Tips for Avoiding Disputes in Construction Contracts

Fortunately, on construction projects, contract disputes rarely arise. This is because many parties have long standing relationships and otherwise adhere to custom and practice in the industry regardless of what their contract says. When disputes do arise, it is typically because the parties have a different understanding of contract terms. This is a discussion of some of the typical provisions that create disputes and tips for addressing them.

Incorporation Clauses

Incorporation clauses “incorporate” other documents into your contract, whether it is a proposal, an upstream contract, drawings or any other document. These clauses are important because they can significantly modify the terms in the contract itself. If, for example, your contract incorporates a proposal, the terms of that proposal are also part of your contract. Essentially, if your contract has an incorporation clause, your contract is not your contract. Your contract is your contract plus whatever else is incorporated into it.

Tip: Ensure that you know what is incorporated into your contract and obtain copies of all incorporated documents. Only then can you review all of your contract documents and know what they require.

Inspection/Investigation Clauses

Inspection and investigation clauses put the burden on the contractor to inspect and/or investigate the site conditions, drawings and/or specifications before bidding the work and entering into a contract for the work. These clauses are important because they limit a contractor’s ability to recover additional compensation, above and beyond the contract price (i.e. extras), if site conditions are not as expected or as indicated or if the drawings or specifications are improper or incomplete. If, for example, you sign a contract indicating that you have inspected the site conditions and drawings and are fully aware of those conditions but have not done that inspection and encounter some unforeseen conditions in your work which would have been identified during an inspection, you generally cannot recover the additional costs incurred as a result of those unforeseen conditions.

Tip: If your contract requires you to acknowledge that you have done an inspection or investigation of the site or the drawings before entering into the contract, ensure you actually complete that inspection or investigation, or it can cost you later.

Pay if Paid and Pay when Paid

Pay if paid and pay when paid clauses generally provide that a downstream contractor will not get paid until an upstream contractor gets paid. These clauses are important because they can drastically impact when payment becomes due. If, for example, you sign a contract with a general contractor including a pay if paid or pay when paid clause, the general contractor and the owner get in a dispute and the owner refuses to pay the general contractor, then you’re not getting paid either. Now, there are ways to get paid even despite these clauses, but those typically require perfecting and litigating a mechanics lien — something that can be expensive and time consuming.

Tip: Negotiate these terms accordingly. If you are an upstream contractor, you want them in your downstream contracts, and if you are a downstream contractor, you want them removed from your contracts.

Change Orders and Extras in Writing

Disputes over change orders and extras are the most commonly litigated issue on construction projects, and as a result, most construction contracts these days require that change orders and extras be in writing. These clauses are important because they outline how extra costs on a project need to be documented before being recoverable. It is worth noting, however, that if a change order or extra is requested orally, the person requesting that change order or extra cannot subsequently rely on a contractual provision requiring that change orders or extras be in writing to avoid having to pay for the additional work.

Tip: Confirm all on-the-job oral requests for additional work in writing, and if possible, include the price term for that work in the writing. Notably, everyone has a smartphone these days, and it only takes a few seconds to send a text or email confirming an oral change or extra request in writing, so there is no excuse for not documenting oral requests.

Discretionary Language

Discretionary, subjective language has no place in contracts, but it has become a typical part of construction contracts. This language is important because it gives one party great power in determining how a dispute will be resolved. If, for example, you sign a contract that provides that “work will only be accepted and paid for, if, in the sole opinion of the architect, it is done properly,” then that party has carte blanch to determine what work is acceptable and whether it will pay for that work. This creates issues when the party capable of making the subjective determination acts unreasonably or outside of custom and practice.

Tip: Ensure that all language in a construction contract is objective — namely, based on custom and practice in the industry, in a workmanship like manner, etc.

Attorneys’ Fees Provisions

Many construction contracts include a provision identifying who has to pay whose attorneys’ fees in the event litigation arises on the project or under the contract. When used properly, these provisions can be a useful tool to ensure that parties act reasonably in their dealings with one another. However, many times, these provisions provide that the downstream contractor will pay the upstream contractor’s attorneys’ fees in the event of litigation, giving the upstream contractor the upper hand in a dispute.

Tip: Include attorneys’ fees provisions in your contracts, but make them so the prevailing party in the litigation is entitled to attorneys’ fees from the losing party, as it will make all parties in a dispute act in a reasonable manner.

Get a Good Attorney

Having an attorney that can litigate contract disputes for you is great, but having an attorney that can keep you out of contract disputes is even better. To that end, every construction company should have a trusted construction attorney that it can turn to for the drafting of contracts and/or to address any contract questions or issues that arise during the course of a project. With services like Legal Services Link, which allows you to post a summary of your legal needs online to find an attorney, there is no longer any excuse for not having the perfect attorney on speed dial.

Matthew Horn, Esq. is the president and co-founder of Legal Services Link, a platform allowing those with legal needs and attorneys to quickly and easily connect via email.

For more articles regarding business in the construction industry, click here. Tags: February 2017 Print Issue