A Detailed Overview of Construction Contracts Academy... · A Detailed Overview of the ... Different Contract Types Job Order Contracts: ... work shall make all scheduled payments

A Detailed Overview of the Contract for Construction

Heather F. Shore, Esq. 911 Main Street, Suite 2300 Kansas City, MO 64105-5319

Phone: 816-292-7000 www.brlawkc.com

http://www.brlawkc.com/�

Different Contract Types 1. Lump sum contracts 2. Unit price contracts 3. Cost plus contracts 4. Cost plus contracts with a guaranteed maximum

price 5. Design/Build contracts 6. Construction management contracts 7. Job order contracts (JOC’s) (Indefinite supply

contracts)

Different Contract Types

Lump sum contracts: This is a contract for a fixed price. The contractor bears all the risk of loss for

costs of completion within scope of work defined by the owner.

Usually competitively bid but less flexibility to negotiate terms when the government sends out the contract for competitive bidding.

Different Contract Types Unit Price Contracts: This is a contract based on specified unit prices for

quantities of work that are estimated.

Usually involves easily measurable quantities of work. e.g., earth removal, rock removal, concrete placed

Often done with different prices for different volumes of

work anticipated to pass on discounts to owners and lower risk of loss to the contractor.


Cost Plus Contracts: In a cost plus contract the owner pays for the actual cost of

the contract plus a flat fee or percentage of the project costs. Some courts will impose a “fiduciary relationship” between

the owner and contractor that forces the contractor to manage and control costs.

This is a contract with limited use because the owner must generally have a large amount of control over the scope of the work and the labor, equipment and supplies to be used. The large management burden placed on the owner has caused a

variation of the contract to become used.

Different Contract Types Cost Plus with a Guaranteed Maximum Price

Contracts: This is a cost plus contract with a clause stating a maximum

price that will be paid for the project.

This eliminates the need to prove a breach of fiduciary duty for high project costs.

Note: often there is a “shared savings clause” included wherein the parties split the benefit of projects lower than the maximum guaranteed price to incentivize the contractor to work to keep project costs low.


Design/Build Contracts: This is a contract with one entity to both design and

construct the project. This often reduces costs and responsibility as well as

speeds up the project. The contractor may be able to furnish design services

without worrying about designer licensing laws. See Strain-Japan R-16 School District v. Landmark Systems, Inc., 965 S.W.2d 278 (Mo. App. 1998)


Construction Management Contracts: This contract allows the owner to retain a contractor,

architect, engineer or other person to manage the project including reviewing plans and specifications, budgets and managing execution of the work.

Two types of construction management contracts:

1. At-risk: The manager may contract directly with tradesman and suffers the risk of loss for costs associated with them.

2. Not-at-risk: The manager may take bids but the owner contracts directly and bears the risk of loss.


Job Order Contracts: These are competitively bid contracts with a

fixed price for an indefinite amount of work.

Usually, they are used for bidding many small projects at one time.

Generally used in the public setting as opposed to the private market.

Standard Form Agreements

Standard form agreements are recommended and have become generally well recognized and used in the industry.

Available forms: American Institute of Architects (AIA) Engineering Joint Contract Documents Committee

(EJCDC) Associated General Contractors (AGC)

Remember to tailor them individually for each job.

The Ten Most Important Clauses of Construction Contracts (with two more to make an even dozen)

Payment Contractor’s Design

Responsibility Differing Site

Conditions Exculpatory Alternative Dispute

Resolution (ADR) Liquidated Damages

Delays and Extensions Indemnification and

Insurance Notice of Claim

Provisions Termination Incorporation by

Reference Flow Down

Documents, Provisions and Issues to Note

Payment Clauses and Issues Types of Necessary Documents for Payment: 1. Schedule of values 2. Application for payment 3. Supporting backup documents (e.g., lien waivers,

certified payrolls, schedule updates and test results) Some lien waivers may be unenforceable.

R.S.Mo. § 429.005.


Payment Timing: 1. Parties should establish their own

deadlines for payment. 2. But be mindful of state and federal statutes

governing payment (prompt payment acts in Kansas and Missouri).

Essential Contract Terms

Statutes and Laws to Consider—Public Construction Contracts

R.S.Mo. § 34.057.1 This statute requires the contractor to pay the subcontractor

within a specified time of receiving payment from the owner.

Kan. Stat. Ann. § 16-1903 Requires payment by the Owner to Contractor no later than 30

days after the Owner receives a properly completed, undisputed payment application.

Requires payment by the Contractor to Subcontractor within 7 business days from receipt of payment from the Owner.

Essential Contract Terms Statutes and Laws to Consider—Private

Construction Contracts R.S.Mo. § 431.180

All persons who enter into a contract for private design or construction work shall make all scheduled payments pursuant to the terms of the contract.

Kan. Stat. Ann. § 16-1803 Requires payment by the Owner to Contractor within 30 days from

owner’s receipt of an undisputed payment application. Requires payment by the Contractor to Subcontractor within 7

business days from Contractor’s receipt of payment from the Owner.


Retainage: Often the owner retains a percentage from the payments until the

end of the project to incentivize the contractor to finish. Statutes will limit the amount that can be withheld.

Private projects Missouri limits retainage to 10%, declares retainage to be trust

funds, and allows retainage to be held for punch list items in an amount sufficient to protect owner.

Kansas limits retainage to 10% and requires contractor to pay the subcontractor within 7 business days of receiving payment of retainage.

Public projects Missouri caps retainage to 5% of the value of the contract unless

the owner determines higher rate is needed; allows owner to hold retainage until completion of punch list items.

Kansas limits retainage to 10% and trigger interest if retainage not timely paid.


Other Issues to Remember Regarding Payment:

Third party roles: Remember issues dealing with the architect’s review of payment

applications and the lender’s requirement for lien waivers. Be mindful of endorsements on the back of checks!

Interest on late payments: R.S.Mo. § 408.020 = 9% interest rate Kan. Stat. Ann. § 16-201 = 10% interest rate

Provisions for billing disputed work: These provisions usually state the owner doesn’t have to pay for

disputed work or she can direct the work through a change directive with the amount to be paid determined later and the contractor can charge an agreed upon amount for this work.


Payment Terms: Three types of payment clauses are often

seen in construction contracts between General Contractors and Subcontractors:

1. Payment by a Certain Date 2. Pay When Paid 3. Pay if Paid

Essential Contract Terms Payment by a Certain Date: - This is the payment clause seen most often in

construction contracts between General Contractors and Subcontractors.

- In this type of payment clause, the General Contractor must pay the Subcontractor by a specified date (often within 30 calendar days from the date of the Subcontractor’s invoices).

Essential Contract Terms Pay when Paid: - Under this payment arrangement, the date by which the

General Contractor must pay the Subcontractor is calculated in reference to the date by which the Owner should have paid the General Contractor.

- E.g. “Payment is due within thirty (30) calendar days of the date when the General Contractor receives payment by the Owner”.

- Note: under this clause, the General Contractor must pay the Subcontractors regardless of whether the General actually does receive payment from the Owner.

Essential Contract Terms Pay if Paid: - Under this payment arrangement, the General

Contractor’s payment obligation to the Subcontractor is conditioned on the Owner paying the General Contractor.

- Language must clearly establish a “pay if paid” arrangement.

- A “pay if paid” clause is no defense to a mechanic’s lien claim in Kansas or Missouri. But Kansas courts have held a surety is not liable to pay subcontractors if the bonded subcontract contains a pay if paid clause and the principal has not been paid.

Essential Contract Terms The Contractor’s Design Responsibility: Design Review: Pay particular attention to design review clauses that may

shift the responsibility of reviewing the designs for defects from the owner or architect to the contractor.

Shop Drawing Review: Understand the clauses that address the scope of the

architect’s or engineer’s responsibilities in reviewing shop drawings.

Look for clauses that address the speed at which the shop drawing process must occur. Keep good records of any delays by the design professionals in

reviewing your shop drawings.

Essential Contract Terms Differing Site Conditions: - A differing site conditions clause deals with estimating costs of

unanticipated physical site conditions such as unknown underground conditions.

- Differing site conditions do not usually render a contract null and void nor do they provide a basis for claiming a lack of a meeting of minds.

- Two Types of Differing Site Conditions Claims: - Type I – subsurface or otherwise concealed physical conditions which

differ materially from those indicated in the Contract Documents, or

- Type II – unknown physical conditions of an unusual nature, which differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents.


Exculpatory Clauses: Pre-bid inspection: A “pre-bid inspection” clause usually requires that

any condition that “should have been seen” during pre-bid inspection by the contractor is deemed disclosed and not a subject of the claim.

This shifts some of the risk from the owner to the contractor.


Exculpatory Clauses: Duty to Discover Obvious Errors: A “duty to discover obvious errors” clause requires the

contractor to discover any patent or obvious errors in the contract documents or to notify the owner of conflicting provisions or ambiguities so they can be clarified before opening the bids.

This also shifts some of the risk from the owner to the contractor.

Essential Contract Terms Exculpatory Clauses: “No Damages for Delay” clauses

Addresses whether the contractor has a right to adjust the contract price after encountering delays at the projects, under various conditions and as a result of one or more potential causes.

Missouri: In the private construction setting “no damages for delay” clauses have been ruled enforceable. But in the public setting the law provides that they are void as against public policy, except for contracts with the Missouri Department of Transportation (public works projects).

Kansas: No damages for delay clauses are now prohibited.


“No Damages for Delay” clause Sample clause:

“In the event the Contractor is delayed in the prosecution of its work by any act, or omission to act, of the Owner or its representatives, the Contractor agrees to make no claim for damages for delay in the performance of the Contract, and agrees that any such claim shall be fully compensated for by an extension of time to complete performance.”


“No Damages for Delay” clauses Exclusions:

Delays caused by active Interference by Owner.

Delays not within the contemplation of the parties.

Delays so unreasonable that they constitute abandonment of the Contract.

Delays resulting from breach of a fundamental obligation of the Owner.


Handling Changed Conditions Pay careful attention to existing drawings Note errors and ambiguities in the plans,

drawings or specifications Inspect the site!


Alternative Dispute Resolution (ADR): An ADR clause establishes a pre-agreed procedure to

resolve disputes and claims on the project. Types:

Negotiation Early neutral evaluation Mediation Moderated settlement conference Arbitration Mini trial Summary jury trial Rent a Judge

Essential Contract Terms Alternative Dispute Resolution (ADR): When ADR is most valuable: - Smaller disputes. - When opposing party is amenable to negotiations. - When the dispute involves complex legal or factual

matters.

Essential Contract Terms Alternative Dispute Resolution (ADR): Example ADR Clause:

Mediation. “The parties agree to first try in good faith to settle any claims, disputes and other matters in question arising out of, or relating to this Agreement or the breach thereof, by mediation in accordance with the Construction Industry Mediation Rules of the American Arbitration Association (“AAA”). If any party commences arbitration or litigation of a dispute without first attempting to resolve the matter through mediation (other than the recordation of a mechanic’s lien and/or a lawsuit to foreclose on said mechanic’s lien, which is specifically exempt from this Article), or if either party refuses to cooperate in the scheduling or conduct of mediation proceedings, then in the sole discretion of the arbitrator or judge, that party shall not be entitled to recover its attorneys’ fees and costs even if they would otherwise have been available to that party.”

Essential Contract Terms Liquidated Damages: - A liquidated damages contract provision imposes payment of

a certain fixed amount in the event of a breach of a contract provision.

- Under Missouri law, liquidated damage provisions are generally enforceable unless they are “so disproportionate to the amount of any such damage reasonably to be contemplated as to be oppressive.” Wilt v. Waterfield, 273 S.W.2d 290, 295 (Mo. 1954).

- See more recent cases cited in materials re penalties.

Essential Contract Terms Liquidated Damages: Example of Liquidated Damages Clause: - “The Contractor understands and agrees that the completion of the

entire Project within the time provided is an essential feature of this Agreement and that the Owner will sustain substantial damages, the amount of which is not possible to accurately determine at this time, if the work is not so complete. The Contractor, therefore, agrees to proceed with due diligence, taking all precautions and making the necessary arrangements to insure the completion of the work within the prescribed time. The Contractor further agrees that its failure to finally and fully complete the work within the time allowed shall be considered a breach of the Agreement and shall entitle the Owner to collect liquidated damages from the Contractor and/or the Contractor’s surety in the amount of $1,000.00 per calendar day for each day the Contractor is late in completing the Project.”


Delays and Extensions: A delays and extensions clause identifies

which party is responsible for any delays and whether the delay entitles the contractor to more time or to reimbursement of costs incurred.


Delays and Extensions: Four types of delays and extensions clauses are often

seen in construction contracts: 1. Nonexcusable Delays—within contractor or

subcontractor’s control = no extra time or money given by owner.

2. Excusable Delays—outside of either party’s control = give the contractor extra time to finish or money to finish at the original time.

Essential Contract Terms Delays and Extensions: 3. Compensable Delays—owner bears responsibility = both

extra time and money typically given to contractor.

4. Concurrent Delays—when two of the above delays overlap and would cause the project to be delayed for similar or the same time periods = responsibilities apportioned between the owner and contract, and extra time or money is awarded accordingly.

Note: a compensable delay coupled with a non-excusable delay becomes classified as an excusable delay.


Delay Damages Clause: Example—AIA A201 - 2007: - 8.3.1 If the Contractor is delayed at any time in the commencement

or progress of the Work by an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner, or by changes ordered in the Work, or by labor disputes unrelated to the Project, fire, delay in deliveries beyond the Contractor’s control, unavoidable casualties, other causes beyond the Contractor’s control, or by causes which the Architect determines may justify a delay, then the Contractor Time shall be extended by Change Order for such reasonable time as the Architect may determine.

- 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by either party under provisions of the Contract Documents.

(For pricing of these damages refer to Section 7.3)


Indemnification: - Under an indemnification provision, a

party is obligated to either directly pay or reimburse the financial losses of another party.

- Indemnification clauses usually contain the words “defend, indemnify and hold harmless”.


Indemnification: It is against public policy in Kansas and Missouri

to include a contractual provision requiring the indemnitor to indemnify the indemnitee for the indemnitee’s own negligence or intentional acts. R.S.Mo. 434.100; K.S.A.16-121.

Insurance fills gaps left by indemnity and incentivizes the indemnitor to assume indemnity obligations.


Indemnification: Example Indemnification Clause: - “Subcontractor shall hold the Owner and the Contractor

harmless from any and all claims, loss, demands for bodily injury, death or property damage incurred by any person or entity, including employees of the Subcontractor, as a result of any negligence, breach of contract, or failure to provide a safe place to work by the Subcontractor, its officers, directors, agents, employees or independent contractors in connection with any work performed under the Master Contract, or as a result either directly or indirectly, from the failure of the Subcontractor to faithfully carry out any provision of this Subcontract and/or the Master Contract.”


AIA Indemnification clause (§ 3.18) The Contractor shall indemnify the Owner,

Architect, Architect’s consultants, and agents and employees of any of them for negligent acts or omissions of the Contractor, Subcontractor, or anyone directly or indirectly employed by them.

No limitation on the amount or type of damages.


Notice of Claim Provisions: - A notice of claim provision provides that failure

to give timely notice of any claim constitutes a waiver of that claim.

- In Missouri, notice of claim provisions are generally enforceable. Gillioz v. State Highway Comm’n, 153 S.W.2d 18 (Mo. 1941).


Notice of Claim Provisions: Benefits and reasons to include these provisions: 1. They give the recipient a chance to gather

information about a claim before the information is lost.

2. They allow for easier settlement opportunities avoiding further claims and litigation.

3. They may help determine if a claim is legitimate. 4. They aid the recipients in managing and budgeting

the project by divulging necessary information at an early stage.

Essential Contract Terms Notice of Claim Provisions: Example Notice of Claim Provision: - “Owner shall, no later than 60 days before initiating an

action against Contractor, provide written notice of claim to Contractor. The notice of claim shall state that the Owner asserts a construction defect claim and is providing notice of the claim pursuant to the Contract. The notice of the claim shall describe the claim in detail sufficient enough to explain the nature of the alleged construction defect and the result of the defect. In addition, the Owner shall provide the Contractor with any evidence in possession of the Owner that depicts the nature and cause of the construction defect.”

Essential Contract Terms Termination: - A termination clause calls for the termination of the

contract under an enumerated set of circumstances.

- Three types of Termination Clauses: - Termination for Convenience:

- Allows an owner (or contractor) to terminate a contract for any reason (including convenience) or even for no reason.

- Termination for Cause: - Allows an owner (or contractor) to terminate a contract under a

specified set of circumstances that usually arise because of the fault of the contractor (or owner, as the case may be).


Termination: Example “Termination for Convenience” Clause: - “This Contract may be terminated, in whole or in part,

from time to time, when such action is deemed by the Owner, in its sole discretion, to be in its best interest. Termination of the Work hereunder shall be effected by notice of termination to the Contractor specifying the extent to which performance of the Work is terminated and the date upon which such termination becomes effective. The date upon which such termination becomes effective shall be no less than ten (10) days after the notice is sent.”


Termination: Example “Termination for Cause” Clause: - “If the Work is stopped for a period of thirty (30) days

through no fault of the Contractor or because the Owner has not made payments thereon as provided in the Contract, then the Contractor may without prejudice to any other remedy the Contractor may have, upon seven days’ written notice to the Owner, terminate the Contract and recover from the Owner payment for all work executed and for any loss which Contractor can substantiate through documentation or otherwise resulting from the stoppage of the Work, including reasonable overhead, profit and damages.”


Incorporation by Reference Clauses: Incorporation by reference clauses usually provide for various

other documents and writings referred to in the contract to be incorporated in full into the contract and become part of the terms and provisions of the contract.

The incorporated documents do not have to be attached to the contract being signed, nor do they even have to exist at that time. Wasson v. Schubert, 964 S.W.2d 520 (Mo. App. 1998). E.g., plans that have not been fully developed or distributed but that

are otherwise identifiable.


Flow Down Clauses: Flow down clauses typically provide that the subcontractor

shall assume to the general contractor certain obligations that the general contractor assumes to the owner regarding the subcontractor’s scope of work.

If there is conflict between the provisions of the general contract and subcontract, courts will generally hold the more specific previsions of the subcontract prevail over the general provisions of the contract or its documents incorporated by reference.