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  Key Contract Provisions
 
  Control of risks and claim prevention begins with a thorough understanding of, and compliance with, key contract provisions and procedures that address them. Therefore, whether you are involved as project manager, lead engineer, or in another way, you must be familiar with all contracts and subcontracts. For example, before changes to a contract cost or duration can be authorized, agreement on procedure for quantification is necessary. Since subcontractors are often bound by these provisions, a copy of the prime contract should be provided to major subcontractors. Typical key provisions include (see glossary for definitions of specialized terms):

1. Substantial/Final Completion

Project completion should be well defined. In some instances substantial completion and beneficial use are interchanged. However, if a project is being beneficially utilized, the project may be partially substantially complete. Thus a clear definition of punch list-type activities that can be done after substantial completion should be included. Reduction of retainage after substantial completion should be addressed. A time period should be defined for the work and providing the documentation required for final completion.

2. Liquidated/Other Damages

Contracts contain provisions for liquidated damages or provisions for consequential damages when a contractor is late in achieving substantial completion (usually). Some contractors include provisions for no (owner) damages for delay. Because delay damages may be significant, and are a major cause of claims, the importance of continually evaluating schedule risks and timely notification cannot be overstated.

3. Notification Of Extra Work

Contracts have a variety of clauses requiring the designer or contractor to notify the owner and/or the designer of any work that is believed to be extra or outside the scope of the contract drawing and specifications. The time frames for notification range from 24 hours to 30 days. It is essential that this be complied with so that the owner may mitigate the impact, if possible, and the contractor document its position. Extra work disputes are also a major cause of claims.

4. Notification Of Delay (Request For Time Extension)

Most contracts require notification of any delay to the overall project completion date or milestone dates. Time frames for notification range from 24 hours to 30 days. It is essential that this also be complied with as above.

5. Differing Site Conditions, Changed Conditions Or Concealed Conditions

Many construction contracts have some form of provision to cover the unexpected which is experienced when excavating a site or opening an existing structure. Because these are different from extra work that typically improves the project, unit prices for potential activities should be included. For example, if soil borings indicate a certain rock hardness, provisions should be made for the possibility of discovering harder or more extensive rock. All entities benefit by having these clauses in the contract, as they provide a fair solution for what otherwise might be a difficult problem. Be alert to the notification requirements and documentation of suitable test results for this type of change. Along with delays and extra work disputes, this is also a major cause of claims.

6. Authority Of Parties

The contract should clearly spell out the authority of the parties to approve change orders and provide for as much authority at the project level as possible. In addition to publishing an organizational chart with names and titles stating responsibilities, it should be clear what change order amount can be approved by each owner's representative and how long the authorization process should take. This is essential for prompt payment for earned work. If this is not in the contract, a Responsibility Matrix must be created at the start of a project.

7. Variation In Quantities

The standard clause in many unit price contracts simply states that if there's a variation in quantities, plus or minus a certain percentage, both parties will agree to negotiate a new price. This does not provide for a resolution of the problem. Equitable contracts specify a pricing structure for changes for various ranges of the quantity of work required.

8. Requirements For Progress Schedules

When the owner requires the designer or contractor to provide a progress schedule, it must be the type of schedule needed for the project that the people using the schedule understand. One way for an owner to get the progress schedule that is needed, on time, is to establish a dollar value in the contract for submission of that schedule. Lack of an adequate schedule submission will result in this dollar value being deducted from requisition. This is not a penalty. As discussed, all participants need timely updates of the schedule to resolve issues.

9. Payment Terms

One of the most important clauses to establish in a contract is the payment terms and the procedures required to obtain that payment. This should include the definition of stored material, retention payments, etc.

10. Rates And Markup For Time & Material (T&M) Work

There is always a possibility that a change in the scope will require work to be performed on a T&M, or cost-plus basis (sometimes called a force account when a dispute is involved.) Therefore, it is important that the contract include not only a clear statement of the rates to be used for labor and equipment, but also the markup for overhead and profit to be applied to labor, equipment, material and subcontract work.

11. Time Limit To Correct (Cure) A Breach

When a party to the contract has breached a "material" requirement (lack of progress or repeated deficiency that jeopardizes performance), there should be a time frame stated (i.e., three days, seven days, etc.) in which the corrective steps are to be started or completed, or default may be declared. Default could result in the contractor being removed from the site with work being completed by others.

12. Resolution of Dispute

If a dispute cannot be negotiated, the two traditional possibilities for resolution are arbitration and litigation (court). Either may be preceded by mediation. There are pros and cons to arbitration vs. litigation. However, if arbitration is specified with one party on the project, the same provision is needed with all other parties on the project (multi-prime projects). All too often disputes involve a number of parties on the same project while a common issue needs to be resolved in a single forum. Alternate forms of dispute resolution include third party "neutral" mediation and dispute review boards. Contract provisions and identification of a third party neutral mediator or review boards need to be incorporated prior to signing.

13. Time Limitations For Claim Submission

Most construction contracts clearly state a limitation on the time frame within which the contractor must submit a claim. It may be within "X" number of days from when a change order was rejected, or number of days of completing the work (which can be vague), or prior to acceptance of final payment. This must be clearly understood and strictly complied with.

14. Exculpatory Clauses

Contract exculpatory clauses are used in an attempt to shift the financial risks for a specified problem from one party, usually the owner, to another party. The presence of exculpatory language can create an adversarial relationship at the start of a job. An example might be "Contractor is responsible for the risk of all subsoil conditions" for which the owner has not provided information. These clauses, which seem to be easy solutions to difficult problems, often create more problems than they resolve.

15. Ambiguous Contract Language

It is probably impossible to prepare a contract with absolutely no ambiguity. Words like: reasonable, timely, prompt, workmanlike, etc. need to be looked at carefully to see if they can be replaced with more precise language less open to interpretation by both parties. For example, a phrase like "the engineer will promptly review shop drawings" could be more clearly stated as "the engineer will review and return shop drawings within fifteen work days of their receipt."