Understanding and Negotiating Construction Contracts The complexities of construction contracts are made easy with this thorough and readable guide
Construction contracts can be complex for both owners and contractors. For contractors, negotiating fair and balanced commercial terms in contracts is just as important as properly managing projects; a properly negotiated contract can mitigate unnecessary risk and unnecessary risk transfer. This, in turn, reduces exposure to financial liability for the contractor and for avoidance of contract claims and disputes.
Understanding and Negotiating Construction Contracts provides a comprehensive and readable introduction to the world of construction contracts. Providing, for example, coverage of the four most common types of contracts—lump sum/fixed-price, cost-plus, time-and-materials, and unit-pricing—it promises to reduce uncertainty and allow contractors to enter contractual negotiations with greater confidence to be able to achieve a fair and balanced contract. This updated new edition reflects the up-to-date best practices to understand how to better negotiate the commercial terms and conditions in construction contracts.
Readers of the second edition of Understanding and Negotiating Construction Contracts will also find:
- Updated information on indemnity, insurance, and negotiation
- An all-new chapter with a contract analysis checklist
- Real-world examples drawn from small residential, retail, large commercial, and international projects
Understanding and Negotiating Construction Contracts is essential for construction professionals and college students studying construction contracts and the liabilities arising out of them.
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 xxv
The Contracting Process xxv
Terms & Conditions xxv
The Concept of Risk Transfer xxvi
This Is a Book Developed Just for Contractors xxvii
Three Final Suggestions xxvii
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 3
“Here’s My Proposal” 4
“Consideration,” or Something of Value 5
The “Happy Test” 5
“Can That Person Sign This Contract?” 6
Call in the Enforcer to Close the Breach! 6
A Contract Example 8
Strange Words & Long Paragraphs 10
Contracting Myths 11
Contract Negotiations 12
Chapter 2: Types & Forms of Contracts 15
Fixed Price & Fixed Schedule Contracts 16
Reimbursable Type Contracts 16
Combined Fixed Price & Reimbursable Contracts 18
Cost Plus Fee Contracts 20
Guaranteed Maximum Price Contracts 21
Target Price Contracts 21
Contracts with Performance Incentives 22
Form of Contracts 23
Some Final Contract Housekeeping— Definitions 30
Conclusion 32
Chapter 3: Scope of Work 33
The Scope of Work Matrix 37
Scoping Drawings 39
Conclusion 40
Chapter 4: Terms of Payment & Cash Flow 41
Cash Flow 42
Interest Rates 44
Periodic Progress & Milestone Payments 45
Conclusion 59
Chapter 5: The Schedule 61
Float 62
Time Is of the Essence 64
Extra Time, but No Money 66
Conclusion 68
Chapter 6: Assurances of Performance 69
Guaranties & Bonds 70
What Does “Failure to Perform” Mean? 72
What Is a Bond? 72
Forms of Assurances of Performance 73
Surety Companies 78
Some Language Considerations on Guaranties & Bonds 82
Types of Performance Assurances 82
Conclusion 101
Chapter 7: Insurance 103
What Is Insurance? 104
Claims Made vs. Occurrence 105
Types of Insurance 106
Important Issues Associated with Insurance 112
Additional Insured Status 120
Additional Insurance Basics 121
A Typical Insurance Clause in a Construction Contract 134
Safety 140
Chapter 8: Indemnity 141
Insurance & Indemnity 142
Indemnity Definitions 142
Transferring the Owner’s Risks to Contractors 143
Fairness Is Not a Consideration 143
Is an Indemnity Required in a Construction Contract? 144
Anti- Indemnity Legislation 144
Examples of Indemnification Clauses 150
Indemnification, Additional Insured Status, & Contractual Liability Insurance 157
Owners Love CLAIMS! 161
Negotiating Indemnity Clauses 162
Knock- for- Knock Indemnities 165
Conclusion 166
Chapter 9: Changes 169
Some Ground Rules 170
Protecting the Project Manager 170
Owners’ Directives 171
Constructive Changes 171
Payment for Changes 172
Sample Change Clauses 172
Major Contract Changes 178
Negotiating Change Clauses 179
Conclusion 180
Chapter 10: Disputes & Their Resolution 183
What’s a Project Manager to Do? A Short Story to Start With 183
Disputes— The Construction Contract’s Bad Actor 184
An Ounce of Prevention 186
Dispute Resolution Options 186
The Folks who Negotiate, Mediate, Arbitrate, & Litigate 188
Dispute Resolution Clauses 189
Conclusion 192
Chapter 11: Damages 193
Breach of Contract/Failure to Perform 194
Contractors’ Financial Exposure 194
Actual Damages— A Silent Risk? 194
Liquidated Damages 196
Consequential Damages 204
Conclusion 206
Chapter 12: Warranties 207
A Workable Definition of Warranty 207
Warranty Issues 208
The Uniform Commercial Code 214
When Is No Warranty Appropriate? 217
Extended Duration Warranties 219
Limiting Provisions in Warranties 221
Pass- Through Warranties 221
Latent Defects & Warranty 222
A Sample Warranty 224
Conclusion 224
Chapter 13: Termination & Suspension 227
Termination for Cause 228
Termination for Convenience 229
Suspension 232
Cancellation 236
Conclusion 236
Chapter 14: Force Majeure 239
Negotiating Clauses 239
Sample Contract Language 240
Conclusion 244
Chapter 15: Other Contract Clauses 245
Site Conditions 246
Use of Completed Portions of the Work 251
Patent Indemnity 252
Secrecy & Confidentiality Clauses & Agreements 253
Owner’s Right to Inspect 254
Independent Contractors 257
Assignment 258
Acceptance & the Punch List 260
Advance & Partial Waiver of Liens 262
Final Waiver of Liens 265
Audit Rights 268
Severability or Validity Clauses 269
Venue & Applicable Law 269
Florida Civil Code Chapter 47 Venue 270
Texas Business & Commercial Code Annotated §272.001 271
Venue and Choice of Law State Statutes 271
Contractual Rendition? 271
Changes in the Law 272
Some Interesting Clauses to Close 273
Chapter 16: A Construction Contractor’s Contract Checklist 275
Chapter 17: International Contracting 283
International Contracts 284
The U.S. Foreign Corrupt Practices Act 285
Letters of Credit 286
Split Contracts: Onshore & Offshore Contracts 288
Political, Religious, & Economic Risks 289
Overseas Private Investment Corporation (OPIC) 290
Legal Systems in Foreign Countries 290
Local Employees, Partners, & Agents 291
Offshore Companies 292
Currency Risks 293
Applicable Law 297
Joint Ventures 299
Joint Operations 299
Import & Export Considerations 300
Understanding INCOTERMS 302
The Export‐ Import Bank of the United States 305
Where to Get Some Help— Ask the U.S. Government 306
Lastly, Use the Right Paper Size! 307
Conclusion 307
Chapter 18: What’s It Take to Do Business in Southeast Asia? 309
Patience Is Golden 310
Walk the Talk 310
Time and Money 311
The US Foreign Corrupt Practices Act 312
Center for Strategic and International Studies 313
Trans Pacific Partnership (TPP) 314
Backdoor to China and India 314
SPECIAL Section— The Socialist Republic of Vietnam (Vietnam) 316
Resources for Business in Southeast Asia 317
Chapter 19: Some Final Thoughts on Negotiating Contracts 319
Why Negotiate? 320
The Concept of Standard Terms & Conditions 320
Risk Transfer Item 1: Get Rid of the Indemnity Clause! 322
Risk Transfer Item 2: Don’t Provide Additional Insured Status 323
Risk Transfer Clauses, Insurance, & Safety 323
How to Say No without Aggravating the Owner 324
The Worst Contracting Word: “Reasonable” 324
The Best Contracting Word: “Notwith- standing” 325
Win- Win & Lose- Lose in Contract Negotiations— Fairy Tales? 326
Is There a Price for Bad Commercial Terms & Conditions? 327
Terms of Payment 327
Some Tips on Successful Negotiating 328
Three First (and Final) Suggestions 328
Resources 329
Glossary 333
Index 349
