AI Review for Construction Agreements

What is a Construction Agreement?

A Construction Agreement is a contract between a land owner or developer and a contractor for the provision of construction services. The agreement defines the rights and obligations of both parties.

A Construction Agreement differs from a Master Construction Contract in that it is not a master form of agreement. While master agreements allow for contracting services for multiple projects using separate Work Orders that incorporate the master terms, a Construction Agreement is limited to a single project, with the scope of work described within the agreement or attached and incorporated by reference.

As a result, Construction Agreements are simpler than Master Construction Contracts, as they do not include references to Work Orders or their operation in relation to the master document. However, Construction Agreements are still vitally important, being one of the oldest and most frequently used contract documents in the construction industry. Additionally, terms of the Construction Agreement (also known as the "Prime Contract") are often flowed down to and incorporated by reference in construction subcontracts.

Key Considerations in Construction Agreements

When dealing with Construction Agreements, there are several key considerations to keep in mind:

1. When to Use a Construction Agreement: Construction Agreements should be used when there is a single, defined scope of work.
2. Flow-Down Terms: Construction Agreement terms are often included in the general contractor's subcontracts. As such, the general contractor should consider the clarity of provisions and their downstream impacts when negotiating the Construction Agreement, ensuring a clear understanding of project requirements, deliverables, and deadlines, and assessing potential payment risks that may need to be shifted to subcontractors.
3. Contract Documents: Construction Agreements often incorporate multiple documents specifying the work to be performed, resulting in lengthy contracts. It is crucial to establish an order of precedence for interpreting and construing these documents in case of conflicts or inconsistencies.
4. Dispute Resolution: Before agreeing to mandatory mediation or arbitration clauses, consider the potential drawbacks. Some attorneys advise against both, as mediation can be used as a delaying tactic and may be ineffective without meaningful discovery, while arbitration can be costly and lacks protections afforded by the court system.
5. Knowing When to Walk Away: If parties cannot reach a mutually beneficial agreement or there are red flags that outweigh the benefits of the project, it may be best to walk away to avoid future battles.

Checklist for a Good Construction Agreement

To ensure your Construction Agreement is effective and comprehensive, use this checklist:

• Clearly define the scope of work
• Specify the contract price and payment terms
• Include a detailed project schedule
• Identify all contract documents and establish an order of precedence
• Address potential flow-down terms and their impact on subcontracts
• Include provisions for changes in work and change orders
• Specify insurance and bonding requirements
• Include indemnification and limitation of liability provisions
• Outline dispute resolution procedures, considering the potential drawbacks of mediation and arbitration
• Specify termination conditions and consequences
• Ensure compliance with applicable laws and regulations
• Have it reviewed by industry legal experts or use our AI contract review for construction contracts software
• Ensure the agreement is signed by authorized representatives of both parties

AI Contract Review for Construction Agreements

To give you a sense for the benefits of leveraging legal contract review software trained by lawyers, we’ve selected some sample language our software presents to customers during a review. Keep in mind that these are static in this overview, but dynamic in our software - meaning our AI identifies the key issues and proactively surfaces alerts based on importance level and position (company, 3rd party, or neutral) and provides suggested revisions that mimic the style of the contract and align with party names and defined terms.

These samples represent less than 5% of the pre-built, pre-trained AI Contract Review solution for Construction Agreements. If you’d like to see more, we invite you to book a demo.

CHANGES IN WORK

For: Contractor

Alert: May be missing a clause providing for changes in the work required by emergencies.

Guidance: In a Construction Agreement, it is essential to incorporate provisions addressing changes in the scope of work, timeline, or other contractual terms due to unforeseen emergencies. Specifically, the contractor should be enabled to act at its discretion during an emergency affecting the safety of persons or property, to prevent threatened damage, injury or loss without concern over whether such efforts will be compensated. This ensures that all parties involved have a clear understanding of their rights and obligations during such situations, protecting their interests and allowing the project to continue despite any challenges.

For example, if a natural disaster like a hurricane is announced, the contractor should be allowed to act in its discretion to protect the construction project from damage by the hurricane (e.g., by boarding it up), which also benefits the owner of the project. The emergency provision would ensure that the contractor is not prevented from taking such measures when no change order or construction change directive has been issued and that it will be compensated for such efforts, which benefit both parties, by equitable adjustments to time and price. 

When drafting the emergency provision, it is crucial to consider relevant statutes or laws, such as state or federal emergency management regulations, building codes, or other industry-specific regulations. These laws may provide additional guidance or requirements for addressing emergencies in construction projects.

‍Sample Language:

CHANGES IN WORK

Change Orders. CONTRACTOR shall make any changes to the Work ordered by OWNER that are within the general scope of the Contract Documents, provided that any resulting changes to the Contract Price and the Substantial Completion Date are first adjusted accordingly pursuant to a Change Order prepared by OWNER in writing and signed by CONTRACTOR stating their agreement upon the change in the Work. If a Change Order requires an adjustment in the Contract Price, the adjustment shall be established by one of the following methods: (a) mutual acceptance of an itemized lump sum; (b) unit prices as indicated in the Contract Documents or as subsequently agreed to by the Parties; (c) costs determined in a manner acceptable to the Parties and a mutually acceptable fixed or percentage fee for overhead and profit; or (d) another method provided in the Contract Documents.

Construction Change Directives. To the extent that the Contract Documents provide for Construction Change Directives in the absence of agreement on the terms of a Change Order, CONTRACTOR shall promptly comply with the Construction Change Directive and be entitled to apply for interim payment if the Contract Documents so provide.

Emergencies. In an emergency affecting the safety of persons or property, CONTRACTOR shall act, at its discretion, to prevent threatened damage, injury or loss. Any change in the Contract Price or Substantial Completion Date on account of emergency work shall be determined as provided in this Article.

Incidental Changes. OWNER may direct the CONTRACTOR to perform incidental changes in the Work that do not involve adjustments in the Contract Price or Substantial Completion Date. Incidental changes shall be consistent with the scope and intent of the Contract Documents. OWNER shall initiate an incidental change in the Work by issuing a written order to the CONTRACTOR, which shall be carried out promptly and be binding on the Parties. 

Unknown Conditions. If in the performance of the Work CONTRACTOR finds latent, concealed, or unknown subsurface physical conditions that materially differ from those indicated in the Contract Documents or from those ordinarily found to exist, and not generally recognized as inherent in the kind of work provided for in the Contract Documents, the Contract Price and/or the Substantial Completion Date shall be equitably adjusted by a Change Order within a reasonable time after the conditions are first observed. 

No Obligation to Perform. CONTRACTOR has no obligation to perform changes in the Work until a Change Order has been executed or written instructions have been issued in accordance with this Article.

CLAIMS AND DISPUTES

For: Owner

Alert: May be missing a clause regarding the dispute resolution process between the parties.

Guidance: In a Construction Agreement, it is vital to incorporate a well-defined dispute resolution process to prevent misunderstandings and facilitate conflict resolution between the parties. This process can help maintain positive working relationships and reduce the likelihood of disputes escalating into more serious issues.

For instance, if a disagreement arises between the contractor and the owner regarding the quality of work performed, having a dispute resolution process in place allows the parties to follow agreed-upon steps, such as negotiation, mediation, or arbitration, rather than resorting to litigation. This approach promotes a more efficient and cost-effective resolution of disputes.

It is crucial to consider relevant statutes or laws, such as the Federal Arbitration Act, which governs the enforcement of arbitration agreements, and state laws governing mediation and other alternative dispute resolution methods. These laws should be considered to ensure that the dispute resolution process outlined in the Construction Agreement is legally enforceable and consistent with applicable regulations.

Sample Language:

CLAIMS AND DISPUTES

Definition. A “Claim” is a demand or request by one of the Parties for the payment of money, an extension of the time permitted for performance, or other relief from the terms of the Contract Documents. The definition also includes any other disputes and matters in question between the Parties arising out of or relating to Contract Documents. The Party making a Claim has the responsibility to substantiate it.

Notice of Claim. As a condition precedent to approval of any Claim by CONTRACTOR arising prior to Final Payment, CONTRACTOR shall give OWNER such notice of Claim within [●●] ([●●]) days after CONTRACTOR recognizes or should have recognized the circumstances supporting such Claim. Furthermore, notice of any Claim for a change in compensation or time for performance shall be given before commencing changes to the Work that relates to the Claim, unless the Claim relates to an emergency endangering life or property. Each Claim shall be in a form consistent with the requirements of the Contract Documents, but at minimum include the date of the notice, the date the basis for the Claim was discovered, the circumstances that support the Claim, and the estimated additional cost or time required to complete the Work. OWNER shall respond in writing denying or approving, in whole or in part, the CONTRACTOR’s Claim no later than [●●] ([●●]) days after receipt of the CONTRACTOR’s notice of Claim. With respect to each Claim submitted, CONTRACTOR shall maintain detailed records which show each expense incurred, including payroll records and receipts for subcontracted Work, materials and equipment, which shall be made available to OWNER for verification while Work subject to the Claim is being performed. After Final Payment, Claims by either the OWNER or CONTRACTOR that have not otherwise been waived per this Agreement, must be initiated by prompt written notice to the other party. All unresolved Claims, disputes and other matters in question between the OWNER and the CONTRACTOR pursuant to this paragraph shall be resolved in the manner provided in this Article.

Work and Payment Continuation. Unless otherwise agreed in writing, CONTRACTOR shall continue Work in accordance with the Construction Schedule during any Claim or dispute resolution. If CONTRACTOR continues to perform, OWNER shall continue making payments per this Agreement. Continued performance by the Parties shall not be deemed a waiver or acceptance of any Claim for additional compensation or an extension of time to complete the Work. The Parties shall cooperate to mitigate potential damages, delay and other adverse consequences arising out of the condition which is the subject of the Claim.

Dispute Resolution Procedures. If the Parties cannot reach resolution on a matter relating to or arising from this Agreement, they shall endeavor to resolve it through good faith direct discussions by representatives with necessary authority to resolve the matter. The representatives shall record the date of first discussion. If unable to resolve the dispute within [●●] ([●●]) days from the date of first discussion, the representatives shall immediately inform the executives of both Parties in writing that resolution was not reached. Upon receipt, the executives shall meet within [●●] ([●●]) days to attempt a resolution. If unresolved after [●●] ([●●]) days from the date of first discussion, the Parties shall endeavor to resolve the matter by mediation through the current Construction Industry Mediation Rules of the American Arbitration Association, which shall commence within [●●] ([●●]) days and conclude within [●●] ([●●]) days from when the matter was first discussed. Either Party may terminate mediation after the first session but must deliver the decision to terminate in person to the non-terminating Party and mediator. Mediation costs shall be shared equally. If unresolved after discussion or mediation, the Parties shall submit the matter to [arbitration using the current Construction Industry Arbitration Rules of the American Arbitration Association with arbitration to occur in the county in which the Project is located/litigation in either state or federal court with jurisdiction over the matter at the Project location.] The non-prevailing Party, as determined by the dispute adjudicator, shall bear the costs of any binding dispute resolution procedure.

Barred Claims. All Claims and causes of action, whether in contract, tort, warranty breach or otherwise, are barred unless asserted within the time required by Applicable Laws or ten (10) years after Substantial Completion of the Work, whichever is earlier. OWNER and CONTRACTOR waive all Claims and causes of action not commenced in accordance with this paragraph. Neither mediation nor arbitration shall relieve the obligation of CONTRACTOR to give timely notice of Claims. No conduct or settlement negotiation during mediation shall be considered a waiver of the right of OWNER to assert that Claim procedures were not followed.

REMEDIES

For: Contractor

Alert: May be missing a clause providing contractor with remedies for any rejected work.

Guidance: In a Construction Agreement, it is essential to create a fair and transparent mechanism for addressing disputes resulting from rejected work. This approach ensures that the contractor has appropriate remedies available and fosters a balanced contractual relationship, reducing the likelihood of disputes escalating into costly litigation.

Establishing a clear framework for addressing issues related to rejected work can help maintain a positive working relationship between the parties and minimize disruptions to the project timeline. For instance, if the owner deems a portion of the contractor's work substandard or non-compliant, the agreement should outline steps to rectify the issue, such as allowing the contractor to correct the work, negotiate a reduced payment, or seek other agreed-upon remedies.

Relevant statutes or laws to consider in this context may include state-specific construction laws, such as mechanic's lien laws, which can provide additional protections and remedies for contractors in the event of non-payment or disputes related to rejected work. Moreover, the owner should be aware of any federal regulations or industry-specific standards that may apply to the project, as these may also impact the available remedies and dispute resolution processes.

‍Sample Language:

REMEDIES

CONTRACTOR’s Remedies for Nonpayment. If OWNER does not pay CONTRACTOR within [●●] ([●●]) days from the time payment should be made as provided in the Contract Documents, CONTRACTOR may, without prejudice to any other available remedies, upon [●●] ([●●]) additional days’ notice to OWNER, stop the Work until payment of the amount owing has been received. The Contract Price shall, by appropriate amendment, be increased by the amount of CONTRACTOR’s reasonable costs of demobilization, delay, and remobilization, plus interest as provided in the Contract Documents.

Consequential Damages. Except for liquidated damages and insured losses, OWNER and CONTRACTOR agree to mutually waive Claims against each other for consequential damages arising out of or relating to this Agreement, capped at [●●] percent ([●●]%) of the total Contract Price. This independent waiver applies only between OWNER and CONTRACTOR directly; lower tiers shall not be subject to waiver flowing down from CONTRACTOR. Consequential damages include (a) for OWNER, 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; (b) for CONTRACTOR, loss of financing, lost business, reputational damages, loss of profits unrelated to the Work, and principal office overhead costs and expenses. Either Party may elect to buy out of this waiver for a fixed fee of $[●●]. In the event of such an election, traditional rights to damages shall apply between the Parties.

Rejected Work. If CONTRACTOR disagrees with a decision to reject Work or materials, CONTRACTOR may proceed with corrections under protest and invoke the provisions of this Agreement which cover dispute resolution. If such rejection is found to be without merit or with no adequate foundation, CONTRACTOR shall be entitled to a Change Order and OWNER shall pay all costs associated with corrections completed under protest.

Best Practices for Using Construction Agreements

To effectively use Construction Agreements, follow these best practices:

1. Detailed Scope Definition: Clearly and comprehensively define the scope of work, including specifications, drawings, and performance requirements, to minimize ambiguity and potential disputes.
2. Thorough Review: Carefully review all contract documents, ensuring consistency and clarity. Engage legal counsel and construction industry experts to identify potential risks and issues.
3. Negotiate Fairly: Strive for a balanced agreement that equitably allocates risks and responsibilities. Be willing to negotiate and compromise, but be prepared to walk away if necessary.
4. Communicate Effectively: Maintain open lines of communication with all parties involved in the project. Regularly discuss progress, issues, and changes to foster collaboration and promptly address any concerns.
5. Document Everything: Keep detailed records of all project-related documents, communications, changes, and progress. This documentation can be invaluable in the event of disputes or claims.

By understanding the key considerations, using a comprehensive checklist, and following best practices, owners and contractors can create effective Construction Agreements that promote successful project execution and minimize potential disputes.