Construction contracts have many elements found in a basic
business contract, however there are a number of unique terms
that are found almost exclusively in construction contracts.
Bond and Surety
Breach of contract
Differing site conditions
Incorporation by reference
No damage for Delays
Right to stop work
Scope of work
Schedule of values
Termination (for cause or convenience)
Anything But Typical
Call us now to discuss how you can benefit by
using a different approach to managing to your legal needs.
- Can have different meanings. One type of abandonment is contract
abandonment, where the parties both have conducted themselves
in such a way that the original contract is no longer valid.
Both parties may mutually agree to do this, or it can become
part of a claim.
Another type of abandonment is where a contractor fails to perform
the work on a project by either not starting the project in
a reasonable amount of time, or not completing the work, or
failing to resume work in a reasonable amount of time. Abandonment
of a construction project without legal excuse is a cause for
sidciplinary action under B&P sect.1707.
a form of alternative dispute resolution (ADR), is for the resolution
of disputes outside the courts, where a third party reviews
the case and imposes a decision that is legally binding for
both sides. Arbitration is most commonly used for the resolution
of commercial disputes, particularly in construction disputes
imposed by contract terms.
Arbitration can be either
voluntary or mandatory and can be either binding or non-binding.
Non-binding arbitration is, on the surface, similar to mediation.
However, the principal distinction is that whereas a mediator
will try to help the parties find a middle ground on which to
compromise, the (non-binding) arbitrator remains totally removed
from the settlement process and will only give a determination
of liability and, if appropriate, an indication of the quantum
of damages payable.
Protests & Disputes - In public contracting, there
are specific procedures dictated by California Public Contract
Code. to handle bid protests. The procedures are very specific
as are the timelines in which to formalize a protest. The procedure
is often complicated.
- One of the parties in a contract that does not fullfill their
obligatory promise has breached. There are different levels
of breaches such as minor, material, fundamental, anticipatory.
The reasons can be where one of the parties makes it impossible
for the other party perform their obligation, one of the parties
refuses to perform their obligations, one of the parties is
unable to or will be unable to perform their obligation. Not
every failure to perform amounts to a breach because there are
a number of excuses for non performance.
Bonds & Surety A lot of people
like to sum up a surety bond as insurance, but in reality, surety
bonds are a financial guarantee. They are a part of the insurance
industry but they serve as a financial guarantee for the obligee
(or person requiring the bond).
Every contractor is required to get a bond in California. many
projects require a bond of some form. Common construction bonds
are bid bonds, performance bonds and payment bonds. Other bonds
may be obtained for special situations such as bonding around
a mechanic's lien.
change - A cardinal change is where ordered changes exceed
the general scope of the contract. It is a deviation so far
outside the scope of work that it invalidates the terms of the
original contract. Abandonment and cardinal change are often
used interchangeably, but have been distinguished by the California
Supreme Court. calling the two doctrines“fundamentally
different.” According to the court, under an abandonment
claim, the contractor is entitled to recover its total cost
(less payments received) for work both before and after the
contract was abandoned. In contrast, under a cardinal change
claim, the contractor is only entitled to breach of contract
damages for the additional work constituting a cardinal change.
While the court rejected a public contractor’s right to
bring an abandonment claim, it purported not to address a contractor’s
right to bring a cardinal change claim.
orders - a procedure that is defined in the contract
to provide for modifications of the contract scope of work.
Change orders can increase the cost of the work, reduce the
cost of the work, or have no cost impact. Along with the cost
factor is an amount of time that the project schedule may change
due to the change order.
conditions - A term that identifies anything that is
different than at the time of the bid. In many cases it has
to do with the site conditions that were undetected prior to
construction, but may also include factors that have changed
since construction commenced. The importance of a changed condition
is the impact it may have on the cost of the work or the delay
in the schedule.
- Within a contract, terms that are in conflict with other parts
of the same contract. This is a common, yet serious problem
when contracts are created from pieces of other contracts taken
out of context. Terms and conditions often affect other provisions
of a contract in several areas.
damages - are damages that do not flow directly and immediately
from an act but rather flow from the results of the act; damages
that are indirect consequences of a breach of contract.
site conditions - Where the construction site is not
what it was understood to be at the time of bidding. An example
is when a contractor encounters subsurface or latent physical
conditions differing materially from those indicated in the
contract documents. It typically will be "reasonably unforeseeable
on the basis of all the information available to the contractor
at the time of bidding.
- failure to perform specific terms of a contract obligation.
Often used interchangeably with material breach, but often specifically
identified within contract terms.
- Subsurface deficiencies, construction deficiencies, material
deficiencies, design deficiencies, all can cause defects in
the finished construction project.
- Based on the project schedule and the critical path, delays
are anything that extends the project schedule completion date.
This can be applied to interim milestones as well as final completion
Clause. The contract may specify who is responsible for the
design. If the construction contract specifically requires a
contractor to provide design services and specify design and
performance criteria, a contractor is to procure those design
services from a licensed design professional.
part of an agreement which relieves one party from liability.
It is a provision in a contract which is intended to protect
one party from being sued for their wrongdoing or negligence.
Usually the Owner wishes to impose the same obligations on the
contractor's subcontractors, flow-down clauses are common in
construction subcontracts. However the scope of responsibility
is often disputed by subcontractors due to limited involvement
in a prject. Flow-down payment clauses may include pay-when-paid
and pay-if-paid clauses.
by Reference The construction contract itself typically
does not explicitly address every detail of the parties' agreement.
Therefor, it is common to permit parties to incorporate other
documents into the construction contract by reference.
is a contractual promise in which one party agrees to protect
another party from financial loss.
In most cases, indemnification
applies only to situations in which the loss is caused by negligence
rather than by an intentional act of malice. Since most businesses
are required to provide this kind of security for a wide variety
of situations, not just construction contracts, indemnification
is one of the more common contract terms.
Damages Liquidated damages clauses are another common
feature of construction contracts, especially contracts in which
time is of the essence. Liquidated damages clauses in construction
contracts require that the contractor must compensate the owner
for every day construction extends beyond the end date specified
in the contract.
Act - The Miller Act (1935) is a federal law that requires
contractors performing public work projects (addition or general
repairing of any governmental building or public works facilities)
to produce a performance bond as well as a labor and material
payment bond in any contracts that exceed $100,000. Since government
construction projects are unable to protect themselves from
non-payment with a traditional lien, the Miller Act was created
to protect the subcontractors as well as the suppliers when
dealing with projects owned by the federal government.
- Exactly what the words mean. That there is no contract
between the parties. At least one requirement necessary to constitute
a contract does not exist. A basic contract consists of an offer
for goods or services, an acceptance of that offer by the other
party, and consideration for the goods or services. There must
be a mutually agreed to understanding of the intent of the obligation.
Damage for Delay Clause. An exculpatory clause commonly
included in construction contracts. However, when the delay
is not reasonably contemplated by the parties at the time of
contract formation, a "no damage for delay" clause
may not deny the contractor recovery for additional costs.
clause. In order to be paid for additional costs incurred in
performance, a contractor must provide the owner with adequate
notice of such claims. Whether notice is adequate will generally
depend on whether the timing and substance of the notice conform
to the notice requirements in the contract.
is the primary concern of most parties to a construction contract.
The contract should clearly define the manner in which payment
is made, and address progress payments, retention, time for
payment, and final payment.
AIA Document A201-1997, Article 9 deals with payment. Article
9.2.1 requires the contractor to submit a schedule
of values to assist the architect in evaluating the contractor's
applications for payment. After receiving the contractor's applications
for payment, the architect issues a certificate for payment
to the owner pursuant to Article 9.4. By the certificate for
payment, the architect certifies to the owner that, to the best
of the architect's knowledge, information, and belief, the work
is in accordance with the construction contract. Other contracts
may have different procedures, so it is important to understand
the specific terms of each contract.
Pay if Paid, Pay When
Paid Clauses. These clauses, are common, but are not
enforceable under California Law. A clear schedule of values
and a definite payment procedure should be adhered to by the
contractor in order to preserve its rights to payment.
- one of the parties believes that the payment procedures were
not followed, or that the amount of money owed on a particular
payment is not what was agreed to.
Projects that do not fall into the definition as public works
of Federal projects are typically private works. Every type
of project that is funded from private money is considered a
private works project. There are some hybrid types of projects
that involve contracts between private companies, but are ultimately
funded from public source.
Works Construction projects that derive their funding
from the public. This includes municipalities, counties, regional
agencies, water and wastewater districts, public schools, state
infrastructure such as highways, and any project that is funded
with money collected by a government entity from the public.
There are state laws specifically for public works projects
which all public works projects must follow.
Federal projects are public works projects that derive their
funding from federal sources. The Federal Government has specific
laws that govern Federal projects.
Prevailing wage may include both wages and benefits. It encompasses
the compensation for a worker given for performed labor.
The Davis-Bacon Act all
federal government construction contracts, and most contracts
for federally assisted construction over $2,000, must include
provisions for paying workers on-site no less than the locally
prevailing wages and benefits paid on similar projects.
is a portion of the contract price paid into an escrow account
before substantial completion of the work, and is beneficial
to both the owner and the contractor. For the owner, retention
ensures that the project is completed, protecting against default
by the contractor. And for the contractor, retention protects
against default by the owner.
The final payment is distinct from, the progress payments. In
addition to the requirement that the work conform to the contract,
the owner typically attaches certain conditions to the contractor's
receipt of the final payment.
Right to Stop Work
The right to stop work is not the same as the right to terminate.
While termination is permanent, a work stoppage lasts only until
the cause of the delay is resolved.
Every construction contract should address the conditions under
which each party has the right to stop work and who should bear
the costs for the work stoppage or delay.
In order for the contractor to stop work for nonpayment, it
must follow the specified procedures in the contract. The contract
time may be extended until payment is made and the contract
price may be increased to include the contractor's reasonable
costs incurred in stopping work.
(Project) All construction projects have a schedule.
Small projects may have only an informal schedule, but large
projects have a comprehensive schedule that a contractor and
owner take seriously. When progress does not keep in sync with
the schedule or additional time is required due to delays or
changes to the work, the the schedule often changes, and the
critical path (CPM) may be affected, which in turn may trigger
delay damage claims or liquidated damage charges.
of values - Not to be confused with a project schedule,
a schedule of values is an assigned 'value' to various phases
of work, or percentage of completion. This schedule is important
for allocating progress payments to contractors in amounts that
have been agreed to by way of the schedule of values.
of Work The contractor involved in a construction project
has a scope of work. The scope of the work is defined by the
construction contract between the owner and the contractor.
Subcontractors scope of work is contractually defined, but by
a different contract. (Between the General and the Sub) And
each subcontractor has a specific scope of work based on the
It is very important to have the scope of work very explicitly
defined because contractor or subcontractor is not obliged to
perform work that is beyond the contractual scope of work.
The scope of work becomes important when the owner issues a
change order, requiring that the contractor or subcontractor
to perform tasks that are outside the original scope of work,
or are a modification to the scope of work.
Any changed or extra work ordered by the owner which exceeds
the scope of the contract work may in certain circumstances
be considered a cardinal change. A cardinal
change may be considered a breach of contract, and may allow
the contractor to stop work until the parties reach an agreement
regarding the work beyond the contractual scope of work.
Inspection Clause. A site inspection clause requires
the contractor to inspect the work site to verify the accuracy
of the owner's description of the site. If the construction
contract contains such a clause, the contractor must comply
with its duty to inspect before it may recover
for differing site conditions.
Notice gives the claimant a lien against undisbursed
construction funds in the possession of either the owner or
the lender. For private works of improvement, the Mechanic's
Lien and Stop Notice gives the claimant a lien against undisbursed
construction funds in the possession of either the owner or
For private works of improvement,
the Mechanic's Lien and Stop Notice are cumulative remedies
which can be simultaneously pursued along with a suit for breach
of contract on the underlying debt. Generally, a Mechanic's
Lien cannot be filed on a publicly owned parcel of real property.
On California public works projects, the Stop Notice and payment
bond claims are cumulative remedies.
for Cause or for Convenience. A construction contract can be
terminated for cause or for convenience. A termination for cause
occurs when one party stops work because of a deficiency in
performance by the other party. Because the contract is terminated
as a result of a party's own poor performance, the law typically
provides the terminated party with little recourse in the event
of a termination for cause. A termination for convenience, by
contrast, occurs when the owner stops work for reasons other
than a deficiency in performance by the contractor. Because
a termination for convenience is not the result of poor performance
by the contractor, the law may provide the aggrieved contractor
with significant rights against the breaching owner.
- A valid contract where there is no legal remedy if there is
a breach. A contract may be unenforceable when certain statutory
requirements have not been met. For example, an oral contract
to buy land would not be enforceable because the Statute of
Frauds requires such an agreement to be in writing. Similarly,
statutes of limitations, which limit the length of time available
for legal action, may apply to contracts of certain types and
render them unenforceable after a certain period of time. Parts
of a contract may be unenforceable, while other parts of the
same contract are enforceable.
of Consequential Damages Clause. Construction contracts
also frequently include a mutual waiver of consequential damages
clause, whereby both parties agree to waive all consequential
damage claims relating to the contract. Consequential damage
waivers may amount to no damage for delay clauses when costs
arising from delays are characterized as consequential.
Warranties can be either express or implied. Contractors will
be held to any express warranties made in the construction contract.
The express warranty typically lasts one year from the date
of substantial performance but may be some other time frame
as specified in the contract. Implied warranties are those that
are understood to be in effect, even if there is nothing in
writing. A contractor's failure to fulfill an express warranty
to repair or replace defective materials may constitute abandonment.