Construction Contracts and Contractor Forms Provide Solid Protection
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Despite the many strong advantages of standard form construction contracts, they don't fit all projects. Even where they are an appropriate starting point for your project, the contract terms may need to be modified to fit your specific circumstances. In considering whether a standard form construction contract is appropriate, and which one to use, you should keep in mind that if they have been developed by specialty trade groups, the contractor contract terms can, in subtle and not so subtle ways, favor the membership of that trade organization.
For example, construction contract documents created by the American Institute of Architects are sometimes used and, in general, are well-balanced documents. The AIA documents provide a significant project role for the project architect, which may or may not fit the contractor's delivery system. By contrast, the Associated General Contractors of America, in conjunction with other organizations, has developed a construction forms series which it claims are well balanced and don't favor one particular party. Both of these examples highlight the need for the contractor to be well versed with the particulars of the contracts he uses, and understand where to modify the terms to suit his needs.
Standard form construction contracts have several advantages. First, because the documents are widely used in the industry, the terms are generally well understood by parties involved in construction, which hopefully results in fewer misunderstandings on the job. Unlike construction contracts drafted from scratch that may fail to address important issues, the contractor form contracts are generally thorough and cover virtually any issue that is likely to arise in a construction project.
In drafting arbitration clauses on a construction project, the owner should take care that the clause in the owner-architect, owner-engineer, owner-general contractor and owner-construction manager building contracts each provide that all parties may be brought into one proceeding.
Because standard form construction contracts have been used over a period of time, a body of case law has developed addressing the specific legal contract terms and clauses used in these types of contracts so that when issues arise, the parties can look to prior decisions to see how certain key provisions have been interpreted. Standard form construction contracts are easily obtained at a relatively low cost.
From a contractor’s point of view, the owner’s exercise of a termination for convenience clause can impact the contractor’s profit. Simply stated, if the construction contract is terminated for convenience, the contractor will not earn the profit that was anticipated when the construction agreement was executed. If the agreement is terminated, the amount paid to the contractor may not recapture the contractor’s office overhead that was allocated to the contract.
On occasion, an owner may go back and forth between terminating a construction contract for convenience, rather than for cause. Many owners use a termination for convenience clause as a precaution when they are not sure if there is sufficient grounds to terminate for cause. If the owner selects termination for convenience in a contract, he might be able to avoid the possible contention that termination for cause was improper.
A professional who is familiar with all types of construction contract, as well as construction practices, can determine what contract modifications may be necessary for your particular project. Given the propensity for construction projects to result in problems such as cost overruns, schedule delays and payment disputes, it is important that your construction contract protect your interests. Overall, a properly tailored standard construction form contract is the best way to ensure that you get the end result you want and any disputes are resolved in a fair and appropriate manner.
Under the Cost Plus construction contract, the builder is paid for the actual cost of labor and materials plus a fee, usually in the form of a percentage. This construction agreement is used when the scope of the work is uncertain or the client wants to make decisions on materials and workmanship during the project. Project costs in Cost Plus construction contracts often exceed initial estimates.
Because construction projects can be so complex, the construction industry has a long tradition of providing, in the body of a construction contract, for disputes to be resolved through arbitration proceedings. If you chose to use a standard form builders contract for your project, it is still wise to have that document reviewed by an attorney or other professional.
Termination for convenience clauses in construction forms are intended to provide the owner with the option to terminate the remaining balance of the contracted for work for a reason other than the contractor’s default. If the owner cannot obtain additional financing to complete the work, the owner can terminate the balance of the work for convenience so long as there is a termination for convenience clause in the building contract. If a construction contract does not contain a termination for convenience clause, and the owner terminates the agreement before the work is complete, then the contractor would be entitled to the value of the work completed plus profit that he or she would have earned on the balance of the contract.
In addition to terminating a construction contract for cause or convenience, an owner can delete any or all of the balance of the scope of work. Should the owner make a deletion at any time before or during performance of the construction agreement, the contractor must review the contract to determine what his or her rights and obligations may be.
The Construction Management contract arrangement is suited to the client wanting to simplify personal involvement in a home building or remodeling project. The client works with the construction manager to outline in the body of the construction contract what he wants, and seeks the professional advice of the manager to help protect his interests. The construction manager, in accordance with the terms specified in the construction contract, works with the architect and builder or sub-contractors to oversee completion of the project.
Unit Price construction contracts are primarily used for repairs and maintenance. The work is detailed in an itemized schedule attached to the contractor form listing each construction trade. The job is broken down in the building contract into segments such as electrical, drywall and painting with a fixed price for each type of work.
Many construction contracts include a clause that allows the owner or the prime contractor to terminate the contractor’s remaining work on the project at the owner’s convenience. A contract termination may not due to any fault on the part of the contractor. Termination for convenience clauses first were included in federal government procurement construction contracts. Termination clauses now are becoming common in private construction contracts.
In every construction contract there is an implied covenant of good faith and fair dealing. It can be argued that if the termination for convenience clause in a contract is exercised in bad faith, the termination may be a breach of contract. If the owner chose to exercise the termination for convenience clause in his building contract when the project work was ninety percent complete, in order to avoid paying the balance of the profit on the remaining contract work, the termination could be held to be a bad faith termination and constitute a breach of contract.
Most construction contracts include provisions for termination of the contractor’s remaining work on a project under certain pre-defined conditions. Contract clauses typically are included to define the particular events that will allow the owner to remove the contractor from the project and prevent the contractor from completion of his or her scope of work.
Termination for convenience clauses are common in government construction contracts. If a construction contract does not include a termination for convenience clause, termination for anything less than cause entitles the terminated contractor to its loss profits for the project.
Termination under the provisions of a contract constitute termination for cause. Termination clause provisions in a construction contract will define what constitutes a default that entails sufficient cause for the owner to terminate the contract, and spells out the rights the construction contractor has under the contract to remedy such a default.
There are numerous standard form construction contracts available in the marketplace. Most construction contracts have been developed by trade groups and organizations whose members play a significant role in the construction business, or by private companies specializing in construction contracts, such as Contractor City and UDA. Among the organizations whose standard form construction contracts are widely used are the American Institute of Architects (AIA), the Engineers Joint Contract Documents Committee (EJCDC), and the Associated General Contractors of America (AGC).
Organizations and companies such as the AIA, the AGC and the EJCDC have developed a series of contractor forms and documents addressing different types of construction projects. Contractor City specializes in robust, flexible forms and contracts for small to medium contractors. All good construction contracts define the various relationships that may exist on a project such as contractor/subcontractor, architect/owner, etc.
Before including a clause in a construction contract providing the authority to elect between arbitration and court, the law of the state where the project is located should be reviewed. A few states have held that certain building agreement arbitration clauses are unenforceable as they lack mutuality of consideration. Most states allow arbitration clauses in commercial builder contracts.
When choosing construction contract arbitration, consider some important issues in drafting such a provision, regardless of whether you are an owner or a general contractor. Important construction arbitration considerations include concepts such as should you use a neutral service provider, do you want all disputes to go to arbitration and how will the arbitrators be selected. Good construction forms note details such as whether an arbitrator will award the cost of the arbitration to the prevailing party, will the arbitration be confidential, and so forth.
Draft the building arbitration clause to provide that the drafter of the clause, whether an owner or a general contractor, has the right to elect to proceed either in court or in arbitration. Porper drafting provides the flexibility within the body of the construction contract of deciding which venue is appropriate for the particular dispute.
The Time and Materials ccontract structure is typically reserved for major repairs under one contractor. The client pays for the cost of materials and labor on an hourly rate. Time and Materials construction agreements contain no additional markup or fees. If a Time and Materials contract does not specify completion within a specific number of hours, the job may take longer than necessary.
Time and Materials is a rare contract and is usually seen only in maintenance arrangements, handyman work and certain public works contracts. Under the time and materials schema, the contractor charges an hourly or job rate plus the pass-through expense of its consumables. You only pay when your contractor works, so many contractors will tend to work very slowly under a time and materials arrangement.
Construction projects, whether a simple office remodel or a multimillion-dollar plant expansion, can be one of the more challenging projects undertaken by any business entity and require a solid construction contract. A properly drafted set of contractor forms can be key to a successful project by establishing the expectations, rights and responsibilities of the owner, contractor and other parties involved in a modern construction project.
Given the vital role a good construction contract can play in a successful construction project, it is important to put in place a contract that meets the needs of your specific project. In many instances, parties rely on standard form construction contracts. If you are considering using a standard form contract, it is important to know the pros and cons of doing so.
Termination for convenience clauses also are becoming increasingly common in private works building contracts. If a prime construction contract contains a constraining clause, any related subcontracts should also include a similar clause. The amounts paid under the subcontract constraining clause should reflect the prime construction contract’s constraining clause.
Under the Design-Build construction contract, the architect, designers and builder work together to prevent delays and save time. Historians note that this style of contract is centuries old. Many companies offer design-build services, and use contractor forms specializing in new home construction or remodeling.
Design-build construction contracts are presented as a convenience to save time and money by not dealing separately with architects, designers and builders. Design-build works best for standard designs that are built repeatedly but not for renovation projects requiring custom detailed construction contracts. It is normally the architect's job to ensure the builder follows plans and construction codes, and no construction contract can compell an architect to objectively perform this task when employed by the builder.
Whether taking on a simple tenant improvement, developing commercial land, or building a dream home, you will need to use a construction contract to get the project done. Knowing the types and choices of construction contracts before signing is the first best step towards protecting yourself.
In a Design and Build contract, the consumer contracts with a single party that both designs and builds the project. Commonly the design-build party in this arrangement is either a joint venture between an architect and builder, or a builder that also functions as a design professional. In a design-build agreement, substantial cash and time savings can be realized by using one party and there will be a predictable cost and better execution of the project due to clearer understanding of the creative vision by the builder. In the event of problems, the client is protected by the construction contract and has a single source for the responsibility for the finished product.
Whenever a problem arises in any construction using a design-build construction contract, the client does not risk being stonewalled by a separate builder and design professional each blaming the other for errors. The construction documents for the solicitation of bids under design-and-build require for a lot of up front details to be furnished by the client, including a layout of the project scope and the size, type, and desired design character of the building and site. Design-build contracts include as project specifications items covering type and quality of materials and workmanship.
Under the Cost Plus construction contract arrangement, the contractor is reimbursed for the actual cost of labor and materials, plus charges a fee which is typically a lump sum or percentage of the total costs, for overhead and profit. A Cost Plus contract rarely starts with a blank slate regarding specifications and costs. In a Cost Plus agreement, the client and contractor will create a list of specifications then estimate a budget to match to those specifications.
The contractor under a Cost Plus construction agreement will have to keep good records of its costs, as most clients in a cost-plus arrangement tend to overspend. A great way to stay on budget within a cost plus building contract is to set a guaranteed maximum price. Contractors are aware that where the client wants to have a free hand to select materials and workmanship as a project proceeds, the Cost Plus arrangement can be extremely flexible and accommodating.
Most construction contracts include a change order provision. Construction contract change order clauses allow for adding and deducting changes. If an owner attempts to delete all of the remaining work on a construction contract and tries to give it to another contractor, the owner is in breach of the contract. Construction change order clauses are intended to further the contract, not to prevent completion, and they protect the contractor.
There is one construction contract that directly benefits the client by guaranteeing that the builder will complete the project for a set price - the Lump Sum construction contract, also known as the Fixed Price, Specifications, Complete Plans or Stipulated Sum construction contract. The fixed price type of builder contract requires complete plans and specifications setting forth directions in enough detail to enable a contractor to carry them out. The builder may add other commitments in the standard contractor forms, such as a specific schedule, a management reporting system or quality controls. For people on a budget, a stipulated sum type of contract is very predictable. Under the Lump Sum construction contract, the builder can request additional money in the event of an unanticipated occurrence.
A construction contract is a contractual agreement between the client and contractor that defines what is expected from each party and when, and which also provides each side with levels of legal protection. Every country and state or province has authority over construction contract agreements within its borders, and requires specific disclosures be included to ensure codes and regulations are observed. All residential building projects should be performed under a construction contract, whether it's new home construction, a remodeling project or major repairs.
Customers who are not able to fully articulate the desired project specifications should expect that the contractor will attempt to shake out as much profit as possible from their construction contract, meaning that if the client did not provide a specification for a certain aspect of construction, the contractor will most likely use the lowest suitable grade materials and workmanship to save costs.
A solid construction contract, spelling out the materials and specific steps and phases to complete the job, protects both the contractor and the client.
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