Drafting contracts for construction projects can seem like a daunting undertaking, but with some planning and preparation, either by in-house counsel or using outside resources, it doesn't need to be.
When your organization undertakes construction projects, it is inevitable that the in-house counsel will be tasked with drafting or reviewing the contracts. Here, you’ll find some best practices for ensuring that the process is done efficiently and effectively.
Who Drafts the Contract?
Among the first considerations is which party will draft the contract – a design professional (architect or engineer), general contractor or the business owner? For virtually all companies, it is advisable that your company takes responsibility for drafting the construction contracts. As the owner of the project, your company is, after all, the party that will be cutting the checks to pay for the construction work – and therefore, it should be the one furnishing the contract.
Yes, there will be negotiation of certain terms in the contract, but your time is best spent negotiating from a starting point that was drafted with your company’s interests in mind, on terms you know your company can live with. The alternative is beginning negotiations from a contract supplied by a design professional or general contractor, in which case the proposed terms may be far from what is palatable to your organization. In such a situation, there will usually be much more ground to cover to attain terms that are ideal for your company. Therefore, the owner of the project should take responsibility for producing the contract in the vast majority of scenarios.
As in-house counsel, a decision must be made as to whether the requisite expertise exists within your own law department to handle what are typically rather lengthy and complicated contracts. If not, it is important to consult with outside counsel having expertise in commercial construction contracts. Doing so will enable you to quickly and efficiently obtain a draft of a suitable contract.
One Size Does Not Fit All
Regardless of whether in-house or outside counsel will do the drafting, there are a myriad of considerations before a first draft is produced. In the world of commercial construction contracts, there is a vast array of different types of contracts intended to address different project scenarios. As one might imagine, a contract that is appropriate for the new construction of a $100 million urban high-rise is not appropriate for a small conference room renovation at a company’s headquarters. With that in mind, some considerations when selecting the appropriate construction contract format include:
- What will the project’s delivery method be (traditional design-bid-build, design-build, or integrated project delivery)?
- Will the design professional be hired by the owner (typical of the traditional delivery method) or by the contractor (common for the design-build delivery method)?
- What is the method by which the contractor or design professional will be compensated (fixed-fee, cost plus fee, cost plus fee with a guaranteed maximum price, time and materials, etc.)?
- Is the project subject to public procurement requirements (competitive bidding, multi-prime requirements, etc.)?
- Are there sustainable (aka “green building”) aspirations for this project (such as LEED accreditation, BREEAM, Green Globes, etc.)?
The above list is by no means comprehensive; it is intended merely to point out a few of the considerations that are relevant when selecting an appropriate construction contract to suit the needs of your company.
Form Contracts Versus Customized Contracts
The next consideration is whether a bespoke contract is required, or whether a template-based contract is suitable.
Perhaps the most common template-based construction contracts are promulgated by the American Institute of Architects (known as AIA Contracts).[1] There are other template-based contracts that are also quite good, including those from the Engineer’s Joint Contract Documents Committee (EJCDC),[2] ConsensusDocs [3] and others. Bear in mind that the term “form contract” or “template-based contract” is somewhat imprecise, because the “form” or “template” is merely a framework. Representatives of both parties almost always modify the provisions therein, sometimes heavily, before the contract is executed. Very often, the resulting contract differs significantly from the default language in the form.
The decision to utilize a template-based construction contract versus a bespoke one is typically a function of the owner’s preference. Certain companies prefer to forgo the template-style contracts in favor of their own custom contracts. In recent years, a trend has emerged where more owners are seeking customized construction contracts.
That said, whatever an individual company may prefer, there is virtually no construction project that cannot be adequately drafted using a template-based contract. For example, AIA offers more than 180 different construction contracts and forms, and ConsensusDocs advertises more than 100. With such a variety of template-based offerings, there is likely a contract template that is relatively close to the ultimate needs of your project. From there, it can be tailored by your in-house law department or in conjunction with outside counsel.
Keeping Your Contracts Current
Periodically reviewing and revising the construction contracts deployed by your law department is always a sound business practice and effective risk-management technique. Doing so has two major benefits: (1) Your contracts should reflect the evolution of construction industry practices, which are often shaped by recent case law developments; and (2) Your contracts should reflect the preferences and risk tolerances of your business, which evolve over time.
The issuers of template-based construction contracts overhaul their documents incrementally, sometimes as infrequently as once every 10 years. From a practitioner’s standpoint, this is a woefully inadequate regimen for reviewing your construction contracts. Instead, it is recommended that companies do a review of their contracts at least every other year. Also, certain political developments (e.g., the introduction of tariffs) or notable case law developments should prompt a review of your construction contracts in between regularly scheduled reviews.
Efficient Contract Administration
Selecting an appropriate contract is just one element of in-house counsel’s role in protecting company interests as part of construction initiatives. Of course, protecting the company would not be exceedingly difficult if there were unlimited time to review and negotiate the contract terms for each and every construction project. But because of time and budgetary constraints, it is crucial to find the right balance between protecting the company and efficiently managing contract review and issuance. Best practices include the following:
1. Create templates. When papering a new construction project for your organization, it is rarely advisable to start from scratch or even from the stock language in a completely unedited contract template. Instead, figure out what contract terms are generally accepted within your organization, and create a template containing those terms. This should be the starting point from which in-house counsel, facilities personnel and outside counsel begin to formalize the contract for a new construction project.
2. Contract library. Maintain a library of contract templates for the various types of construction projects typically undertaken by your company. Consider categorizing your projects into small, medium, large and extra-large designations – and assign a dollar value to each category. The figures assigned to each range are wholly dependent on the company, but by categorizing your projects and maintaining preapproved contract templates within each category, you can greatly optimize the time required to negotiate and issue a contract.
3. Repeatable work. Very often an organization will have similar types of construction needs on a recurring basis. For these types of projects, consider entering a master agreement with a few preferred contractors and design professionals. The master agreement is a delivery system, whereby the owner and the contractor or design professional negotiate virtually all of the boilerplate-type provisions at one time, and the parties agree that those terms will be effective for a prescribed term. Upon execution of the master agreement, a contract is not formed until the subsequent execution of a work order, which typically contains the bare essential terms of the project. These include, among other things, the specific work to be done, the name of the design professional (if any), the cost, the time for completion, and an enumeration of the contract documents. All other contract terms are contained in the master agreement. This format allows the company to quickly and efficiently contract for new construction projects without having to negotiate all of the boilerplate-like terms each and every time.
With some planning and discipline, the selection and issuance of suitable construction contracts need not be a daunting task for your law department. The important thing to remember is that one size does not fit all, and a key to success is pairing the right contract with the characteristics of the project. With some organization and implementation of the ideas described herein, in-house counsel can be both effective and efficient in managing legal spend to draft and review construction contracts, while at the same time mitigating unnecessary risks and best positioning the company for successful projects.
[1] https://www.aiacontracts.org/
[2] EJCDC® documents are promulgated by three major engineering groups: the American Council of Engineering Companies, the American Society of Civil Engineers, and the National Society of Professional Engineers. https://www.ejcdc.org/
[3] ConsensusDocs® is a not-for-profit coalition of national associations representing the interests of various stakeholders in the design and construction industry – including contractors, subcontractors, insurers, sureties, equipment manufacturers, owners, accountants and suppliers. https://www.consensusdocs.org/
Published May 10, 2019.
