What every construction contract should have
Emergencies often require immediate responses, and the longer it takes to respond, the more serious the problem can become. In many cases, there simply isn’t time to draft and negotiate a comprehensive agreement that would ordinarily be fitting for a major project. When these circumstances arise, there are certain key issues that absolutely must be resolved before work can begin: • Scope of engagement: The contract should clearly describe what services are included and the standard of care and acceptance criteria being applied. The description should be as specific as possible.If there are other related or additional services that are not covered, or which would be available only for an additional fee, this should be noted to avoid any argument or confusion down the road. Whenever possible, avoid phrases that could broaden or add ambiguity to the agreement, such as “provide all goods or services necessary to complete the project.” Several industry associations such as the Associated General Contractors, American Institute of Architects and American Council of Engineering Companies, offer lists that may be useful in designing the scope. • Payment and billing terms: The contract should specify the basis for payment (for example, time and materials, milestones) and when payment is due. The agreement should also list the contractor’s rights if the owner does not pay on time, such as interest, attorneys’ fees or the right to suspend or terminate work.The more clearly you define these terms, the more likely you are to receive prompt payment and avoid payment disputes. • Limitation of liability: A limitation of liability establishes the maximum liability that a contractor will face if there is a claim resulting from the project. Limitation of liability clauses prevent huge losses that may be disproportionate to the profits or value of a project.Contracts should also include a waiver of consequential damages barring any indirect expenses such as lost profits. These damages, when applied, often grossly exceed the value of any project and can lead to financial disaster. • Suspension and termination: The contract should clearly define the circumstances when either party can suspend or terminate the project and the consequences that will result. Frequent bases for termination include uncured material breach, a party’s bankruptcy or assignment for benefit of creditors, substantial change in conditions, or in some instances, convenience.A termination or suspension will often result in substantial demobilization costs and waste in the form of financial commitments to subcontractors and vendors, the contract should specify how these costs, as well as any lost anticipated profits, will be treated in the event of a termination. • Dispute Resolution: A well-drafted dispute resolution clause reduces the likelihood that claims will lead to arbitration or litigation. Many contracts include escalation clauses, which require senior management to meet to try to resolve disputes as a prerequisite to litigation or arbitration. Senior management are often able to evaluate issues more objectively and keep personality conflicts from interfering with a business solution.Similarly, many contracts require parties to mediate disputes before proceeding to litigation or arbitration. Mediation is a nonbinding process in which a neutral third party works with the parties to help them negotiate a fair compromise. While this process is nonbinding, mediations very frequently resolve even hostile disputes and can help to prevent claims from becoming protracted and costly battles. Success in the market is often a function of realizing revenue while controlling risk.A well-written, enforceable contract ensures a clear understanding between the two parties, manages expectations and sets a path for resolving any disputes that may arise.Kenneth E. Rubinstein and Tobias W. Crawford are members of the Construction Law Practice Group at Nelson, Kinder & Mosseau, Boston and Manchester.