<H3><B>LAW :A Contracting Checklist </B></H3> | <B><H3>Here’s What You Should Be Thinkin... Page 1 of 4
Oct 23, 2006
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Published October 2006
LAW :A Contracting Checklist
Here’s What You Should Be Thinking About
Before Having a Contract Developed
By Stanton Phillip Beck and Dennis M. Strasser
The contract negotiation process is an opportunity for parties to clearly communicate
expectations and allocate risk. Contracting parties must have a full appreciation of the
issues involved in the negotiation process, their interrelationships and their relative
importance to the end result— a successful project. The following checklist presents some of
the issues that should always be considered and clearly presented in any contract. The
checklist is not exhaustive: every project has unique aspects requiring project-specific
considerations and modifications.
Most of the following checklist items are addressed in standard Associated General
Contractor (AGC), American Institute of Architects (AIA) and Engineers Joint Contract
Document Committee (EJCDC) contract forms. While these contract forms are meant to
balance the interests of the contracting parties, a number of the clauses that are acceptable
to general contractors are rejected by owners, and vice-versa. Where it is not self-evident,
both positions will be articulated.
1) Consequential Damages/Liquidated Damages. Contractors prefer that the waiver of
consequential damages contained in the standard form contracts remain. Owners, on the
other hand, prefer to remove the waiver of consequential damages, particularly where there
are potentially large impacts from construction delays, such as additional rental costs,
construction financing, lost revenues and similar damages. As a compromise, contractors
may agree to liquidated damages in place of risking actual damage claims.
2) Contractual Order of Precedent. Most contracts consist of multiple documents, which
may often be inconsistent or ambiguous. An order of precedence should be included in the
contract to provide direction in the event of inconsistencies between the documents. Owners
may also include language requiring that, in the event of ambiguity or inconsistency, the
greater number or better quality shall govern.
3) Limitations Periods. Most standard contract forms prescribe when the applicable
limitations period(s) on claims will start to run and for how long they will run. The standard
forms generally prescribe shorter limitations periods than those allowed by law. As a result,
owners strike these provisions, whereas contractors prefer they remain.
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4) Change Orders/Claims. Contracts generally require timely notice of changed
conditions, preclude claims absent written notice in accordance with contract provisions and
place limitations on contract adjustments and remedies. Obviously, contractors do not favor
these provisions, whereas owners often require them. These provisions, including what
constitutes timely notice, must be fair and practical for the type of project. Unreasonable
notice provisions and overly broad limitations on remedies will be closely scrutinized and
may be deemed unenforceable when construed by a court. Many states have statutes
addressing contractual damage or claim limitations.
5) Dispute Resolution. The standard form contracts generally call for mediation followed
by arbitration of disputes. Both contractors and owners generally accept mediation
requirements. However, while contractors generally favor arbitration, most owners do not.
Arbitration is best applied to small claims and may prove to be very expensive for larger,
complicated matters. If arbitration is the dispute resolution process of choice, the contract
must so provide, as arbitration cannot be compelled absent mutual agreement.
Consolidation of disputes must also be addressed.
6) Insurance and Bonds. Insurance limits should be specified in the contracts, and
submittal of proof of the types and amounts of coverage should be required. The financial
ability of the contractor should be considered by the owner, as most CGL insurance covers
damages resulting from the contractor’s work, but not the contractor’s faulty workmanship.
As a result of this lack of insurance coverage, owners may require payment and
performance bonds if there is any question of insolvency or the project is of such a risk that
a problem could result in the insolvency of the contractor, recognizing such an approach
does nothing to address these concerns after construction is completed.
7) Indemnification. Contractors generally attempt to limit any indemnification
requirement to negligence. Owners often require indemnification related to any fault,
whether negligence or otherwise. In addition, owners require a waiver of any statutory
immunities so as to effectuate the underlying purposes of the indemnification language.
8) Force Majeure. The elements of a force majeure clause need to be carefully defined.
One often-neglected element is whether abnormal materials cost increases fall within the
force majeure clause.
9) Contract Time/Schedule, Schedule Float. Owners often specify that there will be no
extension of time for concurrent delays. In addition, they generally specify that there shall
be no adjustment in time for non-realization of an anticipated early completion prior to the
contract time and that they own any float in the project schedule. If not otherwise defined
by contract, any schedule float benefits the party utilizing it first. Owners generally will
require detailed schedules that are regularly updated. The ongoing record created by these
schedule updates can assist in analysis of claims arising out of the contract.
10) Errors and Omissions as Contract Costs. Standard forms do not allow the
contractor to charge or recover for work it knew was inconsistent with the design or laws,
codes and ordinances. Most owners also disallow costs resulting from errors or omissions
that should have been known but for the ignorance of a particular worker.
11) Scope of Work. The scope of work defines what the owner is paying for and what the
contractor is being paid for. A clear and concise scope of work is key in assuring the
expectations of both parties are met. The scope of work should identify which portions of
the work will be provided on a design-build basis. Contractors will desire a differing site
conditions clause to avoid risk which otherwise will fall to it under common law in the
absence of such a provision.
12) Cost/Compensation. The standard form contracts define the contract type, i.e.,
guaranteed maximum, time and materials with a guaranteed maximum, cost-plus, and
others. Obviously, all elements of compensation, including any allowances and assumptions,
must be clearly identified. Many owners will require lien waivers for any payments made.
13) Ownership of Design/Contract Documentation. The parties should consider
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limitations on subsequent uses of the design, ownership and the right to obtain and utilize
electronic media, along with any limitations on such uses. Ownership and use is of particular
concern where termination occurs prior to project completion.
14) Choice of Law/Venue. If out-of-state parties or projects are involved, specify venue
and which state law applies to interpretation of the contract. The standard forms generally
set venue and choice of law as that of the project locale. These issues are particularly
important vis-à-vis statutes of limitations/repose and any statutes relevant to insurance,
indemnity and limitations of liability.
15) Audits. Owners may demand the right to audit any records at any time.
16) Warranties. Contractors will attempt to have any warranties limit other remedies,
while owners will demand warranties in addition to those remedies allowed by law.
17) Termination. The standard contract forms allow profit to be paid on the unfinished
portion of the project for a termination for convenience. Owners often strike this provision,
limiting profit to work completed in accordance with the contract documents.
18) Safety. The contract should require satisfaction of programs and documentation as
required by law.
19) Submittals. Although processing submittals presents a significant administrative
burden for the contractor, owners often require submittals for each component incorporated
into the work. The contract should clearly identify submittal requirements to ensure that the
owner’s expectations are met and the contractor has considered the cost and schedule
ramifications associated with required submittals.
20) Aesthetics. Although the standard forms are to the contrary, most owners require final
approval of any elements they deem to be related to project aesthetics.
21) Retainage. Owners often require retainage as additional security to complete the
project and/or remedy defective work. In negotiating for reduction or elimination of
retainage, contractors may successfully argue that owners are always "ahead of the game”
from a financial perspective because the work always precedes the billings and related
payments.
22) Prior Occupancy. The parties should consider whether or not prior occupancy of all or
a portion of the work will occur and whether it will constitute acceptance, the start of
warranty periods, assumption of site safety responsibilities or a waiver of any rights
otherwise afforded by the contract.
23) Liens. The lien provisions of the standard form contracts are generally acceptable to
both contractors and owners. Owners often supplement the lien provisions to ensure that
liens are subordinate to any bank financing obtained by the owner.
24) Integration Clause. This clause states that the written contract represents the entire
agreement, supersedes all prior negotiations and agreements, and may only be amended in
writing. In expressly limiting the contract to that contained in the signed writing, the
integration clause can limit subsequent disputes concerning whether other documents and
communications form part of the contract.
25) Waiver of Subrogation. A waiver of subrogation is an agreement that, for any claim
covered by insurance, the person or entity paying the claim will not seek reimbursement
from another person or entity, even if that person or entity is at fault, to the extent that
insurance covers the loss. Waivers of subrogation apply to CGL claims, but not workers’
compensation or professional liability insurance.
In addition to the foregoing, there are many other contract provisions that are potentially
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significant to any particular project. As always, a common-sense, practical approach to
contract analysis and negotiation is imperative to ensure that the expectations of both
contracting parties are met.
Stanton Phillip Beck is Chair of Lane Powell’s Construction Services Group, representing
and counseling product manufacturers, owners, architects and engineers in all aspects
affecting development and the construction industry. Nationally recognized, Beck has been
involved in major construction projects and complex product liability actions for product
manufacturers. He can be reached at becks@lanepowell.com or 206-223-1344.
Dennis M. Strasser is Counsel to the Firm and a member of Lane Powell’s Construction
Services Group. He counsels owners, design firms, insurers and product manufacturers, and
serves as a dispute resolution provider. Strasser is a frequent speaker on contracts, risk
management and project implementation. He can be reached at strasserdd@lanepowell.com
or 206-223-1347.
http://www.buildernewsmag.com/viewnews.pl?id=516
10/23/2006