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A Construction Contractor’s Contract Check List
A checklist with some key commercial contracting issues
identified can be one valuable tool in the process of understanding
and evaluating the commercial risk in a customer’s proposed
construction contract.
by Kit Werremeyer
President, Southernstar Consultants, LLC
It’s been said that a checklist creates laziness on the part of
the user. Fill out the checklist and if the results look okay for
whatever the checklist analyses, proceed and don’t do any further
analysis.
Performing a thorough analysis of the commercial risks associated
with a construction contract for a project requires some skill and
the ability to understand and evaluate the proposed commercial terms
and conditions in order to best protect the assets of the company.
Each construction project will have a different mix of commercial
risks associated with the project contract’s commercial terms and
conditions.
There is no such thing as a standard construction project. There
is also no such thing as standard commercial terms and conditions.
As such, it is difficult to develop an all-encompassing and
comprehensive checklist that would be appropriate for each and every
construction project and set of commercial terms and conditions.
Having a thorough knowledge of the typical risks associated with
commercial terms and conditions and having the ability to
independently understand and analyze these risks for each contract
is the best way.
Having said all that, a checklist is simply one tool to use in
the contract analysis process. If it is used with some
circumspection, it will at least highlight some of the most common
or typical commercial risks associated with a construction contract.
As long as a checklist is used in conjunction with independent
evaluation and analysis of the commercial terms by the reviewer,
then the risk review process can be more properly performed.
Here’s a brief 10 point checklist, with accompanying notes, to
consider using as part of a contractor’s more comprehensive contact
evaluation and analysis process:
| Contract Clause |
issue to review |
ok? |
Not ok? |
if not ok see
note x |
| Scope of Work |
Very thoroughly written? |
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1 |
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Interfaces defined? |
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2 |
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Exceptions noted? |
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3 |
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Work by others defined? |
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4 |
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| Terms of Payment |
Positive cash flow? |
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5 |
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Downpayment? |
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6 |
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Retention? |
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7 |
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Paid if Paid/Paid when Paid? |
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8 |
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| Schedule |
Adequate for work to be performed? |
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9 |
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Realistic if LDs? |
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10 |
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Contingency in schedule? |
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11 |
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| Insurance |
Realistic amounts? |
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12 |
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Additional insured? |
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13 |
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| Indemnity |
Broad form? |
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15 |
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Intermediate form? |
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16 |
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Limited form? |
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17 |
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Financial limits? |
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18 |
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Anti-indemnity state? |
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19 |
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Time limits? |
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20 |
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| Changes |
Time and money? |
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21 |
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Prior written agreement? |
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22 |
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| Disputes |
Negotiate first? |
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23 |
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Mediation? |
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24 |
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Arbitration/Litigation? |
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25 |
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| Assurances of Performance |
On demand bond from bank? |
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26 |
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True guaranty by surety? |
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27 |
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| Damages |
Liquidated damages? |
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28 |
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Consequential damages? |
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29 |
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| Warranty |
Start time? |
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30 |
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Length of Warranty? |
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31 |
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Exceptions? |
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32 |
Notes:
- Most claims and disputes arise out of poorly defined
scopes of work.
- Define scope at interfaces between contractors to avoid
disputes.
- Clarify what scope you are not going to perform.
- Clarify what scope you expect to be performed by others.
- Do a cash flow to make sure the agreed upon terms of
payment create a positive cash flow for the project.
- Always try to get a downpayment of some form of very
early payment.
- Do not agree to retention. Provide a warranty bond
instead. Keep the cash.
- These terms are unfair. Eliminate or put a maximum time
period on receipt of payment.
- Enough time to do the job? Really?
- If LDs, is the schedule achievable and realistic? If not
change.
- Have some contingency in your schedule. Unforeseen delays
always occur.
- Is the amount of the insurance required realistic for the
value of the job? If not, lower.
- Providing the client additional insured status gives him
full access to your insurance policy(ies) at no cost.
- Contractual liability provides insurance coverage for
your financial obligations under the indemnity clause in the
contract. Can you live with the indemnity as written? Is the
indemnity enforceable?
- Broad form indemnities make you financially responsible
for claims arising out of any degree of your client’s
negligence.
- Intermediate form indemnities make you financially
responsible for claims arising out of any degree of your
client’s negligence, except his sole negligence.
- Limited form indemnities make both you and your client
financially responsible only to the extent of you and/or
your client’s negligence for claims.
- Broad and intermediate form indemnities must have maximum
financial limits.
- Some states outlaw broad and/or intermediate form
indemnities in construction contracts. Check first; don’t
assume.
- Indemnities should only be in effect for claims actually
occurring while you are physically working on the
construction site, no other time frames allowed.
- All changes should have time and money considerations.
Time only is unfair.
- All changes in writing before proceeding. No exceptions!
- The best way to resolve disputes is through negotiation.
- Mediation is the next best way to resolve disputes.
- Arbitration and litigation are poor, and costly, dispute
resolution processes.
- An on-demand bond is not an assurance of performance, or
a "performance bond". These types of "bonds" can be easily
cashed by the client.
- A true assurance of performance, a "performance bond", is
a guaranty provided by a surety company. These types of
"bonds" cannot be easily cashed by the client.
- Are liquidated damages necessary? Are they a penalty?
Limit, limit, limit.
- There should always be a mutual exclusion of
consequential damages, and it must be in writing in the
contract.
- All warranties must have a definitive and well defined
start time.
- All warranties must have a stated duration, i.e. 12
months.
- Exceptions to warranties must be stated. i.e. corrosion,
wear and tear, improper use, etc.
And a final point is: use your own knowledge and skill—or the
knowledge and skills of others—to thoroughly understand and evaluate
the risks associated with each of the construction contract’s
commercial terms and conditions. After you sign the contract, it’s
too late to change those risky commercial oversights!
Click Below to Download This Checklist Form:
CONTRACTS-CHECKLIST
Need help with negotiating or setting standards or policy for
construction contract commercial terms and conditions? We can help!
Contact Southernstar Consultants LLC at 813-653-3090.
Copyright © Kit Werremeyer November, 2004, Revised February 2008.
Revised February 2009.
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