Utilizing Contract Negotiation and Formation

This article is part two of a continuing series identifying key construction clauses. Negotiating and drafting any type of commercial or transactional contract, whether it be an open account agreement or construction contract, is an exercise in risk allocation. In order to allocate that risk, the individual reviewing the agreement must first be able to identify and understand the risks likely to be encountered. The ability to do this effectively, is driven not simply by a familiarity with construction law, but by a fuller understanding of your business operations and the project itself.

 

Through the process of negotiation and the inherent communication chains created in a negotiation, all participants are better informed at the outset of the project, therefore the contract will likely better serve the parties, and the odds are enhanced that the participants’ anticipated benefits and goals from the transaction will be met. As a direct result of time spent at the front end understanding the contract terms and risk allocation, everyone should benefit by the end of a project. Here are a couple of typical clauses found in construction contracts that deserve special attention and focus during the contract negotiation process:

 

NO DAMAGE FOR DELAY CLAUSE

One of the great risk allocators in the construction industry is the no damage for delay clause. The contractor in bidding the project must carefully examine the contract documents to determine whether or not there is, in fact, a no damage for delay clause contained within the terms of the contract. If there is one, the contractor must bid the contract with knowledge that such a clause exists and it will have the burden of proof to get around the no damage for delay clause. Customarily, this provision provides that while the contractor or subcontractor is not entitled to a claim for delay damages, it will be entitled to an extension of time. Many times the contract will provide that the contractor is entitled to no damage for delay, but, on the other hand, the owner or contractor is entitled to liquidated damages for any delay caused by the contractor or subcontractor.

 

CONTRACTORS REVIEW OF DOCUMENTS

In general, owners are responsible to contractors for errors and omissions in the construction plans and specifications. As a result, owners frequently seek to insert exculpatory clauses in contracts shifting the risk of defects in the plans and specifications onto contractors or subcontractors. In general, for the exculpatory clause to be enforceable, it must be sufficiently specific so as to put the contractor on notice that he oshould not under any circumstances rely on the accuracy of the plans and specifications to prepare an estimate for the cost of the work to be performed. Many contracts provide that the contractor must inform the owner and seek correction of or clarification of any document deficiencies such as errors, omissions or inconsistencies and to do so prior to proceeding with the work. In the event that the contractor then proceeds recognizing such error, inconsistency or omission and fails to report it to the owner or architect, the contractor will then be responsible should the installation prove defective.

 – Paul A. Sheridan