What are the key risks that should always be taken into consideration before any construction contract is signed?
Deborah Cazan
Partner
The key risks that should always be taken into account when a contract is signed are risks associated with uncompensated delays and cost increases. Provisions relating to the scope of work deserve significant attention to help minimize these risks. Defining the scope of work is often put on the backburner while parties focus on negotiating the rest of the terms and conditions of the contract. And when these scopes are inserted, they are often not closely reviewed by attorneys who tend to defer to project personnel on scope. These situations can lead to costly disputes.
Instead, make sure: (1) the correct plans and specifications have been referenced in the contract; (2) an attorney or his/her business counterpart is familiar with relevant specifications; (3) the exhibit containing the assumptions and clarifications is clearly written, has been coordinated with language in the body of the contract and can be clearly understood by attorneys and business people beyond the preconstruction personnel who drafted them; and (4) the contract addresses the order of precedence in the event of a conflict between or among contract provisions (including exhibits). With regard to specifications referenced above, an attorney review is advised because many specification sections, including submittal sections, change order sections, payment provisions and construction progress documentation sections, regularly vary from the negotiated sections of the actual contract. Contractors also unwittingly accept design risk through performance specifications, and the accompanying obligations and risks are underestimated by those tasked with the initial review of those documents. In sum, a clear scope is as important as clear terms and conditions.
Wm. Cary Wright
Shareholder
There is an art to risk management in contract negotiations. Which party has more leverage? Who is in the best position to assume that risk? The answers to these two questions are not always aligned.
Risk transfer provides for the allocation of the risk of loss. Before signing a contract, there are several risks to consider, with the following three being some of the most significant potential risks.
Most construction contracts call for certificates of insurance, but the certificate alone does not function to transfer risk. It is important after receiving a certificate to obtain and review policies and endorsements. Key risk-transfer tools are gaining additional insured status and waiver of subrogation where one party waives rights of their insurer to sue another for damages covered by insurance.
Indemnification provisions shift the legal and financial risk from one party to another. Such provisions require the party taking on the risk to defend (provide an attorney and pay legal bills), hold harmless (waive rights to sue), and indemnify (pay for any claim/damage/loss) the other party. Indemnification generally shifts risk of loss or damage to the party performing the work under the contract.
Consequential damages can include costs related to lost profits/opportunities and other indirect financial losses. An owner is often more likely than the contractor to incur consequential damages but, if allocated to the contractor, such damages can be crippling. That risk can be mitigated or potentially avoided altogether by incorporating a waiver of consequential damages into the contract.
Christopher K. LeMieux
Founding Partner
Before signing any construction contract, contractors should consider whether they are assuming other people’s liability. Contractors should consider whether the contract delegates any design responsibility to the contractor (commonly referred to as delegated design). This growing trend can expose contractors to additional risks, such as liability for design defects. Another key risk to consider is whether the contract provides a remedy for errors, omissions or conflicts within the plans and specifications and whether the contractor assumes liability for those issues. Understand the contract’s delay provisions and implications in agreeing to a contract that includes a “no damages for delay clause” as delays are almost certain to occur during any construction project. Consider all clauses imposing defense and/or indemnity obligations upon the contractor to determine whether the contractor is assuming liability for issues beyond their control. Contractors should also review the contract carefully for the presence of a waiver of consequential damages. The inclusion of such waivers may shield a contractor from claims for financially devastating indirect losses, such as lost profits. Consider any clauses that limit the right to pursue claims, understanding the extent to which you might be forfeiting your right to address legitimate grievances. Finally, contractors must consider whether the contract’s insurance requirements can be met, to cover potential risks adequately, mitigate exposure to uninsured risks, and prevent breach of contract claims. Understanding these risks prior to signing any construction contract is critical, as they can significantly impact the success or failure of a project or business.
Angela Richie
Partner, Co-Chair Construction Practice
Prior to executing any construction contract, contractors and subcontractors should make sure they have preserved their rights to collect payment for work they have performed, either through preserving mechanic’s lien and/or payment bond rights.
On private projects, first, identify the actual owner of the land and the building, and whether the owner has sufficient funds to pay for all work performed. Next, file prelien notices in the states where such prelien notice is a condition to your ability to file a mechanic’s lien, and calendar follow-up lien deadlines. Then, add a provision to your contract that preserves your rights to file liens:
Releases. Any form or release wherein the Subcontractor purports to release the contractor, owner or design professional is hereby qualified by the following language, whether or not the subcontractor specifically adds the language: “This release shall apply only to work for which payment has been received in full by Subcontractor, and it shall not apply to retainage, pending or disputed changes or payments, or amounts not yet paid.”
On public projects, obtain a copy of the payment bond prior to starting work. Then, calendar the deadlines for notice and enforcement of payment bond claims.
On any project, many contractors and subcontractors are forced to finance the cost of changes for an extended period of time. Modify your contract to provide deadlines for the review and payment of change orders as a condition prior to continuing to perform change-order work.
What should contractors consider when looking for an attorney experienced in construction law?
Matthew E. Cox
Partner
When a contractor is looking for an experienced construction-law attorney, the contractor should look for someone who has a background in construction. What follows are a series of questions to consider. Are they a former engineer or have they actually worked in the industry prior to becoming a lawyer? Are you as the contractor looking for someone to review contracts, help with a claim or provide project advice? Depending upon your need, it is important to find out if they are familiar with the type of construction your company performs. For instance, while someone may be very experienced with vertical construction, they may have no experience with mass grading sites. Therefore, it is important to find out what type of cases they have handled. Do they only review contracts? Do they only typically file mechanic’s liens? Have they handled a delay claim? Have they handled a loss productivity claim? Have they handled a dispute regarding differing site or subsurface conditions? Do they handle mainly insurance defense or private matters? Who else do they represent? The most important thing you want to know is whether the attorney you have vetted and entrusted is going to be working on your case or handing it off to an associate. How busy are they? How well do they communicate? What is their method of billing? What is their reputation? All of these considerations will help you in selecting the right construction attorney who is experienced for you and your company’s needs.
Danielle Waltz
Partner
Contractors should consider knowledge of the industry and technical background. Additionally, contractors should look for attorneys who can see the whole field and will give them sound advice that helps them avoid costly litigation.
When should a construction firm use liens or other methods to secure the right to payment of its costs and fees from an owner?
Marcus Tucker
Partner
Payment of obligations to subcontractors can be routine through the accepted practices of submitting requests for progress payments. However, when payments are not made; for example, when an owner terminates a general contractor or the general contractor does not meet payment obligations, the filing of mechanic and materialman’s liens are the subcontractor’s strongest leverage to secure payment. But subcontractors must be very precise in the manner in which they serve notices of liens, file their liens and provide copies of the liens. States have different lien requirements with regard to the timing of notifying owners and general contractors of obligations that have not been paid and the content of the liens are very important.
Generally, general contractors can lien the property to force payment, and liens entitle subcontractors to recover funds that have not been paid by or “trapped” with the owner before they are paid to the general contractor. In some states, the amount of contractual and/or statutory retained can be liened and recovered. The threat of foreclosure by general contractors and subcontractors is substantial leverage to force the owner to pay its obligations. In some states, the lien rights take priority over a secured creditor’s interests. Public and private projects that are supported by bonds also can be subject to liens but special procedures may apply. The owner’s options with liens include resolving the lien through payment, bonding around the lien or initiating legal processes to remove the lien. Determining the best option requires lien expertise.
Should jurisdiction and venue provisions be considered when drafting a construction contract?
Allen Estes III
Partner, Co-Chair Construction Practice Group
When drafting a construction contract, all parties to the contract should pay careful attention to the jurisdiction and venue provisions of the contract. Both contract provisions could substantially modify or limit the rights of the parties.
Jurisdiction provisions select whether a court or arbitration panel will decide any dispute between the parties to a contract. Jurisdiction provisions often include some requirement that prior to the parties having the right to proceed to court or arbitration, their dispute must be submitted to nonbinding mediation. These clauses are usually enforceable and operate to provide one additional step which must be completed before access to a tribunal is granted to either party.
Venue provisions control where the dispute will be heard. It is not uncommon that the party to the contract with the most bargaining power will select the venue of their principal place of business so as to have, quite literally, home court advantage. However, pursuant to the law in some states, the parties are prevented from selecting a place other than the location of the project as the venue where any dispute related to the project will be heard.
Always remember to have your lawyer review the contract before you sign it so that you can be apprised of the risks associated with your contract and successfully mitigate and/or navigate those risks.
Gregory Cokinos
President and CEO
Absolutely—especially in complex construction projects where owners, contractors and subcontractors (or more likely their lawyers) may ultimately have very different preferences after disputes arise. In fact, it is not uncommon for contractors to require their subcontractors and suppliers to agree to the same jurisdiction and venue provisions as those set forth in the general contract (often by way of flow-down provisions). Negotiated jurisdiction and venue provisions would ideally give the parties the ability, at least in theory, to assert some control over the forum of substantive disputes before they arise, and to avoid protracted—often complicated and expensive—forum disputes after they arise (which, in our experience, can be litigated for years before the substance of an underlying dispute is even put at issue). They also help avoid the potential for double-tracked litigation of the same or similar issues across multiple forums. For example, if a subcontractor files suit against a general contractor in Texas for nonpayment, and the general contractor files suit against an owner in Oklahoma for nonpayment for the same work, which forum ultimately controls? What if the competing jurisdictions apply different (substantive and procedural) law? What if the competing jurisdictions result in inconsistent judgments? Jurisdiction and venue provisions—which include agreements to arbitrate in a particular location—help alleviate those concerns by agreement, long before disputes make the parties considerably less agreeable. It is our strong recommendation that all construction contracts include jurisdiction and venue provisions along with choice of law provisions—and most already do.
Ben Westcott
Co-Managing Shareholder
Would you want to fight in the Philippines with a local or U.S. based referee? What’s the size of the ring? Can you tie up the other fighter? Or punch low? Glove weight? Day/night fight? The answers to each of these questions depends on whether you are Mohammed Ali or Joe Frazier. No one answer benefits both. This planning and analysis should be part of selecting your jurisdiction and venue for disputes. What is your advantage and how do you get it?
Agreeing to a remote venue may result in fewer disputes, as may choosing a more expensive venue like ICC arbitration. Agreeing to a local venue may get you more claims from local subcontractors but also more support if you get into a large dispute with the owner. Do you have a local reputation? Is it negative or positive? Will arbitration help or hurt when considering that reputation? Do you want to be in court or arbitration when you have an onerous, one-sided contract?
Another key component is what legal limitations apply to your selection. Some states, including Texas, have prohibitions against selecting the law and courts of another state for a Texas construction project. See, e.g. Tex. Bus. & Com. Code § 272.001(a)-(b). Is interstate commerce involved and will a federal preemption of your local state law apply? Be sure and check your state’s laws on what can and cannot be legally accomplished in your choice of venue provisions.
Why is it important for construction contracts to include a price escalation provision? Absent an escalation clause, can a contract be amended?
Timothy Woodward
Partner, Construction Practice Group Chair
Price escalation can materially affect, sometimes all-together eliminate, a contractor’s expected profit margin, especially on significant, longer duration projects. Escalation of material costs are often hard to predict. While some major owners such as Departments of Transportation, will include limited escalation provisions for fuel and other specific materials, it is important for contractors and owners to clearly establish up front how risks are allocated for material escalations. If the contract does not provide a material escalation provision then it may be amended later, but that will often depend on the magnanimity of the owner because there is no clear common law legal entitlement for a contractor just because they price of a certain material suddenly spiked during the course of the project. Given the volatility of the world market affecting many forms of critically important construction materials—e.g. steel, concrete, fuel—it is risky for a contractor to assume all risks of escalation without some preprescribed contractual manner to address such things.
Joshua Levy
Partner
Material availability and price volatility have emerged as the biggest post-COVID risks for construction projects. We have seen parties neglect to properly plan for this risk repeatedly since 2020. We have also seen many questionable claims for force majeure when contractors or subcontractors fail to plan. The most important action is to discuss the contract price in the context of potential escalation and then draft an appropriate clause that reflects the parties’ intent for the distribution of this risk. The contract term should be clear that the contractor is only entitled to a change order for escalation when the price increase is truly beyond its control. Beyond identifying who must pick up the tab, the best escalation clauses include the manner for calculating price relief. For instance, the parties can first establish a threshold where marginal escalation does not trigger a change order, and then identify a benchmark for the value of the allowable price increase. The parties can always amend a contract that does not have an escalation clause, and, in fact, a change order is a contract amendment, but one party can always say no to another party’s plea for relief.
Can statements made during a mediation process later be used in an arbitration process?
Evan Blaker
Partner
This is an interesting question because most people who have been through the mediation process will likely say no because they recall that at the beginning of a mediation, everyone agrees that what takes place during mediation is private and for settlement purposes only. But what does that mean exactly? To be sure, no one could ever be questioned directly about something they said at a mediation. At the same time, during the mediation, you are still providing information to your opponent. For example, say the parties are trying to resolve a claim related to a change-order request. The subcontract requires the subcontractor to initiate a claim within 10 days of the event giving rise to the claim. At the mediation, the general contractor says that it rejected this part of the claim because the change order sought payment for work that was within the subcontractor’s scope and because the subcontractor failed to provide timely notice of a claim. During the mediation, the subcontractor acknowledges that it included this rejected change order within a larger claim that was initiated a year after the change-order request was denied. If the case does not settle, you can be sure that during cross-examination during an arbitration the subcontractor will be asked to admit that it did not file a timely claim. So, in this quick example, you can see how things said at mediation can later be used in the arbitration proceeding.
How can incorporating dispute resolution into a contract along with procedures to encourage transparency and collaboration among parties help when an issue arises?
Matthew S.C. Moore
Managing Partner, Texas Offices
Dispute-resolution procedures can serve as a proactive measure to effectively manage disputes when they arise in real time. By expressly identifying clear dispute-resolution procedures within the contract, the parties establish a framework for addressing disagreements in a structured and efficient manner. The protocols reduce the likelihood of disputes escalating into costly and time-consuming legal fights.
Under the traditional approach, phased dispute resolution typically involves: 1) negotiation, 2) mediation, and 3) formal legal proceedings. During the first phase, the negotiations usually start at the project field-level and then escalate to the executive-level. A well-drafted and well-adhered-to negotiation framework often results in a relatively quick and inexpensive resolution. Even if the dispute is not resolved at this level, it will help the parties better understand the other’s position.
On larger-scale construction projects, parties may also establish a dispute review board to render non-binding recommendations for resolution of disputes and a dispute avoidance board to help the parties avoid disputes by providing a forum to proactively address issues before they turn into full-blown disputes.
Regardless of what dispute-resolution procedures are agreed to, transparency and collaboration often depend on whether the parties created a culture of trust, cooperation and goodwill from the outset. If so, the parties will be more inclined to work together towards mutually beneficial solutions rather than resorting to adversarial tactics.
Michael Powell
Vice President, Construction Division
American Arbitration Association
Incorporating dispute-resolution mechanisms and procedures for transparency and collaboration into a construction contract can significantly aid in managing issues when they arise. These mechanisms can lead to early resolution by providing for one or more techniques, such as dispute avoidance and resolution boards, negotiation and mediation, which prompt parties to address conflicts before they escalate, thus minimizing costs and preserving relationships.
A clear framework within the contract defines the processes for handling disputes, reducing uncertainty and providing for consistent management. Multi-tiered alternative dispute-resolution clauses, which typically require mediation followed by arbitration, prompt a structured approach to conflict resolution. Transparency procedures, such as regular updates and mandatory information sharing, foster trust and reduce misunderstandings.
Collaboration is further encouraged through joint problem-solving sessions and using a project neutral to ensure balanced communication. Clear definitions of roles and responsibilities, along with specific performance metrics, help in the early identification of potential issues, preventing them from becoming disputes.
Most importantly, understanding how to modify draft or form contracts is essential to managing issues pre- and post-dispute. Utilizing online tools such as ClauseBuilder.ai and ClauseBuilder.org can be highly effective. These tools enable parties to craft custom clauses tailored to their specific needs, aiming to include all essential elements and make them easily understood by all parties involved.
By embedding these mechanisms and leveraging tools like ClauseBuilder.ai and ClauseBuilder.org, parties create a transparent and collaborative environment that facilitates early dispute resolution, preserves business relationships, and reduces the risks and costs associated with conflicts.
What is the biggest risk to contractors that are having difficulty finding skilled workers?
Rob Remington
National Chair, Construction Practice Group
The shortage of skilled labor has affected the entire construction industry. According to the AGC’s 2023 Work Force Survey, 94% of highway and transportation contracting firms in the U.S. need skilled labor. The resulting impact on contractors is significant and manifests itself in a myriad of ways, not the least of which are diminished backlogs, reduced project productivity, project delays, safety issues due to less qualified and experienced workers, and lower workforce morale. To combat the problem, the industry has recognized the need for programs designed to encourage high school and college students to consider a career in construction. Contractors are also offering candidates counseling and training for high-paying career advancement opportunities along with competitive compensation and incentive packages designed to attract and maintain workers. Importantly, the construction industry is missing an entire segment of workers. Women account for over 50% of the 161 million people employed in the U.S., yet they make up only 6.4% of the construction working population. This statistic shows that the industry is at a severe disadvantage because its workforce is coming from only one-half of the national work population. Any resolution to the labor shortage must involve doing a better job attracting workers from less traditional segments of the workforce, especially women.
Trent Cotney
Partner and Construction Team Co-Leader
Hiring and keeping a skilled crew is a huge challenge for contractors, especially in a time when many workers are aging out of the industry. One in five of all construction workers are 55 or older. When finding workers is difficult, and more experienced workers may retire, the biggest risks to operations can potentially be project delays, quality issues and/or safety concerns in the midst of trying to train newly hired workers on the fly.
Contractors can address these issues by contacting their legislative representatives to support acts and bills that fill the pipeline of skilled workers. For instance, A Stronger Workforce for America Act (H.R. 6655), will reauthorize and enhance the 2014 Workforce Innovation and Opportunity Act. It calls for upskilling workers through individual training accounts, on-the-job instruction and other initiatives; allowing states to create “critical industry skills funds;” ensuring eligibility programs are aligned with employers’ skill needs; emphasizing work-based training for youth workers; and strengthening programs for those released from prison to gain skills and transition to meaningful employment.
Another bill that addresses the workforce shortage is the Essential Workers for Economic Advancement Act (H.R. 3734). It creates H-2C, a new visa for temporary workers to work in year-round, nonagricultural positions, valid for 36 months with two consecutive renewals. There are Perkins Career and Technical Education State Grants. Each year, Congress allots funding for CTE programs, and increases in funding would be a boon to the construction industry, allowing students to pursue skills-based careers.
