Every term of a construction contract is negotiable. That does not mean, however, that every term of a construction contract should be negotiated. Construction contracts are all about risk-shifting. General contractors and subcontractors should evaluate their risks and negotiate accordingly. This article identifies eight construction contract provisions that are frequently negotiated in this manner on complex projects and with good reason:

Whether you are a general contractor or a subcontractor, it is critical to understand and accurately define a scope of work statement in any construction contract. The scope of work statement should clearly identify each party’s obligations and responsibilities, and accurately identify project deliverables, tasks, milestones, deadlines, and parameters. The scope of work forms the basis for the entire contract and, therefore, needs to be sufficiently detailed to enable the parties to perform the contract and make informed decisions about the other terms of the contract.

Change orders are used to alter the scope of work and amend the original contract. The unpredictable, multi-layered nature of complex construction projects creates the need for change orders. Therefore, parties to a construction contract need to negotiate a change order procedure that allows them to nimbly and efficiently address issues that arise during performance of the contract such as changes to the design, schedule, materials, and cost of the project. The contract should identify the process for requesting and approving changes, who will perform the extra or changed work, how the cost of the extra or change is to be determined, how extra or changed work is to be paid and when, and whether and how the parties can waive the change order process.

Owners want their construction projects completed on time and on budget. So, it is important for parties to negotiate and agree to realistic milestones and deadlines and to develop a contractual process for dealing with delays and schedule changes. Construction contracts should clearly state what happens in the event of a delay, whether delays are excusable, whether and how deadlines can be extended, how the monetary cost of a delay is to be determined, and who bears the cost of the delay. Many contracts assess monetary penalties for delays and address whether the parties have the right to seek delay damages in the event of a dispute.

Construction contract disputes are inevitable. Consequently, construction contracts often include a written claims process. A claims process clause should identify how and when claims are to be made, whether and how claims can be waived, what documents and backup are needed as part of a claims submission package, and how disputes are to be addressed and resolved. If the parties cannot reach resolution, they can also agree to mediate, arbitrate, or litigate their disputes. In addition, the contract should address who bears the cost of such procedures and whether a party may seek its attorney fees and costs related to these procedures.

Parties frequently limit the damages that one or both parties may recover from the other in the event of a dispute. It is common for parties to agree to “no damages for delay” clauses or that only actual damages may be recovered, expressly foreclosing the ability to recover, special, consequential, non-economic, or punitive damages if allowed under applicable law. When damages would be difficult to determine using conventional methods, parties may also agree to a liquidated damages provision which sets out a formula for calculating damages.

Every construction contract needs to set forth clear, detailed payment terms. Paid when paid, Net 30, and retainage clauses are all commonly used in the industry. On larger projects, progress payments may also be negotiated. Each party needs to evaluate the effect of the proposed payment method on their cash flow to determine what works best for them and negotiate accordingly.

An indemnity clause allows the parties to shift the risk of liability for expenses or losses from one contractual party to the other. There are a wide variety of indemnification provisions, but generally, one party agrees to indemnify (defend, hold harmless, reimburse, or cover costs of) the other party for one or both parties’ actions or the actions of third parties (such as architects, engineers, or subcontractors). Courts interpret and enforce indemnity provisions differently based on the applicable law, so parties should keep that in mind when negotiating these types of provisions. It is also critical to understand how indemnity provisions work with the party’s insurance.

Construction contracts typically include a termination clause which identifies the procedures for terminating the contract and how payment or damages will work in the event of termination. The parties should also consider whether they want to allow the other party to terminate for cause or convenience or both and under what circumstances and deadlines each type of termination may occur.

Our Construction Group has extensive experience negotiating and drafting construction contracts, including EPC, Design Build, CMAR, and Design-Bid-Build contracts for complex public, private, and P3 projects.