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Developing a Construction Contract:
Clauses to Consider
A contract is as important to the success of any project
as the estimate. Unfortunately, contractors only spend
a fraction of the time reviewing a contract as they
do in preparing their bid. As a consequence, tight profit
margins are quickly exceeded by claims that are not
properly controlled by the contract.
A key to minimizing and controlling risk is the contract.
A contract, while it will not guarantee that a claim
will be avoided, can greatly control and reduce a contractor’s
liability exposure. Following are a few contract clauses
that may warrant special consideration.
Changed Site Conditions
Analysis and Comments
A “Changed Conditions” claim is not an
automatic right. The contract must expressly provide
for the ability to make a claim if the situation arises.
Often the contract will set a review standard and time
frame in which to make a claim. These contract clauses
will indicate the condition(s) that must exist to warrant
recovery. Any procedures set for submitting a claim
must be followed. Failure to follow procedures could
result in a waiver of the claim. A Changed Conditions
clause will typically permit recovery for “unforeseen”
conditions, as a contract right. Disclaimers and exculpatory
clauses may limit the Owner’s liability for unforeseen
conditions. Burden of proof and risk of loss are often
shifted to the Contractor by requiring it to inspect
the site and prove that the condition would not have
been discovered by a reasonable inspection. Disclaimers
may be negated if the Owner is discovered to have withheld
significant information from the Contractor regarding
the project site conditions.
Contract Clauses to Consider
- “Contract sum will be equitably adjusted
for conditions which are (1) at variance or differ
materially from those indicated on the plans, or (2)
differ materially from those generally encountered.”
- “Contractor shall be reasonably compensated
for site conditions that are materially different
than those shown on the contract documents.”
- Contract Clauses to Avoid
- “Contractor warrants it has visited the site
prior to entering this contract.”
- “Owner/Architect do not warrant or guarantee
the accuracy of any information concerning subsurface
conditions contained in the contract documents.”
- “Contractor agrees not to use any information
provided by Owner, or to make a claim arising from
the variance from the information provided by the
Owner and the actual conditions.”
Time Extensions
Analysis and Comments
Time extension provisions are important components
of construction contracts. Time extensions help define
the status of the project schedule, delay claims, assessment
of liquidated damages, and the Owner’s right to
terminate. Contracts will often recognize the right
to seek time extensions, but limit the Contractor’s
remedy solely to an extension of time. The contract
should clearly define the circumstances for granting
and obtaining a time extension. The work that is delayed
should be compared to critical work items in order to
determine the proper time extension. An Owner’s
refusal to grant a time extension may result in a constructive
acceleration claim.
Contract Clauses to Consider
- “Contractor is entitled to extensions of
contract time for any delays beyond its control.”
- “Contract time shall be extended to reflect
changes in the scope of contract work.”
- “Owner has the right to have other Contractors
on the site, and, if there is any delay, as a result
thereof, then the contract time will be extended.”
Contract Clauses to Avoid
- “Contractor shall coordinate the work of
all project parties, including parties contracted
by the Owner, and Contractor shall not be entitled
to a time extension for delays caused by any other
party.”
- “Contractor will receive a time extension
only when a no cost change order is issued to the
Contractor.”
Defective Contract Documents
Analysis and Comments
Defective contract documents may entitle the Contractor
to compensatory damages for delays, extras, changes,
etc. It may also relieve the Contractor from having
to perform all or a part of the contract work. If defects
exist, the Owner may have materially breached an implied
warranty that the contract documents were suitable for
construction. The key word is “materially,”
since minor breaches of implied warranty may not entitle
the Contractor to compensation. Owners must be aware
that its obligation to furnish a Contractor non-defective
contract documents often exceeds the responsibility
of the Architect/Engineer to provide similarly accurate
documents.
Contract Clauses to Consider
- “Contractor will be compensated for work
not shown or reasonably reflected on the contract
documents.”
- “Contractor may claim for additional or extra
work arising from defects, deficiencies or conflicts
contained in the contract documents.”
Clauses to Avoid
- “Contractor shall review the contract documents
for accuracy and conformity and notify Owner of any
defects.”
- “Contractor shall review the documents for
conformity with applicable laws and notify Owner of
any violation that may be found.”
Plans vs. Specifications
Analysis and Comments
Plans and specifications are to be read together.
In case of conflict, the contract can provide direction
as to the interpretation of the documents. However,
contract clauses establishing the priority of documents
might not conclusively govern the interpretation. More
specific details often take precedence over general
provisions, even though a contract clause may state
the contrary. In the absence of a controlling contact
clause, the law will often give precedence to the more
specific detail.
Contract Clauses to Consider
- “The more specific detail will prevail.”
- “In case of conflict between plans and specifications,
the specifications will govern.”
- “All discrepancies between the plans and
specifications identified by either the owner or contractor
shall be brought to the attention of the other party,
in writing, in a timely manner to resolve conflict.”
- “In case of a conflict, the more reasonable
means of proceeding in terms of costs shall prevail.”
Contract Clauses to Avoid
- “In case of conflict between the plans and
specifications, the Contractor will , at its own cost,
the work that is most detailed and expensive.”
- “Contractor is responsible for performing
all work necessary to complete the project as designed
regardless of whether the work is necessitated by
a conflict or lack of information contained in the
plans and specifications.”
Acceleration of Work
Analysis and Comments
A clause allowing the Owner to direct acceleration
and provide for compensation to the Contractor will
require reasonable compliance by the Contractor. In
other words, a Contractor cannot refuse to accelerate
where the contract specifically allows the Owner to
institute acceleration. This could pose a problem if
the Contractor has neither the forces nor the equipment
to accelerate when directed by the Owner. Before accepting
an acceleration provision, a Contractor should weigh
its possible ramifications carefully. When directed
to accelerate, the contractor should record all costs
that are incurred as a result of the acceleration including
home office staff and overhead costs.
Contract Clauses to Consider
- “Owner shall have the right to direct the
Contractor to increase its manpower and/or work hours,
and owner shall compensate contractor if Contractor
agrees to accelerate.”
- “Contractor shall not increase its manpower
at the direction of the Owner unless the direction
is provided in writing and with an acknowledgement
that Contractor shall be compensated for the increase
and the Contractor shall not be held responsible for
any damages if Contractor’s reasonable efforts
result in the timely completion of the project.”
Contract Clauses to Avoid
- “Owner shall have the right to direct the
Contractor to increase manpower and/or work schedules
to meet established project schedules without additional
compensation.”
- “Owner, at its discretion, may adjust the
project work schedule and any adjustment of schedule
shall not give rise to a claim from the Contractor.”
Work And Contract Changes
Analysis and Comments : An Owner’s right to
perform changed work, including the method of performance,
should be established and defined by the contract. The
scope of a change should not be infinite. Typically,
changes are permitted only where it is “within
the general scope of the work.” A change directive
may be a breach of contract if the work, means and methods
of performance, or procedure are drastically altered,
or if there is a “no changes clause.” The
contract should provide the procedural requirements
(notice, written authorization, etc.) where a change
affects the contract price or project duration. The
Contractor may waive its right to compensation or extensions
of time if it performs extra or additional work without
a properly authorized change order. Change orders should
include all terms, directives and conditions the parties
agree to such as, but not limited to, time, cost, regional
workforce increases, etc.
Contract Clauses to Consider
- “Owner reserves the right to increase or
decrease the work of the Contractor and increase and
decrease the contract amount as is mutually agreed
upon by the Owner and Contractor.”
- “Contractor shall not perform extra work
without written authorization by way of an executed
change order or change directive with cost to be settled
later.”
Contract Clauses to Avoid
- “Owner reserves the right to increase or
decrease the work of the Contractor and determine
any increase or decrease to the contract amount it
deems appropriate.”
- “Contract work may be adjusted in accord
with the project budget and schedule by the project
Owner.”
Interference With Work
Analysis and Comments
Interferences may result from actions of the Owner,
the Architect/Engineer or other contractors as a result
of poor coordination; disruption of performance schedules;
unavailability of site and work areas; defective contract
documents; etc. While similar to a delay, the act of
interfering with the work of another is recognized as
a separate action for which a recovery may be due. A
Contractor’s right to a recovery is dependent
upon the terms and conditions contained in its contract.
Intentional and unreasonable interferences can constitute
a breach of contract regardless of the provisions contained
in the parties’ contract. The contract should
be the source for determining which interferences are
compensable. Generally, interference disputes that arise
between Contractors are not compensable by the Owner.
Contract Clauses to Consider
- “Contractor shall be compensated for delays
caused by Owner.”
- “If Contractor’s performance of work
is hindered, delayed or disrupted by the actions of
the Owner, Design Professional, Construction Manager,
or any other party, Contractor shall be entitled to
a time extension, contract cost adjustment or both.”
Contract Clauses to Avoid
- “Owner shall not be responsible to the Contractor
for delays caused by other contractors, the Owner,
or any of Owner’s representatives.”
- “Contractor shall receive a time extension
only if a work interference occurs.”
Liquidated Damages
Analysis and Comments
The inclusion of a liquidated damage provision has
important consequences for both the Contractor and Owner.
A liquidated damage provision, and “time is of
the essence” provision, requires greater emphasis
to be placed on the time extension provision. A Liquidated
Damage provision is normally a substitute to the Owner’s
right to collect actual delay damages. It represents
the Owner’s attempt to quantify potential losses
for delays prior to the start of the project. Liquidated
damages viewed as penalties may not be upheld.
Contract Clauses to Consider
- “Contractor shall be liable for $___ for
each day work progresses beyond the contract completion
date that are a result of the Contractor’s acts
or actions.”
- “Contractor shall not be responsible for
any costs arising from delays to the performance of
work.”
Contract Clauses to Avoid
- “Contractor shall be liable for $___ for
each day work progresses beyond the contract completion
date.”
- “Contractor shall pay the Owner those costs
set by the Owner for each day the project runs beyond
the scheduled completion date.”
- “Time is of the essence, and the Contractor
shall be responsible for any delays to the project
schedule.”
Termination
Analysis and Comments
“Termination for Convenience” and “Termination
for Default” should be separate contract clauses
because they refer to totally different events. The
convenience clause permits the Owner to discontinue
work without the Contractor being in default of the
contract. The Termination for Convenience clause should
specify the procedures by which the contract may be
terminated, as well as the compensation that will be
paid to the Contractor. Often, lost anticipated profits
are not recoverable costs in a termination for convenience
situation. A termination for convenience is not an automatic
right, but must be exercised by the Owner in good faith.
The Termination for Default provision should specify
the conditions upon which it can be exercised. It should
also contain a “correction period” to allow
a Contractor an opportunity to correct the default and
control their risk exposure.
Contract Clauses to Consider
- “Owner shall have the right to terminate
Contractor for failure to . . . "
- “Owner may terminate contractor for its convenience
but shall pay the Contractor for . . .”
Contract Clauses to Avoid
- “Owner may at any time terminate the Contractor
at the Owner’s discretion.”
- “Owner may stop the project at any time without
having to compensate Contractor.”
Legal Fees
Analysis and Comments
Legal fees are a non-recoverable cost of arbitration
or litigation unless the contract or a statute specifically
provides for recovery. The potential for having to pay
another party’s legal fees, if you are proven
to be wrong, or having acted in bad faith, will promote
the settlement process. At the time a contract is executed,
neither party is planning a dispute, and will therefore
normally include a “never to be used” legal
fee clause. Contractors should ensure that these provisions
are not one sided, but equitable and fair.
Contract Clauses to Consider
- “All legal fees shall be paid to the prevailing
entity.”
- “The prevailing party in a dispute shall
be entitled to seek recovery of reasonable legal fees.”
Contract Clauses to Avoid
- “Owner shall be entitled to collect attorney’s
fees if Owner prevails in a dispute situation.”
- “Owner shall be entitled to collect attorney’s
fees from Contractor if Contractor fails to recover
the full amount of the claim Contractor has asserted
against Owner.”
Arbitration/Litigation/Mediation
Analysis and Comments
Arbitration and litigation procedures have respective
pros and cons that must be considered before a contract
is entered. Regardless of whether arbitration or litigation
is selected, an intermediate step that promotes early
dispute resolution should be inserted into the contract.
Disputes that are left to the end of the project create
adversarial positions. Early dispute resolution procedures
can include a form of on-site mediation or mediation/arbitration
that is triggered once a claim is filed. On-site resolution
will avoid adversarial entrenchment. Contractually,
joining the Architect/Engineer in any subsequent proceeding
should be considered to avoid separate proceedings from
progressing in separate forums with regard to the same
issue. Legal fees can be reduced or avoided if early
communication and resolution of disputes is required
by the contract.
Contract Clauses to Consider
- “Any and all claims shall be submitted to
mediation as a condition precedent to proceeding in
arbitration or litigation.”
- “Owner and Contractor agree to submit any
and all disputes arising from this contract to a dispute
resolution panel formed by Owner and Contractor prior
to the project’s start.”
- “Architect/Engineer shall be joined in any
proceeding as a necessary party.”
Contract Clauses to Avoid
- “The Architect/Engineer’s decision
shall be final with regard to any dispute or claim.”
- “Owner shall select the dispute resolution
procedure at the time a dispute arises.”
XL Environmental • Risk Control Division •
520 Eagleview Boulevard, PO Box 636, Exton, PA 19341
• Phone: 800-327-1414 • Fax: 610-458-7285
• xlenvironmental.com
XL Environmental is a division of XL Specialty Insurance
Company.
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