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The Benefits of Securing Early Legal Review of Construction Contracts

Posted by HMS Law Group | Nov 17, 2016 | 0 Comments

A construction contractor is naturally familiar with tools and methods of construction. When evaluating a potential job, it follows that a contractor tends to focus on what is going to be built, how long the job will take, and how much the job pays. These basic terms, if satisfactory, might seem sufficient to accept the job at hand and begin work. But before the first hammer is raised, another tool must be brought forth to ensure the project is square, level, and plumb – the contract.

A contract is one of the most important tools you have to drive the success of each job and protect the interests of your business. A well-written contract establishes a basis of communication and a point of reference between you and your client. An incomplete or otherwise poorly drafted contract can quickly lead to misunderstandings and disputes — problems that could expose your business to investigation by the Contractors State License Board or even litigation.

The details of a construction contract are critical to the value and success of a project. Consequently, it is imperative to ensure you have a qualified construction attorney review your contract not only to confirm that it is written in a way that is clear and fair to all of the parties, but to also make sure the contract is designed to best protect you and your business.

Early contract review by an attorney helps ensure that the expectations of the parties are accurately described in a written contract. A well-written contract avoids unexpected liabilities and promotes a smooth relationship between the parties. One indispensable part of a well-written construction contract is ensuring that the basic and most essential matters of any construction arrangement are addressed. Although some of those matters seem blatantly obvious, they can often be overlooked absent a thorough review, threatening the legal viability of the entire agreement.

Identifying the Parties

First, the parties to the contract must be identified appropriately. That requires the full legal name of each party, along with each party's corresponding address and signature.

Detailing the Scope of Work

Second, and more complicated, is the task of describing and circumscribing the scope of work. Scopes are often included in any construction contract, however, the necessity of thorough details is sometimes not well understood. Because this section memorializes specifically what the contractor will and will not do, providing adequate details is key. The scope of work should explain the exact services to be provided, and give a description of materials, quality, grade, and other specifications that pertain to the project.

Setting the Schedule

A schedule of work should also be included to describe who will perform each major component of the work and when.  The schedule of work should set forth a clear notice to proceed date, the date when construction will begin, and when the construction will complete, as well as describe which days on the calendar will be considered work days. This section will also typically include disclaimers of liability and responsibility for delay caused by the owner in performing any action that is a necessary precondition to the contractor's performance, such as securing necessary permits, approvals, or easements, or for other delays outside the contractor's control including weather events.

Addressing Risk-Shifting and Indemnification

Closely related is the matter of risk-shifting and indemnification. The contractor and owner will frequently try to shift certain risks from themselves to the other party, in order to avoid financial responsibility in certain scenarios. In its most basic essence, contractual indemnity occurs when someone agrees to hold another harmless for certain claims, losses, or damages. Indemnifications may appear to be mere legalese when in fact they may represent some of the most financially devastating clauses when something goes wrong on a project and people start pointing fingers. These clauses should never be accepted outright without heavy scrutiny.

Allocating Decision-Making Authority

Allocation of decision-making authority is another basic matter to be addressed by the contract. The contractor and owner both need to consider, within the total context of the project, who will have legal authority to make decisions regarding the project, including change order approvals and stage-based approvals. This determination should not be made in haste nor without thorough contemplation, because the named persons will have actual authority to legally bind the person or company they represent.

Establishing Cost  and Payment Terms

Finally, project cost and payment terms should be stated in clear and simple language. These terms should be approached carefully and directly so that there is no confusion regarding the cost of services included in the scope of the project. The payment section should address the schedule of payments, the amount to be paid, and the related terms and conditions. For example, the contract may specify progress payments of a fixed amount to be paid on a recurring periodic basis, with the remainder of the project value paid as a lump sum upon the contractor's satisfaction of all necessary performance conditions. The payments may have a built in delay, such as payable five days upon becoming due, or other terms as the parties agree.

Thoroughly vetting all of these details along with the remaining nuances of your construction contract can provide greatly increased predictability and enforceability. Contractors can protect themselves and guard against unforeseen contractual pitfalls by involving qualified legal counsel at the earliest possible stage. The qualified attorneys at HMS Law Group are ready to help your company navigate the contracting process to ensure that you get the most out of your construction projects.

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