Construction Contracts FAQs

1.  What terms are essential for binding construction contracts?

For a contract to be binding, the form does not matter, the content does. There are three fundamental steps in contract formation – an offer, acceptance of that offer and some form of consideration, which can be as simple as mutual promises to perform. There must be a meeting of the minds, so if an offer is extended and the other party responds accepting the concept of the offer, but suggesting revisions, the response is not an acceptance, it is a counteroffer, which must then be accepted.

Until the parties are clear on the terms (and the terms can be verbal), there can be a defense of mutual mistake – each thought they were comparing apples to apples, but were actually comparing apples to oranges. This is one reason a signed written contract is generally preferable.

2.  What does an indemnification clause do?

Often contracts contain clauses to the effect that “each party shall defend, indemnify and hold harmless the other party from and against any and all claims, actions, suits, demands, or judgments asserted, and any and all losses, liabilities, damages, costs, and expenses, including, attorneys’ fees alleged or incurred arising out of or relating to any operations, acts, or omissions of the indemnifying party”. Translation: If one party (Party A) to the contract causes a third party to make a claim against the other party to the contract (Party B), then Party A agrees to pay the attorney’s fees, costs, expenses and any damages involved in defending the claim.

The things the indemnifying party could do that would result in liability to the indemnified party are listed at the end of the provision (essentially acts or omissions under the agreement). This provision requires that the indemnified party promptly notify the indemnifying party of a claim and allow that party to control the defense or settlement of the claim. An indemnification provision addresses the risk that your company might be liable for damages resulting from something the other party does related to the contract.

 3.  What is a “no damage for delay” clause?

Customarily, this type of contractual provision stipulates that while the contractor or subcontractor is not entitled to a claim for delay damages, it will be entitled to an extension of time. Many times the contract will state the contractor is entitled to no damage for the delay, but, on the other hand, the owner or contractor is entitled to “liquidated damages” for any delay caused by the contractor or subcontractor. One of the risk allocators in the construction industry is the no damage for delay clause. In bidding the project, the contractor must carefully examine the contract documents to determine whether or not there is, in fact, a no damage for delay clause contained within the terms of the contract. If there is, the contractor must bid the contract with knowledge that such a clause exists and it will have the burden of proof to get around the no damage for delay clause.

 4.  What is the intent of a clause indicating the contractor or subcontractor has reviewed the plans and specifications?

In general, owners are responsible to contractors for errors and omissions in the construction plans and specifications. As a result, owners frequently seek to insert exculpatory clauses in construction contracts, shifting the risk of defects in the plans and specifications onto contractors or subcontractors. In general, for the exculpatory clause to be enforceable, the clause must be sufficiently specific so as to put the contractor on notice that he or she should not under any circumstances rely on the accuracy of the plans and specifications to prepare an estimate for the cost of the work to be performed.

Many agreements contain contractual provisions specifying that the contractor must inform the owner and seek correction of or clarification of any document deficiencies such as errors, omissions or inconsistencies and to do so prior to proceeding with the work. In the event that the contractor then proceeds to recognize such error, inconsistency or omission and fails to report it to the owner or architect, the contractor will then be responsible should the installation prove defective.

 5.  What is the Statute of Frauds?

Most states, including North Carolina, have a “Statute of Frauds”, which requires that certain contracts absolutely must be in writing. For example, a contract for the sale of goods for the price of $500 or more is not enforceable unless the contract for the sale is in writing and signed by the party against whom enforcement is sought. N.C.G.S. §25-2-201. There are exceptions for this particular statute including specially manufactured goods or where payment has been made and accepted.

Other contracts controlled by the Statute of Frauds are contracts that cannot be performed within one year; a guaranty to pay the debt of another; an agreement to pay a debt discharged in bankruptcy; a commercial loan by a banking institution in excess of $50,000; and any transaction involving real property.

 6.  What is the scope of work?

Most construction contracts will contain either a clause or an article that sets out the scope of work governed by the contract. It is important for the contractor or subcontractor to review and consider the requisite scope of work to ensure the tasks set are within the means and competencies of the contractor or subcontractor who is to perform the work. It is also important to compare the scope of work to the compensation anticipated for the work, to ensure that the contract has been bid correctly.

 7.  What is a change order and how does a change order relate to a contract?

A construction agreement should contain within its terms a contractual provision on how to handle the inevitable changes that occur as a project unfolds. Changes to the contract may occur within the scope of work, may involve the time table for the project or may relate to unforeseen circumstances that must be addressed in order to move the project forward. It is critical to determine how these changes are to be addressed, the procedure for approval of changes and for a subcontractor or contractor to obtain the necessary written approvals before going out on a limb by initiating the change.

 8.  What is a “pay when paid” or “pay if paid” provision?

In North Carolina, neither “pay when paid” (i.e., contractor reserves the right to withhold payment to subcontractors until such time as the contractor receives payment from the owner) nor “pay if paid” (i.e., contractor reserves the right to withhold payment to subcontractors and only pay them if he is paid by the owner) are enforceable; both are void as being against public policy. Under the North Carolina Prompt Pay Act (N.C.G.S. §22C), failure of a contractor to promptly pay a subcontractor becomes grounds for the subcontractor to seek interest at the rate of 12% APR.