Construction Contracts—Five Tips for Owners

Construction Law Report Spring 2013

05/01/2013

Christopher M. Walters

In a typical construction contract negotiation, the contractor starts with an advantage over the owner. It has negotiated dozens of contracts, typically using the same form, and knows what that form says. Owners often are not in as enviable a position. Most owners negotiate construction contracts (and for that matter, contracts with architects, engineers and other project professionals) on an occasional basis, and often accept boilerplate forms provided by the contractor without substantial discussion or negotiation. This article provides some basic guidelines for review and negotiation of construction contracts by Oregon property owners, their project managers and representatives.

  1. Start With the Right Contract. An owner must first decide whether to accept a contractor’s proposal to start with its form, or instead prepare its own contract. In either case, the owner must establish whether the form under consideration is appropriate for the transaction. For example, contractors sometimes will present a standard construction form in cases where a hybrid design-build or construction-management form is more appropriate. Whichever form is selected, a careful initial review of the entire document is warranted, to determine whether it includes provisions that are consistent with fundamental transaction terms. For example, contractors often provide for consideration an unmodified version of a form published by the American Institute of Architects. Owners should recognize that the AIA publishes at least a half-dozen different forms of construction contract, to deal with differing project complexities and structures, and that other organizations publish construction forms that may be more favorable to the owner, or more tailored to the construction format being used.

  2. Cover the Basics. From an owner’s perspective, the fundamentals of any construction contract are the definition and scope of work, time for commencement and completion, price, and closeout responsibilities. Each of these fundamental concerns may or may not be adequately covered in the contractor’s proposal, or the standard language of its contract form. Forms typically include qualifications to each of these basic parameters, which may excuse the contractor from responsibility for expected performance. Some of these qualifications may be not be obvious. For example, while the standard AIA construction forms give the parties an option to negotiate liquidated damages for late performance, they also include a boilerplate clause where, unless changed, the owner waives all claims for loss of income or use arising from late project delivery. Thus use of the standard form without modification could leave the owner without practical remedy for late performance by the contractor. Similarly, contractors often present forms where compensation is stated on a time and materials basis, giving the owner no protection if costs exceed the owner’s budget. Identification and consideration of such fundamental issues is critical.

  3. Pre-Construction Considerations. It is important that the contract properly allocate between the parties responsibility for such pre-construction matters as the contractor’s review of site conditions, and the procurement of permits, insurance, and bonds. Standard forms may include provisions that are inconsistent with the owner’s intent. For example, the standard AIA construction forms mandate that the owner purchase “all risk” builders risk insurance. An owner who signs such a form, without the purchasing such insurance, may be at risk of loss for claims that would have been covered by the policy, including potential claims from the contractor.

  4. Consider the Construction Process. The construction contract should clearly document the roles and responsibilities of the owner, contractor, and design professional during the construction process. Many boilerplate forms give short shrift to the role of the owner (and its project manager), and instead allocate to the architect rights that the owner may consider excessive. Conversely, many standard forms provide the contractor with multiple grounds for excuse if the project is delivered late or not in accordance with the owner’s program.

  5. Address Job Closeout. A typical standard form will give a generic standard for project completion that, in most cases, is inadequate. For example, if the project should not be considered complete until an occupancy permit is issued or an inspection passed, say so. Consider including specific additional conditions for completion and release of retainage, such as provision of construction lien waivers and project manuals. Identify a time period and process for completion of punchlist work. Finally, review the provisions for resolution of disputes, to ensure they provided a balanced platform that promotes resolution instead of inducing claims.

A review of these basic considerations will help ensure that crucial project issues are addressed to the owner’s satisfaction during negotiation of a construction contract.

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