Common Pitfalls in Construction Contracts and How to Avoid Them

Construction projects involve multiple parties – owners, contractors, subcontractors, architects, engineers – and intricate contractual relationships between them. It’s easy to overlook issues or make mistakes when drafting construction contracts. However, unclear or unfair contract terms can lead to confusion, disputes, delays and extra costs down the road. Here are some of the most common pitfalls in construction contracts, and tips on how to avoid them.

Ambiguous Scope of Work

The scope of work defines what is included in the project. An unclear, incomplete or too broadly defined scope is asking for trouble. When expectations around deliverables aren’t explicit, contractors may have very different interpretations of what they are supposed to provide. This often leads to disputes when the owner isn’t satisfied with the end product. Instead, you should:

• Clearly specify every task, product, service, milestone and deliverable required. Don’t assume anything is implicit.
• Break down the scope into well-defined phases if it is a large, complex project.
• Use detailed plans and specifications to supplement the written scope.

Unclear Payment Terms

Payment terms include payment amounts, schedules and requirements for release of payments to the contractor. Vague payment terms lead to contractors being underpaid or payments being delayed. This strains relationships and may even cause work stoppages. Make sure to:

• Include a detailed payment schedule outlining specific payment amounts tied to completion of milestones.
• Specify exact requirements and documentation needed for payment release, such as inspection reports.
• Include terms for partial payments and retentions if applicable.

Poor Change Order Process

Modifications to the original scope are inevitable in most construction projects. A sloppy change order process results in unauthorised changes, cost overruns and disputes. You should:

• Institute a formal change order process requiring written change requests and approvals before additional work.
• Specify exact documentation required such as change orders, revised plans, and updated schedules.
• Establish who can approve change orders and spending limits for approvers.
• Update contract prices and schedules promptly for approved changes.

Unclear Roles and Responsibilities

When multiple prime contractors and subcontractors work on a project, unclear divisions of responsibility can quickly derail projects. Failing to define roles leads to omissions, duplications, finger-pointing and general confusion. Use the following tips:

• Use responsibility matrices to designate roles for each specification section or project phase.
• Include detailed subcontractor scopes of work in prime contractor agreements.
• Appoint a principal coordinator role to align teams.

Poor Dispute Resolution Process

Despite best efforts, disputes over performance, delays, payments, change orders etc. will crop up. Contracts should establish fair dispute resolution methods like negotiation, mediation and arbitration to resolve issues quickly. Here are a few tips:

• Institute tiered dispute resolution requiring negotiation first, followed by mediation, then final binding arbitration if needed.
• Specify time frames to complete dispute resolution steps before further escalation.
• Select mediators and arbitrators with construction expertise to resolve technical issues.

One-Sided Risk Allocation

Sometimes contracts push excessive risk onto one party, especially owners requiring contractors to take blanket responsibility for all project risks. This skews contractual balance and fairness. Instead, you should:

• Include mutual risk-sharing wherever feasible, such as making events of force majeure reciprocal.
• Limit liability for unforeseeable risks beyond either party’s control.
• Cap excessive penalty amounts to reasonable levels.
• Allow for time extensions where warranted.

With careful drafting and review, you can avoid common pitfalls and set your construction projects up for success. Getting building contract administration services from an experienced design and build contract administrator is advisable for crafting balanced, comprehensive contracts.

Investing in good contracts provides immense value over the entire project lifecycle.