Common Issues with Commercial Construction Contracts
Commercial construction can be some of the most lucrative projects for contractors and builders to work on and can lead to highly profitable office or retail spaces for property owners. However, with the possibility for high profit comes the chance that a single contractual provision can be abused by one party. In many cases the most abused or misused commercial construction contract provisions include the scope of work provision, pay structures, delays provision, warranty provisions, and indemnification provisions. If any of these clauses are not properly written or lack certain focus areas, costly litigation may ensue. With over 20 years of experience, Antonoplos & Associates Washington DC construction attorneys can help construction company owners, contractors, subcontractors, material suppliers, architects, and designers with a wide range of services before, during, and after a construction project.
The Scope of Work Provision
The scope of work provision—also called the performance duties provision—lays out a clear description of the work that will be performed, time frames for the work, and what is expected from both the property owner and builder or contractor during the job. Additionally, this clause will normally discuss what will occur if there are any unforeseen events that occur that prohibit either party from doing what is stated in the contract. Finally, the scope of work clause will also describe how the commercial building design documents will be handled and interpreted.
At the heart of any construction project lies the work that is going to be completed. Furthermore, with multiple construction companies and contractors all working on one project, it is imperative that each contract have a specific timetable for when work is to be done. This not only ensures that your project finishes in a reasonable amount of time, however, it also allows you to keep track of the work each party is completing.
Common issues with the scope of work clause have to do with incomplete descriptions. When incomplete descriptions appear within a contract, builders or contractors may experience confusion or simply try to take advantage of you which leads to incomplete or defective work. Consequently, additional problems tend to appear with coordination between multiple contractors which can also lead to disputes concerning the quality of the work completed. This occurrence is especially dangerous. It can lead to lower property values or issues with the structure of the building itself.
Unclear or No Language Concerning Pay Structure
Determining whether the pay structure of a job is fixed price or cost plus is important to both the property owner and contractor or builder. In a fixed-price contract, the owner and contractor or builder agree to the work that will be done and the cost of the project before the job begins. Fixed-price contracts are very common as they provide the property owner with a high degree of cost certainty. However, though the price is fixed, these types of contracts—in order to protect the contractor or builder—allow the contractor or builder to request more compensation under limited circumstances.
Common issues occurring in construction contracts regarding pay structure happen when it is unclear what pay structure is in use. Typically, a contractor engages at the design stage to help with scoping and estimating the project. At the end of the design, the contractor or builder submits their final cost estimate for the job. While property owners will simply approve the estimate, they commonly do so without saying whether the agreement is fixed-price. This is an issue as the price the contractor gave could be a budgetary estimate instead of a fixed price. This uncertainty can lead to disputes regarding which party gets to keep the contingency fee if it goes unused. Additionally, parties could argue about how any additional compensation will be funded.
In construction contracts, the delays provision details the process through which contractors or builders can request time extensions because of events that occurred where the contractor or builder bears no responsibility. Additionally, delays provisions will typically allow contractors or builders to request additional compensation. The reason that this provision is in a contract is so that builders and contractors have insurance. This insurance is that no legal issues will occur if events happen that delayed the project. For example, delays provisions are common when labor disputes, material shortages, and actions taken by government agencies occur.
Additionally, delays provisions entitle a builder or contractor to monetary compensation for extra expenses. This normally applies to all expenses the builder or contractor incurred as a result of the delay. These extra expenses typically include material price escalations, project acceleration costs, and costs associated with extended project overhead costs.
Issues with delays provisions occur when this clause is written in a way that allows builders and contractors to extend the timeline of a project while still receiving compensation when no event occurred that should delay work. The obvious issue with this clause is that property owners have to pay a company that is not working. Furthermore, when a company does not complete work, other businesses involved in the project have to slow down or completely stop working. This extends the time until a property can start bringing in revenue for the owner. A consequence of this is that the project will take longer to complete.
Additional Issues With Delays Provisions
From these examples, it is easy to see how if you are stuck negotiating with the contractor or builder, the project may be held at a standstill until you and the builder or contractor can resolve the issue. Many businesses want to move on to another company and not pay the original contractor for the remaining work. While a contractor delaying work has many negative affects, this can bring up legal issues. If the contractor files suit, you will go to court and have a judge interpret the language of the contract.
A warranty in construction contracts deals with a builder or contractor’s legal obligation to repair defects in a property. These defects typically do not become noticeable until after the project has been completed. Stating that there is even a warranty is important. After this, the contract must discuss the duration of the warranty and what will be covered under the warranty. For example, a contractor building a new home may agree to a warranty that is 12 months long. For this warranty, it will typically apply to every aspect of the house that the contractor works on. However, a builder that is remolding an existing property may only agree to a 3-month warranty. In this situation, the property owner may also have to pay half the cost of the repair project.
Issues with construction warranties occur when the contract does not specify the key elements discussed above. Additionally, issues occur regarding whether the contractor has the obligation to remove and replace the defective part, responsibilities for return shipping, and whether there is a warranty on the warranty repair work. Furthermore, a warranty could be as long as 12 months. However, if there is no start date on the warranty, the contractor could claim that the 12 month period began at the beginning of the work and not when the project was completed. For example, a contractor may purchase appliances for a renovation project six months before the project is done. If the appliance only has a 12-month warranty from delivery, the owner might effectively only have six months of protection.
The indemnification provision is the portion of construction contracts that detail the responsibility property owners and builders or contractors have concerning third-party judgments or liabilities. Essentially, this provision lays out what will happen to a contract if a third-party claims indemnification. In addition to removing or placing liability on parties, damage or injury to third parties commonly occur.
There are a few common issues that occur due to indemnification provisions. These issues include the builder or contractor not indemnifying you from third-party legal actions that arise from the project. If this occurs, the property owner may go through litigation with a third-party for damages caused by the contractor. Furthermore, many state laws nullify indemnification provisions. In this case, you may think that you are safe when in actuality, the provision does nothing.
You can easily prevent each of the issues above with the help of a construction attorney. Many businesses shy away from hiring a construction attorney because of the perceived cost. However, hiring an attorney to review and draft legal contracts allows you to avoid issues that lead to costly litigation. Antonoplos & Associates has over 20 years of experience helping construction businesses in DC, Maryland, and Virginia. As such, our construction attorneys are here to help you throughout the entirety of your construction project.
Contact our DC Law Office for More Information
Finally, for more information on common issues with commercial construction contracts, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding construction law, check out our blog.