What Should Be Included in a Well-Made Construction Contract

Most people know very little about the potential dangers of the construction process until it’s too late. So when businesses look to expand or remodel their facilities, a seasoned construction law attorney can act as a safety net.
Construction laws vary by state. Talk to a local construction lawyer for legal advice about enforcing a construction contract for your building project.

Preparation Is Key in Construction Projects

“The level of quality between contractors can be astounding,” says Matt Herstein, an attorney with Deneweth, Dugan & Parfitt in Troy, Michigan. “Like anything else, you have some who are exceptionally good at it and some who you wouldn’t want doing [the job] at all.”

With construction projects, preparation is key. It makes the process easier and also allows owners to focus their attention on what’s most important, such as defining what they are getting and at what project cost.

“Paying attention to the scope of work and defining it at the beginning is probably one of the most critical ways to avoid a dispute later on,” Herstein says. “Nobody wants ambiguity because that’s ripe for litigation.”

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Final Payment Terms

Recently, a Boston business owner found himself too busy to follow up with his contractor, who’d dropped the ball in the final stages of a construction project. “It was pretty clear to me what was happening,” says Jeffrey Alitz, an attorney with Freeman Mathis & Gary. “The contractor started not showing up as much, missing weeks on end of not being on the site, and the schedule was starting to get off track — all signs that the contractor was looking to do other work.”

Alitz’s client had forgotten about a contract provision that allowed him to withhold 10 percent of each payment until project completion and instead had been automatically paying each invoice of the payment schedule in full. As soon as the owner started holding back part of the contractor’s fee, Alitz says, “Project done. No follow-up claims. Unfortunately, no work for lawyers like me. Simple advice, but once I gave it, the owner had the project finished to their satisfaction.”

Keep Your Construction Contract Simple

“No. 1: Keep it simple,” says Alitz. “Detailed contracts notoriously can be very thick, very wordy, and as a consequence, people don’t read them and tend to forget about them.”

Of course, simplicity doesn’t always make it easier. At a minimum, elements of a construction contract should address such questions as: When does the contractor get paid? Start date and completion date. Exclusions. Time frame. How will you resolve disputes? “Arbitration is great for contractors, not so good for the homeowner,” says Alitz, who recommends mediation if necessary.

He also recommends making sure the contractor bears the responsibility if the cost of materials and labor goes up. And, as in Alitz’s example, stipulate that you’ll withhold a percentage of what you owe as an incentive for the contractor to finish what they started.

Don’t Rush the Design Process

Mark McAlpine is the founding principal and managing partner of McAlpine Attorneys and Counselors, based in Auburn Hills, Michigan. In his experience, one of the biggest and most common mistakes is that owners tend to rush the design process, which can lead to schedule delays and increased costs.

This is especially relevant on larger projects that have several subcontractors or suppliers who are providing structural, mechanical, HVAC, and electrical design. When an owner rushes the design, it’s harder for the construction manager to coordinate these essential elements of the project. “Failure to do so could lead to conflicts during construction that are very expensive to resolve,” McAlpine says.

Reasonable Project Timeline

Lisa Glahn of Foley & Lardner originally worked as a construction litigator and later shifted to primarily helping clients write better legally binding agreements. “I grew tired of fighting all the time,” she says, “and realized that if the contract had just been written slightly differently, litigation could have been avoided.”

She often lectures on five key elements she says every construction contract should address:

1. The use of contingency funds
2. Lien waiver requirements and the right to discharge liens
3. Termination of the agreement
4. Force majeure (unforeseen circumstances such as inclement weather)
5. Indemnification and liability insurance requirements

Have a Legally Sound Construction Contract

However, it all comes down to the contract. There are many professional associations and organizations providing templates for construction projects. These can be customized for each project, and it isn’t unheard of for either party to adjust the contract documents to shift risk to the other side.

“In their base form, they are good, fair baseline documents that can get a project up and going and give everyone a level of comfort that this document has been prepared in a fair way that’s reasonable for all sides,” Herstein says. “The key is to have someone take a look at the contract for you.”

McAlpine agrees. Customizing standard contracts requires expertise that even a company’s in-house attorney may lack. One major reason for this is that construction contracts incorporate outside documents, such as building codes or industry standards. It’s hard to fully know how change orders could affect other provisions.

“There’s a lot of complexity to how these documents interact with each other,” he explains. “When you modify one, if you’re not careful, there can be a ripple effect. There are multiple layers of documents that have to be taken into consideration.”

Navigating Price Escalations, Delays, Materials Contracts, and More

Attorneys specializing in construction help clients navigate issues around price escalation, supply delays, and scope creep. You should address how you allocate risk for these issues in the contract phase. “These problems really didn’t exist as much three years ago, certainly not to the extent that they do today,” Herstein says. “Many older forms don’t really have this spelled out.”

To cope with price escalation, an owner may want to avoid risk by locking in a price, McAlpine says. However, by doing this, general contractors may, in turn, try to cover their bottom line by building in contingencies for the increases. One solution is for one party to cover a certain percentage of an increase, say up to 10 percent, with the other paying anything that goes over.

Owners typically do not favor this approach, so McAlpine’s firm has recently developed a more palatable solution. “There are a handful of commodities that are the most volatile right now, so in some cases, we’re putting in price escalation clauses that are key to those specific commodities,” he says.

Willingness to negotiate goes a long way toward successfully resolving an issue, and it’s rare that contractors and private owners go to litigation. However, patience is vital right now as the construction industry copes with supply and labor shortages.

“There’s tremendous pent-up demand in the industry,” McAlpine says. “It’s going to be an interesting couple of years ahead of us.”

Find an Experienced Construction Lawyer

Despite its complexities, the risk of not reading your contract can be huge, Glahn says. “Litigation is going to cost a ton of money. So is the suspension of work,” she says.

“It’s tedious. It’s painful. But understanding your contract is so important to getting the job done. I also think that if your contractor believes that you, as the owner, are detached from the agreement and don’t really understand what leverage you have, they are more likely to take advantage.

An attorney can provide vital legal help for dispute resolution, including a breach of contract or nonpayment, or if the need arises for arbitration.

Visit the Super Lawyers directory to find an experienced construction law attorney.