It goes without saying that any contract should be carefully reviewed before signing. But construction contracts can be especially tricky, given their unique language and the potentially far-reaching consequences when something goes wrong. This is why we highly recommend a lawyer or in-house counsel review all contracts. Here’s an overview of the highlights – and pitfalls – of a construction contract.
Very simply, the scope details the work that is to be performed, time frame for completion and a mechanism for changing that scope along the way. Obviously, a detailed description is important here, and a good rule of thumb is this: a third party who was not involved in contract negotiations should be able to review the scope and understand exactly what is (and is not) to be done. It is also critical to state that all changes to the scope of work are to be made in writing – which is equally beneficial to owners, general contractors, and subcontractors to avoid later disputes and litigation.
Terms of Payment
Most construction contracts will reflect a schedule of multiple payments, and this is where that schedule is defined. Look for easily measurable milestones that will trigger payments, for example: “framing complete,” not “project 40% complete.” A frequent sticking point with payment terms is the amount of the deposit paid at contract signing. Clients are often reluctant to part with a large sum before any actual work is completed, but understand that the contractor often incurs substantial up-front costs in ordering materials for a given project. Having said that, state and local laws often limit the amount a contractor may request as a deposit to a certain percentage of the total contract amount.
If something goes wrong during the project, whose insurance will cover the loss? This is the essence of this portion of a construction contract. In many cases, a contract will require that the client be named as an additional insured on the contractor’s various policies, and will specify minimum coverage amounts. In some cases, specific endorsements will be required. This section should be carefully reviewed with your insurance professional.
The important distinction here is between an express warranty and an implied warranty. Express warranties are specifically noted in the contract, while implied warranties are based on the law. An implied warranty, for one example, would hold that any goods provided by the contractor are suitable for the purpose for which they are being used.
Carefully review any warranty disclaimers as well, as these may limit your rights to statutory recourse should something go wrong.
There’s still more to know about construction contracts … we’ll cover more details in a future post.
Question about construction contracts? Contact Consolidated Insurance.