article_The Five Key Elements of a Construction Contract

The Five Key Elements of Every Construction Contract – Forget Them and You're in Trouble!

The one key document that contractors must deal with each and every day is the contract. This piece of paper is the essential heart of each project. Being so important, it amazes me how many contractors overlook or disregard its contents and the impact they can have on the profitability of the project.

The word contract comes to us from the Latin work “contractus”. It means an agreement between two or more parties to complete a specific amount of work for a specific value. Other words that come from it are contractors and contracting.

In order to help you, I'm offering some basic fundamental information about the key elements of any construction contract. You'll want to make certain that they are properly addressed in your next contract.

Payment is absolutely important to the success of the project, but it always amazes me to find it misrepresented or left out completely in some contracts. Check to make sure that the following information regarding payment is included in your next contract.

When and how often payment is allowed or scheduled
How payment amounts will be calculated, including retainage, if any
When payment will be received
What amount of payment will be released, including retainage.
Who will authorized and approve payment
Where payment will be received and released to you

One of the most effective ideas I've ever conceived for prompt payment was what I called, “The Zero Dollar Invoice”. What we did during the “Honeymoon Period” (that period of time between Notice of Intent to Award and Notice to Proceed) was to forward to the owner a copy of the intended invoice we would be using for our partial payment request. Since no work was performed (we weren't even on the job yet) nor any quantities of work or dollar values for work performed were included, it showed the contract amount, quantities, unit prices, etc. Hence the name “Zero Dollar Invoice”. The idea was to get approval from the owner of the invoice procedure that they wanted. This avoided delays at the time of our first invoice because that it wasn't the right type of submittal.

We also included in our cover letter the exact time of the month that we would be submitting our invoice, how we would obtain agreed amounts of completed work with their representative and when we would be expecting payment from them, including interest for late payments, if applicable. This procedure cleared the path for our partial payment requests and helped us to obtain prompt payment.

What are the specific documents (specifications, drawings, addendum's, etc.) that make up your contract work. Make sure that each and every one is properly listed. I've seen too many contracts that don't have the specific documents listed. This leaves you wide open for disagreement and delays later on. Get them included and listed in your next contract!

This one always gets left out in construction contracts. Who is the representative of the owner? How much authority does he or she have? What procedures are you required to follow? When do you have to provide notification, etc.? Where do you go to locate the recognized authority? Get this information included. Don't get stuck in a quagmire of non responsiveness from everyone while they figure out what to do. Address this issue before you sign the contract and things should run a lot smoother during the progress of the work.

There is no such thing as a contract that gets completed without change orders. Just contractors who end up taking it on the chin because of no change order procedures in their contracts. Make certain that the key basic elements for change orders is addressed:

Who you have to notify and receive permission from for change order work
When and how do you have to notify them of potential change order work
What documents do you have to provide
How and when the change order work will get paid
Where the additional funds will come from for the change order work
What is the reasonable time for approval and what is the additional cost for your delays are while you're waiting for approval
How you and the owner will resolve the change order issue if immediate approval for the work is not received in the agreed time

Remember, change order work is not “extra work”. It disrupts the progress and productivity of the work as you had originally planned for when you bid the work. It is not your fault nor your responsibility, and you should be justly compensated for this unanticipated disruption.

The time that you planned to complete the work is important to obtaining the bottom line results you anticipated when you bid the work. Too many contractors have given away their intended profits because they failed to make a schedule that honestly represented the way they bid the work. If you figured the job for 120 days and the owner gives you 180 days to complete the work, don't stretch your schedule out to meet the 180 days. If the owner delays you and you use up the extra 60 days, you'll have a hard time convincing anyone (including the judge and jury) that you were in fact delayed. Make sure the following properly covered:

You are not responsible for delays caused by the owner in obtaining the required permits, easements, approvals, permissions, etc., to do the work.
You are not responsible for delays caused by others
You are not responsible for “Acts of God”
You are not responsible for inclement weather
You have included adequate time for long lead items (Be specific and tie this into your supplier with whatever documentation you have received from them)

Next get a large pre-printed rubber stamp made that says: "The above schedule does not take into effect any changes or delays caused by others, weather or Acts of God." Get a pad of red ink and stamp your schedule before you submit it to the owner.

Some owners will even have “liquidated damages” or penalties for being late (not many owners will financially reward you for early completion, but don't let this discourage you from at least attempting to negotiated it). Make sure that scheduling has been properly included in the contract.

Contracts can be a double-edged sword if the proper information has been included. No one for the owner is going to make sure that you're properly covered. Only you can do that.

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