Building A Better Construction Contract

One Sunday evening at supper with my wife’s family, someone asked our nephew if he had any good jokes. Without missing a beat, he sighed, shook his head and said, “I was hoping to have a construction joke ready...but it’s behind schedule.”

Construction projects are complicated undertakings that depend on uncontrollable factors and involve significant expense and effort. Add that to most issues not arising until work is underway or fully complete, and it’s easy to see why problems occur.

The best way to prevent a project’s complete derailment is to have a plan in place accounting for as many outcomes as possible, while leaving enough flexibility to manage unforeseen circumstances.

At a minimum, a construction contract must contain five essential elements.

ESSENTIAL ELEMENTS OF A CONSTRUCTION CONTRACT

1. SCOPE
A contract’s scope defines the parties’ rights and obligations, and the project’s schedule and objectives. The scope should contain the parties’ full names, addresses and signatures, the included and excluded work, mandatory milestones, delay consequences and quality standards. Important scope provisions include:

• That the completed work will comply with all plans, specifications and applicable laws.

• That the contractor will submit and regularly update a detailed construction schedule.

• A “time is of the essence” clause.

• Defined construction start and completion dates.

• The necessary requirements for the project to be considered complete.

Although not fatal to enforceability, construction contracts should be in writing to provide concrete evidence of the agreed-to terms and, in Kansas, extend the time to assert a breach of contract claim to five years.

2. RISK ALLOCATION
Construction contracts allocate the parties’ risk most critically through insurance and indemnification clauses, warranties and unknown or hazardous conditions procedures. Insurance provisions establish the policy coverages, limits and durations the parties are expected to carry.

A contractor’s insurance must insure it to work on the specific project, and the parties should name each other as additional insureds on their respective policies to create direct contractual rights.

Indemnification generally requires the parties to defend and hold each other harmless for damage or injury to the project or third parties resulting from their own acts or omissions. Importantly, additional insured and indemnity provisions are unenforceable in Kansas when one party seeks to insure against, or indemnify, its own intentional or negligent acts or omissions.

Warranties allocate risks related to the work’s quality and performance following completion. Contractors are regularly required to expressly warrant that their work will be of good quality, conform to the plans and specifications and be free from defects for one year.

Contracts should specify when that warranty period begins and if anything may extend it, and how manufacturer’s warranties will be transferred to the owner. Notably, even if Kansas construction contracts are silent on warranties, a duty for contractors to perform their work skillfully, carefully, diligently and in a workmanlike manner is implied by law.

The presence of unknown or hazardous conditions can drastically change a project. Upon discovery, contracts should require the parties to immediately notify each other and appropriate government agencies, and detail remediation and safety responsibilities.

Time and payment adjustments due to the discovery should be limited to the extent the conditions were not known, or should not have been known, when the contractor’s estimate was set.

3. WORK CHANGES
At some point, all construction projects will change. A finished project can differ significantly from what the parties originally agreed to.

Effective contract change provisions outline procedures for requesting and issuing changes, and how change disagreements will be addressed.

Change orders, change directives and minor changes in the work are addendums to the contract that stipulate what the desired or necessary changes are, how they affect the project schedule and what the additional work will cost. Every change should be documented in writing and signed by both parties.

4. PAYMENT
Owner and contractor financial priorities in a construction project are defined by two questions: “How much will this cost?” and “When am I getting paid?”

Effective contract payment provisions answer these questions by clearly stating amounts that are due, when amounts are due and the terms and conditions of payment.

Contractor bids to establish a project’s anticipated cost should spell out the project cost in a way that reflects the scope of work and includes all potential fees and charges.

Unforeseeable circumstances affecting the cost can be addressed through change provisions, but known or predictable costs likely won’t be reimbursed.

Payment timing forces owners’ and contractors’ interests into direct conflict. Owners don’t want to pay for incomplete or defective work, and contractors must avoid significant time and material investment without payment guarantee.

Kansas law eases this tension by setting a 30-day time limit for owners to make payments owed to contractors while allowing owners to retain a portion of the payment until the project is substantially complete.

Contractors may also file mechanic’s liens for unpaid bills, creating a legal claim to the owner’s real estate.

The goal is to provide leverage to each party to ensure projects reach full completion and full payment as close together as possible.

5. DISPUTE RESOLUTION
Many construction contracts contain binding arbitration provisions. In Kansas, parties can mutually agree that arbitration be used to resolve disputes instead of formal court proceedings. In arbitration, there is no jury and the proceedings are closed, but the arbitrator has significant discretion in a final decision with limited appeal rights. Sometimes, the parties also agree to pre-litigation (or pre-arbitration) mediation to facilitate resolution if a dispute does arise.

Much like the projects they govern, construction contracts can be incredibly complicated and exhausting to manage. The most effective examples result in a living document that is precise yet adaptable. By addressing scope, risk allocation, payment, work changes and dispute resolution before work ever begins, a contract’s parties will have created a solid foundation to successfully complete their project on.

This update has been prepared for informational purposes only. It is not a legal opinion; does not provide legal advice for any purpose; and it neither creates nor constitutes evidence of an attorney-client relationship.