Construction Contract Review How To – Part 2 of 3

In Part I of this series, you learned about contract review technique. In this Part II you will learn how it is important to expect the unexpected while reviewing a construction contract (look out for what is hidden in plain sight).  In the third and final Part, you will learn how to identify common clauses or concepts of significance.

Construction contracts can be quite elaborate.  They must be read carefully, and in their entirety to find what may be hidden in plain sight.

Contract documents never exist in a vacuum. They are layered atop of the real-life activities, risks, and potential rewards of a construction project. Contracts are designed, when they are created well, to address every conceivable activity, risk, and potential reward that you may encounter on a construction project, and dictate what the outcome will be under each particular circumstance. It is therefore necessary when reviewing a contract that you take the crystal ball approach to find what may be hidden in plain sight. Sentences in a contract must be read in contemplation of some future issue. If read without context, the sentence can, and often will, take on a completely different meaning to the reader, obscuring risks and outcomes.

Following are a few examples that illustrate how context can drastically impact the meaning, application, and outcome of a particular clause.

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Context, however, is not the only reason it is important to expect the unexpected while reviewing a construction contract. You must also expect the unexpected to avoid overlooking important terms, conditions, or restrictions that may be hidden in plain sight. Whether a privately customized contract, or an industry standard form, today’s contracts often contain tables of contents, a numbering scheme, and headings for various sections in the contract. Observe these with a healthy distrust. Not every contract drafter intentionally obscures important clauses, though some do. Others, by accident, or imprecision, include clauses which should be contained in one location in a completely different section, either as an afterthought, or because they were not careful when crafting the contract document.  Still others place the clauses right where they should be, but those clauses necessarily interplay with clauses in other sections. Interrelated clauses, even if under separate headings, must be read and interpreted together.

We have seen contracts with conditions precedent to payment buried in a section of the contract titled “other provisions.”  Those “other provisions” started with paragraph upon paragraph of language contractors often skip over as “boilerplate.”  Deep in the center of that section was a single sentence that drastically shifted the risk of payment.  Contractors should know that today’s “boilerplate” is no longer really boilerplate and therefore poses considerable risk if ignored.  Classic boilerplate was all purpose language that was typically non-negotiable, and which was standardized across many contract documents.  Very little contract language today is standardized, but rather, it is highly customized by its author to protect one party over another.

On many occasions contractors will endeavor to slant things in their favor by insisting that their proposal be made an exhibit to the contract.  Feeling safe  through their attached proposal, they often overlook important provisions within the body of the contract.  Consider the following example.  Exhibit B to the contract lists various specifications and other documents.  You have asked that Exhibit B be revised to add your proposal, thinking that makes the proposal part of the contract and will control your obligations.  Your proposal attached to the contract specifies a level 3 drywall finish.  However, concealed within the often overlooked definitions section of the contract is a provision indicating that proposals and other submittals by the contractor are not part of the contract documents.  You might say to yourself at this point, but my proposal was actually attached, so that overrides the provision in the definitions.  It might just do that, but for another clause hidden in plain sight in a different section which indicates that where there is an internal conflict between the contract documents, the exhibits do not control.     When these provisions are all read and interpreted together, your level 3 finish is out the door, and the level 5 finish specified in a “project manual” referenced in the contract is in. 

We have found in the very same enumeration section a deadline to submit a Request for Information or waive claims related to design conflict or ambiguity.  These provisions were most certainly not where they should have been, unless, of course, the authors of these contracts, and others like them, were trying to hide important terms in plain sight. 

Having reached this point in the article, you may be thinking that a careful reading of the body of the construction contract will save you, but not so fast.  Terms, conditions, and restrictions can be hidden in other, less obvious places.  In industrial construction, for example, the body of the contract itself may be innocuous enough. However, the total set of contract documents often includes specifications spanning into the thousands of pages. When most think of specifications, they think of engineering details and materials lists. In their purest form, specifications are just that. However, plans and specifications often contain additional written terms, regularly hidden in plain sight, that have a significant impact on the contractor. Some specifications, for example, include procedures and schedules for dispute resolution.  Contractors will often skim over dispute resolution clauses, leaving those to the lawyers should a matter need to proceed to litigation or arbitration. However, those clauses often impose during construction claim deadlines and claim deliverable requirements that must be met to later have a legal right to pursue litigation or arbitration. These requirements can include, for example, delivery of a written protest or objection within so many hours or days of a directive, required content for the claim deliverable, and a specified delivery method and address for the deliverable.  Overlooking contract terms hidden in specifications or other contract documents can cost you millions.  Your time is precious, so you may rationalize these risks to your company as merely theoretical.  You may choose not to spend the time to look for what may be hidden in plain sight, but doing so brings considerable risk.  When this article goes to print, the legal professionals at Zinzow Law will have won a lawsuit for its general contractor client over a single issue:  the subcontractor’s failure to timely comply with precisely these types of conditions precedent to a claim.

By applying the contract review principles in Parts I and II, and those you will learn in forthcoming Part III, you can reap your just rewards for Building America.