Take time with 4 ‘standard’ contract terms

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The questions to ask before inking a construction deal

By Tamara Boeck
Dolan Media Newswires

Spend any time within spitting distance of a construction project and you’ll instantly feel how the crush of time pressure affects those involved in varying ways, with multiple ripple effects.

But pressure starts long before shovels hit the ground. Contract negotiators are urged to quickly tie everything up: ink the deal and get going.

The risk, however, is that many of the more mundane aspects of the contract don’t get the vetting they should, to the level they should.

When balancing time and money, don’t overlook these four standard terms:

Scope: Is it sufficiently detailed and allocated?

A significant majority of disputes arising during and after construction projects relate to the scope of responsibility among the numerous parties involved.

Developers/owners: Have you vetted the overlap or conflicts that may have been provided by your designers? Have you unwittingly assumed responsibility for some scope of the project that you never intended? Did you intend to have the general contractor assume responsibility for the entire project, including the design services? If not, do your agreements with the architect/engineer clearly define the obligations, including level of design and scope of liability, or mutuality of obligations?

Is the general contractor only responsible for building what was expressly provided in the design, with no liability for a failure of the ultimate performance or construction? Have you, as the developer/owner, implicitly or expressly warranted the plans and specifications? Will your architect/engineer verify the fieldwork by on-site inspection, and if so, how often and to what level?

Who is handling the payment application and verification of schedule of values? Are you qualified to oversee the general contractor’s scope of work and payment applications in a timely manner? Is your lender providing payment application review to a level of work quality satisfaction or more superficially?

Consider carefully who is responsible for what area of work so that proper sequencing, work, responsibility, warranty and liability will not end up in finger-pointing. Insurance and indemnity obligations should parallel the scope.

Insurance: Are the various coverages properly aligned to address the risk?

We all conceptually appreciate that risk does not disappear if it is not allocated; we just wish it would go away.

But are you ensuring that the risk is either fully allocated or insured to your business risk level of comfort? Do you, as the developer/owner, have sufficient levels of insurance for the course of construction, particularly business loss or failure to start the business or complete the project?

Is a bond more appropriate? If bonded, is the project adequately bonded past substantial completion, and does the bond termination coincide with the length of the warranty or statute of limitations?

Are there sufficient levels and scope (as well as duration) of completed operations insurance coverage for the project by the designers, general contractor and subcontractors/suppliers? Is there a limitation of liability, waiver of consequential damages, or some other cap on risk?

Do you have any or adequate business interruption or other property or casualty insurance to cover the bare risk that you’ve been allocated? Having a qualified broker and agent and experienced counsel is highly recommended.

Indemnity: Is it limited and capped?

The language and scope of indemnity provisions can be daunting to read and decipher. Have you considered each of the potential applications of the provision? Does the provision cover only items for which insurance would normally provide coverage?

What if there’s a breach of contract, but no personal injury or property damage? What if you or your agents contribute to the cause for the indemnification in whole or in part? Did you consider whether there is an obligation to defend even if the obligation to indemnify is not clear early on?

What is the indemnity obligation interplay with the insurance obligations? Do you have any say in choosing the counsel that defends your company? What if consultants and experts are necessary in your defense — is that included in the indemnity language? Does the language cover the costs and expenses of an appeal of any action?

What if the cause of a defect is a vendor’s product? Does the vendor contract waive liability, cap liability, or include any indemnity obligation if the claim against another is greater than that limit or cap? Does that limitation flow down to the subcontractors?

Have you verified that the applicable state law allows the provision? Many laws have changed in recent years and severely restrict terms in construction contracts.

Lien waivers: Are they valid, and do you have a process?

The bad economy revealed gaps in both the lien documentation waiver process and lack of compliance with good contracts. Do you have a detail-oriented staff person to manage the monthly paperwork?

Do you have current release waivers, both conditional and unconditional, for progress payments? Do your contract and/or state statute permit withholding payment until proper paperwork is received? Do you require full payment applications and releases as a condition precedent to any payment?

Do you require unconditional releases for progress payments to avoid surprises at the end of the project? Are you permitted to contact contractors and suppliers to verify payments or make joint payments if there’s any doubt as to compliance?

Have you considered requiring sworn statements with payment applications, and waivers or releases on payment applications that there are no outstanding claims or disputes for payments? Does your contract include immediate action by the contractor to protect the project from liens, stop notices, or other claims? If you have to remedy any claim and “chase,” are your fees recoverable?

While there’s no way to protect against every eventuality, proper advance consideration of known and common disputes will go a long way to mitigate these risks.

Tamara Boeck is a partner in the construction and design practice group of Stoel Rives LLP in Portland, Ore.