Construction Contracts 101

By Doug Thomas



In its most basic form, a construction contract provides a framework that defines, for both parties, the expectations for an agreement. Although the fine points should be addressed by your attorney, you should firmly grasp the big picture before he or she becomes involved.

Why re-invent the wheel? The American Institute of Architects (AIA) has invested a great deal of time and money in developing a set of standardized contracts that address relationships between owners and architects and owners and contractors. Some agencies such as HUD require that these forms be used. These are boilerplate forms with blank spaces that require specific terms and conditions to be detailed, i.e., start and completion dates, fees, retainage, etc. They are a great place to begin. Again, familiarize yourself with the contents, and consult with your attorney before releasing the final document.

Why have one at all? Most times, the protections afforded by a written contract are completely unnecessary. Both parties act in good faith and practice, and everything comes out the way it's intended, with only a mutual agreement between informed and willing parties. But sometimes, and not necessarily because of devious intent, things go wrong: markets dry up, suppliers are unable to deliver product, pricing changes make a project unfeasible. You can get left holding an empty bag. Your contract can help you to recover some or all of your investment, be it time or product.

Oral or written? An oral or verbal contract works very well in some instances when the speed or the value of a transaction makes a written contract cumbersome or impractical, but it provides very few remedies in cases when disputes arise. The value of a written contract is that it is a written contract. One contract law professor used to say, "If you wrote it at all, you wrote it all." This means that if you took the time to create a written document to delineate terms and conditions, then you probably included everything that you deemed important. Consequently, if your contract says, "apples sliced and removed from the core," don't wonder why they still have a peel.

You and who? Be certain that your contract is executed with the party you intend. Particularly in today's dynamic business environment, when companies merge, are bought up or spun off, it is important that the terms of your agreement follow the changes in relationship. You may want your original agreement to include language that binds subsequent parent entities to the terms of your agreement. Alternatively, you may request the new entity to endorse the existing contract or negotiate a whole new contract.

I agreed to what? Sometimes it's an oversight or omission that ends up costing a whole lot of money. You can limit your exposure to runaway costs due to liability claims with the inclusion of language in your contract that limits your liability - not because you are careless or incompetent, but because stuff happens.

And if we don't agree? Dispute resolution is another area that should be addressed by the contract. Not only should it be addressed, but you should thoroughly understand and agree with the implications of the choices. Arbitration and mediation are often confused. Arbitration allows an independent third party to decide the merits of a dispute, in favor of one side or the other, without having to go to court. Mediation also involves a third party but results in a mutually agreeable (or mutually distasteful) solution. They both require the intervention of a third party. If your contract contains language that requires one of them for dispute resolution, you need to understand that they both preclude the relief that the courtroom may provide. If you don't agree with it, change it. The point of a contract is to negotiate a mutually agreeable set of terms and conditions that will serve the needs of both parties under all foreseeable circumstances.

As stated previously, any contract that you are considering should be drafted or reviewed by your attorney. But you can help yourself, and save some attorney's fees, by having a firm grasp of the main issues prior to eliciting their services.



Doug Thomas is a construction cost analyst and construction-monitoring inspector for Building Consultants, Inc. He can be reached at 410-715-2277, ext. 17, or Doug@ eConstructionServices.com.