A lawyer discusses construction contracts: Success depends on a combination of many factors - by C. Jaye Berger

When clients come to consult with me about construction contracts or attend one of my seminars, it is commonplace for them to tell me they are looking for “the perfect, bulletproof contract.” Unfortunately, the success of any contract depends on a combination of many factors, not the least of which is party’s own business practices and professionalism in handling the inevitable changes and disagreements that occur on projects. The location of the project is a factor, as is whether it is commercial or residential. In some states, such as New York, there are Home Improvement Contractor licenses required for residential projects with certain language required in those contracts.

There are printed, fill-in-the blank form contracts offered by certain organizations, such as the American Institute of Architects (AIA), and by other organizations. Extensive riders can greatly change the contract. There are other contracts drafted by attorneys for the clients with varying levels of understanding about the process of construction. Sometimes AIA form contracts wind up being so heavily edited that they vary greatly from the original form and are really no longer AIA documents. This is not usually a good thing, especially  if you are using the form because you think the AIA contracts express the standard in the industry.

Contracts also depend on which side of the deal you are on. Contractors contracts may tend to be more favorable to the contractor’s interests, whereas owner’s contracts tend to be more favorable to the owner’s interests. Understanding the process of construction helps in choosing the words and subjects drafted into the contracts. Once the first draft is shared,  the process of negotiation helps the parties to meet somewhere closer to the middle. In other words, there is no such perfect document, but everyone can strive to come as close to perfection as they can.

Construction contracts are so important, yet some people just look at them as just  fill in the blank  forms that are only needed so that you can get started. Even in this day and age where so much information is available to so many, some contractors still just prepare a scope of work on a couple of sheets of paper with a payment schedule. They think they can figure things out in the field along the way. Unfortunately, when disputes occur, people read them with magnifying glasses to see if it supports whatever position they are taking on a given topic. When they find that it does not, it can lead to litigation where they look for a judge or arbitrator to help the parties to figure out what was intended or what is fair. Therefore, it is worth taking some extra time with them before signing, since the process of negotiating such agreements helps iron out many potential problems that may occur once work commences.

There are no magic number of pages. It needs to be as long as is needed to fully express and describe the intentions of the parties and the work that needs to be done. This is true whether you are build a building,  renovating an office, renovating a retail store or combining two co-op apartments. Some gut renovations of co-op apartments and townhouses are as complicated and expensive  as building a new building. However, the concepts and legal provisions are largely the same, but the way that is expressed in a contract varies greatly. No two contracts are the same.

For projects where “homes” are being renovated, which includes co-op apartments, they will need to use certain statutory language specifically  for home improvement contracts. An attorney who works in this area of the law should be consulted. Some parties try to save money by doing their own negotiating and only calling in an attorney when they feel they are having a problem. This is short-sighted thinking.

For the contract to really work in the way it is intended, it is important to have the project as fully designed and thought out as possible before any work begins. You do not want to still be designing aspects of the project after the contractor has started demolition. That is the worst place to be from a negotiating point of view. The client has contractually committed to the contractor. The landlord may have given a date by which the work must be done. Their home or office is under demolition and the parties are still talking about changes in designs, which means changes in prices and the completion date. Things should be worked out by a designer or architect on paper before the work begins to avoid delays in completion. Changes worked out “in the field” are sometimes not well thought out or approved by the landlord or board of directors.  The risk is that the price will be changing substantially and the client has lost any leverage to negotiate a better price or go elsewhere.

This is in contrast 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. 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. There will need to be change orders or even amendments to the contract.

A well-drafted contract can save the day, because it has anticipated issues that may arise and provides answers. For example, if the project is running late, the drafter may have put in language that there would be per diem “fees” for each day the project is late, starting a certain number of days after commencement. There may be change orders extending the completion date. In other words, there is a cushion before these fees kick in, but they do kick in as encouragement to the contractor to get the project finished.

These are very complicated agreements and having an understanding of the changing nature of construction and legal counsel who understands all of  this can make a big difference in the outcome.

C. Jaye Berger, Esq.  is the principal of the Law Offices C. Jaye Berger, Manhattan, N.Y.