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Construction

The process of building is complex and owners, contractors and subcontractors are bound to follow many rules and regulations in order to complete projects on time, on budget, and without legal hassle.  To that end, construction law is really an amalgamation of a variety of many areas of law an area of law including contracts, real estate, insurance, employment law and collections.  For this reason, companies that are in the construction industry need attorneys who are well-versed in a wide array of different disciplines.  That is where myHRcounsel comes in.  Many of our attorneys began their careers with our law firm as general practitioners, working in many different areas of the law at the same time.  With this breadth of knowledge, we are able to fully advise construction clients on every aspect of the construction industry. 

Bruner & O’Connor on Construction Law is widely considered the preeminent legal treatise on the subject of construction law.  It comprises seven volumes and likely could gobble up even more space on a bookshelf.  To save you a few months of reading time, we have distilled down those seven volumes to present an overview of what we feel are the four major components of construction law: contracts, warranties, insurance and payment. 



Contracts

Unlike other types of contracts, construction contracts are unique in that they must be meticulously tailored to address a host of complex issues that must be grappled with for each new project.  Some of these complexities lie in the fact that every project is unique as to its location, objectives and ownership.  There are also many more uncertainties in the construction contract realm than with other more standard contracts including unforeseen weather or location conditions, issues with scheduling and coordinating a diverse array of subcontractors each with their own industries, workforces and demands, building codes, standards and licensing requirements, zoning regulations, varied types of required insurance, unique pricing arrangements and statutorily prescribed lien procedures.  Taking into consideration all of these additional “wrinkles”, it is no wonder that the average construction contract easily exceeds 100 pages.

As you can see, the importance of the construction contract really cannot be overstated.  Ensuring that every facet of the project is dealt with in this document is of paramount importance.   

Warranties

A warranty is an assurance by one party to an agreement of the truth of certain facts upon which the other party may rely and is intended to relieve the other party of any duty to ascertain these facts for itself by promising to reimburse that party for any loss if the facts warranted prove to be untrue.  Basically, one party is promising that the work they perform will live up to certain standards or they will compensate the wronged party if they fail to.  There are two main types of warranties in the construction context: explicit or express warranties and implied warranties.  Express warranties are those that are spelled out in writing in the construction contract.  These include warranties about the materials and equipment to be used, the construction services to be provided, the callback or repair warranties, vendor warranties, and design-build warranties.  There are even more types of implied warranties: implied warranty of good workmanship, habitability, fitness for a particular purpose, workmanlike construction, implied warranty of services, implied warranty of real estate, implied warranty of site conditions, etc.

Often, contractors prefer that the construction contract NOT contain particular warranties and so attempt to disclaim warranties either in whole or in part.  While this can be relatively easy in the case of express warranties as they are spelled out clearly and disclaiming them is more obvious to the contracting parties, disclaiming implied warranties is often more difficult.  This is because the language of the warranty does not appear in the contract itself and there could be public policies reasons behind the reason for the implied warranty making it nearly impossible, or at least more difficult, to disclaim. 

Insurance

Unfortunately, claims for personal injury and property damage are common on constructions projects.  Further adding to these woes is the fact that owners, contractors and subcontractors often fail to adequately address these insurance coverage issues during the contracting phase and so find themselves unprotected when faced with a claim.  Contractors must ensure that they not only have their own insurance policies in place affording sufficient coverage for all risks in a project, but they must also ensure that subcontractors and sub-subcontractors do the same. 

Since projects vary widely as do scopes of work, it is important that the insured’s risk manager, insurance broker and legal counsel work together to make sure the project is assessed completely and all risks are properly considered.  One of the major types of coverage that an insured should have is commercial general liability (CGL) coverage.  This type of coverage provides coverage for bodily injury or property damage, usually on an occurrence-by-occurrence basis – meaning an accident, including continuous or repeated exposure to substantially the same general harmful condition. 

Further complicating the issue of construction industry insurance coverage, is the fact that there are several business risk exclusions to a CGL policies which can include an owned property exclusion (meaning coverage is not provided when an insured owns or leases the property), “your work” exclusion (meaning coverage is denied when damages are due to the contractor’s own faulty or defective workmanship) and contractual liability exclusion (meaning coverage is excluded for losses the insured is obligated to pay because the insured assumed liability for the loss in a contract). 

Aside from CGL coverage, there are a litany of other types of construction industry-related insurance policies including automobile liability, builder’s risk and property insurance, contractor’s equipment insurance, contractor’s pollution liability, professional liability (errors & omissions); subcontractor default insurance, and worker’s compensation, to name a few. 

Payment

Ensuring a steady flow of money is the paramount consideration for any construction project to progress smoothly from start to finish.  This is because cash flow problems touch on all other aspects of a project and can cause work to grind to a standstill.  After all, you can’t start building the building until the foundation is poured.  Some of the major issues related to payment in the construction industry are contingent payments, progress billing, and due on sale clauses.

Contingent payment clauses (also called pay-if-paid or pay-when-paid clauses) are provisions within construction contracts that state payment from the general contractor to the subcontractor is contingent on payment from the owner to the general contractor.  General contractors benefit from including these provisions in their contracts because otherwise the general contractor would be on the hook to continue paying all of its subcontractors regardless of whether they were being paid.   Understandably, though, when payments from the owner stop, and the general contractor is no longer able to make payment to the subcontractor, work stoppage issues ensue if the subcontractor can no longer pay their workforce or cover the cost of materials and equipment.  All parties involved must understand when the contract has a contingent payment clause and what the practical ramifications of contingent payment may be.

Another common issue regarding payment in the construction industry are progress payments.  A building contract is essentially a large credit transaction.  The builder risks labor and materials on the promise that eventually the owner is going to pay for services rendered.  In order to temper the sting of this economic risk, often construction contracts create timeframes in which progress (or periodic) payments are owed.  This mid-project cash flow helps keep the contractor and subcontractors working and ensures the timeline of the project moves along.  The amount and timing of the progress payment is spelled out in the contract and based on a schedule of values that is submitted by the contractor before starting construction. 

Mechanic’s liens are also a very important issue to discuss as it regards payment.  Mechanic’s liens are meant to protect those who in good faith furnish material or labor for the construction of a building or other project.  These types of liens create a claim against the owner of the property that was constructed, remodeled or otherwise improved.  Most state laws require that the contractor give the owner notice of the materials or labor to be supplied by the contractor, then if the contractor is not paid, they must file a claim of mechanic’s lien in the county where the property is located.  There is usually a prescribed timeframe in which the contractor has to work out a solution with the owner or file a lawsuit.  The names of documents to be filed and timeframes in which to file them range widely and knowledgeable counsel should be consulted regarding the specific laws of each jurisdiction.

 

FAQS

Q. What must be present in every contract?

A. Regardless of whether it is a construction contract or any other type of contract, every contract must have an offer, acceptance and consideration.  Consideration is the legal term for an exchange of goods or services between parties. 

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