Construction Contracts

Construction contracts have many elements found in a basic business contract, however there are a number of unique terms that are found almost exclusively in construction contracts.

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Abandonment - Can have different meanings. One type of abandonment is contract abandonment, where the parties both have conducted themselves in such a way that the original contract is no longer valid. Both parties may mutually agree to do this, or it can become part of a claim.

Another type of abandonment is where a contractor fails to perform the work on a project by either not starting the project in a reasonable amount of time, or not completing the work, or failing to resume work in a reasonable amount of time. Abandonment of a construction project without legal excuse is a cause for sidciplinary action under B&P sect.1707.

Arbitration a form of alternative dispute resolution (ADR), is for the resolution of disputes outside the courts, where a third party reviews the case and imposes a decision that is legally binding for both sides. Arbitration is most commonly used for the resolution of commercial disputes, particularly in construction disputes imposed by contract terms.

Arbitration can be either voluntary or mandatory and can be either binding or non-binding. Non-binding arbitration is, on the surface, similar to mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground on which to compromise, the (non-binding) arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable.

Bid Protests & Disputes - In public contracting, there are specific procedures dictated by California Public Contract Code. to handle bid protests. The procedures are very specific as are the timelines in which to formalize a protest. The procedure is often complicated.

Breach - One of the parties in a contract that does not fullfill their obligatory promise has breached. There are different levels of breaches such as minor, material, fundamental, anticipatory. The reasons can be where one of the parties makes it impossible for the other party perform their obligation, one of the parties refuses to perform their obligations, one of the parties is unable to or will be unable to perform their obligation. Not every failure to perform amounts to a breach because there are a number of excuses for non performance.

Bonds & Surety A lot of people like to sum up a surety bond as insurance, but in reality, surety bonds are a financial guarantee. They are a part of the insurance industry but they serve as a financial guarantee for the obligee (or person requiring the bond).

Every contractor is required to get a bond in California. many projects require a bond of some form. Common construction bonds are bid bonds, performance bonds and payment bonds. Other bonds may be obtained for special situations such as bonding around a mechanic's lien.

Cardinal change - A cardinal change is where ordered changes exceed the general scope of the contract. It is a deviation so far outside the scope of work that it invalidates the terms of the original contract. Abandonment and cardinal change are often used interchangeably, but have been distinguished by the California Supreme Court. calling the two doctrines“fundamentally different.” According to the court, under an abandonment claim, the contractor is entitled to recover its total cost (less payments received) for work both before and after the contract was abandoned. In contrast, under a cardinal change claim, the contractor is only entitled to breach of contract damages for the additional work constituting a cardinal change. While the court rejected a public contractor’s right to bring an abandonment claim, it purported not to address a contractor’s right to bring a cardinal change claim.

Change orders - a procedure that is defined in the contract to provide for modifications of the contract scope of work. Change orders can increase the cost of the work, reduce the cost of the work, or have no cost impact. Along with the cost factor is an amount of time that the project schedule may change due to the change order.

Changed conditions - A term that identifies anything that is different than at the time of the bid. In many cases it has to do with the site conditions that were undetected prior to construction, but may also include factors that have changed since construction commenced. The importance of a changed condition is the impact it may have on the cost of the work or the delay in the schedule.

Conflicting Terms - Within a contract, terms that are in conflict with other parts of the same contract. This is a common, yet serious problem when contracts are created from pieces of other contracts taken out of context. Terms and conditions often affect other provisions of a contract in several areas.

Consequential damages - are damages that do not flow directly and immediately from an act but rather flow from the results of the act; damages that are indirect consequences of a breach of contract.

Differing site conditions - Where the construction site is not what it was understood to be at the time of bidding. An example is when a contractor encounters subsurface or latent physical conditions differing materially from those indicated in the contract documents. It typically will be "reasonably unforeseeable on the basis of all the information available to the contractor at the time of bidding.

Default - failure to perform specific terms of a contract obligation. Often used interchangeably with material breach, but often specifically identified within contract terms.

Defects - Subsurface deficiencies, construction deficiencies, material deficiencies, design deficiencies, all can cause defects in the finished construction project.

Delays - Based on the project schedule and the critical path, delays are anything that extends the project schedule completion date. This can be applied to interim milestones as well as final completion date.

Design Delegation Clause. The contract may specify who is responsible for the design. If the construction contract specifically requires a contractor to provide design services and specify design and performance criteria, a contractor is to procure those design services from a licensed design professional.

Exculpatory clauses part of an agreement which relieves one party from liability. It is a provision in a contract which is intended to protect one party from being sued for their wrongdoing or negligence.

Flow-down Usually the Owner wishes to impose the same obligations on the contractor's subcontractors, flow-down clauses are common in construction subcontracts. However the scope of responsibility is often disputed by subcontractors due to limited involvement in a prject. Flow-down payment clauses may include pay-when-paid and pay-if-paid clauses.

Incorporation by Reference The construction contract itself typically does not explicitly address every detail of the parties' agreement. Therefor, it is common to permit parties to incorporate other documents into the construction contract by reference.

Indemnification is a contractual promise in which one party agrees to protect another party from financial loss.

In most cases, indemnification applies only to situations in which the loss is caused by negligence rather than by an intentional act of malice. Since most businesses are required to provide this kind of security for a wide variety of situations, not just construction contracts, indemnification is one of the more common contract terms.

Liquidated Damages Liquidated damages clauses are another common feature of construction contracts, especially contracts in which time is of the essence. Liquidated damages clauses in construction contracts require that the contractor must compensate the owner for every day construction extends beyond the end date specified in the contract.

Miller Act - The Miller Act (1935) is a federal law that requires contractors performing public work projects (addition or general repairing of any governmental building or public works facilities) to produce a performance bond as well as a labor and material payment bond in any contracts that exceed $100,000. Since government construction projects are unable to protect themselves from non-payment with a traditional lien, the Miller Act was created to protect the subcontractors as well as the suppliers when dealing with projects owned by the federal government.

No Contract - Exactly what the words mean. That there is no contract between the parties. At least one requirement necessary to constitute a contract does not exist. A basic contract consists of an offer for goods or services, an acceptance of that offer by the other party, and consideration for the goods or services. There must be a mutually agreed to understanding of the intent of the obligation.

No Damage for Delay Clause. An exculpatory clause commonly included in construction contracts. However, when the delay is not reasonably contemplated by the parties at the time of contract formation, a "no damage for delay" clause may not deny the contractor recovery for additional costs.

Notice clause. In order to be paid for additional costs incurred in performance, a contractor must provide the owner with adequate notice of such claims. Whether notice is adequate will generally depend on whether the timing and substance of the notice conform to the notice requirements in the contract.

Payment is the primary concern of most parties to a construction contract. The contract should clearly define the manner in which payment is made, and address progress payments, retention, time for payment, and final payment.

AIA Document A201-1997, Article 9 deals with payment. Article 9.2.1 requires the contractor to submit a schedule of values to assist the architect in evaluating the contractor's applications for payment. After receiving the contractor's applications for payment, the architect issues a certificate for payment to the owner pursuant to Article 9.4. By the certificate for payment, the architect certifies to the owner that, to the best of the architect's knowledge, information, and belief, the work is in accordance with the construction contract. Other contracts may have different procedures, so it is important to understand the specific terms of each contract.

Pay if Paid, Pay When Paid Clauses. These clauses, are common, but are not enforceable under California Law. A clear schedule of values and a definite payment procedure should be adhered to by the contractor in order to preserve its rights to payment.

Payment disputes - one of the parties believes that the payment procedures were not followed, or that the amount of money owed on a particular payment is not what was agreed to.

Private Works Projects that do not fall into the definition as public works of Federal projects are typically private works. Every type of project that is funded from private money is considered a private works project. There are some hybrid types of projects that involve contracts between private companies, but are ultimately funded from public source.

Public Works Construction projects that derive their funding from the public. This includes municipalities, counties, regional agencies, water and wastewater districts, public schools, state infrastructure such as highways, and any project that is funded with money collected by a government entity from the public. There are state laws specifically for public works projects which all public works projects must follow.

Federal projects are public works projects that derive their funding from federal sources. The Federal Government has specific laws that govern Federal projects.

Prevailing wages Prevailing wage may include both wages and benefits. It encompasses the compensation for a worker given for performed labor.

The Davis-Bacon Act all federal government construction contracts, and most contracts for federally assisted construction over $2,000, must include provisions for paying workers on-site no less than the locally prevailing wages and benefits paid on similar projects.

Retention is a portion of the contract price paid into an escrow account before substantial completion of the work, and is beneficial to both the owner and the contractor. For the owner, retention ensures that the project is completed, protecting against default by the contractor. And for the contractor, retention protects against default by the owner.

The final payment is distinct from, the progress payments. In addition to the requirement that the work conform to the contract, the owner typically attaches certain conditions to the contractor's receipt of the final payment.

Right to Stop Work The right to stop work is not the same as the right to terminate. While termination is permanent, a work stoppage lasts only until the cause of the delay is resolved.

Every construction contract should address the conditions under which each party has the right to stop work and who should bear the costs for the work stoppage or delay.

In order for the contractor to stop work for nonpayment, it must follow the specified procedures in the contract. The contract time may be extended until payment is made and the contract price may be increased to include the contractor's reasonable costs incurred in stopping work.

Schedule (Project) All construction projects have a schedule. Small projects may have only an informal schedule, but large projects have a comprehensive schedule that a contractor and owner take seriously. When progress does not keep in sync with the schedule or additional time is required due to delays or changes to the work, the the schedule often changes, and the critical path (CPM) may be affected, which in turn may trigger delay damage claims or liquidated damage charges.

Schedule of values - Not to be confused with a project schedule, a schedule of values is an assigned 'value' to various phases of work, or percentage of completion. This schedule is important for allocating progress payments to contractors in amounts that have been agreed to by way of the schedule of values.

Scope of Work The contractor involved in a construction project has a scope of work. The scope of the work is defined by the construction contract between the owner and the contractor. Subcontractors scope of work is contractually defined, but by a different contract. (Between the General and the Sub) And each subcontractor has a specific scope of work based on the trade.

It is very important to have the scope of work very explicitly defined because contractor or subcontractor is not obliged to perform work that is beyond the contractual scope of work.

The scope of work becomes important when the owner issues a change order, requiring that the contractor or subcontractor to perform tasks that are outside the original scope of work, or are a modification to the scope of work.

Any changed or extra work ordered by the owner which exceeds the scope of the contract work may in certain circumstances be considered a cardinal change. A cardinal change may be considered a breach of contract, and may allow the contractor to stop work until the parties reach an agreement regarding the work beyond the contractual scope of work.

Site Inspection Clause. A site inspection clause requires the contractor to inspect the work site to verify the accuracy of the owner's description of the site. If the construction contract contains such a clause, the contractor must comply with its duty to inspect before it may recover
for differing site conditions.

Stop Notice gives the claimant a lien against undisbursed construction funds in the possession of either the owner or the lender. For private works of improvement, the Mechanic's Lien and Stop Notice gives the claimant a lien against undisbursed construction funds in the possession of either the owner or the lender.

For private works of improvement, the Mechanic's Lien and Stop Notice are cumulative remedies which can be simultaneously pursued along with a suit for breach of contract on the underlying debt. Generally, a Mechanic's Lien cannot be filed on a publicly owned parcel of real property. On California public works projects, the Stop Notice and payment bond claims are cumulative remedies.

Termination for Cause or for Convenience. A construction contract can be terminated for cause or for convenience. A termination for cause occurs when one party stops work because of a deficiency in performance by the other party. Because the contract is terminated as a result of a party's own poor performance, the law typically provides the terminated party with little recourse in the event of a termination for cause. A termination for convenience, by contrast, occurs when the owner stops work for reasons other than a deficiency in performance by the contractor. Because a termination for convenience is not the result of poor performance by the contractor, the law may provide the aggrieved contractor with significant rights against the breaching owner.

Unenforceable - A valid contract where there is no legal remedy if there is a breach. A contract may be unenforceable when certain statutory requirements have not been met. For example, an oral contract to buy land would not be enforceable because the Statute of Frauds requires such an agreement to be in writing. Similarly, statutes of limitations, which limit the length of time available for legal action, may apply to contracts of certain types and render them unenforceable after a certain period of time. Parts of a contract may be unenforceable, while other parts of the same contract are enforceable.

Waiver of Consequential Damages Clause. Construction contracts also frequently include a mutual waiver of consequential damages clause, whereby both parties agree to waive all consequential damage claims relating to the contract. Consequential damage waivers may amount to no damage for delay clauses when costs arising from delays are characterized as consequential.

Warranties Warranties can be either express or implied. Contractors will be held to any express warranties made in the construction contract. The express warranty typically lasts one year from the date of substantial performance but may be some other time frame as specified in the contract. Implied warranties are those that are understood to be in effect, even if there is nothing in writing. A contractor's failure to fulfill an express warranty to repair or replace defective materials may constitute abandonment.