7 Construction Contract Mistakes to Avoid in 2022
(1) Don’t agree to liquidated damages without a waiver of consequential damages.
Liquidated damages and consequential damages provisions should be considered together when negotiating a construction contract. Liquidated damages are a measure of compensation which, at the time of contracting, the parties agree will represent damages in case of breach, whereas consequential damages are damages those that flow indirectly from a breach of contract. Both types of damages can compensate an owner for contractor delays in performance. If liquidated damages are included in a contract, the contract should also include a waiver of consequential damages to make clear that liquidated damages are the owner’s sole remedy for delay damages. Most AIA owner/contractor agreements, like the example from A101TM-2017 below, include a prompt where the parties can include liquidated damages. Likewise, the A201 TM-2017, General Conditions of the Contract for Construction includes a waiver of consequential damages provision at Section 15.1.7.
A101-2017, Standard form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum
§ 4.5 Liquidated damages, if any:
(Insert terms and conditions for liquidated damages, if any.)
A201-2017, General Conditions of the Contract for Construction
§ 15.1.7 Waiver of Claims for Consequential Damages
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit, except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.7 shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.
(2) If you are behind on a project, try to negotiate a grace period with the owner.
For project owners, it is expensive and time consuming to fight over delays or to replace a contractor. If you are behind schedule, you may be surprised to learn that your client is willing to grant you a grace period to avoid these problems. Most owners are aware of the challenges facing construction companies in 2022, including labor shortages, supply chain disruptions, and material price fluctuations. Some owners are willing to work with a contractor who is behind schedule so long as they are making meaningful progress in bringing the project to completion. If the owner is willing to grant you a grace period, make sure to get it in writing. The A201-2017, General Conditions of the Contract for Construction allows for modifications that are issued after execution of the contract so long as they are done by a written amendment that is signed by both parties.
A201-2017, General Conditions of the Contract for Construction
§ 1.1.1 The Contract Documents
The Contract Documents are enumerated in the Agreement between the Owner and Contractor (hereinafter the Agreement) and consist of the Agreement, Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to execution of the Contract, other documents listed in the Agreement, and Modifications issued after execution of the Contract. A Modification is (1) a written amendment to the Contract signed by both parties, (2) a Change Order, (3) a Construction Change Directive, or (4) a written order for a minor change in the Work issued by the Architect. Unless specifically enumerated in the Agreement, the Contract Documents do not include the advertisement or invitation to bid, Instructions to Bidders, sample forms, other information furnished by the Owner in anticipation of receiving bids or proposals, the Contractor’s bid or proposal, or portions of Addenda relating to bidding or proposal requirements.
(3) Be wary of long correction of work periods.
As a contractor, you likely don’t want to provide maintenance on a building years after it’s completed. To avoid this, contractors should pay close attention to the warranties and correction of work language in their contracts. Typical construction contracts require a contractor to provide a general warranty that their work is free from defects, then provide a one-year period where they will correct work that does not conform to the contract documents. Contractors should be aware that the general warranty extends beyond the correction of work period, and that the correction of work period affords contractors an important right to cure defective or nonconforming construction before the issue escalates. Nonetheless, contractors should be aware of obligations that go beyond the general warranty and standard one-year correction period unless they are getting paid for the extra work. From an owner’s perspective, it might even be easier and cheaper to hire a separate maintenance contractor or a facility manager to handle these needs. The A201-2017, General Conditions of the Contract for Construction contains the following warranty and correction of work provisions.
A201-2017, General Conditions of the Contract for Construction
§ 3.5 Warranty
§ 3.5.1 The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials, or equipment not conforming to these requirements may be considered defective. The Contractor’s warranty excludes remedy for damage or defect caused by abuse, alterations to the Work not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage. If required by the Architect, the Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment.
§ 12.2.2 After Substantial Completion
§ 12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Section 9.9.1, or by terms of any applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of notice from the Owner to do so, unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty. If the Contractor fails to correct nonconforming Work within a reasonable time during that period after receipt of notice from the Owner or Architect, the Owner may correct it in accordance with Section 2.5.
(4) Don’t agree on pricing too soon in the design process.
Project fast-tracking has been an evolving trend for decades in the construction industry. In fact, one of the reasons that design-build and construction manager project delivery methods have become so prevalent is the fact that the construction team can get started with their work before the design is fully complete. This dynamic can create tension between architects and contractors as contractors are pushed by their clients to set pricing earlier and earlier in the design process. While this may result in a quicker construction timeline, the potential for conflict increases between the design and construction teams as the design evolves and becomes more expensive after the contractor has agreed to a contract sum. Simply put, both parties should recognize that the more a contractor knows about a project’s design, the easier it is to price it accurately. Construction manager (both at risk and as advisor) and design-build delivery methods typically allow the owner and contractor flexibility as to when pricing is established. To avoid disputes, it’s advisable to strike a balance between fast-tracking a project and waiting until the design is complete enough to establish accurate pricing.
AIA Contract Documents for construction manager as constructor and design-build delivery models establish a two-phase contracting process. Initially the construction manager or design-builder are contracted to provide services during the design phase of the project. This allows them to become familiar with the owner’s requirements and key elements of the project design as they are being developed. Once the design is reasonably well advanced, the construction manager or design-manager enters into an amendment to establish pricing for construction. Here are the applicable provisions from the AIA’s construction manager as constructor and design-build agreements that allow flexibility as to when contractor pricing is established.
A133-2019, Standard Form of Agreement Between Owner and Construction Manager as Constructor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price
§ 3.2 Guaranteed Maximum Price Proposal
§ 3.2.1 At a time to be mutually agreed upon by the Owner and the Construction Manager, the Construction Manager shall prepare a Guaranteed Maximum Price proposal for the Owner’s and Architect’s review, and the Owner’s acceptance. The Guaranteed Maximum Price in the proposal shall be the sum of the Construction Manager’s estimate of the Cost of the Work, the Construction Manager’s contingency described in Section 3.2.4, and the Construction Manager’s Fee described in Section 6.1.2.
AIA Document A141™–2014, Standard Form of Agreement Between Owner and
Design-Builder
§ 2.2 Contract Sum and Payment for Work Performed After Execution of Design-Build Amendment
For the Design-Builder’s performance of the Work after execution of the Design-Build Amendment, the Owner shall pay to the Design-Builder the Contract Sum in current funds as agreed in the Design-Build Amendment.
(5) Consider a price escalation clause.
By now, every contractor knows that material prices have fluctuated significantly since 2020. The good news for contractors is that owners are also well aware of these realities. The result is that owners have shown a willingness to accept some of the risk of material price escalation in the form of price escalation clauses in their contracts. This doesn’t come without limitations; however, as owners are more likely to accept price escalation clauses if contractors are transparent about their pricing, if there are reasonable caps on material prices, and if these clauses allow for the possibility of owner savings if prices go down.
(6) Buy materials early.
Another possible solution to fluctuations in material prices is for contractors to buy materials early and lock in rates that match their bid prices. While this may cause additional storage costs, contractors can plan ahead and include those costs in their proposals. One key to this strategy is to make sure you can get paid for materials that are purchased early when those costs are incurred. For example, Section 9.3.2 of AIA 201-2017 allows the contractor to be paid for “materials and equipment delivered and suitably stored at the site for subsequent incorporation into the Work.” Section 9.3.2 also allows the contractor to be paid for materials and equipment stored offsite, so long the owner approves of the payment and the storage location in advance. Buying materials early won’t protect against all price increases, but it may be more palatable to owners than including a price escalation clause in a contract.
A201-2017, General Conditions of the Contract for Construction
§ 9.3.2 Unless otherwise provided in the Contract Documents, payments shall be made on account of materials and equipment delivered and suitably stored at the site for subsequent incorporation in the Work. If approved in advance by the Owner, payment may similarly be made for materials and equipment suitably stored off the site at a location agreed upon in writing. Payment for materials and equipment stored on or off the site shall be conditioned upon compliance by the Contractor with procedures satisfactory to the Owner to establish the Owner’s title to such materials and equipment or otherwise protect the Owner’s interest, and shall include the costs of applicable insurance, storage, and transportation to the site, for such materials and equipment stored off the site.
(7) Don’t forget to factor increased labor rates into your proposals.
Labor rates for construction workers are likely to increase in 2022. Many higher skilled workers have retired during the Covid-19 pandemic. Added to that, increased hourly rates for unskilled workers in other sectors (restaurants, retail, etc.) have pushed rates for entry level construction work higher. In short, you may have to pay your workers more than you think in 2022, so make sure to factor those additional costs into your proposals.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.