January 2020 – Law and Civil Engineering

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More on Contract Clauses
by Eugene Bass

On of the main purposes of a contract is to allocate risk between the contracting parties. Generally, the parties expect that contract terms will express normal risk allocation. Sometimes, however, a contract may contain terms that vary from the expectations. Care must be taken to review all the terms of the contract to be aware of the unusual or unexpected provisions that can significantly affect anticipated risk and the contract price.

Clauses requiring a contractor to investigate a job site and related conditions and to acknowledge satisfaction with those conditions are not uncommon. The reason for this type of provision is to protect the owner from changes to the project that may increase the cost if unanticipated conditions are found. If the owner supplies misleading information, such a requirement may not be enforceable, however. If an owner intends that the contractor conduct an extensive investigation before submitting a bid, the price will, of course, reflect those costs, providing the bidders appreciate the necessity for such an investigation. A bidder should clearly understand if it is the owner’s intention to shift the risk of site conditions to the contractor or the bid price will be higher than it should be. Owners should also be aware that to the extent they do not invest in pre-bid site investigations, the price of their project will increase to reflect the added costs to the bidders. Also, there is more possibility that the contractor’s investigation may not be as thorough as it should be, thus increasing the risk of problems during construction.

Sometimes contracts seek to limit compensation or damages arising from delays by providing that the only remedy available for a delay is a time extension of the contract. Time delays can be very expensive and often mere time extensions will not provide reasonable compensation for the delayed contractor. If faced with such a provision, a contractor should seek to limit it’s application where delays are not within the contemplation of the parties or are unreasonable. Also, such clauses should not be applied to bar any claims for delay that can be passed onto the owner.

Payment clauses that seek to only require payment to a subcontractor after the general contractor is paid, can be very problematic. The legitimate intent of such a clause can be to provide that payment will be made in due course when the submittal, approval and payment process has been completed. Another purpose can be to provide that if the general contractor is not paid by the owner, the general contractor does not have to pay the subcontractor. That may not be a risk that the subcontractor will appreciate, especially after fully performing the work. Special care should be taken to recognize and understand such clauses and to be sure that they are modified, if necessary.

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