How to avoid pitfalls and stay out of litigation
A construction contract is an agreement to improve real property. A contract is created when an offer is accepted and consideration (payment) is provided.
The undertaking of construction projects often involves significant sums of money and risk of personal injury. Just one error in a contract or subcontract can be catastrophic for a construction company, which is why it is so important to understand what your contract requires of both parties.
1 Be sure you are contracting with the correct company or individual.
This may seem basic, but we see this often when projects end up in litigation. It is key to confirm the company listed on the contract is the correct entity and that the person signing the contract has authority to do so. When the wrong company is listed, it can lead to issues with insurance coverage, licensing and indemnity down the line.
2 Put your contract in writing.
Depending on the state where the project is being built, there are many issues that may arise by failing to put the contract in writing. In Florida, for instance, any project that is going to take more than a year to perform must be in writing.
There also may be specific types of contracts that must be in writing according to state law: the promise to guaranty the debt of another; a contract for the sale of real property; the sale of goods in excess of a certain dollar amount; a contract for the purchase or lease of materials or services with a condo association; a contract for professional services, etc.
3 Be sure the prime contract is attached.
Often the prime contract is incorporated into a subcontract. But too often, the prime contract is not attached or even provided to the sub.
Before you agree to be bound by the terms of a prime contract, it is important to know just what that entails. What insurance is required? What are the indemnity terms? What are the warranty obligations?
4 Include a detailed scope of work.
It may seem simple at the beginning, but when a project goes south, having a detailed scope of work is key.
When your contract lists the scope of work as “HVAC,” what does that mean? Did it include providing materials, or just installation? Did it include plumbing and electrical work?
If the scope is unclear, it opens the door for others to argue your scope of work was much larger than you agreed.
5 Require a detailed payment provision.
No one wants to work for free. But if your contract does not include a detailed payment provision, you may end up doing so.
It is important the payment provision in your contract includes information such as: When you will be paid – weekly, monthly, upon completion or when the contractor receives payment? What’s required prior to receiving payment – pay app, lien release, approval by the architect? Is there a retainage and if so, how much? What are your rights if you do not get paid?
All of this must be clear in your contract to avoid the risk of not being paid, or not being paid timely.
6 Confirm your indemnity obligations.
Indemnity is the concept of holding someone else harmless.
You are agreeing to be responsible for the losses and cost of defense for another.
Subcontracts often require subcontractors to indemnify the general contractor for any losses or defense of claims related to the subcontractor’s work on the project.
But what about the reverse? Is the general contractor required to indemnify the subcontractor if it is sued due to poor work by the general contractor? Is the subcontractor also being asked to indemnify the general contractor for its own bad acts? If so, be sure you are aware of the law in your state.
For instance, in Florida, if a general contractor wants to be indemnified by a subcontractor for the general contractor’s own bad acts, it must have a monetary limit and cannot include intentional misconduct.
7 Never waive your lien rights in advance.
A construction lien gives laborers, contractors and material suppliers security for a debt incurred in providing a product or service. Without it, you run the risk of not being paid.
No contract should require the waiver of lien rights before payment. Also, such a requirement may be against the law in your state. In Florida, a lien claim cannot be waived in advance and any advanced waiver is unenforceable.
8 Address differing conditions.
Often contracts require a contractor visit and inspect the site prior to bidding. This allows the contractor to determine if the nature of the work will require a higher burden and address it in their bid. On other projects, the owner may provide information regarding the existing conditions. But what happens when the site is not what was expected? Who is expected to pay any extra costs that are incurred as a result? This may depend on whether the differing conditions were foreseeable. Addressing these issues in your contract can save you time and money.
9 Be clear how a delay will be handled.
How long a project will take and when it will be done are important for all parties to a contract.
But it is important the contract is clear on how any delay will be handled. A contract should clearly lay out any time requirements and how time extensions may be requested or granted.
The contract also must state whether damages for delay are required and if so, how they are to be calculated. Will liquidated damages be used or will actual damages be calculated? Liquidated damages are used where the actual damages may be hard to calculate, and a monetary figure is agreed to in the contract for each day of delay.
Actual damages for delay may include the cost of increased labor, materials and overhead, as well as loss of use and interest.
How a delay will be handled must be clear in the contract to avoid any issues down the line.
10 Insurance. Insurance. Insurance.
More and more, insurance is becoming a major player in construction contracts and the litigation that arises out of them.
Contracts must carefully address the types and limits of insurance required. This needs to include whether additional insured endorsements are required, and if so, in what format.
Be sure to address other important factors such as completed operations, exclusions and deductibles. Contracts should require a copy of the policy, not just the Certificate of Insurance.
Before entering a construction contract, it is imperative you know what you are agreeing to and that you can meet those obligations. It is just as important to understand what is required of the other party.
Anything not addressed in the contract will be open to interpretation when and if a lawsuit is filed.