The construction contract is a critical component to every construction project. And, unfortunately, construction contracts can be long documents understood only by attorneys.
This generally means that the contract, rather than clarifying the work agreement and making things simple, becomes the issue around which disputes revolve and the battleground on which payment disputes are fought.
Onerous, but popular, construction contract provisions can get a project started off on the wrong foot before work even begins. Punitive contract provisions such as “pay when paid,” “pay if paid,” and “no lien” clauses, or strict claim notice provisions are well known throughout the industry, but subjected to varying levels of scrutiny depending on jurisdiction. Accordingly, it’s nearly impossible to know exactly what law applies and how contract provisions will be interpreted without being an attorney fairly seasoned in construction law issues. And, resorting to leveraging contractual power to avoid financial risk may be a losing bet in the long run, anyway.
Adding clauses that may or may not be enforceable, or agreeing to such clauses, may only muddy the water in any potential dispute and result in lengthy litigation. Rather than attempting to assert control over the project by wringing out every concession possible through leveraging contractual power, it is likely a better idea to make sure that the contract contains only necessary provisions, and that those clauses are as clear as possible.
Clauses to Include
While clauses like pay when paid, pay if paid, no lien and strict claim notice provisions are prickly and of potentially undetermined validity, there are some clauses that are (or should be) mandatory in every construction contract, and regarding which great care should be taken to make sure they are clear.
Some contract provisions to consider and include in construction contracts are: scope of work, indemnification, payment conditions and choice of law/jurisdiction. Consider arbitration or mediation clauses, but know that these clauses can cause some difficulties when confronted with a potential mechanic’s lien claim.
While these provisions are mandatory, they are not without their own potential litigation hiccups. In his article “A Tactical Guide to Avoiding Construction Contract Disputes,” Wally Zimolong notes that “Scope, Price, and Time” and some payment condition clauses are among the construction contract clauses that are most often litigated. This just furthers the point that construction contracts, to be most useful, should be as clear and concise as possible. While litigation is never the desired outcome, a clear contract is more likely to result in a favorable and quick outcome than a muddled contract.
Standardized Contract Documents
It’s worth noting that standardized contract documents, particularly the AIA construction contract forms and templates, are widely used in the construction industry. This is both good and bad. While standardized forms make it less likely that odd-ball one-off clauses are included in a contract document and can streamline the contract negotiation and review process, it is important to note that construction contracts are not one-size-fits-all.
Each construction project is unique, and no matter the source of the form or template, each individual project requires at least some unique risk allocation, and will require some revision and modification to meet individual needs. Further, the standardized forms provided by one particular organization or group within the construction industry may be tipped in favor of those particular parties, whether intentionally or not; and, depending on the choice of law used to interpret and enforce the contract, certain clauses or provisions may be treated differently from state to state.
Contracts are a necessary part of every construction project. The best practice for everybody involved is to make sure that the contracts are as clear and precise as possible, so that any potential dispute can be dealt with quickly and relatively easily. The clearer the contract, the easier it is to determine what should happen in the event of a dispute. While standardized contracts may get partially down that path, and streamline the negotiation, it’s important to review every contract carefully in order to be prepared if problems occur.