By J. Brewer Anderson, Cobb Law Group

Despite the strong legal protections America has developed for construction contracts since our founding 250 years ago, many contractors still fail to utilize these protections to their full effect. Frequently, their attention can get caught up in the logistics and operational aspects of an upcoming project, resulting in niche, but helpful, legal protections being left in the dust. As such, with uncertainty and difficulty surrounding negotiations of contract terms, final contracts can often be oversimplified. While there is nothing inherently wrong with simple contracts, you may be lacking important terms that guarantee protections from job-site disruptions, disputes, and more.

The Foundational Contract

As with everything on the construction project, legal protections start with the owner. Contracts between the owner, engineers, general contractors, etc. set out the groundwork for the whole project. Further agreements involving subcontractors and suppliers often build off (or even merge with) the originating contract. Prime contracts are therefore crucial to ensuring protection for all project participants.

While scope can often be glanced over or taken for granted as understood by all parties, it is important that the boundaries are clearly defined in the initial contract proceedings. Any gaps or overlap between general contractors or engineers can create major problems, such as schedule disruptions, failure to complete required operations, or even damage to the project itself. When any of these problems arise, the flow of money can be disrupted and profits lost. Therefore, it is imperative that a clear and complete scope is outlined in the general contract with minimal room for personal judgement in the future, or on the jobsite.

Liability protections are also integral to contracts overseeing the project. While the determined scope often outlines the general liabilities and responsibilities, there are further protections that can be used in a contract to minimize monetary risk or loss. For example, limitation of liability clauses and damage caps can be helpful to protect general contractors from excessive financial risk. Limiting the amount you can be held liable for and the acceptable claims that can be made against you will have a direct impact on the expected profits throughout long-term practice.

Keeping Risk Out of Subcontracts

Similar to general contracts, a great deal of liability is contained within subcontracts. It is important to maintain healthy working relationships with subcontractors as you will often work with the same one(s) over the course of several projects. It is therefore helpful to reduce the number of disputes that could possibly arise between the GC and subcontractor when disruptions occur.

While indemnity is often misunderstood, it is necessary when detailing and accounting for liabilities between the General Contractor and subcontractor. Indemnification clauses shift the financial responsibility between the GC and the subcontractor when one causes damage or losses on the job site. These range from “narrow form”, in which subcontractors are responsible only for their sole negligence to “broad form”, where subcontractors are liable for all losses under contract. Indemnification clauses often vary on a state-by-state basis, so it is important to be aware of the protections available under applicable legal codes.

Flowdown clauses are useful as they preserve the baseline provided in general contracts and have agreements accepted between the GC and owner “flowing down” to agreements entered into between the GC and subcontractor. It is a catch-all that protects the general contractor as the employment of a subcontractor assumes their compliance with the owners’ demands. This flowdown clause guarantees that consequences of breach of contract will be the sole responsibility of the party in breach of the terms and not unjustly attributed to a compliant party.

“Pay-if-paid” and “Pay-when-paid” provisions are contractually important as they can define the financial relationship between the GC and subcontractor. “Pay-if-paid” places payment risks on the subcontractor; in the event of owner default, neither the subcontractor nor the GC will receive payment. Under “Pay-when-paid” clauses, the risk falls on the GC as there is a reasonable timeline in which the subcontractor must be paid, regardless of the GC’s receipt of payment.

Before the Work Starts

It is important to cover your procedural bases prior to beginning work on a jobsite as failure to do so can place you at risk of avoidable liabilities or loss of legal protections. Examples of important considerations prior to work on a job include but are not limited to:

• Applicable licensing and registration requirements met for operating area

• Signed contracts outlining the scope of work

• Adequate labor force for the scale of the job

• Notice of Commencement/Notices of Furnishing and delivery of Notice to Owner (if applicable)

Translation to the Jobsite

When negotiations have been finalized, and work is begun on the jobsite, it can be difficult to maintain practices that protect your legal and financial rights. With change orders, delays, disruptions, etc., there are often more variables than a supervisor or project manager can reasonably keep track of throughout the life of a project. While it may seem like another nuisance to keep up-to-date records and copies of written correspondence, the complexity of a modern jobsite makes it more essential than ever to keep as much as possible documented and accessible to maintain accountability both within, and outside, your party’s involvement on the jobsite.

Keeping documentation of all invoices, purchase orders, change orders, jobsite updates, signed agreements, correspondence between supervisory units, etc., is the most effective precautionary measure that can be taken to protect from possible disputes that may arise throughout the lifespan of a project. Due diligence in this aspect can protect against accusations, double payments or missing payments, litigation, etc.

After Project Completion

Securing payment can often come down to the awareness of legal protections that are available under the law. It often happens that suppliers or subcontractors can stop receiving payments, resulting in them ceasing work on the jobsite. This injures the party not receiving payment, and the rest of the jobsite as there will be delays arising from the loss of an integral subcontractor or supplier. Maintaining and keeping your lien and payment bond rights current can greatly reduce the risk of nonpayment. In the occurrence of nonpayment, valid liens and payment bonds allow contractors and suppliers to legally pursue missing funds, without the cost of litigation.

The available protections and the amount of complications that could possibly arise are innumerable. When unique circumstances arise or there is a clear opportunity to strengthen your legal claims, it is prudent to hire an attorney specialized in these matters. For example, when reviewing a contract that is unusually large in scope, an attorney’s assistance can strengthen your rights and available protections. Additionally, attorneys can ensure that valid claims to payment are not lost in scenarios of nonpayment or other financial disputes. Short-term dealings with a contract lawyer may also prove to be beneficial in drafting a standardized and complete contract that can be broadly utilized over future contracts. Whether your firm feels the need to employ counsel or not, awareness of risk management techniques and legal protections are paramount to securing payment and maintaining healthy relationships between contracting parties.

About the author:

Brewer Anderson is a Construction Law Paralegal at Cobb Law Group.