Construction contracts come in different shapes and sizes depending on the nature of the project. Each contract will have different provisions in it, some that are of a general nature and others which are more specific to the needs of a project. Regardless of the nature and scope of the project, pay close attention to certain provisions to help minimize some risks associated with construction projects. These provisions include, but are not limited to, the contract price, scope of work provision, schedule of work, change order, payment, lien release, default, termination, default remedies, and dispute resolution provisions. This series of articles will break down each of these provisions.
Remember that all of the provisions mentioned operate together as a single contract and not in a vacuum. So, always make sure that you read the entirety of a construction contract. If you need assistance understanding or negotiating a contract, contact West Mermis, PLLC.
Contract Price:
The contract price is the price to be paid for the completion of the construction project. Different contract forms present the contract price in different ways. For instance, the Guaranteed Maximum Price (“GMP”) contract has a maximum limit on the contract price. The GMP is not to be exceeded by the general contractor unless the project owner specifically agrees to do so. Similarly, a Lump Sum contract between a general contractor and a subcontractor requires the general contractor to pay the subcontractor a lump sum for the subcontractor’s work instead of paying per unit of work as the work is completed. At the other end of the spectrum are the Cost-Plus contract between a general contractor and owner and the Unit Price contract between a general contractor and a subcontractor. These contracts charge for the work or material as it is completed or provided and do not have a maximum limit on the contract price.
Generally, a GMP contract is more favorable to the project owner because the fixed price provides more certainty to the owner, allows for easier budgeting, and offers the owner more protection against certain price escalations by shifting that burden to the contractor. Consequently, GMP contracts can pose more of a risk to general contractors because they put a ceiling on the project price. However, the risks to a general contractor can be mitigated by including other provisions in the construction contract, such as robust change order provisions, which help pass price escalation costs to the owner.
Similarly, in a contract between a general contractor and a subcontractor, a Lump Sum contract is more favorable to the general contractor because it puts a ceiling on the subcontractor’s contract price. The Lump Sum contract offers the general contractor more certainty in budgeting and shifts the risk of price escalations to the subcontractor. Such contracts between general contractors and subcontractors are not very common. However, if you are a subcontractor who is about to enter into a Lump Sum contract with a general contractor, make sure that you pay attention to other provisions, such as the change order and work schedule provisions, to ensure that you are not bearing all of the risk associated with potential price escalations.
Conversely, a Cost-Plus contract is more favorable to the general contractor. A Cost-Plus contract essentially allows the general contractor to bill the project owner as the project progresses. In such a contract, the owner bears the majority of the risk of price escalations. The owner may also likely bear the costs associated with corrective work. Some Cost-Plus contracts may include an estimate of total costs for the project. However, this is merely an estimate that may be exceeded. If you are an owner and you can dictate the type of contract, then choose a GMP contract instead of a Cost-Plus contract. However, if you are limited to a Cost-Plus contract, then you can mitigate the associated risks, at least partially, by including certain provisions in the contract. For instance, you can include provisions in the contract which give you the right to review and approve construction costs before they are incurred, thereby giving you more control on the spending. You could also include provisions which shift the burden of corrective work costs to the general contractor.
Similarly, a Unit Price contract or Unit Price arrangement between a subcontractor and contractor is more favorable to the subcontractor. These are more common between contractors and subcontractors, with subcontractors submitting invoices to the general contractors as work progresses. This type of contract or arrangement does not limit the amount a subcontractor can charge for materials or labor. It shifts the risk of price escalations to the general contractor. If you are a general contractor who has a Unit Price contract or arrangement with your subcontractors, mitigate your risk by (1) assuring that you include robust change order provisions in your contract with the subcontractor so that you have some control over the increases, and (2) assuring that you include robust change order provisions in your contract with the owner so that the owner bears, at least in part, the cost associated with price escalations.
When you are considering entering into a construction contract of any size, always consider your role in the construction project and then consider which contract form would be most beneficial. The issue of the type of contract should be discussed and agreed upon before a contract is ever created. Then, when reviewing the contract, make sure to carefully review and, if possible, negotiate, the terms of the contract.
Jasmine Singh is a litigation associate for West Mermis PLLC. She represents a variety of clients, such as homeowners, general contractors, subcontractors, and insurance companies, in multiple complex litigation matters.
