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Are You Managing Your Contract Risks, or Are Contract Risks Managing You?

One of the most important things for contractors to consider before signing a contract is whether the agreement properly allocates project risks.

While it can’t be known in advance which contract provision will be most critical in the event of a dispute, certain known risks should be addressed prior to signing. Several provisions that address risk allocation are called contract “killer clauses.” ConsensusDocs, the only standard contracts written by a coalition of more than 40 leading design and construction industry associations, illustrates best practices regarding these contract provisions.

Unknown Site Conditions

In general, contractors should make sure, whenever possible, that the risk of unknown site conditions does not fall to them. If that risk shifts from the owner to the contractor, the contractor needs to carefully evaluate the potential liability that could arise from such unknowns, and the proposed schedule and pricing should reflect those unknown risks as much as possible. For example, generally contractors should not take on the role of site and site document inspectors. Good contracts hold a contractor liable for only what can be observed by a reasonable inspection of a project site’s surface conditions, but no independent subsurface exploration is expected of the contractor. If a contract provision has the contractor obligated to study and compare contract documents to uncover errors, or to verify site conditions or report on site conditions, the contractor is undertaking a risk that is likely not desirable and possibly not insurable.

For example, if a provision states that “the contractor has reviewed the site and applicable documents and is satisfied that the contractor’s pricing is sufficient to cover all work, including all foreseen or unforeseen risks, including any concealed or subsurface variances,” the contractor is likely taking on an unnecessary and burdensome risk, especially in regard to the italicized language. In general, the owner is in the best position to know or have actual site conditions documented, and to bear the risk of unknown variances. Most owners do not want contractors including sizeable contingencies in their bids to cover unknown site conditions. The ConsensusDocs 200 Owner and Constructor Agreement provides a good example of fair risk allocation.

Order of Precedence

It is critical to have an established order in which contract documents will be given weight in the event of a conflict. As a project progresses, there can be changes made along the way that necessarily create conflicting contract documents. Such documents can include supplemental instructions and responses to RFIs, and even verbal directives from architects, engineers or owner representatives. “He who has the gold, makes the rules” is not a best practice. Contractors should be watchful and insist that any change in scope be memorialized in a written change order.

ConsensusDocs contracts provide a clear order for interpreting conflicting documents, which helps prevent unnecessary delay and expense. In general, the most recent contract documents govern with change orders being paramount. The thought being that while the parties may have understood the project needs at the time of contract signing, project developments, whether they are based on site specifics, evolving owner needs, revised designs, financial considerations or other issues, sometimes project needs must change. If that is the case, it is most common that the change order will detail those project changes and the related effects on price or schedule. Change orders should always be in writing and signed by the relevant parties. As such, in the event of a dispute, the more recent change order should be given more weight than a conflicting provision in a contract that was signed in the past.

Owner Financial Information

Does the contract provide adequate opportunities for the contractor to request owner financial information throughout the life of the project? Some standard contracts provide the opportunity for owner financial information requests at the beginning of the project, but often that opportunity is lost, at least in practical terms, once construction begins.

The ConsensusDocs 290 Guidelines for Obtaining Owner Financial Information and 290.1 Financial Questionnaire provide an easy and direct way for contractors to quickly determine the financial viability of projects. Contractors value ConsensusDocs-based projects because they clearly possess the contractual right to request and obtain financial viability information throughout the life of the project.

Dispute Mitigation and Resolution

The best time to determine the process for addressing and resolving issues and disputes is before they arise. ConsensusDocs provides a multi-tiered process to address issues, and focuses on open and direct communications. Rather than the traditional silo and funnel approach to project communications, ConsensusDocs emphasizes direct communications at the first instance, with a tiered acceleration process. This provides for quicker resolution of issues before they escalate into intractable claims. All parties benefit from clear, direct and efficient issue resolution through the minimization of misunderstandings, miscommunications, unnecessary meetings, delays and disruptions.

When confronted with an agreement with provisions that shift risk inappropriately, contractors should try to educate the owner on how these provisions can negatively affect project price, schedule, project team and overall success. Often owners don’t realize that by shifting risks unnecessarily, they pay more than would otherwise be necessary if the party in the best position to manage the risk did so.

In the end, by thoroughly vetting a contract before signing, contractors will better understand their roles, responsibilities and potential liabilities. ConsensusDocs are the first and only consensus standard contracts written by and for designers, owners, contractors, subcontractors and sureties. A fair and balanced contract helps contractors procure the best team and the best pricing to provide better project results, and better project results facilitate future business.

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