Subcontractor Compliance Audit, Contractual Risk Transfer Audit, Financial
Consultation for Surety Credit Maximization
Understanding Construction Contracts
Construction contracts can contain terms that impact your company’s bottom
line. Reviewing them carefully prior to signing is indispensable, and can
save your company time and money. This contract review guide is meant to be
a starting point for reviewing contracts in general. It highlights some
common contract terms and their potential impact. You can begin to
understand which terms are most often negotiated in contracts generally.
Then, with the help of licensed inside or outside counsel, analyze the
commercial risks associated with construction contracts in depth and
understand terms and conditions to protect your company’s assets.
Scope of the Agreement
Examine the definition of services to be provided to ensure the language is
clear enough for an unrelated third party to understand the scope. The
contract should include a time frame for completion of services. The rights
and obligations of both parties should be clearly outlined. Any mechanism
for changing the scope of the contract, as well as any of the terms, if
allowed, should also be outlined within the contract.
Terms of Payment
Terms of payment should be clearly listed within the contract so that the
expectations of both parties are clear. The contract should specify the
agreed payment schedule for goods received.
There are two types of warranties: express and implied. Both types are
assurances regarding particular issues, such as performance.
Express warranties are those that are defined specifically in the contract.
Implied warranties are based in statutory and/or common law, depending upon
your jurisdiction. They are two-fold: a warranty of merchantability, which
requires that goods/services must reasonably conform to an ordinary buyer’s
standards, and a warranty of fitness for a particular purpose, which states
that if a seller knows the intended purpose for the product or service, the
act of selling the product to that customer implies that it is fit for that
Be aware of warranty disclaimers and understand how the disclaimer limits
your statutory rights. If it disclaims all warranties, express and implied,
then you will likely be limited to the remedies in the contract for issues
related to things like performance. You should also examine any disclaimer
in the context of the contract. While it may require you to disclaim your
statutory rights, other contract language may give you adequate rights and
remedies regarding the points about which you are most concerned.
Damages, Limits of Liability and Indemnification
These three items are often in close proximity to one another in a
contract, as they are interrelated. Damages may be defined as certain types
of losses that could create liability under the contract. A limit on
liability would restrict the amount of damages that a party would be
required to pay if found liable for such damages. Sometimes this may also
include a limit for indemnification.
Indemnification provisions allocate risk and cost between the parties. It
is important to examine whether the party assuming the risk is the party
with the most control over that risk. For instance, when a company’s
employees are required to work at a customer’s location, the company is
often asked to release the customer from all liability relating to the
employees presence at the customer’s location.
In some cases, indemnification is limited to negligence or to a specific
dollar amount, under a heading of “limits of liability.”
Some contracts will contain minimum bodily injury and property damage
liability coverage amounts that the party must possess and also may require
that the customer is added as an additional insured on those coverages.
Prior to consenting to any contract, it is prudent to examine insurance
coverage against the amount of liability exposure in a particular
Terms and Conditions
It is also vital to examine any terms and conditions contained in the
• Governing Law & Jurisdiction – Look at the
governing law provision to make sure that you are comfortable with the
implications of the state law chosen by the drafter. This can impact the
interpretation of the contract from warranties to indemnification.
Additionally, when specific statutes or regulations are referenced in the
body of a contract, it is as though that statute or regulation is wholly
contained within the contract itself. It is vital to read and understand
that language prior to giving your consent. This happens regularly in
government contracting situations.
• Dispute Resolution – This is another clause with
which you must be comfortable with the laws of the state or forum chosen by
the drafter. The rules chosen to govern dispute resolution can impact the
outcome. Additionally, you should consider whether dispute resolution is
right for your situation.
• Intellectual Property – When you are disclosing
and/or licensing your company’s intellectual property, be it trademarks,
copyrights or patents, it is important to include a clause that recognizes
the owner of such intellectual property and affirmatively states that the
agreement does not transfer any rights.
• Standard of Care – A standard of care clause may
appear in certain types of contracts. The standard of care that is provided
by the law should provide the minimum standard of care for the provision of
services under the contract.
• Term/Termination – The contract should provide
both parties with the right to terminate the contract. The situations in
which termination is allowed will vary from contract to contract. Some
contracts will allow the right to terminate in cases of dissatisfaction;
others will allow it with a specific notice, for no cause. It is important
that you contemplate in what cases you would want the right to terminate the
contract. There should also be language defining the term of the contract.
Does it have a finite term? Does it automatically renew each period?
• Right to Cure – Related to termination, some
contracts will contain a right to cure clause. This would give the
defaulting party notice of a breach and a finite period of time in which to
remedy such a breach.
Standard Form Contracts
Unlike other industries, construction lacks a consistent set of laws like
the Uniform Commercial Code or a federal statutory scheme. Contracts
produced by professional and trade associations for architects (American
Institute of Architects), engineers (Engineers Joint Contract Documents
Committee) and commercial contractors (Associated General Contractors of
America) can serve as important references and benchmarks when drafting a
new contract. They are a good source of industry best practices, and using
them can greatly reduce drafting and review time, meaning lower overall
transaction costs for your company.
For all of their advantages, there are several things that you should be
cautious about when using standard form contracts. Note the following
cautions about standard forms before using them:
• Standard forms, which are written broadly to
encompass many different contexts, require transaction-specific and
jurisdiction-specific modifications. For example, certain states require
that indemnities be written in a certain way.
• Changes made to one part of the document, such
as definitions of words or terms, may affect other parts that make reference
• Custom-drafted and industry-drafted forms are
often incompatible. Even industry-drafted forms from different publishers
can be incompatible.
• Standard forms always contain the bias of the
drafter. Use this bias; know when to use various standard forms published by
different industry organizations.
Reviewing general terms and features of construction contracts will help
you grasp the consequences of its terms and conditions for your business. In
any case, to ensure its completeness and accuracy, it is necessary to submit
each contract you must sign to legal review.