Constructing a Well-Built Contract

Recently, a Boston business owner found himself too busy to keep after 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 was so distracted he’d forgotten about a contract provision that allowed him to withhold 10% of each payment until the project was complete and instead had been automatically paying each invoice 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.”

A solid construction contract can mean the difference between a big headache and a satisfied sigh of relief at the end of a successful expansion or remodel. So what should you include?

“No. 1: Keep it simple,” says Alitz. “Construction 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, simple doesn’t mean easy. At a minimum, a contract should address such questions as: When does the contractor get paid? Can you take back the agreement if they bail out mid-way? How will you resolve disputes? “Arbitration is great for contractors, not so good for the owner,” 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, like it did when the pandemic triggered massive supply chain issues. 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.

Lisa Glahn of Foley & Lardner originally worked as a construction litigator and later shifted to primarily helping clients write better contracts. “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 critical areas she says every construction contract should address: the use of contingency funds; lien waiver requirements and the right to discharge liens; termination of the agreement; force majeure (unforeseeable circumstances such as inclement weather); and indemnification and insurance requirements.

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.”

If your buildout is pretty straightforward, you can get a contract template from the American Institute of Architects (AIA) and complete it yourself. But you might want an attorney to help structure the contract and flesh out details, especially if your contractor has hired one. Says Alitz: “The longer [the contract], the more likely it is you need someone who can assess it and do that quickly, someone who has seen 100 of them, knows what to look for and can explain the highlights.” 

For more on this area of law, see our overview on construction law.