A Primer On Construction Contracts

AIA Doc ComparativeFor most contractors, daily responsibilities are simply too many to afford much time and effort in drafting optimal contract forms.  This task, however, should not be overlooked.  Contract language will directly affect your rights and obligations.  It will determine, among other things, your scope of work, payment rights, insurance, indemnity, and warranty responsibilities, as well as how and when disputes are resolved.  Favorable language can mean the difference between profit and loss and, in some circumstances, solvency and insolvency.  At the front end, presenting a well-crafted contract to the owner will reflect well on your business acumen and can help procure additional work.  While contracts should be tailored to particular customers and projects, the following is a primer on some important factors and terms to consider when creating or modifying your contract form.

1.  Contract Formation.  A common misconception is that anything short of a written document with the word “contract” in bold across the top will not constitute a binding contract.  More accurately, essentially any exchange between you and another individual or business may create binding obligations.  In legal parlance, all that is needed to form a contract is an offer, acceptance, and consideration.  Contractors should be aware that documents common to the industry, such as credit applications, quotations, purchase orders, change orders, delivery slips, and invoices can, in certain circumstances, form a contract and create obligations for you or your business.  In addition, casual exchanges in the form of emails or even verbal communications can also form a legally binding contract.

2.  Scope of Work Terms.  The provisions that set forth the contractor’s scope of work is typically the meat of the agreement.  These terms describe the service that you have agreed to provide.  It is imperative that you, your project manager, or whoever is responsible for contract procurement, pay careful attention to this provision so as to not bind your company to work that is unreasonable or untenable.  If the scope of work is attached as a separate document, which is common, that is permissible but should be referenced in a clear and concise manner in the principal contract document. 

3.  Payment Terms.  Equally important is the language that specifies how and when the owner is required to make payments.  These provisions should clearly set forth the method of payment, procedure for payment, and, if applicable, any conditions precedent to payment, such as inspections, or, as is common on larger projects, payment from owner to general contractor.  Keep in mind that for residential projects, the Home Improvement Contractors Act, M.G.L. c. 142A, prohibits up-front payment of more than one-third of the total contract price. 

4.  Risk of Loss.  You should pay close attention to the provisions that might affect your obligations in the event something goes wrong.  These primarily include clauses addressing insurance, indemnification and warranty.  This language is particularly important on projects where you are working alongside other contractors with whom you have no contractual relationship.  A poorly worded indemnity or warranty provision may cause your company to take on more responsibility than anticipated.  Make sure that the only work you own is work that you performed.  

5.  Dispute Resolution.  Alternative dispute resolution provisions have become the industry standard.  This is language that requires some form of mediation, arbitration, or both, often in lieu of litigation in the courts.  Arbitration is commonly viewed as a quicker and cheaper alternative to litigation, which is often accurate.  However, builders and remodelers should be keenly aware of the dispute resolution language in their contracts and should adjust the language as necessary to particular projects and circumstances. 

Do not overlook the importance of a good contract that is user-friendly and that contains terms that are advantageous to you or your business.  While the provisions referenced above are some of the more important terms to be aware of, all of the language in your contract form should be carefully reviewed to ensure that your rights and your business are sufficiently protected.

About David Fine

David is an partner in the firm's Litigation Group and is chair of the Construction Law Group. David serves as litigation counsel for contractors, subcontractors, suppliers and other business concerns within the construction industry. He regularly advises his clients on matters such as contract drafting and dispute resolution, surety bond claims, mechanics liens and bid protests. David works closely with a number of local and regional trade organizations, and he often lectures and writes about topics pertinent to the construction industry.
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