Construction Contract Law: What You Need to Know About Scope, Price, Time, and Payment
In my 18 years of practice in construction contract law, I’ve represented contractors, developers, and professional designers — you name it. The disputed amounts range from $2,000 all the way up to several million dollars. The one common thread unifying all these cases is this: It really all comes down to a matter of contract.
I often tell clients that the time and expense that goes into a dispute don’t necessarily have anything to do with the amount in controversy. It has to do with the facts in the case, and really, it underscores the expense that goes into litigating a case involving just a dispute over a construction contract.
Unfortunately, I’m often called by clients to address disputes after they’ve already happened. That is, contracts have been signed and the work is underway.
Entering a Construction Contract Agreement? Get it in Writing
If I had one piece of advice to anybody, it is that an overwhelming amount of of these disputes could have been avoided if the client (meaning the contractor, designer, architect, or their client/s) had reached out to me first and had me review the contract, terms, and conditions that they were agreeing to.
As a practicing attorney and small business owner myself, I understand how hard folks work to get clients and how difficult it is to maintain that client list. In the rush to engage a new customer, it can be easy to overlook just exactly what you’re agreeing to, as opposed to taking the time to review the relationship you’re entering. Often, we tend to focus solely on the economic aspect.
Most people have heard the term “get it in writing.” That’s not just something that we say. It is, in fact, the law. The law is that, if you have a written contract agreement, then the court is going to look at that as the manifestation, or proof, of the intent of both parties. Very rarely is the court going to entertain evidence as to what the parties thought or said to each other, even if it conflicts with what the contract says.
Scope of Work (aka Statement of Work)
Your scope of work is simply what you have agreed to perform for your customer and what your client agreed to pay you for. You need to be clear in the contract:
- What services, specifically, are you going to be performing?
- What services will you not perform without additional compensation?
Where I see the biggest mistakes in this area is this: The client requests a proposal and for the most part, there is a clear understanding of what it is you’re agreeing, or not agreeing, to perform.
That proposal then gets affixed to a larger construction contract, which the client sends back to you and which you countersign.
Very few people actually read the contract that is sent back to them, assuming that because their proposal has been accepted, everybody is clear as to what the scope of work is. And that’s a problem because we often see that the proposal conflicts with the terms and conditions of that larger contract.
I see this problem on projects big and small, several-million-dollar projects and small projects, and it’s often a very discreet language that causes a very large dispute.
An important lesson here is: Don’t attack. Simply allow your proposal to be attached to the larger document. Make sure the scope of work in the larger document accurately reflects the proposal that you’ve presented to the client. And if it doesn’t, you simply have to ask the client to cut and paste your proposal and put it in the body of the document.
Now that we’ve clarified what you have agreed to perform, you need to define what is included in your contract price. It may be clear that you’ve agreed to perform a certain scope of work in exchange for a certain dollar value in payment.
But: Is it just as clear what your customer will be paying you for?
Does the price that they agreed to pay you cover labor, materials, and supervision only? Or do you anticipate your client paying you for things such as taxes, bonds, and insurance?
There could be something like a type of permit or a type of tax that was not set forth in the proposal, but may may be stated in the contract that you’ve agreed to pay for, or front those costs for a client. You may think that there’s a clear understanding that the client is going to reimburse you for that, but it’s always best to make sure that it’s spelled out in the construction contract.
Like I mentioned before: Get it in writing. It’s not enough for you say, well, I know it doesn’t specifically say that I’ll get paid for the permits and other costs that I front, but my client told me not to worry about it, and he’s gonna pay me for it. That’s not going to fly in court. They’re going to look at the contract and say, “I’m sorry Mr or Mrs. Smith. You don’t have that in the written agreement and I can’t entertain what was said outside of the contract.” So that’s that.
Frequently Omitted From a Construction Contract: Time
Next, let’s talk about time. If there’s one term in a contract that I see most frequently omitted, it’s time.
Everybody more or less has something that discusses what the scope of work is. I don’t think I’ve seen a written contract yet that doesn’t mention some price, either. But what about time? How long is it going to take you to complete?
A contract with a set time for completion is the exception rather than the rule. We often see in the more sophisticated and robust contracts that there is a specific provision for someone to include a time for completion, but that’s often left blank, or the time for completion is not consistent with when the contract was executed.
Do not assume that there is a mutual understanding of the length of time that your work is anticipated to take. Moreover, if there are delays on a job that have nothing to do with you, you should get an adjustment in the time it takes you to complete the contract. You should not be held to an unreasonable completion date.
If a conflict arises, you need to understand that if there is no time set forth in the contract, courts will read in a reasonable amount of time into the contract.
What is reasonable? It’s going to depend on the facts and circumstances of the particular case. You should also know that it’s going to cost you a lot of money to prove what is reasonable cause.
Reasonable is a subjective term. It’s fact-sensitive. That means that if you get into litigation, that there will be discovery. And with discovery, you have increased costs.
And again, the contract is going to be used as manifestation of what the parties intended the agreement to be. So if the time frame in the construction contract is not something you can deliver, or there’s some delay beyond your control and the client says to you, don’t worry, I’m not going to hold you to the contract completion date? That’s not going to be enough. You’re going to want to have a written amendment to the contract that memorializes that contract completion date.
You May Be Unwittingly Agreeing to Flow-Down Clauses in Your Construction Contract
These are also known as “incorporation by reference” clauses. This happens when the contract says that the terms and conditions you are agreeing to are not just the ones before you, but other documents, as well.
These documents could be your client’s agreement with the owner of the construction project, or project drawings. They could be any body of document that were not available to you when you signed the contract.
If there are flow-down clauses or incorporation by reference clauses, then those terms and conditions will become just as binding on you as the terms and conditions that are stated in the physical document that you’re being asked to sign.
Now, the problem here is this: If you don’t take the time to understand what else is being incorporated into the contract, then you may find yourself agreeing to a whole host of things that you’re completely unaware of.
You may be agreeing to a different scope of work than what you stated in your proposal. You may also be agreeing to certain dispute resolution procedures, termination provisions, or how your claims get processed.
So what should you do? If you see any types of clauses in your contracts that reference other documents, you should request to review them, as well. Just because you didn’t have them at the time that you signed your contract, doesn’t mean you have a defense, or that they are any less binding. In fact, plenty of contracts actually state that by signing it, you’ve either reviewed those third-party documents, or waived the right to do so.
Payment Terms: Pay-When-Paid Vs. Pay-if-Paid
There are a few important questions that this part of the construction contract should answer:
When and how are you going to get paid for your work? By that I mean, what is the timeframe? After you complete your work and submit your invoice, will your customer be required to pay you?
How is it that they are required to pay you? I don’t mean, is it by cash, check, or some form of wire. I mean, what are the prerequisites that you need to achieve to be entitled to payment? Is it simply that you have performed? Does your work need to be approved by a third party? Are there documents that you need to sign before being able to submit a request for payment?
There are two type of clauses in a contract relating to payment: pay-when-paid, and pay-if-paid.
Pay-when-paid is simply a timing mechanism. It states when you will receive the payment, in relation to when the customer made a payment. If you’re a subcontractor, for example: How many days after your customer receives payment will that payment be remitted to you? Is it 10 days, 15, 20 days?
The pay-if-paid clause is much more onerous, especially if you’re a subcontractor: It’s a condition precedent, which means something must happen before your client is obligated to pay you anything. That “something” is usually that they must receive payment from their client first (typically the project owner).
To look at it another way: The pay-if-paid clause is potentially very damaging to someone who is lower down the payment stream. If that person up the food chain does not get paid, you don’t get paid, and that person with whom you maintain a contract has no duty or obligation to pay you. Even though you may have completed your work on time and did it well, you’ve submitted all required documents and done nothing wrong, you were just unlucky enough to be down the payment food chain.
That may seem unfair, but the way the courts look at this is: They consider it a risk-shifting provision. Basically, it shifts the risk of loss of nonpayment by the owner or the higher tier contractor to the person that agreed to a pay-if-paid clause.
I would say that if there is one clause in your contract that you should change upon reviewing, it’s the pay-if-paid clause. Frankly, you’re not going to be a in a good situation. No matter how much money the contract is worth to you, if your customer is under no obligation to pay you, and you don’t meet your cashflow obligations, you’re not going to be in business very long. Even if you have several contracts, if you’re not receiving cash, you won’t be in business long.
Now, how can you tell if you’re being presented with a pay-when-paid or pay-if-paid clause? Look out for something along the lines of payment being by the owner being a strict condition precedent. If it says that your customer can pay you if, and only if, their customer pays them, you can be pretty sure it’s going to be considered a pay-if-paid clause.
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With Noam Hazan. Click here to watch.