Construction contracts are crucial to mitigating risks for all parties involved and preventing future disputes. However, there are a number of common pitfalls that can be avoided with prior planning and careful drafting. Some key considerations and clauses that construction contracts should include are noted below.
1: Clear and Defined Scope of Work
The scope of work must be defined in clear terms in order to prevent any ambiguities. While this may seem like an obvious point, even slight inconsistencies may become the source of later disputes.
2: Limitation of Liability
In order to limit a company's risk of liability under the contract, a limitation of liability clause needs to be included in the contract. Depending on how the clause or clauses are drafted these clauses can limit a party's liability to certain activities, dollar value and/or can prevent a party from being held liable for consequential damages (such as any loss of use, product, revenue, profit or contract). Without these limitations, a party can face substantial risk in being held responsible for an array of potential damages.
Indemnity provisions are included in most construction contracts. Indemnities are intended to hold one party liable for any direct loss or damage incurred by the other party arising from or in connection with the services performed. It is imperative to ensure that the indemnity language is qualified so that it does not apply if the loss or damage was caused by the other party to the contract or a third party working on the project. Contractors should seek to be indemnified for any direct losses incurred as a result of negligent acts or omission which the other party is responsible for. Properly phrased indemnification clauses can protect your company from losses that are wholly the responsibility of the other contracting parties.
4: Payment Terms
Setting out the payment terms and methods of payment can help avoid any delays in receiving payment. There are a number of important items to define related to payment terms such as when payment will be made, entitlement to interest, and special conditions to payment, for example those that allow for a deduction in price if the project is completed early.
5: Certainty of Terms
It is important to avoid inconsistency and duplication between articles of an agreement, general conditions, and schedules or appendices. This can be particularly important in relation to any documents that may be incorporated by reference. Construction projects typically involve a number of contracts working simultaneously and it is important to ensure clauses line up with the provisions of the main governing agreement and that flow down provisions are taken into account.
In addition to these above consideration and clauses, there are a number of other clauses that should be considered, including, but not limited to:
- Warranty Obligations
- Change Mechanisms
- Termination For Convenience
- Change In Law
- Choice of Law
- Dispute Resolution
It is important to have these clauses articulated properly.
These clauses are only a portion of what can or may need to be included in in your construction contract. In order to prevent potential future disputes and costly proceedings, it is important to ensure that your contract is appropriate for your project and does not omit any important clauses that could leave your company vulnerable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.