For this week’s Guest Post Friday here at Musings, we welcome a return post from Melissa Dewey Brumback. Melissa is a litigation partner at Ragsdale Liggett PLLC in Raleigh, North Carolina where she focuses on construction law issues. She maintains a blog for construction professionals called Construction Law in North Carolina. She can be reached at email@example.com or on Twitter @melissabrumback.
All lawyers talk about the need for a good written construction contract. (If you find a lawyer who doesn’t talk about this, find yourself another lawyer). As both Chris and I have written about previously, the contract is the king. It controls everything about your responsibilities on the project, and therefore should be written with care.
What is a contract? All a contract requires is an offer, an acceptance, and an exchange of promises. Nothing usually needs to be in writing (there are a few exceptions). No special contract forms need to be used, although they can be helpful.
More importantly, what makes a good contract? Here I must give you the quintessential lawyer answer: it depends. The specifics of what should go in your construction contract depend on your project role, the project scope, the jurisdiction you are in, and numerous other factors. While every contract should be fully vetted by a licensed lawyer in your jurisdiction, there are certain things that you should consider as part of every new project.
- Who are the contracting parties? Sometimes you are negotiating with one person, but another is actually the one who will sign the contract. Sometimes you are negotiating with a company doing business under an assumed name. That is fine, but you need to know who the company is, and have the proper party identified. The proper party is the one that must execute the contract to make it valid and binding.
- Who is authorized to represent each party? For example, does the architect have the authority to bind the owner to a change of scope? Does the owner’s on-site representative have the authority to make contract changes? A clear statement of who has authority and how much authority they have is crucial. In typical AIA contracts, for example, the architect can authorize minor changes in the work, but items which involve changes to the price or time require the owner’s authorization.
- What is the scope of work? Be specific in the scope of work to avoid conflicts during construction. A vague description helps nobody. If a set of plans or specifications are to be used, reference them. Also, consider including a list of excluded services so there is no question down the road about what was, and was not, intended to be covered.
- What are the responsibilities of each party? The owner should be required to provide safe access to the site. The contractor should be required to follow all applicable safety laws and to pay all of its subcontractors. The owner should pay according to the contract, and the contractor should follow the contract requirements for changes and requests for information.
- What are the procedures for payment on the project? Payment terms, pay application requests, change order requests, retainage release, and construction change directives should all be established.
- What are the dispute procedures? This category is extremely significant, because if you need to use these provisions, the project has already gone to hell in a handbasket, as they say. Mediation requirements? Neutral initial decision maker? Arbitration or Court? Three member panel, one member panel, private, or AAA arbitration? There are pros and cons for all of these choices, and they are also very jurisdiction-dependent. You should discuss options with your lawyer before the contract is signed.
- What damages can be recovered? Hope for the best, but plan for the worst. What happens if payment is not on time? What happens if critical milestone dates for substantial completion are missed? Interest, consequential damages, extended overhead, lost profit, limitation of liability, and liquidated damages are all items to be decided on up front.
- What is your indemnity obligation? Are you required to defend the owner or another party in court for your error? As I have previously discussed on my blog, indemnity provisions can be very tricky, and before agreeing to indemnity anyone you should have the contract reviewed by both your lawyer and your insurance carrier.
While not an exhaustive list, these 8 factors are the start to drafting a contract that will have everything you need to protect your rights.