Understanding Construction Contracts
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. It is imperative that you enlist the help of licensed counsel and your insurance broker, to conduct an in depth analysis of the commercial risks associated with construction contracts and help you structure the contract’s terms and conditions in such a way to best 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.
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.”
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. Additional insured coverage, however, comes in many shapes and sizes. When negotiating contract provisions, it is important to clearly identify the extent of the additional insured coverage that is required.
Prior to consenting to any contract, it is prudent to examine insurance coverage against the amount of liability exposure in a particular contract.
Governing Law & Jurisdiction
Look at the governing law provision to make sure that you are comfortable with the implications of the state law chosen by the drafter. This can impact the interpretation of the contract from warranties to indemnification, and can even have an impact on whether certain insurance requirements are enforceable.
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:
- Standard forms, which are written broadly to encompass many different contexts, require transaction-specific and jurisdiction-specific modifications. For example, certain states require that indemnities be written in a certain way.
- Changes made to one part of the document, such as definitions of words or terms, may affect other parts that make reference to it.
- Custom-drafted and industry-drafted forms are often incompatible. Even industry-drafted forms from different publishers can be incompatible.
- Standard forms always contain the bias of the drafter. Use this bias; know when to use various standard forms published by different industry organizations.
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.