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5 Provisions That Must Be in Your Construction Contract

Kate McDonald

By Kate McDonald

In Denver’s rapidly growing construction market, the key to success for developers and contractors is understanding the construction contract and potential exposure. While this might sound like a novel concept, the average global value of construction contract disputes increased to $54.26 million between 2019 and 2020, with the number one cause being the parties’ failure to understand the provisions therein. It is crucial every construction project have a written contract. To start, the contract needs to outline each party’s rights and duties, and the language must be clear and unambiguous. From a litigator’s perspective, here are key provisions that should be included in every contract to protect the parties involved in the project.

Indemnification

Every construction contract should include an indemnification provision that allocates the risk between the parties. Simply put, these provisions require one party, the indemnitor, to indemnify the other party, the indemnitee, for damages including attorneys’ fees and costs, in the event of a breach. These provisions usually include three separate obligations: defend, indemnity, and hold harmless. A majority of states, including Colorado, have anti-indemnity statutes prohibiting to some degree, the risk that can be allocated to an indemnitor for the indemnitee’s own fault or negligence. It is important to understand the requirements for the state in which the project is located to ensure the provision is not found void as a matter of public policy. Including indemnification provisions, specifically within a construction contract, is paramount to reducing potential risk.

Additional Insured

The contract should also include language requiring the general contractor to name the developer, its members, directors, shareholders, employees, agents, subsidiaries, and affiliated entities as additional insureds on its commercial general liability policies. This would include during construction, as well as completed operations. In addition to requesting a certificate of
insurance, a copy of the additional insured endorsement should be requested.

Consequential Damages Waiver & Liquidated Damages

Consequential damages often include damages the other party does not foresee, such as lost profits, increased financing costs, and damages to reputation. Mutual waivers are fairly common today and often stand to benefit both parties, as it limits the damages to those that were specifically agreed to by the parties. A liquidated damages provision, on the other hand, outlines
the predetermined damages due if a triggering event, as outlined therein, occurs. For instance, a typical liquidated damages provision is a daily fee that is imposed every day project completion is delayed. Because this payment is predetermined, if a breach occurs, the damages are foreseeable. Including this provision allows the parties to be aware of and understand the damages and repercussions if they do not meet their obligations. As a part of contract negotiation, a party can request some additional precautions, such as a grace period.

Termination for Convenience

This provision enables a party to bring the contract to an end without the need to establish the other party is in default. While usually a written notice is required, it allows a party to terminate the contract for any reason, at any time, without cause. Should the developer have insufficient financing or there is a delay due to unexpected obstacles, such a provision will provide a party an
option to terminate the contract altogether. In negotiating such a provision, the parties should agree upon the terms for final payment.

Claims and Dispute Resolution

A simple condition, yet pivotal, is the claims and dispute resolution provision that outlines the way in which each party submits claims and resolves disputes. While it may be obvious, it’s essential that the parties outline the agreed-upon procedures for handling claims; from placing the other party on notice within a given time of the triggering event to mediation as a condition
precedent to any formal claim being filed, and the proper venue for said claim. It is also helpful to ensure the contractor incorporates the same procedures within its subcontracts or alternatively, has a joinder provision allowing it to bring the necessary subcontractors into an action filed between the developer and general contractor.

Payment

Clearly outlining the terms and conditions for payment is crucial, as such provisions are often at the center of any dispute. Such provisions should include, but not be limited to, the payment schedule, the conditions under which payment may be withheld, the amounts that can be withheld, as well as whether, when a dispute arises, the contractor is required to continue working. Parties often also include terms as to the rights of the contractor to record liens against the real property upon which the project is located and duties upon said contractor if one or more of its subcontractors’ files said liens.

The Key to Construction Success

Understanding each provision, including how those provisions work together, is key to construction success. To ensure such understanding, including within the state the project is located, turn to an insurance professional for review, and turn to a counselor to assist in the negotiation to avoid unnecessary exposure.

Kate McDonald, shareholder with Denver-based McConaughy & Sarkissian, P.C., is involved in civil litigation matters with a primary focus in the construction industry. She has successfully represented homeowners, developers, declarants, builders, contractors, subcontractors, and other construction professionals in cases involving construction defects, breach of contract, breach of fiduciary duty, mold/remediation, mechanic’s liens/foreclosure, product defect, consumer protection, ADA compliance, construction accidents, and delay/acceleration/lost labor claims.

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