By John Frega, esq.
Every construction project features unique and interesting challenges. But drafting your construction contract documents should not be one of those challenges.
Here are five important matters to consider when drafting and managing your construction contracts:
1. Determine the appropriate payment model.
Owners have multiple options for structuring payments to their contractors, and choosing the appropriate payment model largely depends on the type of project. The most common models include lump sum, unit price, and time and material, not to exceed (T&M NTE).
Under the lump sum model, the parties agree to a total, fixed price to be paid for all work under the contract. Lump sum pricing is appropriate for projects with a well-defined scope of work and clear schedule, such as residential homes or commercial buildings.
Under the unit price model, the scope of work is broken into discrete units and prices are established for each unit of work. This model is often used in public projects, such as highway construction or utility construction.
Using the T&M NTE model, the contractor is paid for the actual time spent on the project at rates agreed to by the parties, and is reimbursed for the cost of materials used in the project. The total amount of compensation payable to the contractor is capped at the “not to exceed” amount established in the contract.
This model is commonly used in architecture and engineering contracts, as well as in construction where a lump sum or unit price model cannot be used.
2. Surety bonds and why they are important.
Every construction project contains inherent risk. This includes the risk that a contractor will be unable to complete the project, and the risk that the contractor will be unable to keep up with payments to its subcontractors and material suppliers. The most common method of minimizing this risk is to require the contractor to procure and maintain construction-related bonds, specifically a performance bond and a payment bond.
A third party that guarantees the performance of the contractor, in the event that the contractor is unable to complete the project, issues the performance bond.
The payment bond guarantees that subcontractors and material suppliers will receive the amounts due and owing from the contractor in the event the contractor is unable to make these payments. It is important to ensure that payments are made to subcontractors and material suppliers in order to prevent these entities from asserting liens against the owner’s property.
3. Indemnification and its limits.
Another method of minimizing an owner’s risk is the inclusion of an indemnification provision in the contract. An indemnification provision in favor of an owner requires the contractor to compensate the owner for liabilities or losses that the owner incurs as a result of the contractor’s actions during the project.
In most instances, these liabilities and losses are in the form of claims brought by third parties (such as construction workers or owners of property adjacent to the project site) for personal injuries or property damage. New York law limits the scope of indemnification provisions. Namely, the project owner cannot be indemnified for personal injury or property damage claims that are the result of the owner’s own negligence or intentional wrongdoing.
4. Managing “extra” work issues.
During the course of the project, a need often arises to alter the scope of the project. These alterations most often come in the form of additional, or “extra,” work. Disputes regularly develop between owners and contractors in connection with “extra” work claims.
Often, the parties disagree over what constitutes “extra” work and the amount of compensation due to the contractor for this “extra” work. While disputes cannot be entirely avoided, the number and impact of these disputes can be managed through
First, the parties should strive to draft a clear and well-defined scope of work at the outset of the project. Clearly defining the scope of work may reduce the overall number of “extra” work claims. Further, where the parties agree that there is a need to perform “extra” work, the parties should strive to clearly define the scope and compensation for this work in written change orders, and stipulate that a change order must be executed by the parties prior to performing any “extra” work.
5. Delays and no damage for delay.
Delays hamper the completion of many construction projects, often through no fault of either party. The parties then struggle to determine who will bear the risk of these delays. Project owners can minimize these risks through the use of a “no damage for delay” clause.
These clauses provide that a contractor’s remedies in the event of a delay will be limited to an extension of time to complete the project, equal to the length of the delay. A “no damage for delay” clause has its limits, however. Notably, the clause will not apply where the delays are the result of the owner’s material breach of the construction contract, or where the delays are caused by the owner’s active interference, gross negligence, or willful misconduct.
Frega is an attorney with Bond, Schoeneck & King who practices business and commercial law and advises clients on transactional and litigated matters.