Reviewing Construction Contracts

By Trent Cotney.
Red flags to watch for.

Construction contracts can seem complicated and confusing, so when you review yours, you may be tempted just to sign them and move on. However, signing something you do not fully understand or agree with can be a recipe for disaster. Such a shortcut can lead to disputes and financial loss. 

Therefore, before you sign your next contract, learn about these stipulations and how you can avoid them.

Liquidated damages clauses

You will find a liquidated damages clause in most contracts. It usually specifies an amount of money that one party must pay another as damages for failure to perform the job agreed to in the contract. The amount listed is intended to be a reasonable estimate of the damages that a breach would cause. The ultimate purpose of this provision is to enable the parties to agree, at the start of their professional arrangement, on a fair estimate of damages that later could be difficult to calculate. Unfortunately, owners sometimes use liquidated damages as a way to control and even threaten a contractor facing schedule delays. The provision becomes less of a reasonable estimate and more like a penalty. Some courts may not honor unreasonable liquidated damages estimates, but you may still be at risk if you sign a contract that includes them. Your best bet is to carefully review these clauses in your contracts and negotiate a monetary amount that truly is reasonable. You can also discuss the owner’s concerns about possible delays and find other ways to address those.

Indemnity clauses

Indemnity clauses have a valid purpose in construction contracts, but you must ensure that those you agree to are not overreaching or unfair. Their intent is to state the conditions that would require one party to compensate the other for claims, harm or other liability that impact the indemnified party. In most cases, such conditions are due to failure or fault of the indemnifying party, which is reasonable. However, some clauses call for one party to indemnify another even when fault is shared or when the indemnified party is at fault. That means you would be responsible for paying for a problem you did not cause. Therefore, it is critical that you closely review the language in your indemnity clauses and ensure they protect your interests.

Pay-if-paid clauses

If you are a downstream contractor or subcontractor, pay attention to pay-if-paid clauses. These stipulate that you will not be paid unless the upstream party is paid. The risk is completely shifted from the upstream to downstream contractors, and there is no guarantee downstream contractors will be paid at all. You are strongly advised to avoid such clauses in your contracts.

Of less concern is the pay-when-paid clause, which stipulates that you will be paid then the upstream contractor receives payment. You may still experience issues with timing, but there is a more substantial assurance that you will eventually receive payment.

No damage for delay clauses

These clauses prevent a contractor from recovering damages resulting from a delay the owner (or a consultant or other contractor) caused. These provisions are particularly dangerous because they can mean you will lose time and be unable to begin work on other projects. You will only be allowed to seek a time extension, but you will not be compensated for delays and related costs. Some states prohibit these clauses, and some courts will not enforce them. However, to be on the safe side, make sure your contract does not include them.

Rushed deadlines

Everyone wants to settle the deal and get the project underway, but if an owner is pressuring you to sign quickly, you might want to pause. Sometimes, these urgent requests are legitimate, but they might also be tactics to prevent you from taking the time to voice your concerns and negotiate terms. With that in mind, if you feel you are being rushed, slow down. Review the contract and be sure to consult legal counsel. An experienced construction attorney can review your contracts and spot any suspicious provisions an owner might try to sneak through.

Remember, once you sign a contract, you have agreed to every word in it. So, it is up to you to protect yourself and your company by carefully reviewing contract provisions and ensuring you understand all your obligations.

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams and Reese LLP. To learn more from Trent Cotney reach him at trent.cotney@arlaw.com or 1.866.303.5868.

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