What Is a Construction Contract Review?
Construction contract review is when a lawyer reviews a construction contract on behalf of their client. The construction lawyer will read, identify, and analyze the key terms of the contract to make sure they are fair for their client. Construction lawyers specialize in the construction industry, so they understand reasonable terms.
As part of the service, a construction lawyer will typically provide redlines and engage in contract negotiation on behalf of their client to best protect their interests. The lawyer’s job is to minimize the risk for their client as much as possible and get the most favorable terms in place.
What Should a Construction Contract Include?
Here are some of the essential elements that you should include in a construction contract:
- Names of homeowners and contractor
- Complete contact information of homeowners and contractor
- List of attachments such as blueprints, documents, deals, etc.
- Stipulation for permits, licenses, and insurance
- Cost of project
- Change orders
- Detail of construction work
- Date of completion
- In case of non-payment from homeowners, how to terminate the contract
- Remedies in case of a breach in the contract
- Exclusive rights to withhold payments if a situation arises
- Rights to access the property
- Rights to inspect the property
- Lien waivers
- Warranties
- Amount of damages
- Remedies in case of unforeseen events such as acts of God
- Details of material disposal post-construction
- An agreement, signature with date of homeowners and contractor
- There can be many other clauses depending on the nature of the work. But these make the list of most essentials to look for in a construction contract.
Here is an article about how to make a contract.
Terms You Should Look for When Reviewing a Construction Contract
There are several important terms to look for when reviewing a construction contract. A few are detailed below.
Pay-when-paid
There are two terms in the contract – pay-when-paid or pay-if-paid. These can become huge problems and the main reason for delayed payments.
Pay-when-paid refers to the claim that payment will be cleared when the owners have paid to the subcontractors. Usually, the process states that payments release seven days after receiving payment from the owners.
Since these deadlines for payments are subjected to federal or state laws, it is vital to learn about the systems before applying for the project.
Pay-if-paid is a method of dependency created between the owner, who is liable to pay the contractor, followed by the subcontractor. Uniquely, it shifts the responsibility from the contractor to the sub-contractor for non-payment.
When you see pay-if-paid in the contract, ask for it to be replaced. If the contractor is not removing it, work with caution.
No Damage for Delay
When you see this clause, tread with care. If an upper-tier party is a cause for delay, the contractor will not get reimbursement for costs.
For instance, the subcontractor is not eligible to claim for delays caused by the general or main contractor. It causes huge losses for lower-tier contractors.
To be safe from any losses, change it to include reimbursements. In addition, it will keep the general and subcontractors safe if any upstream party causes delays.
Termination for Convenience
It is another tricky spot to watch out for. The term indicates that the contractor will get paid for services performed or installed until the termination date. So if any material purchased intended for installation becomes the liability for the contractor.
On the safe side, add a clause that indicates the payment or reimbursement will be released for material purchased even after termination.
No-lien Clause
It is often found in the contract. This clause requires the contractor to waive their bond claim or lien right before the project starts.
Without knowing what it entails, the other party often agrees to work without any bond claim or lien against the property. Hence it results in non-payment.
Depending on the state, this law can be removed if not enforced. It would be best if you asked to remove this clause that takes away your legal rights.
Subordination of Lien
You will find subordination of lien under the no-lien clause. It relates to the compliance of mechanics lien in lien’s priority. The term determines who gets the payment first when a lien is foreclosed on.
The mechanics of the lien determine your chances of getting paid. So, if you find yourself at the end of the priority line, getting paid is slim despite having a valid lien.
Liquidated Damages
These are kinds of penalties for completing the project post-scheduled time. Again, these are markers for the homeowner to evaluate the losses in a delay period.
Then, the owners assessed the damages and passed them down to the subcontractor, bypassing the general contractor.
If you find liquidated damages in the construction contract, make sure to edit it by making the general contractor liable for the liability.
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Terms in a Construction Contract Where You Should Proceed with Caution
As you review a construction contract, proceed with caution if you see these terms.Change Orders
Before you sign, review the construction contract for the section that says ‘change orders.’ When examining the section, look at the following options:
- Process of submitting changes
- Deadline and notices for prompting changes
- Process for filing claims
- And clauses that will be in the way of making changes
If you find the deadlines are too short, discuss them with your attorney and apply for an extension in deadlines. You would require ample time to piece together the needed backup information.
Flow-down Clauses
These clauses are originally in the prime contract and are carried forward to the subcontractor’s contract. If you find any clause, make sure to request a copy of the prime contract for review.
Do not agree on terms without reviewing them. And since you (subcontractor or general contractor) are planning on signing the flow-down clauses, you have the right to review these before you seal the deal.
Warranties
Usually, the contract has a clause of warranty for materials and services for a year. Otherwise, check the section thoroughly to see if the homeowner or general contractor outlines no hidden warranties.
Because if the warranties go on for five or ten years, it can be a hassle and liability. So make sure to check this section before you sign the construction contract.
Construction Contract Review Checklist
Below is a checklist of items to review in a construction contract and items to be cautious with if seen in a construction contract.
Terms To Review
- Contract amount
- Contract description
- Schedule
- Scope of work
- Documents
- Insurance
- Responsibilities (owner, general contractor, and subcontractor)
With Caution
- Change orders
- Indemnification
- Dispute resolution
- Flow-down clause
- Warranties
Watch out
- Pay-when-paid and pay-if-paid
- No damage for delay
- No lien clause
- Subordination of lien
- Termination for convenience
- Liquidated damages
- Contract Termination Agreement
- Dispute resolution
- Breach of contract
- Method of compensation
Here is an article about what a contract is.
Sample Construction Contract Language
Scope of Work Clause
The Work. The Contractor agrees to furnish and pay for all supervision, contract administration, services, labor, materials, equipment, tools, and other costs necessary to perform all requirements of the Contract Documents (as hereinafter defined) for the scope of work described on Exhibit A, a form of which is attached hereto, said Work (hereinafter defined) to performed as part of Owner’s biodiesel production facility located at Grays Harbor, Washington (the “Project”). The Contractor shall perform the Work in a workmanlike manner and in strict accordance with this Agreement. The Contractor shall be solely responsible for all construction means, methods, techniques, sequences, procedures, and safety precautions or programs, and for supervising, coordinating and performing all of the work. The Agreement contains the general terms and conditions which will govern all future specifications and scope intended to be issued to and performed by Contractor with respect to the Project. The parties acknowledge and agree that the Project involves several discrete “phases” of Work, and each phase to be performed by Contractor shall be incorporated into this Agreement by an amendment executed by both Parties. Each amendment shall be consecutively numbered (e.g. Exhibit A1, Exhibit A2, etc) and shall describe and detail: (i) the scope of work to be performed; (ii) the Cost of the Work (as defined in Section 5) and the Contractor’s Fee (as defined in Section 4) for the work to be performed; (iii) any attendant and requisite changes to the Project Schedule, Preliminary Schedule of Values, required completion dates, liquidated damages, or fees; and (iv) any other changes to the Agreement terms and conditions necessitated by the particular phase of work. All work described and incorporated on any Exhibit A hereto shall be collectively referred to as the “Work”.
1.1 The Contractor agrees that Steve Dahl shall serve as the Project Manager of the Contractor for the Work and, in that capacity, he shall be responsible for personally managing and administering the performance of the Contractor’s obligations under this Agreement, subject to his continuing employment by Contractor and the needs, staffing and skill requirements of the specific Project stage). The Project Superintendent of the Contractor for the Project will be mutually agreed upon by the Parties. Provided they remain in the employ of or otherwise affiliated with the Contractor, the persons referenced in this Section shall not be replaced without the prior written approval of the Owner. The Owner shall have the right to approve persons proposed as replacements for the Project Manager and Project Superintendent. The Owner’s approvals under this Section shall not unreasonably be withheld. Furthermore, the Contractor agrees that the primary members of the Contractor’s Project team will be available to perform the Work on throughout its duration.
1.2 The Contractor agrees that throughout the Project’s duration, the Contractor will have sufficient resources available to perform and complete the Work in accordance with the Project Schedule (as defined in Exhibit D). Furthermore, the Contractor represents and warrants that any labor or other agreement it may have with its employees or any entity representing them does not expire prior to the Guaranteed Completion Date (as hereinafter defined); provided however, that the collective bargaining agreements governing craft labor required for the performance of the Work do contain wage escalation provisions that may increase wage rates and, accordingly, the costs of labor over the course of the Project. Copies of these agreements will be made available to the Owner upon request.
Cost of Work Clause
Cost of the Work. The Cost of the Work shall be limited to costs reasonably incurred by the Contractor in the proper performance of the Work (as further described below, the “Cost of the Work”), which shall exclude any components supplied by Owner or others. Contractor equipment, labor and supervision shall in be billed in accordance with Contractor’s then current rate schedules (the version effective as of the execution date of this Agreement is attached hereto as Exhibit E). All remaining costs shall be at rates comparable to the standard paid at the place of the Project . Contractor is directed to employ a forty (40) hour work week and not utilize overtime or premium time rates or incur material or equipment expediting costs, unless the Owner has approved the use of such overtime or premium time or expediting costs in writing in advance. In addition, Contractor shall keep Owner regularly apprised of crew sizes and shall provide written monthly reports documenting actual versus estimated man-hours expended in the course of the Work. The Cost of the Work shall include only the items set forth in this Section 5, as follows:
5.1 Wages of construction workers directly employed by the Contractor to perform the construction of the Work at the site or in Contractor’s fabrication facilities.
5.2 Wages of construction workers directly employed by the Contractor to perform the construction of the Work at locations other than the site, provided that the nature and scope of such off-site Work is approved in writing in advance by the Owner.
5.3 Wages or salaries of the Contractor’s supervisory and administrative personnel wherever located or engaged, but only for that portion of their time required for and directly related to the performance of the Work.
5.4 Costs paid or incurred by the Contractor for employee-related insurance, contributions, assessments, travel, subsistence and benefits required by law or collective bargaining agreements and, for personnel not covered by such agreements, customary benefits such as employee-related insurance, contributions, assessments, sick leave, medical and health benefits, holidays, vacations and pensions, provided such costs are based on wages and salaries included in the Cost of the Work under Paragraphs 5.1, 5.2, and 5.3.
5.5 Actual payments made by the Contractor to Subcontractors in accordance with the requirements of the applicable subcontracts and supply contracts, and subject to the provisions of Section 26 and its subparagraphs. As used in this Agreement, the term “Subcontractors” shall include all subcontractors and suppliers under a direct contract with Contractor.
5.6 Costs, including transportation and installation, of materials and equipment incorporated or to be incorporated in the completed Project. Costs, including transportation, installation, maintenance, dismantling and removal, of materials, supplies, temporary facilities, machinery, equipment and hand tools not customarily owned by the construction workers which are provided by the Contractor at the site and fully consumed in the performance of the Work; and cost less salvage value on such items if not fully consumed, whether sold to others or retained by the Contractor. Cost for items previously used by the Contractor shall be fair market value.
5.7 Rental costs of machinery and equipment used in the performance of the Work; provided that in no event shall such rental costs paid for particular items of machinery or equipment exceed the market rate purchase price of such items.
5.8 Costs of installing equipment and components furnished by the Owner (“Owner-Furnished Components”).
5.9 Costs of removal and disposal of debris from the Project site.
5.10 Premiums for insurance, to the extent of the portion directly attributable to this Agreement.
5.11 Costs of permits, fees, tests and inspections paid by the Contractor pursuant to Section 20.
5.12 Costs relating to any general conditions and overhead reasonably allocable to the Work and not to any other project. These costs include items such as utilities, telecommunications, water coolers, portable toilets, etc.
5.13 Cost of the building permit, if obtained by the Contractor; provided, that this cost shall not be subject to Contractor’s markup or fee.
5.14 Other costs incurred in the performance of the Work if and to the extent approved in advance in writing by the Owner.
Changes Clause
Changes. Without invalidating this Agreement, the Owner or Contractor may order changes in the Work within the general scope of this Agreement consisting of additions, deletions or other revisions (each a “Change Order”). It is expressly understood and agreed that the Contractor shall not be entitled to additional compensation or an extension of the ContractTimes for any extra or additional work or for work outside the scope of the Agreement, except as set out in this Section 10.
10.1 The Owner and Contractor shall enter into a written Change Order signed by both parties stating the changed Work to be performed, any agreed changes in the Contractor’s Fee, and any agreed changes in the Contract Times. Any extra or changed work performed without prior written direction or approval of Owner shall not be compensated by Owner.
10.2 If the Owner and Contractor are unable to agree on the changes in the Contractor’s Fee or the changes in the Contract Times, the Owner may direct the Contractor in writing to perform the changed Work and the Contractor shall immediately perform such Work. In such case, and subject to Section 4 above, (i) the Contractor’s Fee shall be calculated in accordance with the following mark-up schedule, as applied to the actual change in the Costs of the Work: 20% on staff labor and supervision; 15% on direct and fabrication labor; 10% on materials and equipment and 5% on Subcontractors; and (ii) the Contract Times shall be adjusted based on the reasonable actual impact on the Contractor’s performance of the Work. If the parties are unable to agree on the changes in the Contractor’s Fee or in the Contract Times, the Owner shall determine any such changes, which shall be subject to arbitration if demanded by the Contractor.
Reference :
Security Exchange Commission - Edgar Database, EX-10.7 11 dex107.htm CONSTRUCTION AGREEMENT, Viewed May 18, 2022, < https://www.sec.gov/Archives/edgar/data/1381697/000119312507121562/dex107.htm >.
Construction Contract Review Cost
According to ContractsCounsel’s marketplace data, the cost of a project involving a construction contract is $922 on a flat fee.
Here is an article about legal contract costs.
Lawyers for Construction Contracts
When you are planning to take up a project, you need to tread with care. Especially if it’s a big project and there are general and subcontractors involved.
Before signing anything, make sure you go to a construction lawyer who knows everything about the construction contract.
A general attorney will not do well with this task. Because there are such nitty-gritty details to a construction contract, only an attorney specializing in the field can guide you thoroughly to save you from any trouble in the future.
Understand when the attorney guides you to get some clause stricken down or edited. If the contractor doesn’t budge, discuss it before you get involved in the project with your attorney.
Are you looking for an attorney? You will find some expert attorneys here in your area.
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