”Time is money.” “On time and on budget.” These are phrases you regularly hear during the construction process. However, price increases, low availability of materials, scheduling concerns with subcontractors, and high cost of skilled labor have frustrated timelines or killed construction projects in recent years. What to do?
The construction contract generally addresses how the owner and the contractor bear the risk of price changes and delays. On the two ends of the spectrum, there are:
Guaranteed maximum-price contracts: There are no changes permitted for cost increases, availability of labor or delays in receiving material. This places all risk on the contractor. Although appealing to the owner, there is risk that the contractor is unable or unwilling to deliver as agreed.
Contract for time and materials: Under which the contractor is entitled to change orders for all increases or delays, with the owner paying a fee at completion of the project. This places the risk of price increase and availability on the owner. While preferential to contractors, delays and overruns may create issues that the owner cannot accept or finance.
A typical construction project falls somewhere between these approaches, with the parties negotiating the following risk-related provisions:
▶ Scope of work. The foundational piece of the construction project, it is important to include enough detail to ensure both parties are aligned.
▶ Risk of cost overruns. The typical construction contract will include a budget estimating all costs required to complete the project. The parties can determine who bears the risk and benefits from the budget, including for specific items.
▶ Construction schedule delays. A construction contract will typically include a schedule outlining the sequence and duration of all activities required to complete the project. The contract should address key milestones, potential extensions, damages for late completion or incentives for early completion.
▶ Site, design and engineering risk. The contract may address who is responsible for site conditions, project design and engineering risk, approval process for changes, and liability for unforeseen conditions, errors and omissions. Often this risk falls on the party that has hired the planner, architect or engineer.
▶ Termination clauses. The contract’s termination or default provisions may permit parties to terminate or pause the contract upon specified events, such as market swings or unavailability of material, and may include a termination fee.
There are other means of alleviating project risk, too. Engaging with project designers, contractors, suppliers, professional services providers and others to define the scope of the project can help address potential risks to timelines, pricing and availability. Potentially buying and storing materials upfront can help, as well as value engineering throughout construction, reviewing components and seeking alternative materials, designs or cost-saving features.
It is important that the parties establish and maintain open lines of communication between owner, contractor, and others to address fluctuating prices and delivery delays during the project.
— Jamie Radabaugh, Boardman Clark Attorney
jradabaugh@boardmanclark.com
Visit boardmanclark.com to learn more.
