Five Critical Points in Contracts

By Timothy R. Hughes, Esq.

Keeping a contract simple and clear helps ensure that a project will stay on track and not mired in litigation.

Contract terms define the financial success or failure of your business. Sometimes the most basic and important terms of a contract are elusive and poorly defined. Lack of a clear mutual understanding of a contract's terms is the quickest path to future litigation. Pay particular attention to these five points.

1. Scope
You must have a clear and well defined scope of work in every agreement. As with other documents, the K.I.S.S. principle applies - Keep it simple, stupid. Do not, however, sacrifice completeness in the scope of work for simplicity. This is an area that deserves more space and definition.

2. Time
Time is money. Construction contracts have evolved in allocation of risk of loss of time. No damages for delay clauses are becoming far more prevalent as are limitations for remedies for delay to extension of time. Subcontract provisions now tend to pass much more risk of schedule slippage downstream to subcontractors.

In the past two years, I have seen a large number of subcontracts which provide that the subcontractor will meet any schedule issued by the contractor. These provisions suggest the subcontractor is liable to meet the schedule regardless of whether that schedule meets original expectations regarding time of performance that were factored into the bidding process. Such provisions may shift legal liability to a subcontractor who inherits a project's earlier delays caused by factors outside its control.

3. Money, Extras, and Notice
Defining the terms of compensation and the timing of payment is clearly a critical part of a well-written contract. It is perhaps equally important to have a clear understanding of how to handle extra work and change orders. Most contracts limit extra compensation to situations where there is an actual written change order before the work, or at a minimum notice of a claim for additional compensation. You must be familiar with your notice and change order requirements.

In practical terms, there is always significant pressure to perform extra work immediately and rely upon verbal field directions. If you proceed in this manner, you proceed at your peril. I have seen numerous cases where this type of procedure in the field resulted in a significant amount of potentially free work performed by a contractor or a subcontractor due to contractual notice and change order requirements.

4. Performance Standards
Specifications for many projects incorporate performance standards of specific industry groups or building codes. You should be familiar with each such standard before you sign the contract. A court may hold you liable to meet the higher incorporated standard without additional compensation even where they go beyond the express requirements of the specifications.

5. Indemnification
Indemnification clauses represent a significant and misunderstood contractual risk. Cases construing construction indemnification agreements abound throughout the country. When you sign an indemnification agreement, you may be agreeing that you are legally liable not only for the cost of correcting your company's defective work, but also for extensive additional and unanticipated liability.

The scope of indemnification may make you liable for the attorney's fees and expenses of the other contracting party. Indemnity may make you liable for another subcontractor's work that is located geographically in your work space. Indemnity can, under some circumstances and in some jurisdictions, make you liable for the other contracting party's own sole negligence. To the extent you have insurance, your insurance company may not be liable to defend or insure against indemnification liability. Thus, it is extremely important that indemnification provisions in contracts are fair, well defined, and well understood by all the parties to an agreement.

Conclusion
A "good" contract is one which is simple, clear, and easily understood. You should apply this basic definition in particular to the contract terms discussed above to ensure that your company does not face more than it bargained for during the project.