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Understanding Construction Contracts

Construction contracts can contain terms that impact your company’s bottom line. Reviewing them carefully prior to signing is indispensable, and can save your company time and money. This contract review guide is meant to be a starting point for reviewing contracts in general. It highlights some common contract terms and their potential impact. You can begin to understand which terms are most often negotiated in contracts generally. Then, with the help of licensed inside or outside counsel, analyze the commercial risks associated with construction contracts in depth and understand terms and conditions to protect your company’s assets. Scope of the Agreement Examine the definition of services to be provided to ensure the language is clear enough for an unrelated third party to understand the scope. The contract should include a time frame for completion of services. The rights and obligations of both parties should be clearly outlined. Any mechanism for changing the scope of the contract, as well as any of the terms, if allowed, should also be outlined within the contract. Terms of Payment Terms of payment should be clearly listed within the contract so that the expectations of both parties are clear. The contract should specify the agreed payment schedule for goods received. Warranties There are two types of warranties: express and implied. Both types are assurances regarding particular issues, such as performance. Express warranties are those that are defined specifically in the contract. Implied warranties are based in statutory and/or common law, depending upon your jurisdiction. They are two-fold: a warranty of merchantability, which requires that goods/services must reasonably conform to an ordinary buyer’s standards, and a warranty of fitness for a particular purpose, which states that if a seller knows the intended purpose for the product or service, the act of selling the product to that customer implies that it is fit for that purpose. Be aware of warranty disclaimers and understand how the disclaimer limits your statutory rights. If it disclaims all warranties, express and implied, then you will likely be limited to the remedies in the contract for issues related to things like performance. You should also examine any disclaimer in the context of the contract. While it may require you to disclaim your statutory rights, other contract language may give you adequate rights and remedies regarding the points about which you are most concerned. Damages, Limits of Liability and Indemnification These three items are often in close proximity to one another in a contract, as they are interrelated. Damages may be defined as certain types of losses that could create liability under the contract. A limit on liability would restrict the amount of damages that a party would be required to pay if found liable for such damages. Sometimes this may also include a limit for indemnification. Indemnification provisions allocate risk and cost between the parties. It is important to examine whether the party assuming the risk is the party with the most control over that risk. For instance, when a company’s employees are required to work at a customer’s location, the company is often asked to release the customer from all liability relating to the employees presence at the customer’s location. In some cases, indemnification is limited to negligence or to a specific dollar amount, under a heading of “limits of liability.” Insurance Some contracts will contain minimum bodily injury and property damage liability coverage amounts that the party must possess and also may require that the customer is added as an additional insured on those coverages. Prior to consenting to any contract, it is prudent to examine insurance coverage against the amount of liability exposure in a particular contract. Terms and Conditions It is also vital to examine any terms and conditions contained in the contract:

Additionally, when specific statutes or regulations are referenced in the body of a contract, it is as though that statute or regulation is wholly contained within the contract itself. It is vital to read and understand that language prior to giving your consent. This happens regularly in government contracting situations. Standard Form Contracts Unlike other industries, construction lacks a consistent set of laws like the Uniform Commercial Code or a federal statutory scheme. Contracts produced by professional and trade associations for architects (American Institute of Architects), engineers (Engineers Joint Contract Documents Committee) and commercial contractors (Associated General Contractors of America) can serve as important references and benchmarks when drafting a new contract. They are a good source of industry best practices, and using them can greatly reduce drafting and review time, meaning lower overall transaction costs for your company. For all of their advantages, there are several things that you should be cautious about when using standard form contracts. Note the following cautions about standard forms before using them: General Understanding Reviewing general terms and features of construction contracts will help you grasp the consequences of its terms and conditions for your business. In any case, to ensure its completeness and accuracy, it is necessary to submit each contract you must sign to legal review.

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