Construction Contracts 101 – Key Terms and Provisions
By Bryan Kelley On August 31, 2017 | Best Practices, Contracts
A construction contract can be a daunting document. It can be hundreds — if not thousands — of pages in length depending on the complexity of the project. In addition to the document that is signed by the parties, the full construction contract can include drawings, specifications, geotechnical reports, general conditions, special conditions, and other provisions. Understanding, digesting, and adhering to the volume of information found in a contract can be a monumental task. We’ve discussed the importance of helping your project managers understand their contracts here on the blog; in this post, we’ll take a look at some common risk-shifting clauses in construction contracts that every contractor should be on the lookout for.
The Scope of Work
A clearly-defined scope of work is a seemingly obvious necessity in any contract. But, contractual disputes including disputed claims for extra work often arise out of unclear or ambiguous scope of work provisions. Specificity and precision are essential to avoid later confusion. General and expansive language (ex: “any and all work necessary or appropriate …”) should be avoided.
Incorporation by Reference
At first glance, a typical contract between a general contractor and subcontractor may appear to be fairly modest in length. But, sophisticated contracts will incorporate additional documents by reference. The types of documents typically incorporated by reference include plans, drawings, specifications or project manuals, geotechnical reports, general conditions, and special conditions. Additionally, subcontracts will often incorporate the general or prime contractor’s contract with the owner by reference, along with a “flow-down” provision. The flow-down provision binds the subcontractor to the general contractor under the same terms and conditions by which the general contractor is bound to the owner.
Incorporation by reference can cause the volume of material in a contract to balloon very quickly. And, any contractual terms that are incorporated by reference are just as enforceable as those found on the actual signed contract. This is true even if the contractor has neither read nor received copies of the documents incorporated by reference.
To identify the documents incorporated into your contract by reference, look to the contract’s definition of the contract documents.
A no-damages-for-delay clause is exactly what it sounds like. These provide that contractor is only entitled to an extension of time in the event of a delay, and is not entitled to any additional monetary damages. This puts the risk of delays almost entirely on the contractor, as he must absorb any extended general conditions costs, home office overhead, and administrative costs arising from the delay.
With some limited exception, these clauses apply regardless of the cause of the delay. However, South Carolina courts have indicated these clauses will not be enforced when delays are caused by:
- Fraud, misrepresentation, or bad faith;
- Active interference, meaning a party has taken some affirmative act to cause the delay;
- Abandonment of a contract; and
- Gross negligence.
North Carolina courts enforce these clauses in private contracts, but they are disallowed by statute in contracts with governing bodies. However, even in the private context, North Carolina generally takes a dim view toward these clauses. In one case, a subcontractor not at fault for causing a delay was awarded an equitable adjustment to its unit prices, even though the subcontract had a no-damages-for-delay clause. See Southern Seeding Service, Inc. v. W.C. English, Inc., 217 N.C. App. 300, 719 S.E.2d 211 (2011).
Arbitration provisions are commonplace in residential and commercial construction contracts. However, they may be unilateral, meaning only one of the two parties can elect to arbitrate disputes. Contractors should also take note of the arbitration forum and applicable rules required by the contract. Also, note that additional dispute resolution measures, such as a good faith meeting or mediation, may be required before parties can arbitrate or litigate a dispute.
Often, dispute resolution provisions are found in a document incorporated into the contract by reference (such as the general conditions). As discussed above, it usually won’t matter if a party hasn’t read or received the document containing the clause, as long as that document is properly incorporated into the contract by reference.
Many states, including South Carolina, impose certain requirements for arbitration clauses. These requirements can relate to specific language that must be in the clause, its location in the contract, and the typeface that must be used to identify the clause. However, any state-mandated requirement related to arbitration clauses will almost never apply to a construction contract. Construction projects involve interstate (rather than intrastate) commerce. This is lawyer-speak for saying that, at least to some extent, equipment or materials virtually always cross state lines before reaching their final destination at the jobsite. Interstate commerce transactions are governed by the Federal Arbitration Act (9 U.S.C. § 1, et seq.), which overrides state law.
Notice Provisions for Default and Termination
Contracts often set forth certain processes and procedures for declarations of default and/or termination. These procedures must be followed to the letter. The contract will specify the type and nature of notice that must be given to the defaulting party prior to any formal declaration or termination, as well as the length of time that must elapse between providing notice and taking any further action.
Any notice provided as part of the default or termination process should not be sent by e-mail. Declarations of default and termination are major events in a construction contract that often result in litigation or arbitration. They should be treated with formality and any notices leading up to a default or termination should be sent in the mail or by an overnight delivery service.
If the party declaring default or termination fails to follow the processes found in the contract, the terminated party could use that failure as evidence of a wrongful termination.
Changes and Extra Work
There is often overlap between the concepts of extra work and changes. In some situations, a change may be directed or a change order issued which results in extra work. Many form contracts (notably the AIA A201) distinguish between three vehicles for changes: (1) a change order; (2) a change directive; and (3) a minor change directed by the architect. A change order requires agreement among the owner, architect and contractor. A change directive must be in the general scope of the existing contract documents, but it only requires agreement between the owner and architect. The architect alone may order minor changes not affecting the scope of the work, the contract amount, or the contract time.
Whether your construction contract makes these distinctions or not, it is critical that your contract requires that changes to the scope of work are made in writing. This requirement is equally beneficial to owners, general contractors, and subcontractors as it can help avoid later disputes and litigation.
All too often, a contractor will commence construction only to determine that the site conditions depicted in the contract documents bear little resemblance to the actual conditions encountered. This often leads to debate as to which party should bear the effects of the differing site conditions.
The AIA A201 General Conditions allow a contractor to request an investigation from the architect in the event unanticipated site conditions are encountered. Upon such a request, the architect will investigate to determine the validity of the contractor’s claim. If the architect agrees, he will recommend an equitable adjustment. If the architect finds no factual basis for an adjustment, he must notify all parties in writing and give the reasons for his finding. The contractor may then make a claim disputing the architect’s findings if necessary.
Contractors should carefully review any engineering or consulting reports on site conditions that are included in bid documents. It must be noted, however, that the contractor will often be responsible for making its own determinations as to the conditions of a site. These reports may or may not be incorporated into a contract by reference; similarly, the contract may indicate whether the contractor has a right to rely on these reports as technical data or if they should be considered for informational purposes only.
These are just some of the common contractual clauses contractors should familiarize themselves with before signing the proverbial dotted line. Each of them can have a huge impact on a project’s success, and a well-drafted and fairly negotiated contract can go a long way toward avoiding potential disputes.