Components of a Written Negotiated Construction Contract

posted by Michael Fortney  |  Dec 15, 2009 7:58 PM in Construction Law:Contracts and Troublesome Provisions

Negotiated contracts

Negotiated contracts are used in the private sector.  Negotiated contracts are not used in the public sector where contracts must be competitively bid.

Contract documents

In most contracts, the contract documents are "incorporated by reference."  Contract documents usually include plans and specifications, the “prime contract” between the owner and all prime contractors, including the general contractor, addenda, building codes and regulations, and modifications to the plans and specifications after execution of the contract.

Scope of work

Disputes regarding scope of work are often the basis of construction claims.  Scope of work is defined as the extent of a contractor's responsibility to perform certain contract work.  To determine the scope of work, the contractor may have to look to other contract documents –  plans and specifications, contracts with others – and to industry standards (building codes, etc.).

The scope of work issues between the owner and the general contractor differ from the scope of work issues between the general contractor and subcontractors.  The general contractor must be sure that all of the scope of work is contracted to subcontractors, and that there are no overlapping scope of work issues.   

Questions regarding scope of work should be resolved in the written contract.  Scope of work references should be detailed in the contract.  If detailed specifications are available, refer to the specifications in designating scope of work.

Price

The price in the contract will either be lump sum, unit price, or time and material.  The contract should include a definite price, or a definite method of determining price.  Absent price, an otherwise valid contract will be interpreted as requiring payment of a fair value (quantum meruit).

Method of payment

Progress payments are periodic payments constituting partial payment of the contract sum. The contract should include a specific provision for time and method of payment and calculation of amount.

A schedule of values should be prepared by the contractor and approved by the owner and architect.  The schedule should accurately break down the scope of work into component parts, and assign a value to each component part.

Applications for payment should be measured against the schedule of values.  The application typically includes the amount of work in place, the cost of materials stored on site, the costs of labor to date, less an amount for retainage and previous payments.  The application is usually certified by the architect or owner and the payment is due thereafter.

Changed work/extra work provision

The changed work provision is a mechanism to allow the project to continue despite unanticipated circumstances or changes in the construction process or plans and specifications.  The change provision allows the owner to demand changes without requiring a new negotiated agreement with the contractor.  Changed or extra work may result in the adjustment of the contract price – either resulting in additional money and/or time to complete the project or a deduct in the price.  Reasons for contract changes include:

 

  1. owner initiated changes in the plans and specifications 
  2. unforeseen site conditions and weather conditions
  3. direction is necessary to remedy design deficiencies
  4. contractor initiated changes, “value engineering”, accepted by the owner
  5. changes in the material quantities from estimate

Typically, contracts permit owners to unilaterally change the plans and specifications and direct the general contractor to perform the changed or extra work.  Similarly, contracts permit the general contractor to identify instances of changed work and request an adjustment to the contract sum or time for completion.  The general contractor is typically required to proceed with the changed work pending the resolution of any claim regarding the appropriate contract adjustment. 

 

If the “change” or “extra” work involves work that is outside of the general scope of the contract, the change is not necessarily subject to the administrative remedy provided by the contract, and the contractor may refuse to perform the work pending resolution of the terms of the contract adjustment.  Such changes are commonly referred to as a cardinal change.

To determine if a change is a cardinal change, look to the following factors:

 

  1. the impact of the change
  2. degree of added complexity and difficulty of the contract work
  3. disruption caused to the contractor’s performance
  4. impact on the contract sum and time for performance.

 

 


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