By AIA Contract Documents
October 29, 2021
Contract terms and conditions are a familiar and essential part of every construction project. Unfortunately, for many contractors, reading them in fine detail can become a rushed effort in the excitement to win a project and get started. That desire to quickly move forward can result in surprises down the road.
Today’s contract documents are varied, and because many of them have been highly customized, often multiple times to fit the needs of the project, they can have hidden, conflicting, or ambiguous terms and conditions.
Here are our top five often overlooked contract terms and conditions that all parties should review and understand before signing the contract:
#1 Payment Terms and Funding: Are you aware of the terms of payment and funding for your project? It’s not enough to rely on prompt payment statutes to know when payment should be made. Make sure the payment terms are fully understood before signing a contract. Of equal importance is each party’s understanding of the project’s funding. In both private and public projects, outside terms in a lending agreement or governing law may require certain steps for funding or for payment to be made. For private projects, owners and lenders may require documents, such as lien waivers and releases, be provided by contractors as a condition for payment, or funding payment. For public works projects, funding may need approval from different agencies prior to the government-owner’s receipt of funds for progress and final payments. Depending on the sourcing of public funds, different state or local agencies may have unique funding procedures that impact how and when payment is to be made for work performed on the project.
#2 Specification Terminology: It’s hard to imagine that a contractor doesn’t fully understand the specifications as outlined by the owner or upstream contractor—but it happens. Again, much like payment terms, contract disputes are often a result of assumptions about the scope of work. Read the fine print contained in the agreement all the way through the detailed drawings to make sure you understand what the owner expects to comply with the defined specifications.
#3 Liquidated Damages: Parties should fully understand their exposure to liquidated damages and how they are assessed. For instance, can liquidated damages be withheld from progress payments, or must they be asserted and recovered as a separate claim? Ambiguity in contracts leads to confusion and often lawsuits. Owners and contractors alike should fully understand the basis for calculating liquidated damages and how they are assessed.
#4 Dispute Resolution: Make sure you understand your project-specific contract’s dispute resolution methods. Careless errors can be made when parties take for granted the applicability or availability of certain dispute resolution procedures. Where a dispute is required to go through a named arbitration or mediation association, parties should ensure that the association has arbitrators or mediators with experience in construction matters. Take caution when a specific arbiter or mediator is named, as this individual may no longer be in practice or have availability to hear your dispute. Finally, consider whether the dispute resolution provisions in the prime contract need to be flowed down in your contracts with subcontractors and suppliers.
#5 Communication Protocols: Review all notice and communication protocols and requirements, as these may vary depending on the issue at hand. In some cases, a contractor might have seven days to submit written notice of a claim, while in other cases, just 72 hours. Furthermore, communication protocols may require you to provide written notice to a designated person or location, via e-mail, regular mail, or even certified mail. Read your contract’s stated communication protocols, or you may risk an inadvertent waiver of claim.
Bonus #6 Broad Indemnification: Indemnification provisions often come across as standard legal terms. However, in one-sided contracts, these provisions can put a contractor on the hook for unexpected costs. For instance, broad contract indemnification provisions can require a contractor to reimburse the owner for legal and professional consulting fees, regardless of a finding of fault.
For all contracting parties, a full understanding of the contract’s terms and conditions is imperative for success. Parties should understand how the terms of the contract, or terms omitted from the contract, and the governing law, may impact the project and completion of work. Beware of the fine print!
In the excitement to win a project, take time to read your contracts and beware of these oft overlooked provisions.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.