Contractors Must Avoid Litigation
When a business relationship is governed by a written contract, it can provide clarity to the parties when an unforeseen event arises. Simple misunderstandings are at the root of most disputes, especially when it comes to the relationship between Contractor and Owner. A simple misunderstanding can cause a relationship that started out with a solid handshake, good eye contact, and promises of fair dealing to turn into the Hatfields & McCoys. Contractors fall behind schedule, use the wrong materials, diverge from plans and specifications, run over-budget, fail to document change orders, etc. Owners demand performance in the face of unavoidable delays, nitpick perfectly good work, change materials, disregard chain of command, demand massive development level reporting on small remodels, fail to pay, etc.
Construction contracts are complex and include several provisions that rarely apply. The Owner is likely more focused on financing, designing, and logistics than pouring over the terms of a 15 page construction contract. Construction contracts are a nuisance to a Contractor that would rather focus on getting the work done – especially, a Contractor with a track record of success being pressured by the Owner to get started. However, a proper contract with all of those rarely-applicable provisions will help avoid misunderstandings.
The following are some key provisions that every construction contract should have to help resolve disputes, allocate responsibility, and otherwise avoid costly litigation:
1. Scope of the Work
The contract should clearly define the Scope of Work, especially with fixed fee contracts or contracts with a guaranteed maximum price. Sometimes the work the contractor is being hired to perform is clearly defined by plans and specifications prepared by an architect and the parties can simply reference those plans. When that is the case, the contractor should ask the owner to expressly warrant the adequacy and completeness of the plans and specifications in the contract. In all other cases, the parties should include each specific item of work in sufficient detail, to include type of material, manner of installation, finish, etc. Examples:
a. Install Wood flooring: $X – bad
b. Install Wood flooring in dining room and living room areas: $X – still bad
c. Install Bamboo flooring in dining room and living room: $X – better
d. Install Antique Java Bamboo Flooring in 132 sq. ft. dining room, 256 sq. ft. living room, and 145 sq. ft. hallway, including removing and re-installing floor molding, as necessary: $X – good
The contractor should try to carve out flexibility. Most Contractors give Owners a best-case scenario when calculating how long the project will take to complete, especially when they are trying to secure the job. Most owners don’t budget extra time and suffer damages when the project does not complete on time. They may have promised availability to a tenant, made move in arrangements, etc. In construction, there are countless unforeseeables that cause delays and that is why a detailed schedule is important. The parties should consider adding the following details to the Schedule:
a. Definition of common delays that are outside of the Contractor’s control, such as weather, material shortages, labor strikes, etc.
b. Procedure for documenting delays. If a weather delay causes the project to fall two days behind schedule, the Contractor should be required to document the delay in writing by a change to the construction schedule within X days. “We had a bad winter” is an excuse that the Owner may find hard to accept when the completion date comes and goes with no end to the work in sight
c. A progress schedule should be used wherever possible, dividing up the work based on project milestones. That way, the parties aren’t looking months or years back on their calendar to decide which delays contractor should be responsible.
d. A daily liquidated damages amount for every day contractor falls behind schedule can avoid arguments over damages. There is usually a “cap” on such liquidated damages clauses, such as 60 days.
I see a lot of contracts where the Contractor is not paid until project completion, and a lot of contracts where the Owner deposits the entire contract price prior to breaking ground. There should be a middle ground, and the parties should protect themselves with a payment schedule. Contractors want the “paid-to-date” percentage to outpace the percentage of project completion. Owners want to keep a large percentage of the contract price due at project completion to ensure that the project is completed to the Owner’s satisfaction.
There are plenty of other clauses in a construction contract that should be given attention and negotiated, such as the ever-complex indemnification provisions, but the foregoing terms are where the Owner and Contractor can thoughtfully create a roadmap to a successful project, free from litigation.