5 COMMON MISTAKES IN CONSTRUCTION CONTRACT

Most companies look for work on public or private construction projects-whether as a General Contractor (GC), Subcontractor, or Supplier. They often make common mistakes placing two priorities above all others:

1-Secure the job,

2 -then please the client.

This is a common mistake made more often.

However, before you sign a contract, it is vitally important to fully comprehend it. Make sure you understand the significance of all terms. Also, be aware of potential consequences of the contractual terms you are about to embark on. Here are some of the common pitfalls that occur often in construction contracts:

1. Get all the documents and clearly define your scope or Boilerplate Contract

As a company, it is important you play your cards smartly. Avoiding common mistakes is very important. It is crucial that you admit that general construction contracts ( Prime contract or PC) are often a combination of partial documents of smaller size. Thus, the contract you are signing is not the complete set of obligations that applies to your work. It is imperative that you obtain the prime contract documents including addenda. Also get all the project’s specifications of the materials. This will provide a full comprehension on how all the provisions work together. Finally, to be aware how you might be bound by those documents.

Having a complete understanding of the prime contract is vital. Because it will prevent binding you to unnecessary and or unfair obligations. It will also prevent limitations, especially if you are a subcontractor or supplier. 

For example, using the virtue of “Flow down”, the PC not only binds the GC to Owner. But additionally contains provisions binding you as a subcontractor as well. This is often the case even though you did not sign the main agreement. In other words, all or most obligations and limitations that apply to the GC apply to you as well. This is often the case even though you were not a signatory of the prime contract.

Moreover, if you do not have a complete understanding of the prime contract. And what are your obligations by under the prime contract you:

• Be negotiating certain points in vain.
• You might be even bargaining, or lowering your price in exchange for certain rights that are useless. Because those rights are defeated by the language of the prime contract.

Further, understanding the specifications is crucial. Because you have the obligations to meet the specifications stated in the prime contract.

Finally, avoid ambiguity at any cost. Never use jargon or vague words such as “generally”, “usually”, or “customary”. When business people negotiate a contract. They often utter that “everyone in the business knows what that means”. But this expression becomes a virgin when projects go wrong. Because there is no such unanimous meaning among the contenders’ lawyers. Suddenly, the ambiguous expression means what will translate as the best result for the lawyer’s client. Therefore, making sure that terms are clear lessens the risk of litigation. Or if the other party insists on litigating, it increases your chances of winning in court.

So get all the documents of the contract. And, read them carefully for a complete understanding of the scope of the project. The more you understand the contract. The better it is for you! So make that your priority before starting the work. This will prevent you from dealing with issues later on. Putting these recommendations will help avoid making common mistakes and set you apart from others.

2. Get it in Writing and Put it in Writing

As every lawyer’s refrain: Get it in writing and put it in writing. Or the French saying “La Parole s’envole, mais l’écrit reste” meaning “words volatilize but the written stays”.

Get it in writing.

Every point you agree on in a construction contract should be in written. This is just in case that some dispute arises. This is especially more important when it comes to the context of change order.

A GC, Subcontractor, or supplier should always avoid this common mistake of proceeding without a written change order. And a one that is approved by all relevant parties. It is highly not recommended to move forward without a signed change order. This can be very risky thing when something on the project goes wrong. Without signed change order it will be easy for a party you are fighting against later to win. The party can easily state that you proceeded in an unauthorized act. Or they can say that you went beyond the scope of the initial agreement. This happens even if the change was clearly agreed verbally by all involved parties at the time. Also the change order may not be valid in court without a written sign-off by the higher command.

Even if none of the parties can deny that the change was agreed upon by all involved at the time. Having a physical copy of a written change order may be your only way out. Therefore, make sure that you get one even for small changes. Most GC make the common mistake of thinking that small changes don’t need to be in writing.

Put it in writing.

Most contractors make the silly common mistake to neglect the communication aspect of a contract. But, paying close attention to all notice provisions with the contract is very important. Especially in terms of who has to be notified, when, and how. Any smart company will follow this notice directives to the tiniest detail and comply with all the requirements. Keep in mind that by not correctly following the notice provisions you are most likely wavering your bargaining for right. Thus your opponent is unlikely to give any pennies if you have made a misstep. That is whether technical or procedural case with respect to your obligations that you agreed upon signing the contract. The same way you request a written copy of any changes, you should provide written copy as well.

3. Limit your Indemnification Exposure

Overlooking an indemnification clause in a proposed contract happens most of the time. Which a very common mistake. Because contractors do not generally give value to this point. But, there may not be a more crucial contract provision to pay attention to during the negotiation process. These clauses generally contain the expressions “Indemnify” or “Hold harmless” or both. To “indemnify” means to be responsible for any judgement against the indemnified party (party receiving indemnification).

A “Hold Harmless” clause essentially waives any claim you might have against a party. Or it waives a right of recovery against it. You might not have the power to negotiate the terms of this type of clause. But, it is important that you at least comprehend what you are agreeing to. And if you happen to have the power to negotiate, you should always aim for it. Make sure to limit your responsibilities regarding an indemnification only to the extent of your own fault. Also limit them if there is hold harmless clause because same terms apply often. This is what we call “Limited Indemnification”. 

Avoiding the two other common forms of indemnification should always be in your best interest.

A- “Intermediate form of indemnification” and especially

B-“broad form of indemnification” since this one is the most dangerous.

More often avoiding being subject to an indemnification is out of your reach. If that’s the case, but wish to proceed with the contract. At least attempt to require the other party to agree to mutual indemnification provision. In this way you will indemnify the GC or owner to the extent of your fault. Provided that the those concerned also agreed to indemnify you to the extent of their respective levels of fault. This aspect is very important in construction contract. So, make sure to always carefully review it even for small projects.

4. Do Not Delay the Start of Warranty Period

Warranty period is very critical. So, it is important to carefully look if the contract includes any warranty period clause on your work or product. This will prevent you from any surprise. It is beneficial for you that the warranty period begins the moment you finish the job or approved. However, most contracts are crafted by the owner or owner’s representative. Therefore, they will often state that the warranty period begins when the project is completed as a whole. Though, you may have no control over the duration of the project as a whole. As result your warranty period may be much longer than you anticipated. So do not make that common mistake.

Thus the necessity for a clear language that starts your warranty period as soon as you have completed the work. Or, depending on where you fall in the contractual chain, when it has been approved by any chain above you.

For instance, if you agree that work or product warranty period start when the project is completed as a whole. You might be trouble if your work is 1 year warranty and the project finishes a year later.

5. Do Not Wave Your Lien of Bond Rights

Some well-intentioned companies often make the mistake to wave their lien or bond right. They do so to please the client. This can backfire if the project or transaction becomes awry. For, a lien or a bond may be your only way for collecting payment in this situation. It is vital that you do not waive your rights to collect payment via lien or bond. 

Despite you may not be able to negotiate this clause, considering that most typical GC/ Owner contracts include such waiver. But, you should always aim for precise understanding of the clause. Then request a modification  agreeable for both parties.

Avoiding these five mistakes will not make the contract perfect. But, it will proactively solve lots of problems before you even start the execution of the project. It is in the contractor best interest to avoid all silly mistake that can be fix before starting work. That is why contractor should avoid these 5 mistake at least at all cost.

Note that there are many others besides these five mistakes. So, always look for more and avoid as many as you can. Remember that no one will do this for you. Hiring an expert may be the best option if your not familiar with contracts.

Contact us for help.

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