Construction Contracts: Six Key Provisions

When negotiating construction contracts for residential or commercial projects, there are several key provisions to include and that require careful consideration.  While this list is not exhaustive, parties to construction contracts must consider the provisions for scope of work, order of precedence, notice of claims, indemnification, insurance and dispute resolution.

Scope of Work

When negotiating a construction contract, the parties must be on the same page with the work to be performed.  Clarity is key as to what work will and will not be included in the contract sum.  This can be accomplished through an attachment or addendum to the contract that specifically lists all services to be provided, supervision, testing and equipment provided.  Many times, an inartfully worded scope of work provision results in parties arguing over what should have been performed on the project and, potentially, litigation over who was responsible for the scope of work.

Order of Precedence

Construction contracts often reference and incorporate many documents into the contract.  First, make sure to read the entire agreement to understand forms the “contract documents” and how those documents relate to one another.  If you do not have copies of all the documents referenced in the contract, request them.  In reviewing the documents that form the contract, ensure there are no conflicting provisions.  A well-drafted construction contract will contain an order of precedence that tells the parties what document controls in the event of a discrepancy or ambiguity.  This is accomplished by including a section in the contract that lists the various contract documents and ranks them in order of priority or precedence.

Notice of Claims

During the course of a construction project, there can be a host of problems that arise.  A well-drafted notice provision allows the parties to learn of and address problems and resolutions sooner rather than later.  A well-drafted notice provision should include to whom the notice is sent, the timing of such notice, the form of such notice (i.e. whether the claim is for delay, more money, or both), and a waiver provision if the notice is untimely.

Indemnification

Indemnification is a risk shifting mechanism that limits and shifts a party’s liability for problems during and after construction.  The person providing the indemnification is the “indemnitor,” while the person being indemnified is the “indemnitee.”  Depending on its wording, the indemnification provision can result in unintended consequences, such as the indemnitee providing indemnification for problems caused by the indemnitor.  Florida Statute Section 725.06 specifically addresses indemnification provisions in construction contracts.  To the extent the indemnitor is required to indemnify the indemnitee for the indemnitee’s wrong-doing, the contract provision must contain certain statutorily required provisions, otherwise, it will be deemed unenforceable.

Insurance

Most construction contracts contain a section that addresses the parties’ insurance requirements.  However, many times the parties do not confirm those requirements are met by the party providing the insurance or that the party providing the insurance can meet the requirements.  A prudent contracting party will consult with its insurer or insurance agent as to its respective insurance obligations.  To the extent a party is required to name the other as an additional insured, the other party must confirm it is named as such on an endorsement or in the policy itself.  Simply naming a party as a certificate holder on an insurance certificate does not equate to additional insured status.

Dispute Resolution

In the event the parties are unable to resolve claims, the construction contract should properly address how the claim ultimately gets resolved.  For example, will the claim be resolved in an arbitration proceeding or in a court of law?  Will the parties be required to first resort to mediation or a meeting before turning to arbitration or to a court of law?  A well-drafted dispute resolution provision will specify where the claims will be resolved (venue), whether there will be a jury trial (if in court), and whether the prevailing party will be entitled to recover its attorneys’ fees.

All of the above-referenced construction contract provisions are critical components to avoiding disputes during and after completion of a construction project.