The importance of a construction contract should never be underestimated. It literally spells out the entire understanding between the owner and the contractor. The contract is usually comprised of an agreement, drawings, specifications, general and supplemental conditions, addenda, and contract modifications made during the duration of the contract.
Although all of these aspects of the contract are important in their own right, the general conditions section has the greatest impact because it typically contains the most provisions relating to the project’s risks. The correct allocation of risks and responsibilities is a significant factor in determining whether or not a particular contract is a workable contract. That’s because allocating risk appropriately will set the project on a winning course. It fosters positive relationships among the respective parties in the contract because everyone is on the same page. The “us against them” mentality that accompanies an unexpected crisis when there is no contingency plan can be avoided. Eliminating uncertainty about responsibilities makes it possible for contractors to avoid adding cost contingencies in their bids to protect themselves from being caught short. It also allows them to plan ahead for contingencies and schedule them as part of the contract performance. In summary, proper risk allocation will ensure fewer claims, lower costs and enable the project to be completed on time.
Using this risk allocation yardstick, how does the standard construction industry contract measure up in terms of being a good contract? In their favor, standard form contracts have had a stabilizing influence on the way construction projects are transacted. Because the industry is not governed by a cohesive set of regulations, industry associations were forced to develop standard contracts to provide members with guidelines for proceeding expeditiously. Legally, they are considered fair and advantageous, which is why they are used so prevalently.
Because most of these contracts are developed with input from industry participants, they incorporate current customs and best practices. Even when the parties choose to draft their own contract, industry standard forms are used as a reference. Because the standard terms and conditions they contain are familiar to industry members, it substantially reduces drafting and review time, which lowers overall costs. This familiarity with terms and conditions and the understanding of their consequences allows contractors and subcontractors to offer lower bids because there are no surprises when establishing the bid price.
In spite of the effectiveness of the standard form contracts, the American Corporate Counsel Association says they should not be used without taking certain cautions into consideration:
- Standard forms should not be used without modifications. Since they are drafted for broad applicability, standard form contracts cannot account for all transaction-specific and jurisdiction-specific terms that the parties require.
- Be wary of the “ripple effect.”Because standard form construction documents often reference other parts of the contract, changes made in one may have repercussions in another. Pay particular attention when changing the definition of a word or term.
- Do not become “contract complacent.”Read the contract, even if it is a standard form. New projects or circumstances may necessitate a “fresh look” at specific boilerplate language.
- Custom-drafted and industry-drafted forms do not mix.Industry-drafted forms usually are coordinated only with other industry-drafted forms from the same organization/publisher. Unless the drafter of the custom form has attempted to coordinate the document with the industry-drafted form, chances are they will not be compatible. Industry-drafted forms from different organizations/publishers usually are not compatible.
- Every contract contains the bias of the drafter. Bias is an inescapable element of any contract. Turn that knowledge into an advantage by knowing both the relative merits and features of and the circumstances under which to use the various standard forms published by different industry organizations.