Understanding and Negotiating Construction Contracts

Kit Werremeyer is owner and president of Southernstar Consultants LLC, Valrico, Florida, US, which provides training in construction contract negotiations and other professional services for engineering and construction companies both in the US and internationally. He has more than four decades’ experience in negotiating fair and balanced construction contracts, sales, major project development, and construction contract dispute resolution.

Acknowledgments xiii

About the Author xv

Preface xvii

Disclaimer xix

Introduction xxi

The Goals of This Book xxi

What Are the Benefits of This Book? xxi

Contractor & Owner Conventions xxii

Private Contracts or Government Contracts? xxii

Key Contracting Concepts xxii

Two Types of Commercial Terms & Conditions xxiii

The Most Important Commercial Terms & Conditions xxv

The Contracting Process xxv

Terms & Conditions xxv

The Concept of Risk Transfer xxvi

This Is a Book Developed Just for Contractors xxvii

Three Final Suggestions xxvii

Chapter 1: Contracts: Basic Training 1

What Is a Contract? 1

The Steps to a Contract 1

Coming to the Party? 2

The Starting Point 3

“Here’s My Proposal” 4

“Consideration,” or Something of Value 5

The “Happy Test” 5

“Can That Person Sign This Contract?” 6

Call in the Enforcer to Close the Breach! 6

A Contract Example 8

Strange Words & Long Paragraphs 10

Contracting Myths 11

Contract Negotiations 12

Chapter 2: Types & Forms of Contracts 15

Fixed Price & Fixed Schedule Contracts 16

Reimbursable Type Contracts 16

Combined Fixed Price & Reimbursable Contracts 18

Cost Plus Fee Contracts 20

Guaranteed Maximum Price Contracts 21

Target Price Contracts 21

Contracts with Performance Incentives 22

Form of Contracts 23

Some Final Contract Housekeeping— Definitions 30

Conclusion 32

Chapter 3: Scope of Work 33

The Scope of Work Matrix 37

Scoping Drawings 39

Conclusion 40

Chapter 4: Terms of Payment & Cash Flow 41

Cash Flow 42

Interest Rates 44

Periodic Progress & Milestone Payments 45

Conclusion 59

Chapter 5: The Schedule 61

Float 62

Time Is of the Essence 64

Extra Time, but No Money 66

Conclusion 68

Chapter 6: Assurances of Performance 69

Guaranties & Bonds 70

What Does “Failure to Perform” Mean? 72

What Is a Bond? 72

Forms of Assurances of Performance 73

Surety Companies 78

Some Language Considerations on Guaranties & Bonds 82

Types of Performance Assurances 82

Conclusion 101

Chapter 7: Insurance 103

What Is Insurance? 104

Claims Made vs. Occurrence 105

Types of Insurance 106

Important Issues Associated with Insurance 112

Additional Insured Status 120

Additional Insurance Basics 121

A Typical Insurance Clause in a Construction Contract 134

Safety 140

Chapter 8: Indemnity 141

Insurance & Indemnity 142

Indemnity Definitions 142

Transferring the Owner’s Risks to Contractors 143

Fairness Is Not a Consideration 143

Is an Indemnity Required in a Construction Contract? 144

Anti- Indemnity Legislation 144

Examples of Indemnification Clauses 150

Indemnification, Additional Insured Status, & Contractual Liability Insurance 157

Owners Love CLAIMS! 161

Negotiating Indemnity Clauses 162

Knock- for- Knock Indemnities 165

Conclusion 166

Chapter 9: Changes 169

Some Ground Rules 170

Protecting the Project Manager 170

Owners’ Directives 171

Constructive Changes 171

Payment for Changes 172

Sample Change Clauses 172

Major Contract Changes 178

Negotiating Change Clauses 179

Conclusion 180

Chapter 10: Disputes & Their Resolution 183

What’s a Project Manager to Do? A Short Story to Start With 183

Disputes— The Construction Contract’s Bad Actor 184

An Ounce of Prevention 186

Dispute Resolution Options 186

The Folks who Negotiate, Mediate, Arbitrate, & Litigate 188

Dispute Resolution Clauses 189

Conclusion 192

Chapter 11: Damages 193

Breach of Contract/Failure to Perform 194

Contractors’ Financial Exposure 194

Actual Damages— A Silent Risk? 194

Liquidated Damages 196

Consequential Damages 204

Conclusion 206

Chapter 12: Warranties 207

A Workable Definition of Warranty 207

Warranty Issues 208

The Uniform Commercial Code 214

When Is No Warranty Appropriate? 217

Extended Duration Warranties 219

Limiting Provisions in Warranties 221

Pass- Through Warranties 221

Latent Defects & Warranty 222

A Sample Warranty 224

Conclusion 224

Chapter 13: Termination & Suspension 227

Termination for Cause 228

Termination for Convenience 229

Suspension 232

Cancellation 236

Conclusion 236

Chapter 14: Force Majeure 239

Negotiating Clauses 239

Sample Contract Language 240

Conclusion 244

Chapter 15: Other Contract Clauses 245

Site Conditions 246

Use of Completed Portions of the Work 251

Patent Indemnity 252

Secrecy & Confidentiality Clauses & Agreements 253

Owner’s Right to Inspect 254

Independent Contractors 257

Assignment 258

Acceptance & the Punch List 260

Advance & Partial Waiver of Liens 262

Final Waiver of Liens 265

Audit Rights 268

Severability or Validity Clauses 269

Venue & Applicable Law 269

Florida Civil Code Chapter 47 Venue 270

Texas Business & Commercial Code Annotated §272.001 271

Venue and Choice of Law State Statutes 271

Contractual Rendition? 271

Changes in the Law 272

Some Interesting Clauses to Close 273

Chapter 16: A Construction Contractor’s Contract Checklist 275

Chapter 17: International Contracting 283

International Contracts 284

The U.S. Foreign Corrupt Practices Act 285

Letters of Credit 286

Split Contracts: Onshore & Offshore Contracts 288

Political, Religious, & Economic Risks 289

Overseas Private Investment Corporation (OPIC) 290

Legal Systems in Foreign Countries 290

Local Employees, Partners, & Agents 291

Offshore Companies 292

Currency Risks 293

Applicable Law 297

Joint Ventures 299

Joint Operations 299

Import & Export Considerations 300

Understanding INCOTERMS 302

The Export‐ Import Bank of the United States 305

Where to Get Some Help— Ask the U.S. Government 306

Lastly, Use the Right Paper Size! 307

Conclusion 307

Chapter 18: What’s It Take to Do Business in Southeast Asia? 309

Patience Is Golden 310

Walk the Talk 310

Time and Money 311

The US Foreign Corrupt Practices Act 312

Center for Strategic and International Studies 313

Trans Pacific Partnership (TPP) 314

Backdoor to China and India 314

SPECIAL Section— The Socialist Republic of Vietnam (Vietnam) 316

Resources for Business in Southeast Asia 317

Chapter 19: Some Final Thoughts on Negotiating Contracts 319

Why Negotiate? 320

The Concept of Standard Terms & Conditions 320

Risk Transfer Item 1: Get Rid of the Indemnity Clause! 322

Risk Transfer Item 2: Don’t Provide Additional Insured Status 323

Risk Transfer Clauses, Insurance, & Safety 323

How to Say No without Aggravating the Owner 324

The Worst Contracting Word: “Reasonable” 324

The Best Contracting Word: “Notwith- standing” 325

Win- Win & Lose- Lose in Contract Negotiations— Fairy Tales? 326

Is There a Price for Bad Commercial Terms & Conditions? 327

Terms of Payment 327

Some Tips on Successful Negotiating 328

Three First (and Final) Suggestions 328

Resources 329

Glossary 333

Index 349