• Five Questions to Ask When Drafting or Reviewing a Contract
  • April 30, 2014 | Author: George F. Burns
  • Law Firm: Bernstein Shur - Portland Office
  • Contractors, owners and designers in the construction industry want to build and complete projects. They don’t really want to be buried in mountains of paper. However, one of the most important first steps on any construction project is to make sure that the contract documents match the project that you are about to build. If you cannot answer the five questions below because the draft contract is not clear, or you don’t understand portions of the draft contract, you likely should seek legal advice before signing anything. It is far less expensive to ask for advice before you sign the contract than after you sign it—or, worse yet, after a serious crisis arises on the project.

    1. Are you really buying or selling what you think you’re buying or selling?

    If you are the owner, have you accurately and completely described all of the benefits that you are to get under the contract for the amount you are going to pay? Conversely, if you are the contractor or supplier, is the description of the benefits so open-ended that my fixed price may not be adequate to cover your costs and leave you a profit? Many cases arrive in our office and head to litigation in which the scope of work is indeterminate or at least arguably vague.

    2. What doesn’t the contract cover?

    Is the contract comprehensive or does it leave holes that you have to fill in some other way? For example, as an owner, you must ask whether this contract delivers all of the goods and services you need to yield the project outcome that you desire? As a general contractor does your subcontract pass on to the subcontractor all of the obligations that you owe to the owner? To the extent that there are gaps in the coverage of the various contracts, are you willing to take the risk that those gaps will continue to be unfilled? Have you adequately priced the project knowing that those gaps exist?

    3. Does the contract have warranty provisions that make sense?

    As an owner building a power plant, you have to know that the plant will actually work. Do you have warranty rights against the contractor or designer if it fails to work? As a general contractor are you taking on too much warranty liability even in cases in which you build the plant exactly as you are told to build it?

    4. Does the contract mesh with other project contracts?

    Do all of the contracts provide for the same dispute resolution mechanism (See how to pick your poison below by David Ray)? Do all of the contracts dovetail with each other in terms of specifying who is to perform what work and in terms of coordinating the various work assignments and schedules?

    5. Is the other party to the contract financially capable?

    If the other party to the contract fails to perform, and breaches the contract, are they creditworthy? Does it have anything to lose? You can have the best contract in the world but if the other party is insolvent, you don’t have a practical remedy. To some extent, the ability to collect can be enhanced through the requirement of insurance for designers and contractors, and payment and performance bonds. A large retainage is another way of managing uncollectibility risk.