Key Provisions to be Negotiated in a Construction Purchase Contract

Written by Rolly Canonce Oribiada, DPSM

Key Provisions to be Negotiated in a Construction Purchase Contract

Written by Rolly Canonce Oribiada, DPSM

by Rolly Canonce Oribiada, DPSM

Construction contracts are complicated documents that try to balance the needs of many different parties involved in a project. Contractors face much uncertainty when delivering on their contract responsibilities, so it is important to design contracts that are fair in allocating risk.

While every clause in a construction contract is important to review, there are some that deserve closer scrutiny. The following top contract provisions to be negotiated with the owner are ones that legal professionals consistently point to as needing special attention.

Construction Delays

There is always the possibility something is going to happen that will cause a delay in project activities. When these delays are out of the contractor’s control, they are called “force majeure” and include things like material shortages, labor disputes, actions on the parts of government agencies, and delays by other project participants such as the owner, architect, or engineer. In these situations, the contractor needs to be compensated for damages arising from these delays. Contractors will often have additional costs, see material prices increase, and end up with higher overhead costs.

Most contracts allow contractors to get extensions of time or to receive damages when force majeure delays occur. However, some standardized contracts do not specifically address compensation. This leaves the door open for owners to include a “no damage for delay” clause in their customized contracts.

The most important criteria in the construction industry are material quality, delivery dependability, and cost. The most important factor of supplier selection should be the quality level of the procurement items. Product quality should consistently meet specified requirements since it can directly affect the quality of the finished goods. Not only product quality reliability, but supplier characteristics like delivery lead time shall also be considered carefully.

A thorough negotiation of the owner or contractor-caused delays can address costs for owner acceleration or suspension, workforce supplementation, mobilization or escalation costs, weather or other delays. If problems arise early in the project, a contractor can hire an independent expert to assess schedule delays and begin building the claim for additional compensation. Force majeure clauses can protect a contractor in the event of unforeseen delays, but in some locales, performing a project in snow, rain or heat may be reasonable job conditions.

Policies and procedures for procurement need to have structure and a sequence. Both need to be reviewed and updated regularly to remain relevant and effective. There is a stronger chance of the processes being followed if they are realistic and easy to understand. The right balance of complexity and control needs to be created when looking at these policies and processes.

Performance Warranties

There is a wide variation in the wording used for commercial construction warranties. Some contracts call for warranties to begin upon substantial completion, while others specify final completion––a date when installation is finished, and even a date of beneficial use. For a contractor negotiating a contract with an owner, these different timeframes pose significant challenges for honoring warranties and can affect the contractor’s future work.

Contract closeout activities are straightforward especially for small value contract and purchase order. However in high value contracts involving progress payment and / or retention payment, the procurement officer ensures that all contractual obligations have been fulfilling by supplier or contractor and that residual obligations – such as all product or service have been provided, documentation in the contract file shows receipt & formal acceptance of all contract terms, there are no claims or investigations pending, any property provided by the Project is returned & discrepancies resolved, warranty matters are resolved and defect period elapsed, any necessary audit has been satisfactorily finalized, final invoice has been submitted and paid, and clearly defined in terms of responsibility, liability, procedures, and timeframes.

Scope of Work

Even on a very small construction project contractors get into trouble with the scope of work clauses. The scope of work usually appears in the general terms very early in the contract, and should very specifically describe what is going to get built. If the description of the work isn’t precise, then it is open for the owner to interpret the scope as broadly as comfortable. The scope of work clause in construction contracts is probably the least written about and likely the most important provision in a well-crafted construction agreement. Most construction disputes arise out of some type of disagreement as to what is and what is not in the project’s scope of work. A properly written scope of work provision will preclude disputes and ensure a clear understanding as to which party is responsible for what work and who bears which risks on the job. Without a clear definition regarding the scope of a party’s undertaking there will be inevitable disputes. In every construction contract, there has to be a clear understanding as to the expectations for quality, completeness of the contract documents, and the nature (scope) of duties for each party to the bargain.

Changes to the Work

Construction contracts normally allow the terms within the contract only to be modified through an approved change order, made in writing and signed by the owner or the owner’s representative. It is important that the contractor requests a written change order for any work not specified in the contract. Proceeding with a change prior to actually receiving the change order places the contractor at risk of not receiving payment.

If the owner and the contractor cannot agree on a price before the contractor must perform a change, the contract should specify an alternative method for determining the compensation to be paid (e.g., time and materials) to the contractor for the added or changed work (and/or the credit for deleted work). The contract should also require that the contractor maintain daily records of all labor and material costs for the changed work, segregated from the base contract work. The owner usually has a contractual right to issue a unilateral change directive if the parties are unable to agree on the terms of a change order and to direct the contractor to proceed with the work pending the resolution of any dispute.

Conclusion

Understanding the impact of these concepts can assist contractors in navigating the risks and adjusting their bids to more accurately account for unknown contingencies or claims. Often a project’s complexity or appeal will require the contractor to grant concessions to an owner on some of the contract terms, but by evaluating the economic impact, the contractor can balance a desire for more business with the distaste of a frustrating build. The importance of careful contract drafting and thorough understanding of the key terms of the construction contract is a critical element to any construction project. This article touches on just a few of the many key provisions inherent in most contracts. While there may be no single “right” clause for every contract, understanding the key issues and resulting responsibilities and risks will enable parties to tailor contract clauses according to the project.


References

Barbara R. Gadbois, et.al. (2017). “Key Construction Contract Provisions”. Retrieved from https://www.constructionworkzone.com/articles/key-construction-contract-provisions, accessed 20/03/2019.

Duane Craig. (2018). “Top 4 Construction Contract Provisions to be Negotiated with the Owner”. Retrieved from https://jobsite.procore.com/top-4-construction-contract-provisions-to-be-negotiated-with-the-owner, accessed 20/03/2019.

John P. Ahlers.(2013). “In Construction Bidding, Construction News, and Notes, Contracting, Government Contracts”. Retrieved from https://www.acslawyers.com/top-ten-construction-contract-provisions-for-contractors-and-subcontractors/, accessed 20/03/2019.

Ng Shi Yun, PDPM (2018). “5 Key Criteria for Supplier Evaluation in the Construction Sector”. Retrieved from SIPMM: https://sipmm.edu.sg/5-key-criteria-supplier-evaluation-construction-sector/, accessed 20/03/2019.

ShivakumarSundar, DLSM (2018). “Overcoming Challenges in Implementing Supply Chain for the Construction Industry”. Retrieved from SIPMM: https://sipmm.edu.sg/overcoming-challenges-implementing-supply-chain-construction-industry/, accessed 20/03/2019.

Stephanie Hayes Cook. (2017). “Negotiating a Construction Contract: Clauses, Changes and Delays”. Retrieved from http://constructionexec.com/article/negotiating-a-construction-contract-clauses-changes-and-delays, accessed 20/03/2019.

Tina Wong WoanChuen, DPSM (2019). Five Essential Criteria for a Successful Procurement Contract. Retrieved from SIPMM: https://sipmm.edu.sg/five-essential-criteria-successful-procurement-contract/, accessed 24/03/2019.

Vivien CheahKhar Wai, DPSM (2019). Six Procurement Best Practices for the Construction Industry. Retrieved from SIPMM: https://sipmm.edu.sg/six-procurement-best-practices-construction-industry/, accessed 20/03/2019.

About the Author: Rolly Canonce Oribiada has substantive experience in the field of procurement and logistics management, and specifically in the construction and tunneling sector. He is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). He holds a Bachelor’s degree in Commerce majoring in Accounting. Rolly completed the course on Diploma in Procurement and Supply Management (DPSM) on March 2019 at SIPMM Institute.

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