Why Clear Provisions are a Must in Construction Contracts
Construction projects—both commercial and residential—require mass amounts of money, time, and resources. The amount of coordination between different companies and teams throughout a project makes this process even more complicated. Thus, if any party involved in a project has communication shortcomings, a project can experience slowdowns, errors, or budgetary overages.
The main ways that property owners, general contractors, and subcontractors reduce the negative effects of communication shortcomings is to create a strong construction contract. Further, creating a construction contract that has clear provisions is vital to reduce risk, avoid disputes, and spell out crucial parameters before, during, and after construction projects. Below are some of the most useful and important reasons why every construction contract should include clear provisions.
Clear Provisions Help Avoid Payment Penalties
When seeking to receive payment, a subcontractor must submit a payment application to the general contractor of the project they are working on. This application typically includes supporting documents such as work performed, photos of work completed, and daily reports of work done. In many contracts, the contractor or property owner only has a limited amount of time to dispute this payment application. Thus, if the contractor or property owner does not dispute the payment application within the stated period, the payment application typically receives automatic approval.
Including clear provisions about payment applications within the contract is especially useful to set clear expectations for everyone involved. One of the most important reasons to include clear provisions is so that each party in the project understands a stipulation known as the Prompt Payment Acts. This act requires property owners to pay contractors or subcontractors within 7 – 14 days of a payment application submission. Failing to meet this timeline could result in penalties under the applicable Prompt Payment Act. Additionally, the part that must make payments could also incur interest and pay for the legal fees of the party awaiting payment.
Help to Mitigate Scope-of-Work Disputes
Incorporating a clear scope of work provision is important to construction contracts. This provision will typically identify the type of work a company will perform. This includes stating if the contractor will provide just the labor for the job or the materials necessary to complete the project as well. This example is one of the reasons why including a clear scope of work provisions is crucial to a project’s success.
Further, certain construction companies may not own the equipment necessary to complete the work on a job. If a clear scope of work provision is in a contract, the company will be able to get the machinery and tools necessary immediately and not spring another unnecessary cost on the property owner or general contractor. These provisions will allow a project to not take unnecessarily long while also possibly reducing the cost of the project.
Additionally, scope of work disputes occur when a contract states that a contractor must handle reasonably inferable work. This type of language can lead to a situation where someone argues that a task should be a part of the contractor’s work but the other party disagrees. Thus, to ensure there are no unnecessary disputes, leave no room for doubt about the provisions of the contract.
Promote Better Understanding About a Contractor’s Responsibilities
Another reason why you should include a clear scope of work provision is to outline what is excluded from the work. This can cover things such as tasks performed, materials used, and specially fabricated items. An exclusions document covers what someone is or is not paying for once they sign a contract for a project. Thus, you should never have a scope of work section without applicable provisions for exclusions.
Even if you include these provisions, situations can still occur where contractors take on more work than initially agreed. While common, having a clear provision detailing the contractor’s responsibilities will mitigate the chance of issues occurring after the project. Additionally, one should always have a written agreement stating the differences in timing, pricing, and other variations related to the additional work. One final note is that you should create these documents as soon as possible. The reason for this is that you want to start the paper trail for this new work quickly. The reason for this is that you have proof if you need to utilize the court system.
Confirm the Payment Schedule and Format
There are many different payment arrangements used in the construction industry. For example, a contractor or subcontractor may receive predetermined payments at regular intervals or only get paid when the contractors finish their portion of the job. However, there are also other cases where payments happen according to the valuation process carried out as the work progresses. In this case, contractors still receive payments, yet these payments will vary depending on the state of the project.
Thus, your construction contract should clearly state how contractors and subcontractors can get paid. The reason for this is that only 53 percent of contractors are happy with how fast they are paid. Further, 80 percent of contractors spend a significant amount of their workweek chasing payments. To further reduce conflict, you should also state how a contractor will receive their payments. This includes whether a contractor will receive a direct deposit or a paper check.
Account for Unforeseen Circumstances
Covid-19 has illustrated how unforeseen circumstances can derail a project entirely. Further, these unforeseen circumstances can lead to financially taxing legal battles with contractors and subcontractors. Even if the courts agree to free parties from their current responsibilities and do not require them to pay the contractor or subcontractor for lost work, the amount of time and legal fees required to go through legal proceedings can be extremely costly.
Thus, you should include clear provisions regarding unforeseen circumstances in your construction contract. This should detail what happens to the contract if either party must stop working. Most companies will state that if a discrepancy occurs, the parties must use a form of alternative dispute resolution (ADR). This could include mediation or arbitration. While mediation is non-binding, arbitration is binding. No matter which form of ADR you utilize, you will have to try this before using traditional litigation.
Without well-written and clear provisions, disagreements and misunderstandings can easily occur. Thus, with any contract—but especially construction contracts—strive to make your contracts as clear and descriptive as possible. Further, this is the best way to create a business relationship that is shared and mutually agreed-upon concerning who pays for what, what work a party is expected to do, and other stipulations that can affect payments or budgets during a construction project. With over 20 years of experience, Antonoplos & Associates Washington 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 in DC, Maryland, and Virginia.
Contact Our DC Law Office for More Information
Finally, for more on why clear provisions are a must in 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.