What are the seven important components of a construction contract?

Construction Contract

As a lawyer in the construction industry, I am often asked what makes a project successful. While many elements are significant, there is no doubt that, at the start of any construction project, there is tremendous value in having clearly defined contract terms. Key provisions should be clearly stated and understood by all parties to help protect your interests and to avoid disputes during the project. Your project’s success can depend upon these seven essential contract components:

 

Full name, address and signatures of both parties

 

When disputes arise in a project, contractors often come to me with a copy of what they believe is an enforceable contract. 

 

Many times, however, the contract is only signed by one party when it should be signed by both parties. One signature makes the contract difficult — if not impossible — to enforce. 

 

This tip may seem obvious, but it is critical to make sure the contract is signed by both parties for it to be legally binding. 

 

Scope of work

 

The contract should clearly set forth the job description of what the contractor has agreed to perform. Just as important is to detail items that are not included in the contract. 

 

By specifically stating within the contract the scope (and non-scope) of work, there will be less room for disputes over the contractor’s duties and obligations.  

 

Payment amount and terms

 

Payment is critical to the success of a project. There should be no confusion as to the cost of services included in the contract and the cost of services beyond the scope of the project. 

 

The schedule of payments, the amount that is due, and the terms and conditions of payment should also be clearly outlined in this section of the contract.

 

Changes

 

Changes occur with almost every single project. 

 

Thus, the parties should clearly set forth the procedure to be followed for changes to the scope of work on a project, including the timing of a change order, the allowable costs, and any schedule modifications that will be allowed as a result of the change.   

 

 

Work schedules/deadlines

 

The contract should establish a clear notice to proceed date, a construction start date and date of completion. Remember to make sure that the contract differentiates between calendar days and work days. 

 

It is also prudent to include in the contract that you are not responsible for delays caused by the property owner in obtaining the required permits, easements and approvals, or for weather-related delays. 

 

Also, as noted above, if there are change orders, make sure the contract  permits adjustments to the schedule.  

 

Dispute Resolution

 

Disputes on a construction project are inevitable. Having a clear dispute resolution process can streamline the process for resolving disputes expeditiously without undermining the progress of the project. 

 

How a dispute is resolved varies from case to case.  

 

You will need to consider:

  • – Will the parties submit the matter to arbitration in court?
  • – Will there be a non-binding mediation requirement that precedes submission to either arbitration, such as arbitration through the American Arbitration Association, using the Construction Industry Rules and Procedures or the institution of a litigated claim in a court of law? 
  • – Will the architect be the initial decision-maker for project disputes? 
  • – What law will apply? 

 

With proper advance planning during the contract-negotiation stage and the inclusion of a well-drafted dispute resolution provision, the parties can streamline the dispute resolution process. 

 

Force Majeure

 

The current COVID-19 crisis underscores the need to have a force majeure clause in every contract. 

 

A force majeure event is defined as “an event or effect that can be neither anticipated nor controlled” that may excuse performance by one or both parties to a contract — like a pandemic, natural disaster, flood, etc.  

 

The Southern District of New York recently held that the COVID-19 pandemic qualifies as a “natural disaster” which may constitute a force majeure excusing performance under a contract. 

 

It is essential that you include a properly worded force majeure provision that will guide each party as to their conduct and obligations under the contract in the event of a future force majeure event such as COVID-19.

 

Another essential element in drafting a good construction contract is having a competent and knowledgeable attorney working on your behalf. If you are thinking about entering into a construction contract or have questions about an existing contract, contact Deanna L. Koestel, Esq., to set up a consultation.

Author

  • Deanna L. Koestel, Esq., is a partner in the law firm of Pashman Stein Walder & Hayden, P.C. She is also a co-chair of the firm’s construction law practice, where she focuses on construction law, commercial litigation and general business law matters in the states of New York, New Jersey and Pennsylvania. Deanna’s experience on the litigation side of construction matters gives her valuable insight into drafting agreements or pre-litigation negotiation settings in order to minimize litigation risks when possible.

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