The Ten (10) Key Points To a Construction Contract: Don\'t Be Caught Without Your Essential Contractor Provisions
10 KEY POINTS TO A CONSTRUCTION CONTRACT:
DON'T BE CAUGHT WITHOUT YOUR ESSENTIAL CONTRACTOR PROVISIONS
The purpose of this article is to identify those elements, terms and provisions that a Homeowners Association should include in any contract entered into with a general contractor and/or a subcontractor. By the time you have reached the point that you are ready to execute a written contract, it is assumed that you have already gone through the necessary steps to ensure that your contractor is licensed, bonded, competent to perform the work in which you are engaging him and reasonably priced. Once the pre-contract background checks have been completed, it is imperative that the contract contain certain critical terms and conditions so that all parties understand their rights, duties and obligations pursuant to the contract.
Always remember that if you fail to specifically set forth a term in your contract and a dispute arises in the future, such ambiguity may be found in favor of the contractor. Any and all agreements or understandings reached between the Homeowners Associations/Owner and the contractor should be placed in writing. Memories have a tendency to fade and be blurred over time; therefore, oral promises by the contractor to perform certain work that is not specifically written into the contract may provide an escape clause for the contractor in the future.
The following terms, conditions and provisions should generally
be included within the
contract:
1. Scope of Work:
The contract should specifically set forth the job description of what
the contractor has agreed to perform. In addition, the contract should
identify the specific materials or named brands of materials to be used
if applicable. As an example, a contract with a plumber should include
the location (e.g. bathroom) that is to be plumbed, as well as specific
brand identification for fixtures. Further, the contract should specifically
state those items that are not included within the contract. As an example,
a concrete contractor who has not contracted to place a waterproofing
membrane between a topping slab and a structural slab should specifically
state that the contract excludes a waterproofing membrane. Also, contracts
should state that the contractor will comply with all plans, specifications
and building codes. By specifically setting forth within the contract
the scope and non-scope of the work of the contractor, discrepancies
in the future as to the duties and obligations of the contractor will
be greatly minimized.
2. Time is of the Essence:
Generally, Homeowners Associations/Owners have a specific time frame
during which they expect the work to be commenced and completed. This
is especially true when the work that is to be performed is structural
in nature, as opposed to merely cosmetic. As an example, a contract
to have a new roof installed on a building will generally require completion
prior to the commencement of the rainy season. Thus, a specific completion
date is necessary. Also, by including a "time is of the essence"
clause, the contractor is advised at the commencement of the contract
that he will be obligated to provide an ample crew to perform his task
timely.
3. Liquidated Damages:
The purpose of a liquidated damages clause is to place a penalty upon
the contractor for failure to timely complete his work. This provision
ties directly into the time is of the essence clause and basically states
that if the work of the contractor is not completed by a specified date
or within a certain number of days from the date of commencement the
contractor will be either obligated to repay monies to the Owner or
forfeit a certain amount of money for each day beyond the original completion
date of the contract.
4. Insurance and Performance Bond:
The contract should include provisions for both insurance and a performance
bond. The contractor should be properly insured, including Workers Compensation
Insurance and General Liability Insurance. If the project is large enough,
it may be advisable to have the contractor have the Homeowners Association/Owner
named as an additional insured. By being named as an additional insured,
the Homeowners Association/Owner would have direct contractual rights
with respect to the insurance policy in case of damage or injury. In
addition, for approximately two (2%) percent of the contract price,
the contractor can also obtain a performance bond which will cover the
Homeowners Association/Owner if the contractor does not perform his
work completely. Thus, the performance bond is in essence an insurance
policy that allows an owner to have the work completed by another contractor
if the original contractor fails to perform.
5. Indemnity:
Due to the litigious nature of the society in which we live, it is important
to have an indemnity provision within the contract. An indemnity provision
generally states that the contractor will hold the Homeowner Association/Owner
harmless and agree to defend and indemnify the owner as a result of
any acts and/or omissions on the part of the contractor that gives rise
to damage or injury to the project or individuals. This provision is
extremely important in circumstances wherein a Board of Directors retains
a general contractor to perform significant renovation to a project
which has the potential to damage individual units which could lead
the individual homeowners to sue the board or the Homeowners Association
for the damage caused by the contractor. By having a properly drafted
indemnity provision, the Board of Directors could then tender their
defense to the general contractor, who would then be obligated to defend
and indemnify the Board against the claim.
6. Fixed Cost or Time and Material Contract:
The contract should be specifically identified as either "Fixed
Cost Contract", i.e., where all work is to be performed for a specified
amount of money or if it is based upon "Time and Material",
i.e. the contractor charges a certain amount for all labor, time, material
and surcharges. Generally a fixed cost contract is more beneficial to
an owner due to the fact that the contract amount is specifically known
as opposed to being based upon the speed and efficiency of the contractor.
7. Payment Schedule:
The contract should set forth when payments are to be made. A contractor
cannot require more than ten (10%) percent of the contract amount up
front or one thousand ($1000.00) dollars whichever is less. In addition,
the payment schedule should be phased in and should never be ahead of
the actual work performed. Don't pay for work that has not yet been
performed. Further, the Homeowner Association should always attempt
to retain a minimum ten (10%) percent retention until the job is totally
completed and accepted by the Owner. To the extent that the Owner can
increase the retention it should. The greater the amount of the retention,
the better the leverage the Owner will have to have the work performed
properly.
8. Warranties and Statute of Limitations:
Any warranty provided by the contractor should be specifically set forth
and identified. You should also determine whether or not the statute
of limitations as to a claim based upon breach of warranty is being
limited by the contractual terms to less than three (3) years.
9. Attorney's Fees:
The contract should also contain an attorney's fees provision which
states that if a dispute arises as a result of the work that is to be
performed under this contract, that the prevailing party in any such
dispute is entitled to the recovery of reasonable attorney's fees. This
provision provides a heavy hammer that can be used to try to force the
non-complying party, whether it be the contractor or the owner, to comply
with the contract.
10. Alternative Dispute Resolution:
Often, parties to a contract will wish to have a provision stating that
disputes or claims arising from the contract or the work will be submitted
to Alternative Dispute Resolution (A.D.R.) or Arbitration. A.D.R can
include, but it is certainly not limited to the American Arbitration
Association (AAA) Judicial Arbitration and Mediation Services (JAMS),
etc. Generally, the inclusion of an A.D.R. provision will be premised
upon the fact that both parties have agreed to waive their rights to
the filing of a judicial lawsuit.
By including the abovereferenced terms, conditions
and provisions, the contract will be clearer and more comprehensive
with all parties understanding their rights, duties and obligations.
