A lawyer discusses what makes construction contracts so complicated: Part I

I thought it would be interesting to discuss what makes construction contracts so complicated, when some people just look at construction contracts as filling in some blanks in a form and then you can get started. Whether you want to build a building, renovate a new office, renovate a retail store or just combine two co-op apartments, the concepts and legal provisions are largely the same. The number of pages used in a contract to express that may vary considerably, but the same basic requirements are in all those types of contracts. So why is there so much back and forth and time spent in negotiating these agreements? To understand that, you have to look at the nature of construction. It is an ever-changing concept. What people thought was "the contract" and the "scope of work" in the beginning, may be very different further into the project. In part II, I will discuss the documents comprising the contract. The parties start negotiating a contract with a set of plans hopefully drawn up by an architect. I say "hopefully," because some projects have very basic drawings and a lot is worked out "in the field." That is the most risky way to commence a project, since it is so unclear that you can be certain that the scope of work and the price will be changing almost immediately. That situation makes for a very complicated contract, because nothing is clear going into the project and it pretty much stays that way as the project continues. Consider a situation where the plans and specifications are as well thought out and drawn up as they can be. Even in that situation, you will see changes in the project due to changes in the work because of the owner's changing needs or problems with ordering certain specified materials and the need for substitutions with long lead order times. The nature of construction is that it is always subject to change. The contractor may begin work and find that there is unforseen deterioration in the wall that will need to be fixed before other work can continue. There may be asbestos that needs to be removed. The floor is taken off and the sub-floor is found to be uneven and work needs to be done. There may need to be electrical upgrades. In these situations, both the scope of the work and the price will keep changing, as well as the completion date. So the fixed price contract the parties thought they had in place may now start needing some changes very quickly. These changes are known as "change orders." They are best described as mini-amendments to the contract. As such, they require the same formalities as far as needing all parties signatures before the work is done. Change orders can increase the price, decrease the price or change the time for completion. Consider this: A contract had a completion date of January 15, 2010 with 150 days for completion. However, there may be 35 change orders, each increasing the completion date from a few days to as much as 120 days. So what started out as a 150-day project to complete may have been extended by 897 additional days because of additional work, unforeseen problems with the work, bad weather and problems with long lead times on ordering materials. This is where things get messy and complicated. The parties have not really kept track of all these changes and where they stand with the schedule for completion. They have fallen into limbo. The project just goes on and on and never seems to end. But a well-drawn contract can come back to save the day, because all of this can be sorted out. For example, the drafter put in language that there would be per diem "fees" for each day the project is late, starting 200 days after commencement. In other words, there is a cushion before these fees kick in. Then, you can add up all the additional time granted in the change orders. In most cases, this math will surprise the contractor, who has been coasting along without anyone bothering him too much about completion. However, when he hears that he is well past the completion date in the contract and may owe the owner a "chunk of change," he may be more motivated to complete the work. However, the key is understanding the changing nature of construction and having legal counsel who understands this and can anticipate these unforeseen situations in contract language. C. Jaye Berger, Esq., is principal at Law Offices C. Jaye Berger, Manhattan, N.Y.