Construction is a complex business. Each project has its own unique physical and commercial considerations. Since there’s no such thing as a “standard” or “typical” construction project, construction contracts should also not be considered standard. The contractor must carefully manage both in order to have a successful outcome and protect the company’s interests and assets. This book will help you manage all these elements of the contract:
- Scope of work and schedule
- Terms of payment and cash flow
- Assurances of performance
- Insurance, bonding, indemnity, and warranties
- Changes to the contract
- Disputes and their resolution
- Damages
- Termination and suspension
- Force majeure
- International contracting
Table of Contents:
Acknowledgments xiii
About the Author xv
Preface xvii
Disclaimer xix
Introduction xxi
The Goals of This Book xxi
What Are the Benefits of This Book xxi
Contractor & Owner Conventions xxii
Private Contracts or Government Contracts? xxii
Key Contracting Concepts xxii
Two Types of Commercial Terms & Conditions xxiii
The Most Important Commercial Terms & Conditions xxiv
The Contracting Process xxv
Excuses for Not Negotiating Better Commercial Terms & Conditions xxv
The Concept of Risk Transfer xxvi
This is a Book Developed Just for Contractors xxvi
Chapter 1: Contracts: Basic Training 1
What Is a Contract? 1
The Steps to a Contract 1
Coming to the Party? 2
The Starting Point 2
“Here’s My Proposal” 3
“Consideration,” or Something of Value 5
The “Happy Test” 5
“Can That Person Sign This Contract?” 5
Call in the Enforcer to Close the Breach 6
A Contract Example 7
Strange Words & Long Paragraphs 9
Contracting Myths 10
Contract Negotiations 11
Chapter 2: Types & Forms of Contracts 13
Fixed Price & Fixed Schedule Contracts 13
Reimbursable Type Contracts 14
Combined Fixed Price & Reimbursable Contracts 16
Cost Plus Fee Contracts 17
Guaranteed Maximum Price Contracts 18
Target Price Contracts 19
Contracts with Performance Incentives 19
Form of Contracts 20
Some Final Contract Housekeeping—Definitions 25
Conclusion 27
Chapter 3: Scope of Work 29
The Scope of Work Matrix 33
Scoping Drawings 34
Conclusion 35
Chapter 4: Terms of Payment & Cash Flow 37
Cash Flow 37
Interest Rates 40
Periodic Progress & Milestone Payments 40
Conclusion 53
Chapter 5: The Schedule 55
Float 56
Time Is of the Essence 57
Extra Time, but No Money 59
Conclusion 61
Chapter 6: Assurances of Performance 63
Guaranties & Bonds 63
What Does “Failure to Perform” Mean? 65
What Is a Bond? 66
Forms of Assurances of Performance 66
Surety Companies 73
Some Language Considerations on Guaranties & Bonds 75
Types of Performance Assurances 75
Conclusion 92
Chapter 7: Insurance 93
What Is Insurance? 94
Claims Made vs. Occurrence 95
Types of Insurance 95
Important Issues Associated with Insurance 101
Additional Insured Status 107
Additional Insurance Basics 109
A Typical Insurance Clause in a Construction Contract 119
Safety 124
Chapter 8: Indemnity 125
Insurance & Indemnity 125
Indemnity Definitions 126
Transferring the Owner’s Risks to Contractors 127
Fairness Is Not a Consideration 127
Is an Indemnity Required in a Construction Contract? 127
Anti-Indemnity Legislation 128
Examples of Indemnification Clauses 131
Indemnification, Additional Insured Status, & Contractual Liability Insurance 137
Owners Love CLAIMS! 140
Negotiating Indemnity Clauses 141
Knock-for-Knock Indemnities 144
Conclusion 145
Chapter 9: Changes 147
Some Ground Rules 148
Protecting the Project Manager 148
Owners’ Directives 149
Constructive Changes 149
Payment for Changes 149
Sample Change Clauses 150
Major Contract Changes 155
Negotiating Change Clauses 156
Conclusion 157
Chapter 10: Disputes & Their Resolution 159
What’s a Project Manager To Do? A Short Story to Start With 159
Disputes—The Construction Contract’s Bad Actor 160
An Ounce of Prevention 161
Dispute Resolution Options 162
The Folks Who Negotiate, Mediate, Arbitrate, & Litigate 163
Dispute Resolution Clauses 164
Conclusion 166
Chapter 11: Damages 167
Breach of Contract/Failure to Perform 167
Contractors’ Financial Exposure 168
Actual Damages—A Silent Risk? 168
Liquidated Damages 170
Consequential Damages 176
Conclusion 179
Chapter 12: Warranties 181
A Workable Definition of Warranty 181
Warranty Issues 182
The Uniform Commercial Code 187
When Is No Warranty Appropriate? 189
Extended Duration Warranties 191
Limiting Provisions in Warranties 193
Pass-Through Warranties 194
Latent Defects & Warranties 195
A Sample Warranty 195
Conclusion 195
Chapter 13: Termination & Suspension 197
Termination for Cause 197
Termination for Convenience 199
Suspension 202
Cancellation 205
Conclusion 205
Chapter 14: Force Majeure 207
Negotiating Clauses 207
Sample Contract Language 208
Conclusion 212
Chapter 15: Other Contract Clauses 213
Site Conditions 214
Use of Completed Portions of the Work 219
Patent Indemnity 220
Secrecy & Confidentiality Clauses & Agreements 220
Owner’s Right To Inspect 222
Independent Contractors 224
Assignment 225
Acceptance & the Punch List 226
Advance & Partial Waiver of Liens 229
Final Waiver of Liens 231
Audit Rights 233
Severability or Validity Clauses 235
Venue & Applicable Law 235
Some Interesting Clauses to Close 237
Chapter 16: International Contracting 239
International Contracts 240
The U.S. Foreign Corrupt Practices Act 241
Letters of Credit 242
Split Contracts: Onshore & Offshore Contracts 243
Political, Religious, & Economic Risks 244
Overseas Private Investment Corporation (OPIC) 245
Legal Systems in Foreign Countries 245
Local Employees, Partners, & Agents 246
Offshore Companies 247
Currency Risks 248
Applicable Law 251
Joint Ventures 253
Joint Operations 254
Import & Export Considerations 254
Understanding INCOTERMS 256
The Export-Import Bank of the United States 258
Where to Get Some Help—Ask the U.S. Government 259
Lastly, Use the Right Paper Size! 260
Conclusion 260
Chapter 17: Some Final Thoughts on Negotiating Contracts 261
Why Negotiate? 261
The Concept of Standard Terms & Conditions 262
Risk Transfer Item 1: Get Rid of the Indemnity Clause! 264
Risk Transfer Item 2: Don’t Provide Additional Insured Status 264
Risk Transfer Clauses, Insurance, & Safety 265
How to Say No Without Aggravating the Owner 265
The Worst Contracting Word: “Reasonable” 266
The Best Contracting Word: “Notwithstanding” 266
Win-Win & Lose-Lose in Contract Negotiations—Fairy Tales? 267
Is There a Price for Bad Commercial Terms & Conditions? 268
Terms of Payment 268
Some Tips on Successful Negotiating 269
Three First (and Final) Suggestions 269
Resources 271
Glossary 273
Index 287
