Friday, July 24, 2015

Make Your Contract Work for You: Top 5 Clauses to Review Before Signing this week’s Guest Post Friday here at Musings, we welcome back Rob Pitkin.  Rob (@KCconstrlawyer) is an attorney with the Construction Law Group of Horn Aylward & Bandy, LLC in Kansas City, where he handles Construction disputes and other types of sophisticated business litigation.  Originally from Iowa, he graduated from Wheaton College in Illinois and Wake Forest University School of Law in North Carolina.  Rob is listed in Best Lawyers in America in Construction Law and serves as an Arbitrator on construction cases for the American Arbitration Association. He has been practicing law for 25 years now and focusing on construction law for more than 15 years. 

Now that private construction work is now heating up, it’s time to revisit those pesky contract documents.  As Chris Hill famously reminds us, “the contract is king,” meaning that many disputes will be governed almost exclusively by what’s in the written contract you have on a project.  So, that begs the question:  What are the 5 most important contact provisions to look for?

  1. Scope of Work

It all starts with the scope of work.  General contractors will want to draft the scope of work as broadly as possible (e.g., “all electrical work,” “all HVAC work,” “all excavating work,” etc.) in order to protect against any “gaps.”  Subcontractors, on the other hand, will want to draft the scope of work narrowly, similar to an itemized bid.  Who prevails will determine the risk of paying for disputed work (no change order if broadly drafted and a change order if narrowly drafted).

  1. Right to Stop Work

It’s surprising to me how many construction contracts I review that don’t specifically permit the contractor or subcontractor to stop work on the project for breach of contract, usually nonpayment.  Without such a clause, the right to stop work is based on a what a court or arbitrator decides after-the-fact was (or was not) a “material breach.”  The better practice is to make sure the construction contract specifically provides that the contractor or subcontractor has the right to stop work upon any breach of the contract, including but not limited to failure to pay an invoices within a certain period of time (usually something like 30 days).  The contract should also provide for the recovery of costs of demobilizing and remobilizing to the job site in the event of such a shutdown and give the contractor or subcontractor the right to terminate the contract at its option under such circumstances (to avoid getting pulled back into a problem situation).

  1. Change Orders

I tell my clients that the terms of the change order clause is less important than following the process that’s laid out.  In other words, I wouldn’t mind a clause that requires written direction and agreement on price for change order before commencement of the work, as long as the contractor or subcontractor enforces this provision and doesn’t perform any additional work without such written direction and agreement.  It is important, however, to make sure the construction contract has a mechanism for dealing with what a commonly associated with a “construction change directive” – where the owner or general contractor directs the contractor or subcontractor to perform certain work without an agreement on price, which is then either resolved after the extra work is completed or litigated thru the applicable dispute resolution proceeding.

  1. No Damages for Delay

I am seeing these more and more in construction contracts.  Basically, these provisions state that the contractor or subcontractor’s remedy for a delay is only an extension of time – no damages.  That seems patently unfair under certain circumstances, especially if the delay is more than 50% greater than the original contract time.  In the construction industry, “time is money,” so the longer a contractor or subcontractor is required to be on-site it costs them money that should be recoverable if the delay is caused by the owner or general contractor.

  1. Dispute Resolution

Finally, make sure you review and understand what will happen if there is an unresolved dispute on the project.  I favor something simple and straight forward:  either litigation in court or binding out-of-court arbitration.  Often, you will see something where the owner or general contractor has the “option” of selecting the dispute resolution, which is problematic if the contractor or subcontractor is the party who initiates the claim.  Somewhat related to this matter is a forum selection clause, which may require you to litigate the case in a faraway venue (usually the owner or general contractor’s hometown).  The better practice is to litigate where the project is located.

In addition, subcontractors should always review their subcontracts to see if the contain a “pay-if-paid” clause that would make payment to the subcontractor contingent on payment by the owner to the general contractor.  If so, these provisions should always be negotiated to avoid the unfair result of the subcontractor bearing 100% of the risk of nonpayment by the owner.

As always, Rob and I welcome your comments below.  Please subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.

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