Practical Tips: What Are the Five Most Important Construction Contract Clauses?
10/22/2014 | Construction Blog
Reviewing construction contracts is a regular part of my practice as a construction attorney. From limited reviews of specific provisions to preparation of an entire array of form contracts, I have seen many different contract clauses and methodologies to evaluate them. In the end, contracts are about the allocation of risk. While the Rules of Professional Conduct prohibit me from giving legal advice as part of this blog, there are some clauses that commonly draw more attention when time is limited in the contract formation stage. Here are the top 5:
- Payment clauses. No contractor likes to work for free. The payment clauses in the contract determine how quickly you get paid, outline the items that must be submitted to get payment, and set out what happens when the company with whom you are contracting does not get paid. Start here.
- Insurance and indemnity clauses. These do not often come into play if your company generally performs work safely. However, the consequences can be large and the financial impact relating to those problems considerable when they are triggered. Be careful about assuming risk you don’t control or can’t insure. There are waiver issues to be concerned about in this area as well.
- Change order clauses. Changes in scope are among the most litigated construction issues. This is for good reason. Change order clauses often set out specific criteria that must be met to receive payment for change order work. The failure to comply with these criteria is often relied upon when there is not enough money in the job to pay for extras or there is genuine disagreement about whether something was included in the original scope. Due diligence in advance helps avoid change order problems, but make sure the change order clause is fair and not overly cumbersome.
- Dispute resolution clauses. Contracts typically contain a number of clauses outlining how claims are to be made while a project is ongoing. They also include dispute resolution clauses at the end which dictate mediation and/or arbitration or litigation. Many contractors treat these as one size fits all clauses; but they should be considered carefully when reviewing a contract. Some projects don’t benefit from mediation of disputes; and others would be better suited for litigation in court as opposed to arbitration. The process by which these dispute resolutions programs are to be administered also matters.
- Forum selection/choice of law clauses. These clauses are often given no consideration at all. The consequences can be devastating though. Be sure to review this clause to confirm that the dispute will be resolved in a convenient forum and using the law that applies to the project work. The location of the project and the law in that venue usually make the most sense.
In closing, contracts allocate risk between the parties. Don’t sign them without understanding what risk is being assigned to you and both whether and how you can control that risk outside the contract. Look at clauses in order of importance to your company and give them each the weight they deserve. Critical thinking and careful evaluation will save a great deal of angst and money on the metaphorical back end.