<H3><B>LAW :A Contracting Checklist </B></H3> | <B><H3>Here’s What You Should Be Thinkin... Page 1 of 4 Oct 23, 2006 Archived Articles | Go To Reprints V 0.9 | V 1.0 View Current Articles Only 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. http://www.buildernewsmag.com/viewnews.pl?id=516 10/23/2006 <H3><B>LAW :A Contracting Checklist </B></H3> | <B><H3>Here’s What You Should Be Thinkin... Page 2 of 4 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 http://www.buildernewsmag.com/viewnews.pl?id=516 10/23/2006 <H3><B>LAW :A Contracting Checklist </B></H3> | <B><H3>Here’s What You Should Be Thinkin... Page 3 of 4 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 http://www.buildernewsmag.com/viewnews.pl?id=516 10/23/2006 <H3><B>LAW :A Contracting Checklist </B></H3> | <B><H3>Here’s What You Should Be Thinkin... Page 4 of 4 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