Construction Contract Review How To – Part 1 of 3

While some in the construction industry today, including Zinzow Law, strictly adhere to these and other traditional guiding principles, there are many who do not.  The written contract was borne many years ago as a creature of necessity.  Prime contracts, subcontracts, material supply contracts, purchase orders, and the like, are no longer the exception; they are the rule.  These contracts range from simple to elaborate, and from less than ten pages to hundreds of pages, but they all have one thing in common.  They must be read and understood.  The keys to success are many, but focusing your efforts in three areas will prove immensely valuable.  These areas are:

(1) contract review technique, (2) expecting the unexpected, and (3) identifying common clauses or concepts of significance.  This three part article series will address each in turn, starting with contract review technique.

Technique is as important, if not more so, than the other two focus areas.  Without technique, there will be a guitar and sheet music but no sound, or important contract clauses and concepts that will go unnoticed. 

Contract review technique must start with blocking focus time.  Contracts are complex.  Pages must be cross-referenced, read, and re-read.  If you allow yourself to be interrupted during review, you will overlook, misunderstand, or forget major concepts.  Print the contract and review it in hard copy form (even if you are a paperless office).  Statistics have proven that even a trained eye catches more issues and has better comprehension reviewing a document in hard copy form than in electronic form. 

Lawyers write and review contracts every day with success, so mimic their success by borrowing some of the tools of their trade.  Think of tools as implements, or an extension of the brain.  One such important implement is a review checklist.  If you do not have one, or your checklist is outdated, attend a contract review seminar taught by an expert where you might procure a reputable one, or seek out construction counsel.  When studying the contract as a whole and against the checklist, use highlighters, colored pens, sticky notes, and the like.  Highlight important areas.  Write comments in the margins.  Use sticky notes to help you easily cross reference.  If your office workflow design commands that you do not print, then use comparable electronic implements (word processor or PDF comment and highlight tools, bookmark or hyperlink tools, etc.).

Make sure you review all relevant documents.  Many contracts use the term “contract documents.”  Some define that term, others do not.  If the term is defined, be sure you print each of the referenced documents and review them.  If the term is not defined, think about what documents may be relevant, such as proposals, plans, specifications, upstream contracts, downstream contracts, exhibits, and warranty documents.  Print and review them.  More often than not, the contract documents must be read as a whole.  When read as a whole they may have a drastically different legal meaning than when read individually.  When read as a whole they may often conflict.  Conflicts must be identified and resolved. 

During your study take note of who drafted the contract documents.  Contract documents come in two forms: (1) so called industry standard and (2) private.  One is no less risky than the other, but you must recognize the distinctions and adjust your review approach.

Industry standard forms have different slants, and these documents each have a specific intended purpose for a particular project or risk (e.g. small project residential, complex commercial, non-complex commercial, industrial, etc.) and contemplate a particular project delivery method (construction management at risk, construction management not at risk, cost plus fee, cost plus fee with a guaranteed maximum price, fixed price, etc.).  The AIA-American Institute of Architects documents, for example, are generally slanted toward the architect first, the owner second, and contractors third.  ConsensusDocs® documents are typically more neutral.  These standard forms have their benefits, but they also come with many drawbacks.  Among those are that you must use the right contract forms for the right project and delivery method (while selection guides exist, contractors often either select the wrong forms, or are presented with the wrong forms), and must catch, delete, revise, and add language that is appropriate for the project at hand.  Be careful to confirm by your-own study whether the standard form has been modified.  Both AIA and ConsensusDocs®, for example, create their templates in a manner designed to show where deletions, revisions, and additions are made, either by a mark in the margin or some other notation.  Do not rely upon these features, as they cannot be trusted.  These templates are often re-drafted outside of the AIA and ConsensusDocs® tools in a manner that destroys this tracking.  Some authors do this with sinister intent to conceal changes, others do it to avoid paying licensing fees.  Either way you will be the victim if you do not read the contract documents carefully. 

Private contract documents can range from fair to patently unfair, and there is nothing standard about them.  Even so called boilerplate is different between one contract and the next.  A different word here or there, and even punctuation placement differences can transform a mild clause into a wild one.  Numbering schemes, organization, and overall structural approach may be different too, so make no assumptions about where to find things in the contract documents.

It is appropriate to start your review with sections on price and time, and then shift to the remainder of the contract documents.  Where possible, read the contract documents entirely through before reaching any preliminary conclusions, and then read them again to make annotations for your further consideration and to determine if review by construction counsel is appropriate.  Last (for now) but not least, review the contract documents with a crystal ball.  Imagine where things can go wrong on your project and why, and then determine how or if the contract documents address those particular challenges.  Part II of this Construction Contract Review – How To will explain why you should expect the unexpected during your contract review, and explain why you must search for what might be hidden in plain sight.  Part III will identify and provide an overview of common clauses or concepts of significance to aid you in issue spotting.  By focusing on the areas described in this series, you will be taking your first steps toward building the American dream.