Construction contracts can be complex, and it’s essential to understand the key terms that are commonly used in them. Here are some important issues to consider when reviewing a construction contract:
- Amount of the Construction Contract: The pricing of the project is a crucial consideration. There are two main types of contracts: fixed price and cost plus. A fixed-price contract means that the contractor will receive a set amount, regardless of the actual cost. A cost-plus contract means that the owner will pay the contractor for the cost of the work plus an agreed-upon percentage. This type of contract may include a guaranteed maximum price to protect the owner from excessive costs.
- Time for Completion of the Construction Project: Setting a completion date for the construction project is essential, but it’s equally important to address how delays will be handled. Parties should consider whether the contract will allow for an extension of completion time and whether the delay will provide for additional compensation to the contractor. They should also consider whether to limit the amount of damages that can be assessed for delay. “Given [the harsh effect of such a provision], courts will strictly construe[,] but generally enforce them absent delay (1) not contemplated by the parties under the provision, (2) amounting to an abandonment of the contract, (3) caused by bad faith, or (4) amounting to active interference.” C. Ernst, Inc. v. Manhattan Const. Co. of Texas, 551 F.2d 1026, 1029 (5th Cir. 1977) (applying Alabama law). In Ernst, the court upheld a contract provision that limited the subcontractor’s claim for delay damages against an owner to an extension of time for the subcontractor. Id. Liquidated damage clauses or provisions, which set an amount for damages related to certain types of breach, are often included in construction contracts. “Liquidated damage provisions in contracts are enforceable under Alabama law as long as the contractual stipulation is reasonable and the measure of damages at the time of the contract was conjectural and uncertain.” E. C. Ernst, Inc., 551 F.2d at 1038 (allowing liquidated damages per the contract and rejecting the argument that the owner could not recover liquidated damages since owner also was at some fault for delay); see also Ray Sumlin Const. Co., Inc. v. City of Mobile, 519 So.2d 511 (Ala. 1988) (provision in building contract, that for each day’s delay in completion beyond fixed date, contractor would be liable in the sum of $3,051.61 on a total contract of $9,254,000, was not a penalty, but rather, was valid provision for liquidated damages); Alpine Const. Co. v. Water Works Bd. of City of Birmingham, 377 So.2d 954, 955 (Ala. 1979) (upholding liquidated damages provision of $100 per day). In short, liquidated damages are generally enforceable in Alabama as long as they are a reasonable measure of damages and at the time the contract was formed, potential damages were difficult to determine with certainty.
- Payment Terms in the Construction Project: The parties must agree on when and under what conditions payment will be made, how much retainage will be withheld, and when it will be released. The contract may also require certain conditions to be satisfied before payment is made, such as the approval of work by an architect or the submission of lien releases. Pay when paid clauses, which make payment to the subcontractor by the contractor conditional upon payment by the owner to the contractor, are sometimes included. These clauses will not necessarily allow for non-payment by a contractor unless they are carefully worded to create a condition precedent to payment by the general contractor. Federal Ins. Co. v. I. Kruger, Inc., 829 So. 2d 732 (Ala. 2002); James E. Watts and Sons Contractors v. Nabors, 484 So.2d 373 (Ala. 1985) (finding clause enforceable under Alabama law if the clause can be said to be a dependent covenant).
- Conditions on the Construction Project: Parties should consider how they will handle unexpected conditions that arise on the project. This could include things such as unexpected rocks or soil conditions.
- Warranties and Limiting the Remedy to an Opportunity to Repair: A contractor may be able to effectively limit the warranty that will be given to an owner, including its duration and the existence of implied warranties. Turner v. Westhampton Court, LLC, 903 So. 2d 82 (Ala. 2004). The contract may also limit the owner’s remedy to having the contractor repair whatever damage may exist. McDonald v. Schwartz, 706 So. 2d 1230, 1232 (Ala. Civ. App. 1997) (involving a suit over faulty construction of a residence); see also, Ala. Code § 7 2 719(a) (allowing for parties to limit remedies “to repair and replacement of nonconforming goods or parts”). That is, “[w]here the parties have set out in a written contract the warranties agreed upon and have provided a remedy in case of a breach of warranty, the remedy thus provided is exclusive.” McDonald, 706 So.2d at 1232; Morgan Building and Spas. Inc. v. Gillett, No. 2980788, 2000 WL 264247, *24 (Ala.Civ.App., Mar 10, 2000); see generally Mann v. Bank of Tallassee, 694 So.2d 1375, 1380 (Ala. Civ. App. 1996) (the party seeking recovery under an agreement must first show their own performance).
- Limiting the Contractor’s Duties to Complying with Plans and Specifications: Some contracts attempt to limit a contractor’s duties to conforming to certain plans and specifications. However, this provision invokes an implied duty that the workmanship involved has been performed in accordance with reasonably acceptable standards of care in the area. McDonald v. Schwartz, 706 So. 2d 1230, 1232 (Ala. Civ. App. 1997) (involving a suit over faulty construction of a residence); see also, Ala. Code § 7 2 719(a) (allowing for parties to limit remedies “to repair and replacement of nonconforming goods or parts”). That is, “[w]here the parties have set out in a written contract the warranties agreed upon and have provided a remedy in case of a breach of warranty, the remedy thus provided is exclusive.” McDonald, 706 So.2d at 1232; Morgan Building and Spas. Inc. v. Gillett, No. 2980788, 2000 WL 264247, *24 (Ala.Civ.App., Mar 10, 2000); see generally Mann v. Bank of Tallassee, 694 So.2d 1375, 1380 (Ala. Civ. App. 1996) (the party seeking recovery under an agreement must first show their own performance).
- Indemnity: Construction contracts may contain indemnity provisions that address instances when one of the parties will indemnify or handle claims against the other party. For instance, these provisions may cover a situation where an owner is sued for personal injury, or suffers personal injury, because of a defect in work. Another example is when one party is sued by a subcontractor for nonpayment.
- Arbitration or Court: Disputes may be handled in arbitration or court. This is a decision that should be made by the parties as determined based on their preference and experience. Jury waivers should also be considered depending on the forum and the parties involved.
- Termination of the Construction Contract: The parties should consider the conditions that allow for, and the ramifications of, terminating the contract. If the contract is terminated without proper grounds, the terminating party could be liable for damages. See Zippy Mart of Alabama v. A & B Coffee Service, 380 So.2d 833, 834-35 (Ala. 1980) (contractor that prematurely terminated contract was liable for lost profits on the uncompleted portion of the contract). It is also important to closely follow the termination provisions in the contract. See Ex parte Woodward Construction & Design, 627 So.2d 393 (Ala. 1993) (court found that general contractor breached contract by failing to follow termination procedure); McFadden Brothers v. Henderson, 128 Ala. 221, 29 So. 640 (1901) (if there is no time of the essence clause then contractor must give reasonable notice of its intent to terminate contract); Bank of Brewton, Inc. v. International Fidelity Ins. Co., 827 So. 2d 747 (Ala. 2002) (Bank never terminated the contractor’s right to finish the project, thereby triggering the bonding company, IFIC’s responsibility as surety to act to complete the project).
- Insurance and Bonding: The construction contract should also address the required types and amounts of insurance and bonding of the contractor and various subcontractors.
Understanding these key terms is essential when drafting reviewing a construction contract. By taking the time to understand the terms, parties can ensure that they are protected and that their project is completed to their satisfaction.