Contracts — Knowledge is Power

Last week I brought up the fact that construction projects are ripe for litigation, and how to get prepared if it seems the project is going south. This week we’ll look at the importance of knowing what you’re getting into at the front end of a project — or in other words, when you sign the contract.

When it comes to contracts, knowledge is power. With a little insight, it may be possible to reduce the chances of getting into a budget-busting dispute. Construction disputes often involve a failure to understand or comply with the contract obligations.

The contract documents, which generally include the plans, project manual (i.e. general conditions, supplemental conditions, technical specifications, etc.), and the contract itself, not only define the scope of work, but they also provide a set of rules and procedures that all parties are to follow. This includes change order procedures, payment procedures, contract termination rights, insurance requirements, indemnity and a host of other important information.

The contract itself also usually defines the powers and limitations that each party has in enforcing those rules and procedures. This is an extremely powerful document, no doubt about it, but many people fail to really read the entire contract before they sign it, much less gain a full understanding of what they are agreeing to.

Judging from the sheer bulk of some contracts, hundreds of hours may have been invested in a contract attempting to make them as comprehensive and foolproof as possible. Yet, it may still fall short of being straightforward and clear for a number of reasons.

Here are nine things to look for in the contract documents to make sure you understand what you may be getting into. This is just an example of some of the common sources of disputes and is by no means an exhaustive list.

1. Defective plans or specifications. Look for anything that would be unreasonably difficult to perform and then clarify what is specifically required in the contract itself. This may be something physically impossible or a conflict within the contract terms. Do not think you will be covered if you list the item as excluded in your proposal or bid. Unless you write in the contract itself that your proposal or bid is included, once you sign the contract, your proposal or bid is not part of the agreement.

2. Unclear or generic scope of work. If the scope of work does not have a clear and detailed description of the specific tasks, getting credit for extras or changes may be difficult because these will not be easily measured against the original intended scope of work

3. Difficult procedures for receiving payments. Many general contractors’ contracts say that the subs get paid only if, or when, the general gets paid. While our courts have outlawed these provisions, people still tend to follow them during the course of the project. Who wants to wait for the end and battle it out in court just to get paid? Also, be aware of payment procedures that allow the owner or general to reject the entire pay application due to a minor defect in the application itself.

4. Inconsistent details. A common example is the stated quantity or quality of a certain material listed in the specs for the project does not match up with what is shown on the plans. Or what is shown on the plans as an existing condition does not match the actual site conditions. It is imperative that those discrepancies be addressed in writing as soon as you know there is a problem.

If you know of the issue before the contract is signed, do NOT sign the contract until the issue has been resolved and the appropriate changes are made to the contract before signing.

5. Unrealistic or undefined project schedules. If an owner or general provides you with the schedule, make sure it is reasonable for your work. If you can’t make theschedule, don’t sign the contract.

6. Vague timing for submittal reviews or requests for information. The contract documents should specify how long it will take the architect to review submittals or respond to requests for information, so that you will know what to expect to coordinate the information with the timing of work being performed on your project. This also allows you to send in a potential claim of the architect drags their feet.

7. Strict notice procedures for delays, extras and changes. It is imperative that you understand the deadlines for how soon you have to advise either the owner or general after you realize that extras or changes in the work are needed or there is going to be a delay. Many contracts have provisions that if you do not provide written notice within the time required, you waive any right to get additional compensation for that extra, changed work or delay. Courts have enforced these provisions, so make sure you comply!

8. Decisions in the owner’s or contractor’s sole discretion. Anything that allows an extremely subjective opinion as a final determination does not bode well for the person on the receiving end of that decision.

9. Incorporation of the prime contract. Subcontracts that reference the prime contract unusually mean that the subcontractor is obligated to the general to the same extent the general is obligated to the owner as it relates to the sub’s work. This applies to notices, insurance and indemnity. Unless the sub reads and understands what obligations the prime contract imposes on the general contractor, there is no way the sub knows what they are getting into.

The fact of the matter is, when a project is going well, the contract itself is rarely looked at. But, if anything goes wrong, everyone runs to the contract first to see who is at fault. If you understand — and follow — your obligations from the beginning, chances are, it won’t be you that everyone points a finger at.


Scholefield, Esq., holds an active PE license in Colorado, an undergraduate engineering degree from the University of Florida, and received her JD from the University of San Diego. Source Code: 20080222tca
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