Construction Law Explained
Understanding Construction Law and Contracts
Construction law encompasses the legal rules and regulations that govern the construction industry. Broadly speaking, it is the study of the law dealing with the description, financing, and execution of the work involved in the construction of structures. Ultimately, it refers to the rights and liabilities of all parties involved with the performance of owner/developer contracts, subcontracts between general contractors and subcontractors, and sub-subcontracts and the like .
Construction law relates to all facets of building construction, including contracts for construction and design, wrongful death and bodily injury, damage to property including roads, streets, highways, bridges, drainage structures, water sewers, harbors, docks, levees, canals, wharves, railways, airports and runways, utility and communication transmission lines, power plants, transmission towers and lines, pipelines, oil field, and marine construction, among others.
A construction contract may also require the use of construction management personnel, construction and engineering professionals, and/or project managers and may involve a variety of arbitration and dispute resolution techniques, such as mediation or arbitration.
Other areas of construction law developing in the construction industry include construction site safety and environmental regulation compliance; construction insurance coverage and bonding law; and the law of public contracting.
Types of Construction Contracts
Several types of construction contracts exist in the construction industry. There are various types of contracts for owners, general contractors, subcontractors and suppliers. As discussed below, the three most common types of contracts are lump sum, time and materials, and cost-plus contracts.
Lump Sum Contract
A lump sum contract is the type of contract most commonly used in the construction industry. It is a single contract amount that encompasses all scope of work for a project. A lump sum contract is often referred to as a "Fixed Price Contract." There are no separate cost allocations for labor, equipment, materials, overhead, or profit, as all of these costs are bundled into the price. The lump sum contract is usually fully inclusive and includes such items as:
Time and Materials Contracts
Time and Materials contracts are used when it is difficult to estimate the labor and material costs to complete the project. These contracts are most often used on repairs and remodel projects because the extent of the problems may not be obvious until the work begins. A Time and Materials contract allocates costs based on the actual expenses incurred for labor, materials, and equipment. Usually, these contracts are issued on a not-to-exceed basis to protect the owner from excessive costs. An example of a Time and Materials contract would require the contractor to obtain the lowest/best price for materials at each step of the process. The bid items could be something like a grade of carpet or laminate for cabinets.
Cost-Plus Contracts
Cost Plus contracts are used when it is difficult to estimate the costs or length of time to complete a project. These contracts establish the cost of the project based on either the labor and material costs or labor only. These contracts may have a Guaranteed Maximum Price to ensure the owner that the project will not exceed a final budget. A Cost Plus Contract would benefit the contractor if the costs were actually much lower that estimated because the contractor would receive a guaranteed fee in addition to the material and labor costs.
Important Clauses in Construction Contracts
One of the most important components of a construction contract is the scope of work. The construction contract will lay out, in written form, the specific work to be done on the property, usually in detail. The scope will also include what will not be done on the property. This is an important distinction to make, as a court may find that work not included in the scope of work to fall within the contract anyway even if you did not mean to include it.
Another key area is the payment terms. A construction contract will generally detail the amount and timing of payment. Some construction contracts make provisions for small payments at various points throughout the course of construction, while others require one lump sum payment at the end of the job. Either way, you want to make sure that your construction contract is clear about the payment process so that you can get paid properly.
Timelines are also a key part of a construction contract. A construction contract will usually lay out a timeline for the project in its entirety. It will also make provisions for which party is responsible for delays in the project. The party that the court decides is responsible for a delay will usually be required to pay the other party for the delays. That means getting the timelines in the contract right in the first place is crucial.
A construction contract will usually also contain dispute resolution processes. The dispute resolution process will lay out a route that the parties will take to come to some sort of conclusion that is legally binding for all parties, usually in avoidance of litigation. Dispute resolution provisions allow for a more amicable resolution and allow the parties to keep their disagreements out of court.
Common Legal Issues in Construction Projects
Legal challenges are an inevitable part of every construction project, no matter the size or scope. With so many moving parts at play, it’s not unusual for disagreements to arise, leading to contract disputes and delays over the course of development. Failing to comply with regulations and building codes can lead to legal disputes as well. Understanding these challenges can help you strategize how to avoid them or prepare for the inevitable if they do occur.
Contract disputes are one of the most common legal issues that large or small developers, contractors and subcontractors face in the construction industry. It is critical that these agreements are well-written and accurate to best protect all parties involved. A breach of contract can result in serious monetary losses and bankrupt small business owners who may not have the resources to financially carry the dispute through to resolution. The costs associated with contract disputes, whether successful or not, make it essential that your contracts are carefully reviewed by a knowledgeable attorney.
Compliance issues arise when federal, state or local building codes and safety regulations are violated on a construction project. A common cause of compliance issues is that project managers don’t understand the regulations or codes that apply to their project, often due to a lack of supervision by the general contractor. Compliance issues can also arise due to faulty inspection by the relevant authorities, or miscommunication between state or federal agencies and contractors. Failure to address compliance issues during the course of a project can lead to serious delays and costly violations. To help prevent these issues, it is essential to conduct regular detailed inspections of the project, and to work closely with contractors to ensure they are following all required safety protocols and regulations.
Resolving Disputes in Construction
While prevention is the best medicine, even the most carefully drafted construction law contracts can’t always eliminate all disputes. What’s important is having systems in place to efficiently address disputes should they arise. A variety of dispute resolution options are possible, including the following:
Negotiation
Negotiation is informal and takes place between the parties to the contract. It’s the least costly and fastest way to resolve a dispute, with virtually no cost if you are able to resolve the matter.
Mediation
When negotiations fail, mediation is often helpful. It’s a nonbinding way of finding a solution to the dispute. Third party (usually a lawyer or retired judge) listens to both sides and helps the parties explore settlement possibilities. The mediator does not decide the dispute – but can aid both parties in evaluating the strengths and weaknesses of their case.
Arbitration
Arbitration is an alternative to litigation. During arbitration, an arbitrator or a panel of arbitrators hears the complaint and disputes and then renders a decision. The parties agree in advance that the arbitrator will have the power to decide the dispute. It’s most common in commercial contract disputes , but parties may also include arbitration clauses in construction contracts. Generally, arbitrations provide a less formal and less expensive method of resolving contracted disputes than lawsuits. The main goal of arbitration is to provide the benefit of a legally enforceable award with the reduced formality of a court action. The parties agree in advance that the arbitrator will have the power to decide the dispute. If parties choose to arbitrate and an arbitrator renders the decision, they are generally bound to that decision through the federal Arbitration Act. Parties are choosing to forfeit their right to present the dispute to a judicial forum.
Litigation
Litigation involves a dispute resolved by a judge (or jury) in courts and, in the end, typically involves appeals to a higher court. Litigation is usually complex, time consuming and expensive. This dispute resolution mechanism is generally considered the alternative of last resort when it comes to construction law cases.
The Role of Lawyers in Construction
The construction of buildings and infrastructure is a complex process, often involving numerous contracts and agreements between various parties. Legal professionals play a crucial role in this process, providing advice and drafting contracts that not only protect the interests of their clients but also ensure that the contracts are enforceable and compliant with all necessary regulations.
Contract management is one of the most important tasks for legal professionals in the construction field. This involves reviewing all contracts related to a project to ensure they provide adequate protection for the client, identify potential liabilities, and clearly outline the roles and responsibilities of each party. Legal professionals also help negotiate the terms of the contracts to minimize the risk to their client while ensuring that they fulfill their legal obligations.
In the event of a dispute, legal professionals are responsible for representing their client’s interests to ensure that they are either compensated for any losses incurred or meet their obligations under the terms of the contract. This may involve advice as to an appropriate strategy for settling a dispute that has arisen or even a determination of the merits of the case. In most cases, legal professionals will find it is preferable to resolve a dispute by way of agreement between the parties rather than litigation or arbitration.
Legal professionals are a vital part of the construction process. By reviewing, negotiating and drafting contracts they can help ensure that their client is not exposed to any unnecessary risk.
Best Practices in Construction Contracts
When it comes to construction law, getting things in writing is essential. But the terms of any enforceable agreement must be carefully written so as to protect your interests without being overly one-sided. The construction agreement you ultimately enter into needs to clearly spell out all the terms that will drive the relationship between the parties, govern what happens if there is a disagreement, and address other important issues that could easily cause litigation if they are not adequately covered.
Though you can never completely eliminate the risk of litigation , strong and comprehensive contracts can go a long way toward mitigating that risk, because they address issues upfront and dictate how they should be resolved if they arise. Good construction contracts typically include information about: The above list of items is not exhaustive, but it gives you a basic framework of what every construction contract should contain. Periodic review of your contracts with your team of advisors is a good way to ensure that you are protected under terms that are clear and reflected in the written instrument.