Essential Provisions in a Construction Contract
Construction contracts are very complex. If not negotiated and drafted with superior skill, disputes will develop. A construction contract should provide detailed information regarding every aspect of the construction. Involving an experienced attorney in formulating a construction contract at the beginning may help prevent future headaches. Here are a few essential provisions that should be included in a construction contract:
Scope of Work – This is important because a contractor is not required to perform work that is outside the contract’s provisions. The scope of work provision should clearly define the duties of each party. Further, the scope of work should exclude services that parties will not be held responsible for providing. A scope of work provision is especially important when changes are ordered by the owner. Changes orders may result in a breach of contract unless a separate provision allows the owner to make such orders. All parties should make sure they understand and agree to everything provided in the scope of work.
Payment – This is one of the main concerns of all parties involved in a construction contract. A provision regarding payment should clearly set out how payments will be made. A schedule of progress payments should be created to define when an owner must make payments. Different milestones in the construction project are often used to determine when progress payments are made. The architect usually inspects the quality of work to ensure a progress payment should be made. For final payment, an owner may require the contractor to release any claims it might have and make warranties regarding the contract work.
Warranties – Parties will be held to any express warranties provided in the construction contract. Contractors should warrant that their work will be free from defects and conform to the contract documents. Further, an owner should require the materials and equipment furnished under the contract to be of good quality and new unless otherwise required or permitted by the contract. If an owner specifies a specific material to be used in construction, a contractor may not be liable for a defect in that material. Additionally, implied warranties may arise as an operation of law and exist regardless of any intention of the parties to create them.
Termination – A construction contract may provide for termination for cause or convenience. Termination for cause may occur when one party stops work because of a deficiency in performance by the other party. A termination for convenience occurs when the owner stops work for reasons other than a deficiency in performance by the contractor. The terminated party has little recourse in a termination for cause; however, a contractor has significant rights against a breaching owner in a termination for convenience in bad faith.
Change Orders – Changes are going to be made in a construction project. Change orders provide a mechanism for the owner to change the original plans or contract terms when the change will increase the contract price or schedule. It is an amendment to the contract agreed to by all parties. As mentioned in scope of work, failure to provide for change orders in the contract may result in a breach of contract.