contracts that can be used as a starting point for negotiations. Pro tip: Ask your lawyer to give you the form in Word format so you can edit it as needed in the future.

Rule #2: Most contracts are initially written to favor one party over the other.

Whoever writes and presents the first contract is the one who has the upper hand . . . at least in the beginning. A general contractor, for example, may have a subcontract drawn up that defines the scope of work in very broad terms to bind the subcontractor to the greatest scope possible. From a general contractor’s perspective, this is important if there is a dispute as to whether or not a particular item is base contract work or an extra or change order. On the other hand, this language does not benefit the subcontractor who will want to limit the scope to exactly what it includes, and doesn’t include.

Rule #3: Contracts can be modified.

Always carefully read and understand your contracts, including obtaining advice from your legal counsel. If terms are unreasonable, don’t hesitate to negotiate for contract changes that will protect your interests. You would not accept unreasonable dollar, scope, or time constraints in the contract, so don’t accept unreasonable payment terms, insurance requirements, indemnity obligations, and the like.

Pro tip: Even if the other party says they don’t make changes to their contract, don’t give up. Prepare an “addendum” that modifies the agreement by referring to the provisions you wish to change. Many folks that will not accept a physically marked-up contract will accept an addendum added as an exhibit to the contract.

Rule #4: To level the playing field, certain provisions can be included, excluded, or modified.

In my previous “Words to watch out for” post, I provided ways subcontractors could handle pay-when-paid, time is of the essence, and other contract provisions. Other areas to pay special attention to include (but are not limited to) project scope definition, timeline and liability connected to claims, delegation of safety obligation, and warranty requirements.

Following these four rules as part of your good contract practices will not only help reduce legal liability, but will establish the foundation needed to reach anticipated budget, schedule, and quality goals on your projects.

 

This article is for informational purposes only and is not legal advice. Consult your lawyer as laws may have changed or be interpreted differently depending on your jurisdiction and the facts of your specific situation.

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