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Construction Contracts are Living Documents

Business

For many contractors, once a client contract is created it is rarely given another thought. That is, until an issue arises with a client over payment terms or scope of responsibility.

In order to maximize profits, contractors need to understand their contracts and treat them as “living” documents that needs to be reviewed and updated regularly. Contractors should routinely review their contracts, reflect on any negative client issues that they may have encountered over the last six months to a year and tweak or rewrite their contracts to their current needs in order to remedy loopholes that lead to negative issues in the past. While there is no magic formula for a good contract, there are a number issues that contractors should include in their agreements. There are certain critical issues that should be included.

SCOPE OF WORK

It is critical that construction contracts clearly spell out the limitations of the contractor’s scope of work. Often contractors find themselves engaging in projects outside the initial scope of work. If the scope of work is not clearly stated in the contract, a difficult client may blame the contractor for the failures of an architect or other trade.

When a client pushes the contractor into doing work that is not part of the original agreement it is called “scope creep.” Scope creep is created by a lack of communication between the contractor and the project owner or client and the failure to clearly define the scope of work in writing in the contract.

Scope creep is analogous to pachysandra, which is a low-growing, shade-loving evergreen that spreads rapidly. If a small patch of pachysandra is planted in the spring, by the end of the summer it will have doubled or tripled in size. This is what happens with scope creep. As a contractor begins to accept changes to the original scope of work without taking the proper measures to control scope creep, the contractor’s workload will double or triple, liability will increase and profitability will usually decrease.

If, during the course of a job or project, the original scope of work changes, the contractor must document the change in writing. While minor changes or deviations may be outlined in an email, larger scope changes should be included in a change order or as an addendum to the original contract.

Scope creep is often the result of undocumented verbal communications. Any conversations concerning the scope of the contractor’s duties or responsibilities should be put in writing. That way, if a dispute arises, the contractor has proof of the agreement. It is not uncommon to see a contractor tied up in litigation arguing over non-payment of work done in connection with verbal scope-of-work changes.

In order to avoid problems with scope creep a good construction contract should state exactly what the contractor is and is not responsible for. It should not contain generalities but rather needs to be as specific as possible. Regardless of whether a client is signing the contractor’s contract or insisting that the contractor signs his, it is the contractor’s obligation to ensure that the scope of work is adequately defined. It may be helpful for contractors to include a general disclaimer to the scope of work that indicates that the contract is not responsible for any activities or work not specifically stated in the scope of work section of the contract.

PAYMENT TERMS

This is one of the most important clauses in the contract yet it is often the most neglected. Most contracts simply state the total price for a project. In order to fully protect the contractor’s profit, the contract should be as specific as possible when it comes to payment terms and progress payments. There needs to be a clear statement of the cost as well as the due dates.

Often a contractor will use amorphous terms such as “upon substantial completion.” They then find themselves arguing with their client as to what that actually means. While “substantial completion” is an acceptable industry term, it is much better to try to be as clear and specific as possible when it comes to laying out the payment schedule. In general, the clearer and more detailed the payment terms are the better the chance of being paid in full and on time.

DITCH THE LEGALESE

Lawyers love to show off their extensive knowledge of archaic Latin terms and complex sentence structures in contracts. Many contracts are littered with words such as “aforementioned,” “heretofore” and “consensus ad idem.” While this legal gobbledygook may make attorneys feel better about themselves, it has no place in contraction contracts. Construction contracts should be as clear and straightforward as possible. It does not matter if the lawyer understands what he or she wrote, what matters is that the contractor and his client understand the terms and conditions of the agreement. This is not to say that contractors should not have their contracts drafted by an attorney.

A construction contract is a living document and needs to be reviewed, at a minimum, once per year. Using clear and straightforward language along with clearly defining the scope or work and payment terms will help contractors avoid liability and remain profitable.

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