It is often said that the contract is “the law between the parties.” Construction contracts govern the relationship between the parties involved in the project, including the owner, contractor, subcontractors, and suppliers, and can be vital to the success of a project.
A well-drafted contract can prevent disputes and provide a clear framework for resolving issues that may arise during the construction process. Below is a list of the most important construction contract clauses to focus on in when planning your next energy industry construction project.
1. Scope of Work
Although it may seem obvious, the description of the scope of work is one of the most important clauses in a construction contract. This clause defines the work to be performed by the contractor or subcontractor, including the materials and labor required to complete the scope.
The scope of work, including any exclusions, should be detailed and specific to prevent misunderstandings or disputes. Often, the scope of work will incorporate or reference pertinent plans, specifications, or other design drawings, which can help to avoid ambiguity.
2. Payment
The payment provisions outline the payment terms, including the amount of payment, the schedule of payments, and any conditions that must be met before payment is made. This clause is critical to ensuring that the contractor or subcontractor is paid on time and that the owner or general contractor has the right to withhold payment for unsatisfactory work or other issues.
Additionally, subcontracts often contain similar, but distinct “pay-if-paid” or “pay-when-paid” clauses that condition payment to a subcontractor on payment from the owner to the general contractor. These clauses are not enforceable in all states and should be specifically written and tailored to meet their purpose.
Careful attention should also be paid to any prompt payment statutes, which may require payment to general contractors and subcontractors within a certain period of time and which vary from state to state. In some states, prompt payment requirements may not be contracted around.
3. Change Orders
The change order provisions govern changes to the scope of work, schedule, and price during the construction process. This clause should detail the process for providing notice of, requesting, and approving change orders, including addressing any additional monetary compensation or schedule changes that may result from the change order.
These clauses should be drafted such that a written, executed change order is required to alter the contract to avoid any potential disputes. Additionally, change order provisions often state that written change orders constitute final payment and compensation for the changes addressed and may constitute a waiver of claims for additional compensation or time related to the issues addressed via change order.
4. Time and Schedule
The time and schedule clause outlines the project timeline and the deadlines for completing specific tasks. This clause is critical to ensuring that the project is completed on time and within budget. The schedule should be detailed and realistic, with specific milestones and deadlines for completing each phase of the project. The project team’s input is vital to these clauses.
Liquidated damages provisions are often included in construction contracts. These provisions require a contractor or subcontractor to pay specified damages if the project or certain tasks are not completed within the time specified in the contract. These clauses are generally enforceable but should be drafted to be commiserate with the damages that would have been incurred due to the delay.
Construction contracts should likewise address the remedies available to a contractor or subcontractor if the scope of work is delayed due to events outside the contractor’s or subcontractor’s control. Construction contracts commonly contain “no damage for delay clauses,” which can prevent a contractor or subcontractor from seeking additional monetary compensation and limit the contractor only to a schedule extension in the event the project is delayed by certain events.
5. Warranties and Guarantees
The warranties and guarantees clause outlines the warranties and guarantees pertaining to the labor and materials used on the project. This clause should detail the length and scope of each warranty and guarantee, and any conditions that must be met to make a claim, including time limitations for providing notice of any warranty claims.
Particularly in energy projects where expensive specialty equipment is commonly included, these clauses should also address warranties provided by material suppliers and whether those warranties will be assigned to the owner.
6. Indemnification and Insurance
The indemnification and insurance provisions outline the parties' responsibilities for indemnifying each other and for obtaining the necessary insurance coverage for the project. This clause should specify the types of insurance coverage required, including general liability insurance, workers' compensation insurance, and property insurance.
The insurance provisions may also require waivers of subrogation. Be sure to confer with your risk management team and/or insurance representatives on these clauses, as well.
Counsel should be aware of applicable anti-indemnity acts that may nullify certain indemnity provisions that are deemed to be overly broad under a state’s law. Many states have both construction anti-indemnity acts and oilfield or energy industry anti-indemnity acts that may limit the scope of indemnity provisions, including knock-for-knock clauses common in the industry.
7. Termination
The termination clause outlines the circumstances under which the contract can be terminated by either party and the rights and remedies of the parties in the event of termination. These provisions should address both terminations for default and terminations for no fault or convenience.
The termination clauses should detail the process for terminating the contract and any rights or obligations of the parties upon termination, including provisions concerning notice of default and opportunities to cure. The clauses should also address the right of a contractor or subcontractor to be paid some or all the amounts due for its work (performed and unperformed) and the right of an owner or general contractor to deduct the cost of completing any remaining work.
8. Force Majeure
The force majeure clause outlines the parties' responsibilities and rights in the event of an unforeseeable event, such as a natural disaster or a government order, that prevents or delays the project's completion.
Typically, these clauses excuse a party’s non-performance if caused by a “force majeure event,” which should be defined in the contract. These provisions should detail the process for invoking the force majeure clause and any rights or obligations of the parties during the force majeure event, including any notice requirements and any rights to suspend or terminate the contract.
Given the recent issues caused by the Covid-19 pandemic, these provisions should be specifically drafted to address in detail which types of events should be considered “force majeure events” and should specifically address whether governmental regulations and supply chain issues related to Covid-19 will be considered “force majeure events.”
9. Dispute Resolution, Governing Law, and Jurisdiction
The dispute resolution clause outlines the process for resolving disputes that may arise during the construction process, including the formal claims process, mediation, arbitration, or litigation. This clause should detail the process for initiating a dispute resolution procedure, any requirements for submitting claims (including notice provisions), any time limitations for initiating the dispute resolution process, any mandatory mediation, and whether unresolved disputes will proceed in arbitration or litigation.
The dispute resolution provisions may designate a location for any arbitrations and may contain forum selection clauses and choice of law clauses, as well. Some states require disputes to be decided in the state where the construction project is located and the application of the project’s states law to the dispute.
10. Limitations and Waivers of Liability
Many construction contracts contain provisions limiting the damages or remedies available to the parties. As previously mentioned, one of the most common limitations in construction contracts are “no damage for delay clauses” that may prevent a contractor or subcontractor from collecting additional monetary compensation for delays to the work.
Additionally, construction contracts may contain clauses whereby the parties waive their rights to seek consequential damages or limit the amount of potential liability to the contract amount (or some multiple of the contract amount). Parties may want to except from the limitations certain obligations such as indemnity obligations or those for which insurance coverage is or should be available.
Construction contracts also often contain lien waiver provisions whereby a contractor or subcontractor is required to waive its right to assert a lien on the property. Some contracts contain “advance lien waivers” whereby a contractor or subcontractor waives its lien rights in the contract before any issues concerning nonpayment arise, while others require the contractor or subcontractor to provide lien waivers with pay applications, preventing the contractor or subcontractor from filing liens for sums or work for which it has been paid.
Conclusion
Construction contracts, particular those in the energy industry, are complex legal documents that require careful drafting to ensure that they provide a clear framework for the project. The clauses discussed above are critical to ensuring that the project is completed on time, within budget, and to the satisfaction of all parties involved.
In-house counsel and outside counsel should pay close attention to these provisions to ensure maximum predictability when issues inevitably arise on energy-industry construction projects.
Author: Thomas D. Bourgeois, Jr., Senior Associate at Kean Miller
