A Detailed Overview of the
Contract for Construction
Heather F. Shore, Esq.
911 Main Street, Suite 2300
Kansas City, MO 64105-5319
Phone: 816-292-7000
www.brlawkc.com
Different Contract Types
1. Lump sum contracts
2. Unit price contracts
3. Cost plus contracts
4. Cost plus contracts with a guaranteed maximum
price
5. Design/Build contracts
6. Construction management contracts
7. Job order contracts (JOCs) (Indefinite supply
contracts)
Different Contract Types
Lump sum contracts:
This is a contract for a fixed price.
The contractor bears all the risk of loss for
costs of completion within scope of work
defined by the owner.
Usually competitively bid but less flexibility to
negotiate terms when the government sends
out the contract for competitive bidding.
Different Contract Types
Unit Price Contracts:
This is a contract based on specified unit prices for
quantities of work that are estimated.
Usually involves easily measurable quantities of work.
e.g., earth removal, rock removal, concrete placed
Often done with different prices for different volumes of
work anticipated to pass on discounts to owners and
lower risk of loss to the contractor.
Different Contract Types
Cost Plus Contracts:
In a cost plus contract the owner pays for the actual cost of
the contract plus a flat fee or percentage of the project costs.
Some courts will impose a fiduciary relationship between
the owner and contractor that forces the contractor to
manage and control costs.
This is a contract with limited use because the owner must
generally have a large amount of control over the scope of
the work and the labor, equipment and supplies to be used.
The large management burden placed on the owner has caused a
variation of the contract to become used.
Different Contract Types
Cost Plus with a Guaranteed Maximum Price
Contracts:
This is a cost plus contract with a clause stating a maximum
price that will be paid for the project.
This eliminates the need to prove a breach of fiduciary duty
for high project costs.
Note: often there is a shared savings clause included
wherein the parties split the benefit of projects lower than the
maximum guaranteed price to incentivize the contractor to
work to keep project costs low.
Different Contract Types
Design/Build Contracts:
This is a contract with one entity to both design and
construct the project.
This often reduces costs and responsibility as well as
speeds up the project.
The contractor may be able to furnish design services
without worrying about designer licensing laws. See
Strain-Japan R-16 School District v. Landmark Systems,
Inc., 965 S.W.2d 278 (Mo. App. 1998)
Different Contract Types
Construction Management Contracts:
This contract allows the owner to retain a contractor,
architect, engineer or other person to manage the project
including reviewing plans and specifications, budgets and
managing execution of the work.
Two types of construction management contracts:
1. At-risk: The manager may contract directly with tradesman
and suffers the risk of loss for costs associated with them.
2. Not-at-risk: The manager may take bids but the owner
contracts directly and bears the risk of loss.
Different Contract Types
Job Order Contracts:
These are competitively bid contracts with a
fixed price for an indefinite amount of work.
Usually, they are used for bidding many small
projects at one time.
Generally used in the public setting as opposed
to the private market.
Standard Form Agreements
Standard form agreements are recommended
and have become generally well recognized and
used in the industry.
Available forms:
American Institute of Architects (AIA)
Engineering Joint Contract Documents Committee
(EJCDC)
Associated General Contractors (AGC)
Remember to tailor them individually for each
job.
The Ten Most Important Clauses of
Construction Contracts (with two
more to make an even dozen)
Payment Delays and Extensions
Contractors Design Indemnification and
Responsibility Insurance
Differing Site Notice of Claim
Conditions Provisions
Termination
Exculpatory
Incorporation by
Alternative Dispute Reference
Resolution (ADR)
Flow Down
Liquidated Damages
Documents, Provisions and Issues
to Note
Payment Clauses and Issues
Types of Necessary Documents for Payment:
1. Schedule of values
2. Application for payment
3. Supporting backup documents (e.g., lien waivers,
certified payrolls, schedule updates and test
results)
Some lien waivers may be unenforceable.
R.S.Mo. 429.005.
Documents, Provisions and Issues
to Note
Payment Timing:
1. Parties should establish their own
deadlines for payment.
2. But be mindful of state and federal statutes
governing payment (prompt payment acts in
Kansas and Missouri).
Essential Contract Terms
Statutes and Laws to ConsiderPublic
Construction Contracts
R.S.Mo. 34.057.1
This statute requires the contractor to pay the subcontractor
within a specified time of receiving payment from the owner.
Kan. Stat. Ann. 16-1903
Requires payment by the Owner to Contractor no later than 30
days after the Owner receives a properly completed,
undisputed payment application.
Requires payment by the Contractor to Subcontractor within 7
business days from receipt of payment from the Owner.
Essential Contract Terms
Statutes and Laws to ConsiderPrivate
Construction Contracts
R.S.Mo. 431.180
All persons who enter into a contract for private design or construction
work shall make all scheduled payments pursuant to the terms of the
contract.
Kan. Stat. Ann. 16-1803
Requires payment by the Owner to Contractor within 30 days from
owners receipt of an undisputed payment application.
Requires payment by the Contractor to Subcontractor within 7
business days from Contractors receipt of payment from the Owner.
Documents, Provisions and Issues
to Note
Retainage:
Often the owner retains a percentage from the payments until the
end of the project to incentivize the contractor to finish.
Statutes will limit the amount that can be withheld.
Private projects
Missouri limits retainage to 10%, declares retainage to be trust
funds, and allows retainage to be held for punch list items in an
amount sufficient to protect owner.
Kansas limits retainage to 10% and requires contractor to pay the
subcontractor within 7 business days of receiving payment of
retainage.
Public projects
Missouri caps retainage to 5% of the value of the contract unless
the owner determines higher rate is needed; allows owner to hold
retainage until completion of punch list items.
Kansas limits retainage to 10% and trigger interest if retainage not
timely paid.
Documents, Provisions and Issues
to Note
Other Issues to Remember Regarding
Payment:
Third party roles:
Remember issues dealing with the architects review of payment
applications and the lenders requirement for lien waivers.
Be mindful of endorsements on the back of checks!
I nterest on late paym ents:
R.S.Mo. 408.020 = 9% interest rate
Kan. Stat. Ann. 16-201 = 10% interest rate
P rovisions for billing disputed w ork :
These provisions usually state the owner doesnt have to pay for
disputed work or she can direct the work through a change directive
with the amount to be paid determined later and the contractor can
charge an agreed upon amount for this work.
Essential Contract Terms
Payment Terms:
Three types of payment clauses are often
seen in construction contracts between
General Contractors and Subcontractors:
1. Payment by a Certain Date
2. Pay When Paid
3. Pay if Paid
Essential Contract Terms
Paym ent by a Certain Date:
- This is the payment clause seen most often in
construction contracts between General
Contractors and Subcontractors.
- In this type of payment clause, the General
Contractor must pay the Subcontractor by a
specified date (often within 30 calendar days
from the date of the Subcontractors invoices).
Essential Contract Terms
Pay w hen Paid:
- Under this payment arrangement, the date by which the
General Contractor must pay the Subcontractor is
calculated in reference to the date by which the Owner
should have paid the General Contractor.
- E.g. Payment is due within thirty (30) calendar days of
the date when the General Contractor receives payment
by the Owner.
- Note: under this clause, the General Contractor must pay
the Subcontractors regardless of whether the General
actually does receive payment from the Owner.
Essential Contract Terms
Pay if Paid:
- Under this payment arrangement, the General
Contractors payment obligation to the Subcontractor
is conditioned on the Owner paying the General
Contractor.
- Language must clearly establish a pay if paid
arrangement.
- A pay if paid clause is no defense to a mechanics
lien claim in Kansas or Missouri. But Kansas courts
have held a surety is not liable to pay subcontractors
if the bonded subcontract contains a pay if paid clause
and the principal has not been paid.
Essential Contract Terms
The Contractors Design Responsibility:
Design Review:
Pay particular attention to design review clauses that may
shift the responsibility of reviewing the designs for defects
from the owner or architect to the contractor.
Shop Drawing Review:
Understand the clauses that address the scope of the
architects or engineers responsibilities in reviewing shop
drawings.
Look for clauses that address the speed at which the shop drawing
process must occur.
Keep good records of any delays by the design professionals in
reviewing your shop drawings.
Essential Contract Terms
Differing Site Conditions:
- A differing site conditions clause deals with estimating costs of
unanticipated physical site conditions such as unknown underground
conditions.
- Differing site conditions do not usually render a contract null and void
nor do they provide a basis for claiming a lack of a meeting of minds.
- Two Types of Differing Site Conditions Claims:
- Type I subsurface or otherwise concealed physical conditions which
differ materially from those indicated in the Contract Documents, or
- Type II unknown physical conditions of an unusual nature, which
differ materially from those ordinarily found to exist and generally
recognized as inherent in construction activities of the character
provided for in the Contract Documents.
Essential Contract Terms
Exculpatory Clauses:
Pre-bid inspection:
A pre-bid inspection clause usually requires that
any condition that should have been seen during
pre-bid inspection by the contractor is deemed
disclosed and not a subject of the claim.
This shifts some of the risk from the owner to the
contractor.
Essential Contract Terms
Exculpatory Clauses:
Duty to Discover Obvious Errors:
A duty to discover obvious errors clause requires the
contractor to discover any patent or obvious errors in the
contract documents or to notify the owner of conflicting
provisions or ambiguities so they can be clarified before
opening the bids.
This also shifts some of the risk from the owner to the
contractor.
Essential Contract Terms
Exculpatory Clauses:
No Damages for Delay clauses
Addresses whether the contractor has a right to adjust the
contract price after encountering delays at the projects, under
various conditions and as a result of one or more potential
causes.
Missouri: In the private construction setting no damages for
delay clauses have been ruled enforceable. But in the public
setting the law provides that they are void as against public
policy, except for contracts with the Missouri Department of
Transportation (public works projects).
Kansas: No damages for delay clauses are now prohibited.
Essential Contract Terms
No Damages for Delay clause
Sample clause:
In the event the Contractor is delayed in the
prosecution of its work by any act, or omission to act,
of the Owner or its representatives, the Contractor
agrees to make no claim for damages for delay in the
performance of the Contract, and agrees that any such
claim shall be fully compensated for by an extension of
time to complete performance.
Essential Contract Terms
No Damages for Delay clauses
Exclusions:
Delays caused by active Interference by Owner.
Delays not within the contemplation of the parties.
Delays so unreasonable that they constitute
abandonment of the Contract.
Delays resulting from breach of a fundamental
obligation of the Owner.
Essential Contract Terms
Handling Changed Conditions
Pay careful attention to existing drawings
Note errors and ambiguities in the plans,
drawings or specifications
Inspect the site!
Essential Contract Terms
Alternative Dispute Resolution (ADR):
An ADR clause establishes a pre-agreed procedure to
resolve disputes and claims on the project.
Types:
Negotiation
Early neutral evaluation
Mediation
Moderated settlement conference
Arbitration
Mini trial
Summary jury trial
Rent a Judge
Essential Contract Terms
Alternative Dispute Resolution (ADR):
When ADR is most valuable:
- Smaller disputes.
- When opposing party is amenable to negotiations.
- When the dispute involves complex legal or factual
matters.
Essential Contract Terms
Alternative Dispute Resolution (ADR):
Example ADR Clause:
Mediation. The parties agree to first try in good faith to settle
any claims, disputes and other matters in question arising out of,
or relating to this Agreement or the breach thereof, by
mediation in accordance with the Construction Industry
Mediation Rules of the American Arbitration Association (AAA).
If any party commences arbitration or litigation of a dispute
without first attempting to resolve the matter through mediation
(other than the recordation of a mechanics lien and/or a lawsuit
to foreclose on said mechanics lien, which is specifically exempt
from this Article), or if either party refuses to cooperate in the
scheduling or conduct of mediation proceedings, then in the sole
discretion of the arbitrator or judge, that party shall not be
entitled to recover its attorneys fees and costs even if they
would otherwise have been available to that party.
Essential Contract Terms
Liquidated Damages:
- A liquidated damages contract provision imposes payment of
a certain fixed amount in the event of a breach of a contract
provision.
- Under Missouri law, liquidated damage provisions are
generally enforceable unless they are so disproportionate to
the amount of any such damage reasonably to be
contemplated as to be oppressive. Wilt v. Waterfield, 273
S.W.2d 290, 295 (Mo. 1954).
- See more recent cases cited in materials re penalties.
Essential Contract Terms
Liquidated Damages:
Example of Liquidated Damages Clause:
- The Contractor understands and agrees that the completion of the
entire Project within the time provided is an essential feature of this
Agreement and that the Owner will sustain substantial damages, the
amount of which is not possible to accurately determine at this time,
if the work is not so complete. The Contractor, therefore, agrees to
proceed with due diligence, taking all precautions and making the
necessary arrangements to insure the completion of the work within
the prescribed time. The Contractor further agrees that its failure to
finally and fully complete the work within the time allowed shall be
considered a breach of the Agreement and shall entitle the Owner
to collect liquidated damages from the Contractor and/or the
Contractors surety in the amount of $1,000.00 per calendar day for
each day the Contractor is late in completing the Project.
Essential Contract Terms
Delays and Extensions:
A delays and extensions clause identifies
which party is responsible for any delays and
whether the delay entitles the contractor to
more time or to reimbursement of costs
incurred.
Essential Contract Terms
Delays and Extensions:
Four types of delays and extensions clauses are often
seen in construction contracts:
1. Nonexcusable Delayswithin contractor or
subcontractors control = no extra time or money
given by owner.
2. Excusable Delaysoutside of either partys control =
give the contractor extra time to finish or money to
finish at the original time.
Essential Contract Terms
Delays and Extensions:
3. Compensable Delaysowner bears responsibility = both
extra time and money typically given to contractor.
4. Concurrent Delayswhen two of the above delays overlap
and would cause the project to be delayed for similar or the
same time periods = responsibilities apportioned between
the owner and contract, and extra time or money is
awarded accordingly.
Note: a compensable delay coupled with a non-excusable
delay becomes classified as an excusable delay.
Essential Contract Terms
Delay Damages Clause:
ExampleAIA A201 - 2007:
- 8.3.1 If the Contractor is delayed at any time in the commencement
or progress of the Work by an act or neglect of the Owner or
Architect, or of an employee of either, or of a separate contractor
employed by the Owner, or by changes ordered in the Work, or by
labor disputes unrelated to the Project, fire, delay in deliveries
beyond the Contractors control, unavoidable casualties, other causes
beyond the Contractors control, or by causes which the Architect
determines may justify a delay, then the Contractor Time shall be
extended by Change Order for such reasonable time as the Architect
may determine.
- 8.3.3 This Section 8.3 does not preclude recovery of damages for
delay by either party under provisions of the Contract Documents.
(For pricing of these damages refer to Section 7.3)
Essential Contract Terms
Indemnification:
- Under an indemnification provision, a
party is obligated to either directly pay or
reimburse the financial losses of another
party.
- Indemnification clauses usually contain
the words defend, indemnify and hold
harmless.
Essential Contract Terms
Indemnification:
It is against public policy in Kansas and Missouri
to include a contractual provision requiring the
indemnitor to indemnify the indemnitee for the
indemnitees own negligence or intentional acts.
R.S.Mo. 434.100; K.S.A.16-121.
Insurance fills gaps left by indemnity and
incentivizes the indemnitor to assume indemnity
obligations.
Essential Contract Terms
Indemnification:
Example Indemnification Clause:
- Subcontractor shall hold the Owner and the Contractor
harmless from any and all claims, loss, demands for bodily
injury, death or property damage incurred by any person or
entity, including employees of the Subcontractor, as a result
of any negligence, breach of contract, or failure to provide a
safe place to work by the Subcontractor, its officers, directors,
agents, employees or independent contractors in connection
with any work performed under the Master Contract, or as a
result either directly or indirectly, from the failure of the
Subcontractor to faithfully carry out any provision of this
Subcontract and/or the Master Contract.
Essential Contract Terms
AIA Indemnification clause ( 3.18)
The Contractor shall indemnify the Owner,
Architect, Architects consultants, and agents
and employees of any of them for negligent
acts or omissions of the Contractor,
Subcontractor, or anyone directly or indirectly
employed by them.
No limitation on the amount or type of
damages.
Essential Contract Terms
Notice of Claim Provisions:
- A notice of claim provision provides that failure
to give timely notice of any claim constitutes a
waiver of that claim.
- In Missouri, notice of claim provisions are
generally enforceable. Gillioz v. State Highway
Commn, 153 S.W.2d 18 (Mo. 1941).
Essential Contract Terms
Notice of Claim Provisions:
Benefits and reasons to include these provisions:
1. They give the recipient a chance to gather
information about a claim before the information is
lost.
2. They allow for easier settlement opportunities
avoiding further claims and litigation.
3. They may help determine if a claim is legitimate.
4. They aid the recipients in managing and budgeting
the project by divulging necessary information at an
early stage.
Essential Contract Terms
Notice of Claim Provisions:
Example Notice of Claim Provision:
- Owner shall, no later than 60 days before initiating an
action against Contractor, provide written notice of claim
to Contractor. The notice of claim shall state that the
Owner asserts a construction defect claim and is
providing notice of the claim pursuant to the Contract.
The notice of the claim shall describe the claim in detail
sufficient enough to explain the nature of the alleged
construction defect and the result of the defect. In
addition, the Owner shall provide the Contractor with
any evidence in possession of the Owner that depicts the
nature and cause of the construction defect.
Essential Contract Terms
Termination:
- A termination clause calls for the termination of the
contract under an enumerated set of circumstances.
- Three types of Termination Clauses:
- Termination for Convenience:
- Allows an owner (or contractor) to terminate a contract for any reason
(including convenience) or even for no reason.
- Termination for Cause:
- Allows an owner (or contractor) to terminate a contract under a
specified set of circumstances that usually arise because of the fault of
the contractor (or owner, as the case may be).
Essential Contract Terms
Termination:
Example Termination for Convenience Clause:
- This Contract may be terminated, in whole or in part,
from time to time, when such action is deemed by the
Owner, in its sole discretion, to be in its best interest.
Termination of the Work hereunder shall be effected by
notice of termination to the Contractor specifying the
extent to which performance of the Work is terminated
and the date upon which such termination becomes
effective. The date upon which such termination
becomes effective shall be no less than ten (10) days
after the notice is sent.
Essential Contract Terms
Termination:
Example Termination for Cause Clause:
- If the Work is stopped for a period of thirty (30) days
through no fault of the Contractor or because the Owner has
not made payments thereon as provided in the Contract, then
the Contractor may without prejudice to any other remedy
the Contractor may have, upon seven days written notice to
the Owner, terminate the Contract and recover from the
Owner payment for all work executed and for any loss which
Contractor can substantiate through documentation or
otherwise resulting from the stoppage of the Work, including
reasonable overhead, profit and damages.
Essential Contract Terms
Incorporation by Reference Clauses:
Incorporation by reference clauses usually provide for various
other documents and writings referred to in the contract to be
incorporated in full into the contract and become part of the
terms and provisions of the contract.
The incorporated documents do not have to be attached to
the contract being signed, nor do they even have to exist at
that time. Wasson v. Schubert, 964 S.W.2d 520 (Mo. App.
1998).
E.g., plans that have not been fully developed or distributed but that
are otherwise identifiable.
Essential Contract Terms
Flow Down Clauses:
Flow down clauses typically provide that the subcontractor
shall assume to the general contractor certain obligations that
the general contractor assumes to the owner regarding the
subcontractors scope of work.
If there is conflict between the provisions of the general
contract and subcontract, courts will generally hold the more
specific previsions of the subcontract prevail over the general
provisions of the contract or its documents incorporated by
reference.
