Construction contracts

Construction projects are unique and in most cases faced with a lot of uncertainties. It is common that construction projects face schedule, cost and quality issues throughout their life. The fundamentals of a project are stipulated in a contract which include the scope of work, change orders, compensation and schedule. Other contract requirements include insurance, indemnification, warranties, suspension and termination and dispute resolution procedures. Focusing on the contract fundamentals will build a solid foundation for your next successful project.

In as much as all the contract requirements are concerned, the major fundamental issues include the scope of works, change orders, compensation and schedule and will be discussed briefly in this article.

Scope of Work

Consider having a clearly defined scope of works for your next project which you intend to bid and negotiate. The scope of works will include drawings, standards and specifications and also the shared responsibility of the project parties. Mae sure that the roles of the project parties is clearly defined in the contract. In most cases, the scope of works focus more on the work of the contractor; however, contractors will need to ensure that the roles of the owner (e.g. providing site access, material supply etc.), architect/engineer and specialty contractors is well written. Special attention should be given to this provision to avoid adjustment which may lead to delays, changes in project costs, claims and ultimately disputes.

Change Orders

It is important to note that even the well laid out plans end up with a change. It is therefore important to make sure that a change order provision is provided for in the contract. This provision will be aimed at addressing any future changes should they arise. Such change orders arise from the scope of works that was discussed above and therefore, the scope of works should serve as a yard stick against which any change should be measured. Also to include in the change order provision is the mechanism for pricing the changes should they arise.

A well-defined change order clause will include fully agreed labor rates, equipment rental rates, allowable mark-ups on material and subcontracts, site/schedule extension costs, and allowable mark-ups for overhead and profit. It is advisable that change order rates are negotiated at the time of negotiating the contract than when they arise sometime into the project. Therefore, the contention of change orders can be reduced if the rules are set and agreed upon before they actually occur.

Compensation

As contractor in business, you need to make money while the owner of the project is looking at getting value for their money. Therefore, payment terms need to be clearly stipulated in a contract. How much the contract is and when and how to be paid must clearly be defined in the contract. There are different types of payment which include reimbursable/cost plus to lump sum to target price with a sharing of underruns/overruns, and everything in between. Whichever payment type that is agreed upon, it must be clear to avoid any ambiguity. It all boils down to money: how much and how or when it is paid. There are numerous payment methods from. Each payment scheme should be well defined in the contract to remove ambiguity.

Key terms under this clause also need to be defined in the contract. For example, it is essential to define “cost” in cost plus contracts. Does it include department and corporate overhead? Likewise, when applying a percentage mark-up for overhead and profit, does that also apply to subcontracted work, or just the main contract?

It is also important to define the payment terms such as payment milestones or progress payments. Contractors should be careful to make sure payment milestones are clearly defined so as not to hold up payment, whereas owners should ensure that a contractor’s cash flow is reasonable and not excessively cash positive.

Schedule

It is important that both parties to the contract agree on the base schedule especially if the contract contains provisions for damages if there are delays of bonuses for early completion. Good schedules will capture refined details of the project with defined start and end dates. The work flow and sequencing of key activities together with certain milestones also need to be defined. It is essential that parties agree on the float for example “who owns the float and who gets to use it first”. Rarely is this float defined in the contract but is often the source of costly claims and disputes.

It is good practice to regularly update your schedule during project execution. This will include actual activity completion dates together with other important scheduling data that can support any delay claims or concerns that may arise. This will help avoid disputes and allow any issues to be addressed appropriately.

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