Danger! Contract Issues Ahead!

how to avoid problems with construction contracts

Executing boilerplate contracts passed down from the client without negotiation can poise huge problems for a contractor. This article discusses some areas of concern that need to be addressed when finalizing a written agreement.

1. Full execution of all documents

If a contract is not either fully executed, or executed in counterparts, it can often be found enforceable. The simple solution is to make sure your file contains a fully executed contract. Additionally, the contract should have a section that permits signing in counterparts, meaning that not everyone has to sign on the same document. If the property owner/manager signs on one contract and the snow plow contractor signs on another contract, then it would be considered fully executed.

2. Less control should be defined by less liability

If the property owner/manager is going to dictate how, when and where services are to be performed, ensure that liability for that discretion lies with them.   In those circumstances, the contract should make clear that if owner declines or decides not to have the Contractor apply the Services to any portion of the Premises, the Owner acknowledges that the Contractor is not responsible for any damages or claims whatsoever relating to or caused, in whole or in part, by the failure to apply the Services to the Premises in any circumstance.

 If the term of the contract is not clear, the opposing parties can make an argument based on whatever benefits them the most. Identify the exact terms of the deal and do not leave anything to chance.

3. Unfinished business

Another major problem I see on a consistent basis is that the scope of work section does not properly detail the how, when and where the operations will be performed. Even when there is sufficient detail, there is often language that puts unfair, unattainable and unrealistic requirements on the contractor. Language such as “Continuous” (i.e., “continuous service” or “continuous monitoring”); “bare pavement” or “slip free conditions” should be avoided. Instead, opt for words that permit servicing within a reasonable period and service that is consistent with industry standards.

4. Uncontrollable events

Fourth, the contract must contain language to limit responsibility for acts of God or other events out of the contractor’s control.  Some examples include delays in performance caused by strikes, weather conditions, and inability to obtain material.  This language is often missing and could play a role in defending claims from the property owner/manager for failure to perform duties, as well as personal injury or property damage claims.

5. Unfair risk transfer language

Lastly, the indemnification and hold harmless language seems to be one of the most misunderstood sections of a contract. As a result, I see contractors sign documentation and ask questions later.

Depending on whether the language is beneficial to the contractor or not, it can significantly impact the obligations of not only the parties but their insurance carriers, including the obligation to defend and indemnify. This type of language increases exposure, as the contractor’s carrier will have to represent not only the insured, but also the indemnified parties. 

It is incredibly important to avoid language that requires the contractor and their carrier to provide defense and indemnification in the following scenarios: (1) based solely on allegations in the Complaint (look for the words “threatened or alleged”), or (2) without regard to whose act or omission could have caused the alleged condition. 

6. Payment defined by performance and invoicing

Too often a contractor executes a ‘paid when paid’ contract.  In other words, the Contractor will not be paid until their client (the general contractor, or property manager) is paid by someone up the stream.    A contractor should ensure that the contract defines how, when and where payment is to be made, preferably within a short timeframe of when the invoice is submitted.   Further, it should allow interest to accrue on overdue payments, an option to terminate agreement based on failure to pay, and identify options to collect that payment (proceeding through court with recovery of legal fees and costs).

In summary, proper risk management means understanding the areas for concern and paying attention to details.  Every step of the process should be analyzed, from bidding through contract negotiations, on to performance, invoicing and collecting payment.  Time spent up front can save a contractor time, money and effort in the long run.

Joshua Ferguson, attorney with Freeman Mathis & Gary, LLP, presented "Risk Management and Error Recovery Tools to Protect Your Company" at the 2018 National Pavement Expo in Cleveland. He can be reached at jferguson@fmglaw.com.