Merriam-Webster defines the term “contract” as a binding agreement between two or more persons or parties; especially: one legally enforceable. In a construction relationship, there are many types of contracts. These include lump sum, guaranteed maximum price, item rate, cost-plus-fixed fee, and cost-plus-percentage of cost. There are also special contracts which include turnkey, negotiated, package, continuing and running contracts.
The type of contract depends on many factors. These factors include the project delivery method, e.g., Capitol Improvement Program (CIP), Public-Private Parntership (P3), Design Build (DB) and Engineer-Procure-Construct (EPC). We reserve the discussion of each of these contracts in relation to project delivery methods for another writing.
The types of contacts available for construction projects can cause concern for owners and sponsors. The owner decides which type of contract to utilize. These contracts are enforceable by law even though the drafters may have lacked attention to detail or may not know contract law and its very real insurance implications. Ignorance of the law is not a valid defense.
From a risk management perspective, the key provisions to the contract are the insurance requirements, indemnity wording and waiver of subrogation provisions. These requirements obligate parties to the contract to protect each other against claims arising from their contractual relationship. Then, the insurance policy provisions must support the contract language.
Contractual provisions that refer to specific clauses in a policy by name or form number can quickly become obsolete. It is a classic example of the chicken before the egg scenario when contract drafters consider insurance requirements only after drafting the contract. Contract writers must be cognizant of these pitfalls. We recommend a consultation with an insurance professional during the drafting of the contract to avoid the pitfalls.
As you can know, contracts to a construction project can be quite confusing for all parties concerned. These contracts, by their very nature, impose a number of obligations and liabilities on all parties to the contract. The ALS Group is very sensitive to these contractual issues and is diligent in ensuring the accurate review of our clients’ contracts. When faced with your next contract negotiation, please contact us or visit our web site.
Remember, to avoid major problems, until a professional has vetted all contracts, no shovel should go in the ground.
About the Author
John Mooney is a Consultant with The ALS Group. Click here to request more information about The ALS Group or for help with developing a risk mitigation strategy and improving your Builders Risk coverage.
