Why You Should Have Your Construction Contract Reviewed.

By Christopher Olson, Esq. and Joseph M. Sweeney, Esq.
Sweeney, Mason, Wilson & Bosomworth

Ben Franklin couldn’t have been more right when he stated, “An ounce of prevention is worth a pound of cure.” That idiom itself should provide ample incentive for you to have your contract reviewed before embarking on any construction project. Although the ultimate goal is always a problem-free job, in the event a dispute does arise during or after a project, the rights and remedies of the owner, contractor and subcontractor (and potentially others involved in the project) will be determined by the terms of the agreement(s) between the parties. Ultimately, a judge, jury or arbitrator will use the contract as a road map to reach a decision they believe to be consistent with the parties’ pre-dispute expectations and agreements. If you don’t have your contract reviewed by experienced counsel prior to signing, you run the risk of being in a disadvantaged position in the event such a dispute does arise. Consequently, it is often wise to spend a little up front and have your contract reviewed and tailored to meet your specific needs with the goal of minimizing your risks, rather than spending significantly more time, money and other valuable resources in litigation fighting over issues that could have been clarified or potentially resolved prior to entering into the agreement.

There are several key provisions that should be set forth with clarity in every construction contract. The following are some examples:
1. Scope of Work. The scope of work must be sufficiently detailed and any exclusions should be clearly set forth in the contract. Any preceding bid or proposal should contain the basic assumptions upon which the bid is based and the proposal should be incorporated into the contract when possible.

2. Change Order and Disputed Work. The contract should clearly set forth the rights and obligations (including authorization and notice) of all parties with respect to requests for or the need to perform work beyond the original scope of work.

3. Payment Provisions. It is important to define when progress payments and final payment (including any retention) are due and how the payment amounts are determined. Attention should also be paid to contingent payments and release requirements.

4. Offer, Extinction and Time of Performance. A bid proposal should contain a date after which the proposal terminates and can no longer be accepted. In addition, the contract should contain a schedule with clearly delineated start and completion dates for performance – including substantial completion, final completion and provisions for extensions of time and other remedies for delay.

5. Concealed Conditions. The contract should contain provisions requiring modification of price and time of performance in the event adverse concealed conditions are discovered after work commences.

6. Indemnity and Insurance Requirements. The appropriate indemnity and insurance requirements should be set forth in detail both for the owner’s and contractor’s protection. Indemnity obligations can have significant implications and must not be overlooked or ignored. Likewise, insurance issues (including additional insured requirements) are very important to iron out prior to commencing any project.

7. Attorney’s Fees Provision and Choice of Forum – To facilitate payment, a contract should include a provision requiring payment of attorney’s fees and costs to the prevailing party in the event collection efforts are necessary. The contract should also clearly address dispute resolution procedures and contain a choice of forum provision which sets forth whether the parties will litigate disputes in state court or through binding arbitration.

In addition to ensuring that the contract sets forth essential terms such as scope, price, timing of payment and performance and dispute resolution, it is wise to make certain that your contract complies with all applicable local, state, and federal statutes, rules and regulations. For example, if your contract involves home improvement work and it does not comply with the California Business and Professions Code, in addition to potential problems enforcing the contract, a contractor runs the risk of being fined by the Contractors State License Board and having a “black mark” on its license history. Such adverse information is public record and may be on the CSLB website when a potential customer looks up the contractor’s licensing information.

Another reason to have a contract reviewed is to make certain that you are well protected in the event of a dispute or resulting litigation. The contract should spell-out how disputes will be resolved and how the costs of any litigation will be allocated. It is important to understand your rights and remedies and the dispute resolution process before beginning work on a project.

In the event of a dispute, a judge, arbitrator or mediator is likely to carefully read your entire contract – which may lead to a disastrous result for one or more parties if proper care is not exercised in (1) drafting the contract and/or (2) adhering to the requirements of the contract. For example, in a fairly recent case in California an engineering firm did a substantial amount of work beyond the scope of its contract with the City of Carlsbad. The City contested the bill for extra services and the Court of Appeals opined that the engineering firm failed to follow the written change order procedures in the contract, which clearly prohibited extra work without written authorization. The end result: no recovery whatsoever for the engineer. P&D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal. App. 4th 1332. The case was a very expensive lesson for that engineer.

In summary, before any construction contract is signed, each party must take the time to carefully review and become familiar with the terms and conditions set forth in the agreement, along with the legal requirements attendant to mechanic’s lien, stop payment notice and payment bond remedies. If you don’t, the result can be catastrophic. If you do, not only can you minimize your risk of costly litigation, you stand a much better chance of defending an invalid claim, collecting money, prevailing in any dispute and/or litigation and sustaining either a business you have worked so hard to maintain or a project you own.

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The information provided in this issue of “Legal Notice” is general in nature and is not intended to answer every question that may arise under different fact situations and should not be relied on in the place of professional advice in a given case. If you have specific questions regarding construction law, please contact Sweeney, Mason, Wilson & Bosomworth.

SWEENEY, MASON, WILSON & BOSOMWORTH is a Professional Law Corporation located at 983 University Avenue, Suite 104C, Los Gatos, California, 95032, telephone (408) 356-3000. This “Legal Notice” is designed to assist our clients and other business owners in spotting issues which may result in costly litigation and court awarded damages if allowed to continue unaddressed. SWEENEY, MASON, WILSON & BOSOMWORTH’s philosophy is that by educating our clients, and other businesses, about their legal obligations, including changes in the law, we best serve our legal goal of minimizing or preventing expensive litigation.
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