Construction projects are major undertakings. There is a lot of coordination required by different companies and teams throughout any construction project. Communication shortcomings can cause slowdowns, errors, and budgetary overages. However, the construction contract is the foundation that keeps the project on track. Creating a construction contract with clear provisions is an important part of reducing risk, avoiding disputes, and spelling out crucial parameters from the start.
Maintaining the utmost clarity while writing or discussing provisions is vital for ensuring that there are no doubts about which parties must pay for particular aspects of a project and when.
Here are some key reasons why you must include clear provisions in construction contracts.
Construction contract provisions help avoid payment penalties
When seeking payment for work performed, a subcontractor must submit a payment application to their contractor. It goes beyond a simple invoice: It typically includes supporting documents — such as continuation sheets — to document all the work performed, photographic evidence of the completed jobs, and daily reports that give specifics about the site and the duties carried out.
However, many contracts have a small window of time when a contractor can dispute a subcontractor’s payment application. If the contractor does not take action within that span, the payment application generally receives automatic approval.
Including explicit provisions about payment applications sets expectations for everyone involved. Doing that also shows that contractors are aware of stipulations known as Prompt Payment Acts. They exist at the United States federal level, and many states have them, too.
Under a Prompt Pay Act, the timeframe for giving payment to a contractor or subcontractor is generally short — from 7–14 days — and the payer may need to deal with electronic payments even more efficiently than paper-based ones.
Failing to clarify the timeline for the receipt of undisputed payments could result in penalties under the applicable Prompt Pay Act.
Then, the paying party may be responsible for interest incurred on past-due payments, and the legal fees spent by the person awaiting payment as they get help collecting the money owed to them.
They can help minimize scope-of-work disputes
Scope of work provisions are also crucial in construction contracts. They spell out the type of work a company will perform. For example, will this company only provide the labor needed for a job, or will it also take care of the necessary materials as well?
Adding clear scope of work provisions to a contract ensures that all parties involved know the expectations placed on them. They can then use their resources to get well-equipped to succeed with the job.
Suppose a construction company does not own the necessary equipment for a job: Clear expectations allow them to get the equipment they need right away, rather than dealing with an unexpected expense. They will also be better able to plan how to cover these costs — from getting equipment at a lower price point, to reducing costs in other areas of the project.
Provisions often state that contractors bear responsibility for all work shown on the plans and specifications. That seems straightforward, but they frequently continue by saying that such parties must handle reasonably inferable work. That could lead to a situation where someone argues that a task should be part of a contractor’s job, but the other party disagrees.
In that case, the costs and duties could quickly go beyond what the party understood or considered when they set their price. The best approach is to leave no room for doubt.
They promote better understanding about a contractor’s responsibilities
The easiest way to prevent the kind of disputes that could arise from a scope-of-work disagreement is to add provisions to cover exclusions. They could cover things like tasks performed, materials used, and specially fabricated items.
An exclusions document covers what someone is — and is not — paying for once they agree to a contractor’s price. That means you should never have a scope of work section without applicable provisions for exclusions.
Situations still arise when contractors agree to undertake more work than initially agreed. That’s okay and expected, but handing those circumstances well means taking care to explain the change order process to every person involved.
You should always have a written agreement specifying the differences in timing, pricing, and other variations related to the new work. Contractors often begin fulfilling the request after merely getting documents that show the change — such as a page added to building plans.
However, waiting to get the change order request creates a paper trail. Having such documentation protects the entity that did the work in case misunderstandings crop up later.
They can confirm the payment schedule and format
There are numerous payment arrangements frequently used in the construction industry. For example, a contractor may receive predetermined payments at regular intervals, or get them when the work reaches an agreed-upon stage.
There are also cases where the payments happen according to a detailed valuation process carried out as the work progresses. Contractors still get paid on a regular schedule, but the amount varies depending on factors such as delays or defects in the work.
Your contractual provisions should also mention how people will get paid. Recent research showed that although 53% of contractors are happy with the speed at which they receive payment, 80% of companies spent significant portions of their workweeks chasing payments.
Those results could point to this problem: Many contractors receive timely payments, but not without significant efforts from the companies that hire them.
Thus, provisions should also mention how a person should expect to get their payments. Should they keep an eye on their bank account on a certain date, or will it be a paper check they receive?
Confirming that important detail eliminates uncertainties that could make a contractor feel doubtful about receiving payment at all.
They can help account for unforeseen circumstances
Professionals who deal with construction financing needs know that unexpected events can adversely affect a project’s budget and timeline. The COVID-19 pandemic recently reminded everyone of how massive unforeseen issues can be. Many state, local and national authorities made decisions about whether construction work could continue during restrictions imposed to control the virus.
Even with many construction companies deemed essential, crews had to do things differently by working in smaller groups that facilitated social distancing. This change meant that work happened slower, although it did still occur. However, there were some instances where affected parties got excused from their contracts when COVID-19 made them unable to fulfill the terms.
When the outcomes of those situations were decided in the courts, some of the rulings resulted in discharged contracts, which freed all parties from their previous obligations. In other cases, the conclusions resulted in altered agreements stripped from duties impossible to carry out but including the still feasible ones.
The ideal way forward is to avoid needing to go to court due to situations outside the control of the affected parties. Clear provisions can help that goal happen. They should include an explicit allocation of risk and damages that occur once one party gets excused from their contract due to unforeseen events.
One common provision centers on the risk of loss. Companies often aim to shift the responsibility for loss to the contractor until the completion of work. If that happens, a contractor’s insurance plan may not cover those expenses.
A better and more frequently used approach is to base the allocation on whichever party can better bear or ease the aftermath of that outcome. However, disagreements sometimes arise regarding which party is better equipped. Then, a possible arrangement would be to add a provision for a 50-50 split or another ratio that both parties perceive as fair. Moreover, adding a force majeure clause accounts for circumstances that make a contract impossible to fulfill.
Clear provisions prevent costly delays and disagreements
This list highlights how easy it is for disagreements and misunderstandings to flourish without well-written provisions. When writing a construction contract, strive for clarity. This is the best way to facilitate a shared and mutually agreed-upon understanding of who pays for what and when they pay, as well as other stipulations that can affect payments and budgets during a construction project.
If you’re reviewing a construction contract provided by someone else, watch out for troublesome provisions that could affect your payment rights.
No matter how clear your contract provisions are, or how reliable your customer has been in the past, disputes still commonly arise. Protecting your payment rights helps provide insurance and peace of mind