Protecting Your Project: Understanding Key Construction Contract Terms
Construction contracts serve as the foundation of successful projects – outlining the responsibilities, rights, and obligations of all parties involved. In Louisiana, where unique legal considerations and relationship dynamics play impactful roles, certain contract clauses are often negotiated prior to execution. To navigate negotiations effectively, property owners, designers, contractors, and subcontractors need to understand each parties’ perspectives and goals in mitigating risks and achieving satisfactory performance. This article breaks down some of the most commonly negotiated clauses and highlights strategies to ensure you are equipped to keep your project on solid footing.
1. Scope of Work
The scope of work clause defines the specific tasks and responsibilities of each party involved in the construction project. It outlines what is included, what is excluded, and the expectations for performance.
Why It’s Negotiated: Ambiguities in the scope of work can lead to disputes over contract interpretation, project delays, and unexpected costs. This seemingly “simple” provision can routinely lead to disputes when the parties fail to take the time to clearly outline the exact duties they agreed to perform.
Negotiation Tips: Ensure that the scope is detailed and comprehensive. Include reference to exact specification numbers (or pages), materials, and timelines. Clear definitions help prevent misunderstandings and ensure all parties are on the same page. Explicitly state what scope of work is excluded—especially if other parties could reasonably assume that it would be included. Ultimately, do not gloss over your scope by merely using general phrases like “painting” or “framing.” These phrases could be assumed to be inclusive of any correlated work.
2. Payment Terms
Payment terms encompass much more than how much one party will be paid or will pay to another. These provisions outline how and when parties will be compensated for their services. This can include the schedule for progress payments, pay applications, retainage, and final payment. Notably, in Louisiana, construction contracts may include contingent payment clauses like “pay-if-paid” or “pay-when-paid.” These clauses, which are enforceable in Louisiana based on the fundamental notion of contractual freedom, impact exactly “when” or “if” payment will be made depending on payment from the owner.
Why It’s Negotiated: Payment disputes are a common source of conflict. Contractors want assurances of timely payment. Property owners, on the other hand, seek to protect their investments and ensure work is completed to their satisfaction without advancing payment for more than what has been properly completed. With respect to contingent payment clauses, contractors prefer to transfer the risk of owner non-payment, if possible. Conversely, subcontractors wish to avoid this contingency to ensure that they get paid for their work/materials irrespective of whether the owner pays the contractor.
Negotiation Tips: Establish a clear payment schedule tied to project milestones and/or inspections. Discuss retainage percentages and conditions for releasing retainage to avoid cash flow issues for contractors, while maintaining ownership protections for completion of work and/or punch list items. Likewise, for subcontractors, weigh the risk of “pay-if-paid” clauses if the general contractor requires it as a material provision of the contract.
3. Change Orders
Generally, change orders are formal amendments to a construction contract that outline changes in scope, cost, and/or schedule. This clause outlines how changes will be managed, reviewed, approved, and documented.
Why It’s Negotiated: Change Order requests are common and can be anticipated by the parties. It would be unreasonable to expect a contractor to be liable for expenses incurred from unforeseeable, hidden, or unavoidable events for which the contractor has no control. However, if the contractor is to blame for the additional cost or delay, then there is no basis for the request and it should be rejected. As a result, contracts should contain express provisions for the review, approval/rejection, and execution of change orders. This ensures that a contractor, if warranted, may increase their contract sum or extend the project schedule if approved by the owner. These provisions directly address the merit or basis for the request, the required timeframe for submission, calculation of costs, and, most importantly, the need for the owner’s express (written) approval of the change order requested by the contractor.
Negotiation Tips: If every change order request had merit and was granted, there would be no disputes caused by these requests. Unfortunately, change orders are one of the most regularly disputed issues during a project. As a result, including a clear process for submitting and approving/rejecting change orders, along with timelines for a response. Define what constitutes a change order and ensure both parties agree on how costs will be calculated. Both parties want to ensure that changes are fairly compensated and documented.
4. Scheduling & Delays
Projects always start with the best of intentions, including the hope that work occurs quickly, expeditiously, and without delay. However, the predicted project completion date and the actual date of substantial completion rarely align.
Why It’s Negotiated: Unaccounted delays, weather events, force majeure (acts of God), supply chain delays, etc. can all impact a project’s schedule and how a project reaches substantial completion. A well-defined project schedule is crucial to ensure timely completion, improve coordination between trades, manage risks, and provide financial protections for the parties due to unforeseen events.
Negotiation Tips: Define how and when parties must notify each other about delays or potential claims so the cause of the delay may be investigated and, potentially, cured expeditiously. Make it clear whether liquidated and/or consequential damages may be recovered, or are expressly waived. Clearly distinguish what type of events are defined as “unforeseen” (weather, natural disasters, government strikes, supply chain disruptions) from those events caused by negligence, poor administration, or mismanagement.
5. Indemnification and Liability
Indemnification clauses allocate risk and responsibility for damages, claims, or losses that may arise during the project. These clauses are, hands down, the most heavily negotiated (and scrutinized) in any construction contract as it impacts liability for certain conduct caused by that party as well as actions of subcontracted parties. These clauses often shift the burden of certain losses or damages by requiring one party to indemnify the other against those liabilities. In Louisiana, it’s key to ensure that the contract obligations do not violate the Louisiana Anti-Indemnity Statute (La. R.S. 9:2800.1) which prevents a party (indemnitor) from indemnifying another (indemnitee) for the indemnitee’s own negligence. In sum, a party is responsible for the damages it causes and cannot contractually pawn off that liability to another.
Why It’s Negotiated: Contractors and property owners want to protect themselves from unforeseen liabilities and damages/injuries caused by others. Negotiations often revolve around the extent of indemnification and whether it is mutual or one-sided.
Negotiation Tips: Aim for a balanced approach that fairly allocates risk. Consider mutual indemnification where both parties accept liability for their own actions. Ensure that indemnification clauses are not overly broad (potentially in violation of state law). Consider including limitations on liability to protect against excessive claims.
6. Dispute Resolution
Dispute resolution clauses outline the methods for resolving conflicts that may arise during the project. This can include in-person meetings, mediation, arbitration, or litigation.
Why It’s Negotiated: The method of dispute resolution can significantly impact legal costs and duration of resolving conflicts. Parties often have differing preferences for how disputes should be handled.
Negotiation Tips: Discuss the benefits of mediation or arbitration as alternatives to litigation, which can be time-consuming and costly. Establish clear timelines and procedures for initiating dispute resolution to ensure a swift process. It may be preferable to resolve a claim/dispute during the course of the project rather than waiting for it to conclude.
Conclusion
Negotiating construction contracts in Louisiana requires careful consideration of various clauses that can impact the success of a project. Obviously, there are many more clauses than those referenced in this article that could impact a party’s liability, exposure, risks, or obligations. Taking the time to address these clauses comprehensively can help prevent disputes, protect investments, and foster positive working relationships throughout the construction process.
Leake’s attorneys can assist with drafting or negotiating construction contracts or provide consultation on any problematic clauses, terms, or issues. Your construction contract is your roadmap—make sure it’s clear and well-defined to guide you toward a successful project. For more information about how Leake Andersson can help you navigate the complex legal landscape of the construction industry, visit our Construction Practice Group page.
