“What terms should be included in a construction contract?” is a question that I have been asked many times over the years. In a world where you can download fill-in-the blank contracts for minimal cost, it can be hard to know what makes for a “good” contract. What follows is a checklist for your consideration in evaluating your next contract.
- The place to start is the type of project. The agreement needs to match the delivery system. If you are using a hard bid form for a CM project, it’s time to start over.
- Integration is important. The general contract should match the subcontracts in terms of downstream obligations. Sets of forms are available from AGC and others that are designed to create matching sets of obligations.
- Key terms should be defined and used consistently. Great care should be taken in drafting those portions of the agreement that are unique to the project. The contract must be understandable by people that aren’t construction professionals, like a judge or jury.
- The issues that are the most frequent sources of dispute should be carefully considered. Disputes over scope of work, extra work, delays, and payment are all foreseeable on every project.
- Insurance, indemnity, and bonding are critical risk management tools for all project participants. You shouldn’t wait until a problem arises before knowing whether you are covered.
- Fairness is important. That means allocating risks to the parties in the best position to control them. Contracts that attempt to shift away the risk of the participant that actually caused the problem may sound good in theory, but they can backfire if they become a disincentive to project completion.
- Dispute resolution mechanisms are not a one size fits all consideration. There are important differences between mediation, arbitration, and litigation.
- The basis for contract termination should be easy to understand because the consequence of wrongful termination can be dire.
- Warranties should be specific and clear. Actions that cause the termination of warranty obligations should likewise be clear.
- Attorney’s fees can be recovered for breach of contract but only if included in the contract. Whether to include such a provision may depend upon whether you are the party most likely to be in breach.
The preceding list includes some of the more important considerations, but it is by no means exhaustive. Just like every project is a little bit different, every contract should be tailored to match.
Jason M. Smiley
Jason Smiley is a partner of Gunderson Palmer Nelson Ashmore, LLP in Rapid City, SD. He is a member of the firm’s Executive Committee. He practices in Construction Law, Real Estate, Personal Injury, Civil Litigation, and Insurance Defense. Jason understands that each client’s concerns and objectives are unique.