It would be nice if everything could be done with a gentlemen’s agreement. But it’s important to get things down on paper in a written contract. That’s especially vital for high-dollar, complex items like construction projects – which require big investments up front, large commitments of capital and labor.
Furthermore, we all hope that all our projects are built to completion without any unforeseen obstacles, delays, hitches or confusion. But we all know that they don’t, and complications can arise that are beyond the ability of any party to a construction contract to foresee.
Here are some of the tenets of sound construction planning and contracting – and the essential elements of a sound construction contract that can withstand adversity and protect the interests of both sides.
Specificity. This is essential even before the contract is entered into, because no bid can be more accurate than the description and scope of work to be done. The contracting entity should ensure that whoever is drawing up the work requirement or request for proposal is qualified to do so. Conversely, contractors should be alert to the possibility that the authors of a ‘request for proposal’ (RFP) or work order may not fully understand what is involved. A successful contract is built from the very first engagement – which could be months before the actual contract is drawn up and signed.
Ideally, the RFP or its functional equivalent should include the following information:
- Property information, including location, approaches, and available storage/staging space. In today’s environment, with Google Earth, it’s often easy to include an areal photo of the work site.
- Architectural and engineering specifications, if they have already been drawn up. If not, contractors should plan on some back and forth as these requirements are identified.
- Environmental remediation or environmental impact mitigation requirements.
- Deadline for completion at a minimum. Milestones for partial completion if possible, though this is frequently a collaborative process. The deadline for completion is frequently set, however.
- Any additional constraints. For example, contractors on federal projects must pay workers according to the Davis Bacon Act, which frequently means that prevailing wages paid to workers will be higher for federal projects. States frequently have similar laws that govern state projects.
Pricing and Allocation
Contracts should address what expenses are reimbursable to the contractor and what kinds of costs are to be included in the contractors’ fees.
Any construction contract should spell out exactly when payment is due to the contractor. This frequently means a series of milestone payments to the contractor. The less frequent the milestone payments, and the later the payments are made, the greater the risk to the contractor.
Spell out at what stages of construction a payment is due to the builder – and the specific procedures for triggering that payment. Ideas include:
- Initial deposit and payment to get work started, hire laborers, lease equipment, and pay a project manager or team to start laying out the whole project.
- Completion of foundation, to include ground-level and basement plumbing and sewage fixtures
- Receipt of a key materials invoice
The contract should also specify how payment is to be made. Credit card payments are expensive. Contractors should bid appropriately. Where possible, use ACH or wire transfers with lower costs, or checks that can also be processed for little or no cost.
Contracts should identify the contract manager on both sides, by name and duty position. If there should be personnel turnover, including duty position can help clear up confusion in larger organizations, though ideally any personnel changes should be addressed in writing, to avoid questions about who is authorized to approve payments and change orders.
Don’t neglect the securing of permits and licenses as a deliverable. Everybody misses them, but they aren’t free, and are a showstopper if you miss this step.
Change order procedures
There is always a significant chance that contracts for construction projects have to be altered mid-stream to account for changes on the ground. Material availability, labor disputes, weather, changes in regulations or zoning, unexpected complications on the job site, and human error combine to lead contracting entities, contractors and subcontractors to alter the contract. Contracts should be clear about setting forth the project and terms while still allowing for flexibility in addressing real-world issues that come up.
Also, material, labor and permit costs can fluctuate. A thorough contract will take this into account, and provide a mechanism for pricing to increase to compensate for this.
Where contracts are less flexible, contractors will have to charge more, to compensate for the risk.
Even among well-intentioned, competent contractors, there is occasionally a mismatch that arises between the project and the core competencies of the contractor. Contracts should specify how and under what circumstances a contract can be terminated, and if a new construction company is to take over the project, what kind of ‘handover’ a contracting company can expect.