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In Florida, a construction contract does more than set a project’s price. A well-drafted agreement should address the parties’ respective rights, responsibilities, risks, and remedies throughout the construction process. When important terms are unclear—or omitted altogether—the potential for payment disputes, delays, change-order disagreements, and other claims increases considerably.
As discussed in Florida Construction Law, construction contracts should include provisions that address every aspect of the construction process. While the required provisions depend on the project and the parties involved, several contractual provisions deserve careful consideration.
Clearly Define the Scope of Work
Before undertaking any construction project, each party must understand precisely what work will be performed for the agreed payment. The construction contract embodies that understanding through its scope-of-work clause.
Defining the scope, however, is not always as straightforward as it may appear. Owners generally want to define the scope broadly so the contract price includes necessary work. Contractors, on the other hand, may prefer a narrower, more specific description so work outside the defined scope may constitute extra work entitling the contractor to additional compensation.
The scope may also be affected by other contract documents, including plans and specifications, bid documents, correspondence, shop drawings and other provisions of the agreement. To that end, contractors tend to include qualifications, exclusions and assumptions within their bid to specifically exclude or qualify certain elements of the work. Therefore, carefully review those documents and incorporate them as appropriate. The contract should also establish an order of priority for resolving inconsistencies among the documents.
Establish Clear Payment Terms
Payment provisions are another critical component of a construction contract. A well-drafted contract with payment terms understood by both parties can help avoid disputes during the project and reduce the likelihood of litigation after completion.
Construction projects generally use one of three primary methods for calculating the contract sum: lump-sum, cost-plus, or unit-price. Once the payment method is established, the contract should address the terms and conditions governing payment, including progress payments, retainage, payment applications, supporting documentation, and final payment.
Progress payments, for example, are partial payments for work completed to date and may be made at specified times, designated stages, or percentages of completion. The contract should clearly identify what must be submitted with an application for payment and under what circumstances payment may be withheld including, but not limited to any notice requirements prior to withholding payment in whole or in part.
Understand Flow-Down and Flow-Up Provisions
Construction contracts also frequently incorporate obligations from one agreement into another. A flow-down provision incorporates duties owed by the contractor to the owner into the contractor’s agreement with its subcontractor. A flow-up provision, conversely, incorporates duties owed by the owner to the contractor into the contractor-subcontractor relationship.
Subcontractors should pay particular attention to these provisions. A subcontractor entering into an agreement containing a flow-down provision without reviewing the owner-contractor agreement may effectively agree to obligations it has never seen. Subcontractors should therefore obtain and carefully review the incorporated documents before executing the subcontract.
Pay Particular Attention to Contingent Payment Clauses
Another provision that can significantly affect subcontractors is the so-called “pay when paid” or contingent payment clause. An enforceable contingent payment provision can shift the risk of an owner’s nonpayment from the contractor to the subcontractor. Under Florida law, the critical issue is whether the provision clearly and unambiguously establishes payment by the owner as a condition precedent to the contractor’s obligation to pay the subcontractor, rather than merely establishing the timing of payment.
The distinction can have substantial financial consequences. If the provision creates an enforceable condition precedent and a dispute results in the owner withholding payment from the contractor, the subcontractor may remain unpaid even when the underlying dispute has nothing to do with the subcontractor’s work.
Address Changes and Extras Before They Become Disputes
Changes are common during construction, so the contract should establish a clear procedure for modifications, change orders, and extra work. The scope-of-work provision and change-order provisions should work together. Work that is necessary but not included within the original scope may become an “extra” or change order, potentially resulting in an adjustment to the contract price.
Contractors should also carefully review change orders before signing them. As Chapter 2 cautions, accepting a change order without reserving the right to pursue additional compensation or time may operate as an accord and satisfaction and potentially bar later recovery for amounts not included in the change order.
The Contract Should Allocate Risk Before Problems Arise
Construction projects inevitably involve uncertainty. Payment issues, unforeseen conditions, delays, defective work, disagreements over scope, and other problems can arise even on well-managed projects.
A comprehensive construction contract is not simply meant to document the parties’ agreement at the start of the project. It should also establish who bears particular risks, what procedures must be followed when circumstances change, and what remedies are available when obligations are not satisfied.
Careful drafting at the outset can provide greater certainty for owners, contractors, and subcontractors and may help prevent an ordinary project issue from developing into expensive construction litigation.
*This article is based upon concepts discussed in Chapter 2, “Selected Construction Contract Provisions,” of Florida Construction Law by Steven M. Siegfried, Nicholas D. Siegfried and other contributors.