Proceeding With Services Before Contract: How To Do It With Confidence

By Bruce Demeter

Many professional firms commence services prior to the execution of a formal contract. Whether working for a private or public owner, contractor, or other professional, the notice to proceed often arrives before the formal contract. Most firms are comfortable commencing services because they are confident that a formal contract will follow and that, in the meantime, their proposal will be recognized as their agreement.

A Proposal Is Not A Formal Contract

While state laws vary on what constitutes an agreement, firms should not rely on their proposal as creating an agreement between the parties. A proposal, by its very nature, contemplates that a formal contract will follow to memorialize the parties’ understandings. Often, the parties will not come to terms regarding the contract or a contract is never forwarded. A firm that relies on their proposal as being the parties' agreement runs the risk of having a neutral third party, such as a court, declare that a contract never existed between the parties due to lack of key provisions. This arises, too frequently, when the client determines to cease payment due to alleged failure to meet schedule or budget. The client will assert that the parties never reached agreement on a contract. In such situations, the firm may be placed in a quantum meruit contract position. In such a position, collection of the hard costs expended is allowable, but not overhead and profit, so long as the party is found to have acted properly in the performance of services.

Develop A Well- Defined Proposal

The answer to the problem would appear to be simple: no work without a written contract. However, reality dictates that firms will continue to receive notices to proceed prior to an executed contract and will continue to commence to perform upon the receipt of the notice for fear of losing a job. Therefore, care must be taken to ensure that services are undertaken with the best possible protection in place. A proposal must be developed that contains sufficient, important information that sets forth key terms and conditions under which the services will be commenced. The proposal should be developed in such a way that if a neutral third party is called upon to determine whether or not an agreement existed between the parties, that the trier of fact can derive a clear understanding of each party’s responsibility.

At a minimum, a proposal should contain the following:

• A clear presentation of the scope of work to be performed.
• A clear description of services to be provided by the client, including consultants to be retained by the owner.
• Fee and reimbursement schedule including the invoicing details.
• Services that will not be performed except at additional cost.
• Important contract terms and conditions including, but not limited to, mutual indemnifications between the parties; limitation of liability; unforeseen conditions; dispute resolution procedure; delivery schedule; project budget; right to collect attorney fees; and waiver of consequential damages.
• Statement that the proposal shall constitute the agreement of the parties until such time it becomes incorporated into the final contract.

Written Confirmation

Once the proposal has been accepted, and the notice to proceed is issued, the firm should confirm in writing the client's direction. The confirmation should indicate that services are being performed in accord with the proposal until such time the contract is executed. After the initial notice is sent, periodic requests for the written contract should be issued. Every application for payment should be accompanied by a note that the executed contract is still pending and that services are still being rendered in accordance with the proposal.

Reality may dictate that certain things may have to occur before all "t's" are crossed and all "i's" are dotted. Reality does not, however, require the professional to abandon its risk control procedures. Everything should be done to define the parties' relationship prior to commencing any work. The easiest way of accomplishing this is to develop a well-defined proposal.

Bruce Demeter was a founding member of the construction litigation law firm Simon & Demeter, P.A. Prior to practicing law, he was a Construction and Project Manager on various multi-million dollar construction projects. Mr. Demeter is a frequent lecturer and writer on the subjects of risk management and construction law.

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