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For	
  General	
  Informa-on	
  Only	
  
Owners	
  of	
  Single	
  Family	
  Residences	
  	
  
California	
  Only	
  
Robert	
  P.	
  Hall,	
  Esq.	
  
Senior	
  Counsel	
  
Construction Contract Issues
for Owners of Residences
Repair and or Renovation General Considerations
What	
  “legal	
  world”	
  do	
  board	
  members	
  live	
  with?	
  
Why	
  should	
  an	
  owner	
  consider	
  
hiring	
  an	
  aBorney	
  for	
  a	
  
proposed	
  construc-on	
  
contract?	
  
Should	
  an	
  ABorney	
  assist	
  review	
  a	
  construc-on	
  contract?	
  
	
  Typically,	
  before	
  a	
  general	
  contractor	
  starts	
  “	
  on	
  the	
  
road”	
  to	
  comple-on	
  of	
  a	
  major	
  reconstruc-on	
  project	
  
based	
  on	
  design	
  documents	
  an	
  architect	
  has	
  prepared,	
  
several	
  contracts	
  that	
  should	
  lay	
  out	
  the	
  “rules	
  of	
  the	
  
road”	
  to	
  project	
  success	
  have	
  already	
  been	
  signed.	
  	
  A	
  
number	
  of	
  events	
  that	
  usually	
  arise	
  during	
  a	
  repair	
  
process	
  can	
  have	
  significant	
  impact	
  on	
  an	
  owner	
  can	
  
occur	
  without	
  an	
  agreement	
  prepared	
  by	
  counsel(see	
  
road	
  map	
  slides	
  (end	
  of	
  presenta-on	
  below)	
  
Renova-on	
  Repair	
  Contracts	
  Overview	
  
What	
  is	
  a	
  Contract?	
  
!   The	
  func:on	
  of	
  any	
  contract	
  is	
  to	
  record	
  the	
  terms	
  of	
  the	
  
agreement	
  between	
  the	
  par:es.	
  	
  A	
  renova:on/repair	
  
contract	
  should	
  define	
  the	
  scope	
  and	
  price	
  of	
  the	
  product	
  
and	
  services	
  to	
  be	
  provided	
  and,	
  among	
  other	
  things,	
  
allocate	
  the	
  risk	
  inherent	
  in	
  the	
  construc:on	
  industry	
  
between	
  the	
  owner	
  and	
  the	
  contractor	
  and	
  architect.	
  
!   An	
  important	
  func:on	
  of	
  a	
  wriFen	
  contract	
  is	
  to	
  give	
  a	
  
level	
  of	
  predictability	
  to	
  the	
  par:es	
  when	
  certain	
  events	
  
arise.	
  	
  WriFen	
  contracts	
  help	
  the	
  par:es	
  predict	
  what	
  
consequences	
  will	
  flow	
  from	
  par:cular	
  events.	
  	
  Stated	
  
another	
  way,	
  from	
  a	
  draIing	
  perspec:ve,	
  the	
  par:es	
  need	
  
to	
  ask	
  themselves	
  “what	
  if”	
  a	
  par:cular	
  event	
  occurs.	
  
Renova-on	
  Repair	
  Contracts	
  Overview	
  
What	
  is	
  a	
  Contract?	
  
!   Examples	
  of	
  “events”	
  the	
  Owner	
  should	
  consider	
  to	
  be	
  
covered	
  in	
  the	
  agreement	
  between	
  owner	
  and	
  contractor?	
  	
  
!   Contractor’s	
  crew	
  member	
  performing	
  elevated	
  deck	
  work	
  or	
  roof	
  
replacement	
  work	
  is	
  injured	
  while	
  performing	
  their	
  work,	
  or	
  
causes	
  damage	
  to	
  adjoining	
  areas	
  not	
  a	
  part	
  of	
  contractor’s	
  work;	
  
!   Contractor	
  runs	
  into	
  unknown	
  condi:ons	
  aIer	
  the	
  repair	
  work	
  
starts	
  and	
  then	
  contractor	
  requests	
  a	
  change	
  order;	
  
!   Design	
  or	
  scope	
  has	
  problems	
  the	
  contractor	
  points	
  out	
  to	
  owner;	
  
!  How	
  does	
  owner	
  and	
  or	
  architect	
  respond	
  to	
  these	
  issues?	
  
!   A	
  contract	
  can	
  allocate	
  the	
  risks	
  and/or	
  respec:ve	
  responsibili:es	
  
between	
  each	
  other	
  when	
  these	
  events	
  occur.	
  
Note	
  this	
  list	
  is	
  not	
  exhaus-ve,	
  but	
  rather,	
  an	
  illustra-on	
  of	
  events	
  that	
  can	
  occur.	
  
CLASSIFICATION	
  OF	
  CONTRACTS	
  
Repair/Renova-on	
  contracts	
  can	
  be	
  classified	
  
according	
  to	
  the	
  method	
  of	
  pricing	
  the	
  work.	
  	
  	
  
General	
  approaches	
  include:	
  
!   Lump	
  sum	
  contracts:	
  
!   Cost-­‐plus	
  contracts	
  (or	
  costs	
  plus	
  a	
  fee);	
  	
  
!   Cost-­‐plus	
  a	
  guaranteed	
  maximum.	
  
CLASSIFICATION	
  OF	
  CONTRACTS	
  
Lump	
  Sum	
  Contracts	
  (Less	
  price	
  risk	
  to	
  Owner)	
  
!   In	
  a	
  lump	
  sum	
  or	
  fixed	
  price	
  contract,	
  the	
  contractor	
  
agrees	
  to	
  complete	
  the	
  contract	
  as	
  described	
  in	
  the	
  
contract	
  documents	
  for	
  a	
  fixed	
  price;	
  
!   A	
  fixed	
  price	
  contract	
  may	
  also	
  have	
  a	
  fixed	
  price	
  per	
  unit	
  
for	
  each	
  of	
  several	
  items	
  of	
  work	
  that	
  must	
  be	
  done	
  (e.g.,	
  
for	
  each	
  cubic	
  yard	
  for	
  fill);	
  
!   Although	
  the	
  price	
  per	
  unit	
  (or	
  yard)	
  is	
  fixed,	
  the	
  total	
  cost	
  of	
  the	
  
job	
  will	
  depend	
  on	
  the	
  amount	
  of	
  work	
  (or	
  yards-­‐units	
  that	
  must	
  
be	
  done);	
  	
  
!   The	
  units	
  can	
  be	
  spelled	
  out	
  in	
  a	
  document	
  aFached	
  to	
  the	
  
contract	
  or	
  the	
  bid	
  customarily	
  called	
  a	
  “schedule	
  of	
  values”	
  or	
  a	
  
“schedule	
  of	
  unit	
  costs.”	
  
CLASSIFICATION	
  OF	
  CONTRACTS	
  
Cost	
  Plus	
  Contract	
  (More	
  price	
  risk	
  to	
  Owner)	
  
!   A	
  cost	
  plus	
  contract	
  provides	
  that	
  the	
  contractor	
  is	
  
reimbursed	
  (usually	
  on	
  a	
  monthly	
  basis)	
  by	
  the	
  owner	
  for	
  
all	
  cost	
  of	
  construc:on,	
  plus	
  an	
  amount	
  to	
  compensate	
  the	
  
contractor	
  for	
  its	
  overhead	
  and	
  another	
  amount	
  to	
  
cons:tute	
  its	
  fee	
  or	
  profit.	
  	
  The	
  fee	
  may	
  be	
  a	
  percentage	
  of	
  
the	
  contract	
  price	
  or	
  a	
  fixed	
  amount	
  paid	
  in	
  monthly	
  
increments.	
  	
  The	
  advantage	
  of	
  a	
  cost	
  plus	
  contract	
  to	
  the	
  
owner	
  is	
  that	
  the	
  owner	
  pays	
  only	
  costs	
  actually	
  incurred	
  
in	
  the	
  prosecu:on	
  of	
  the	
  work.	
  	
  One	
  disadvantage	
  to	
  the	
  
owner	
  is	
  that	
  neither	
  the	
  contractor	
  nor	
  subcontractors	
  
have	
  a	
  strong	
  mo:ve	
  to	
  economize.	
  
CLASSIFICATION	
  OF	
  CONTRACTS	
  
Cost	
  plus	
  a	
  guaranteed	
  maximum	
  price	
  (Price	
  risk	
  
compromise	
  between	
  Owner	
  and	
  Contractor):	
  
!   Comment:	
  a	
  contractor	
  may	
  be	
  mo:vated	
  to	
  economize	
  by	
  
a	
  guaranteed	
  maximum	
  contract	
  price	
  so	
  that	
  the	
  owner	
  
reimburses	
  the	
  contractor	
  for	
  costs,	
  overhead	
  and	
  fees	
  as	
  
in	
  a	
  cost	
  plus	
  contract,	
  but	
  stops	
  paying	
  when	
  the	
  
guaranteed	
  maximum	
  contract	
  price	
  is	
  reached.	
  	
  
Significant	
  Contract	
  Issues	
  
Par-es	
  
!   Make	
  sure	
  you	
  have	
  the	
  correct	
  party	
  you	
  are	
  contrac:ng	
  
with	
  who	
  is	
  also	
  the	
  party	
  who	
  is	
  licensed.	
  This	
  is	
  an	
  
Owner	
  due	
  diligence	
  issue;	
  
!   An	
  unlicensed	
  contractor	
  who	
  performs	
  work	
  on	
  the	
  
project	
  may	
  under	
  certain	
  circumstances,	
  be	
  considered	
  an	
  
“employee”	
  of	
  the	
  owner,	
  with	
  significant	
  legal	
  
consequences.	
  
Significant	
  Contract	
  Issues	
  
Descrip-on	
  of	
  the	
  work	
  	
  
!   Important	
  to	
  list	
  this	
  in	
  a	
  detailed	
  fashion.	
  Consider	
  a	
  
performance	
  criteria	
  if	
  applicable;	
  
!   Consider	
  mee:ng	
  the	
  contractor	
  at	
  the	
  site	
  to	
  discuss	
  the	
  
scope	
  of	
  work	
  before	
  entering	
  into	
  the	
  agreement,	
  and	
  to	
  
ensure	
  the	
  contractor	
  and	
  owner	
  understand	
  the	
  scope.	
  
Contractors	
  pre-­‐job	
  inves-ga-on	
  	
  
!   Get	
  the	
  contractor	
  to	
  visit	
  the	
  site	
  to	
  become	
  familiar	
  with	
  
condi:ons	
  that	
  should	
  be	
  included	
  in	
  the	
  bid.	
  	
  
Significant	
  Contract	
  Issues	
  
Time	
  for	
  start	
  and	
  comple-on	
  	
  
!   Iden:fy	
  when	
  the	
  contractor	
  will	
  commence	
  and	
  complete	
  
its	
  work;	
  and	
  on	
  site	
  work	
  requirements,	
  such	
  as	
  hours	
  of	
  
opera:on,	
  clean-­‐up,	
  and	
  associated	
  owner	
  issues;	
  
!   Who	
  is	
  going	
  to	
  regularly	
  check	
  the	
  contractor’s	
  work	
  to	
  
insure	
  comple:on?	
  	
  The	
  contract	
  can	
  spell	
  out	
  a	
  procedure	
  
the	
  owner	
  wants	
  included	
  ensuring	
  contractor	
  
performance	
  on	
  a	
  monthly	
  basis	
  before	
  payment	
  is	
  
required.	
  
Significant	
  Contract	
  Issues	
  
Delay	
  	
  
!   Owner	
  will	
  aFempt	
  to	
  limit	
  delays	
  for	
  such	
  items	
  as	
  
weather	
  and	
  or	
  material	
  problems	
  outside	
  of	
  the	
  control	
  of	
  
the	
  contractor	
  and	
  contractor	
  will	
  want	
  extensions	
  of	
  
contract	
  :me	
  to	
  account	
  for	
  these	
  issues.	
  Point	
  is;	
  contract	
  
clause	
  should	
  cover	
  this	
  issue.	
  
Permits	
  
!   Contract	
  should	
  iden:fy	
  who	
  pays	
  for	
  and	
  who	
  is	
  required	
  
to	
  “pull	
  them”	
  or	
  obtain	
  permits;	
  as	
  well	
  as	
  who	
  “calls”	
  for	
  
permit	
  related	
  “building	
  department”	
  inspec:ons.	
  
Significant	
  Contract	
  Issues	
  
Requirements	
  for	
  payment	
  of	
  labor	
  and	
  material	
  
!   Must	
  be	
  specially	
  nego:ated	
  to	
  correspond	
  with	
  owner	
  
schedule;	
  	
  
!   Consider	
  use	
  of	
  joint	
  checks	
  to	
  protect	
  owner	
  in	
  case	
  the	
  
general	
  contractor	
  the	
  owner	
  hired	
  with	
  does	
  not	
  pay	
  its	
  
subcontractors;	
  
!   Who	
  is	
  going	
  to	
  check	
  that	
  work	
  is	
  done	
  before	
  an	
  
agreement	
  for	
  payment	
  is	
  made?	
  A	
  contract	
  condi:on	
  
could	
  be	
  added	
  here	
  to	
  protect	
  owner	
  
!   Owner	
  or	
  construc:on	
  manager?	
  
Significant	
  Contract	
  Issues	
  
Contract	
  requirements	
  for	
  payment	
  of	
  labor	
  and	
  material	
  
!   Include	
  wriFen	
  provisions	
  that	
  at	
  the	
  :me	
  each	
  applica:on	
  for	
  
payment	
  is	
  made	
  during	
  the	
  progress	
  of	
  the	
  job,	
  mechanic’s	
  lien	
  
releases	
  are	
  provided	
  on	
  statutory	
  form	
  for	
  that	
  por:on	
  of	
  the	
  
work	
  associated	
  with	
  each	
  payment	
  applica:on.	
  
!   Someone	
  represen:ng	
  the	
  Owner	
  (i.e.,	
  Construc:on	
  Manager	
  
and/or	
  aForney)	
  should	
  be	
  advised	
  to	
  track	
  lien	
  releases	
  from	
  
those	
  sub-­‐contractors	
  and	
  suppliers	
  who	
  had	
  provided	
  the	
  
required	
  20-­‐day	
  preliminary	
  no:ce.	
  This	
  is	
  the	
  only	
  way	
  the	
  
owner	
  can	
  make	
  sure	
  at	
  the	
  end	
  of	
  the	
  job	
  that	
  all	
  required	
  lien	
  
releases	
  from	
  sub-­‐contractors	
  and	
  material	
  suppliers	
  are	
  
provided.	
  
Significant	
  Contract	
  Issues	
  
Extra	
  Work/Changes	
  and	
  Dele-ons	
  	
  
!   Contract	
  clause	
  should	
  not	
  allow	
  contractor	
  to	
  perform	
  
extra	
  work	
  without	
  owner’s	
  wriFen	
  authoriza:on	
  in	
  
advance;	
  
!   Allowances—Note:	
  contractors	
  use	
  “allowances”	
  to	
  charge	
  
the	
  owner	
  for	
  something	
  the	
  contractor	
  is	
  not	
  willing	
  to	
  
offer	
  a	
  fixed	
  price	
  on.	
  Owners	
  should	
  carefully	
  consider	
  
these	
  before	
  an	
  agreement	
  to	
  same.	
  On	
  some	
  projects	
  
allowances	
  cannot	
  be	
  avoided;	
  
!   Dele:ons/Modifica:ons-­‐should	
  not	
  be	
  agreed	
  upon	
  unless	
  
in	
  wri:ng.	
  If	
  aForney	
  is	
  hired,	
  aForney	
  should	
  review.	
  
Significant	
  Contract	
  Issues	
  
Insurance	
  requirements	
  
!   Contract	
  clause	
  –	
  requirement	
  in	
  the	
  contract	
  to	
  provide	
  
no:fica:on	
  to	
  the	
  owner	
  when	
  contractor’s	
  insurance	
  
lapses	
  or	
  license	
  status	
  changes;	
  
!   Owner	
  should	
  consider	
  having	
  its	
  insurance	
  broker	
  review	
  
all	
  insurance	
  provisions;	
  
!   Find	
  out	
  what	
  type	
  of	
  insurance	
  the	
  contractor	
  is	
  offering-­‐
All	
  risk	
  insurance	
  versus	
  specific	
  perils	
  versus	
  claims	
  made.	
  
Significant	
  Contract	
  Issues	
  
Insurance	
  requirements	
  
!   Who	
  pays	
  for	
  deduc:bles?	
  	
  
!   Cer:ficate	
  of	
  insurance	
  provided	
  to	
  owner	
  appears	
  now	
  to	
  
be	
  a	
  standard	
  provision;	
  
!   Owner	
  should	
  be	
  made	
  addi:onal	
  insured	
  on	
  contractor	
  
policy	
  –	
  and	
  on	
  subcontractor’s	
  policy-­‐it	
  appears	
  in	
  today’s	
  
marketplace	
  that	
  all	
  these	
  are	
  standard	
  requirements;	
  
!   Insurance	
  amount;	
  
!   Issue	
  to	
  consider:	
  should	
  it	
  cover	
  poten:al	
  risks,	
  or	
  just	
  the	
  
contract	
  price?	
  
Significant	
  Contract	
  Issues	
  
Contract	
  clauses	
  dealing	
  with	
  correc-ng	
  defec-ve	
  
work	
  
!   Provisions	
  should	
  not	
  only	
  provide	
  that	
  the	
  contractor	
  
warrants	
  his	
  work,	
  but	
  spells	
  out	
  what	
  steps	
  the	
  contractor	
  
will	
  take	
  to	
  deal	
  with	
  problems	
  in	
  his	
  work	
  as	
  they	
  arise.	
  
!   Industry	
  “form”	
  contract	
  language	
  does	
  not	
  go	
  far	
  enough	
  
on	
  this	
  issue	
  
Significant	
  Contract	
  Issues	
  
Indemnity	
  (Owner	
  risk	
  shiXing	
  provisions)	
  
Given	
  typical	
  owner	
  budget	
  limita:ons,	
  owner	
  should	
  
obtain	
  contract	
  requirement	
  that	
  shiIs	
  responsibility	
  
for	
  claims	
  made	
  arising	
  from	
  the	
  contractors	
  work	
  to	
  
the	
  contractor	
  when	
  the	
  claim	
  is	
  submiFed	
  to	
  the	
  
owner	
  
Arbitra-on	
  
!   Pros	
  and	
  cons	
  of	
  arbitra:on	
  versus	
  li:ga:on/aForney	
  
should	
  explain/contract	
  clause	
  iden:fies	
  owner	
  choice	
  
Significant	
  Contract	
  Issues	
  
ABorney’s	
  fees	
  should	
  be	
  included	
  in	
  every	
  contract.	
  
Lien	
  Issues	
  that	
  should	
  be	
  spelled	
  out	
  in	
  the	
  contract	
  
!   Require	
  the	
  contractor	
  to	
  use	
  “best	
  efforts”	
  to	
  prevent	
  
“others”	
  from	
  filing	
  of	
  any	
  liens;	
  
!   Contract	
  provision	
  allowing	
  Owner	
  to	
  withhold	
  payment	
  in	
  
the	
  amount	
  of	
  liens	
  actually	
  recorded;	
  
!   Contract	
  provision	
  allowing	
  use	
  of	
  two-­‐party	
  checks	
  when	
  
lien	
  issues	
  arise;	
  
!   Contract	
  provision	
  requiring	
  lien	
  releases	
  at	
  progress	
  and	
  
final	
  payment	
  points	
  before	
  owner’s	
  payment	
  obliga:ons	
  
arise.	
  
Significant	
  Contract	
  Issues	
  
Termina-on	
  
!   Terminate	
  for	
  convenience	
  
!   Meaning:	
  no	
  reason	
  needed;	
  
!   How	
  is	
  contractor	
  compensa:on	
  measured	
  –	
  owner	
  should	
  :e	
  this	
  
down;	
  
!   Terminate	
  for	
  default	
  
!   Reasons:	
  	
  Non-­‐performance	
  –	
  Bankruptcy	
  –	
  No:ce	
  
!  owner’s	
  rights	
  
!   Related	
  issues:	
  liquidated	
  damages	
  –	
  cost	
  to	
  cure.	
  
Significant	
  Contract	
  Issues	
  
Termina-on	
  
!   The	
  owner	
  should	
  ask	
  its	
  aForney	
  to	
  nego:ate	
  with	
  the	
  
contractor	
  provisions	
  which	
  would	
  allow	
  the	
  owner	
  to	
  
terminate	
  the	
  contract	
  without	
  cause.	
  	
  Many	
  owners	
  
would	
  like	
  to	
  have	
  flexibility	
  in	
  being	
  able	
  to	
  “get	
  out	
  of”	
  
the	
  contract	
  for	
  whatever	
  reason.	
  	
  
Descrip-on	
  of	
  scope	
  of	
  work	
  
Communica-on	
  protocol	
  &	
  
comple-on	
  dates	
  
Contract	
  sum	
  &	
  payment	
  
terms	
  
Twists	
  and	
  turns	
  on	
  “road”	
  to	
  renova-on	
  repair	
  “success”	
  
Contract	
  documents	
  
Right	
  to	
  final	
  payment	
  
Umbrella	
  “agreement	
  binding	
  
all	
  other	
  contract	
  documents	
  
(general	
  condi-ons	
  and	
  plans)	
  
General	
  provisions	
  
Instruc-ons	
  to	
  bidders	
  
Twists	
  and	
  turns	
  on	
  “road”	
  to	
  renova-on	
  repair	
  “success”	
  
Name	
  of	
  contractor	
  
Owner	
  
Admnistra-on	
  of	
  the	
  contract	
  
Construc-on	
  by	
  Owner	
  or	
  
separate	
  contractors	
  
Twists	
  and	
  turns	
  on	
  “road”	
  to	
  renova-on	
  repair	
  “success”	
  
Contractor	
  
Subcontractors	
  
Changes	
  in	
  the	
  work	
  
Payments	
  and	
  comple-on	
  
Protec-on	
  of	
  persons	
  &	
  
property	
  
Twists	
  and	
  turns	
  on	
  “road”	
  to	
  renova-on	
  repair	
  “success”	
  
Time	
  
Insurance	
  and	
  bonds	
  
Miscellaneous	
  provisions	
  
Termina-on	
  or	
  suspension	
  
of	
  the	
  contract	
  
Twists	
  and	
  turns	
  on	
  “road”	
  to	
  renova-on	
  repair	
  “success”	
  
Uncovering	
  and	
  
correc-on	
  of	
  work	
  
For	
  General	
  Reference	
  Only	
  
Board	
  Members	
  Common	
  Interest	
  	
  
Developments	
  
Robert	
  P.	
  Hall,	
  Esq.	
  
Senior	
  Counsel	
  
Construction Contract Issues
for Owners of Residences
Repair and or Renovation General Considerations
The information contained herein is not intended to and does not constitute legal advice, create any attorney-client relationship with anyone viewing it, or
serve as a substitute for legal advice to a client by a lawyer on a particular matter. Accordingly, the general information contained herein should be
considered an advertisement. You should not act or rely on any information contained herein without seeking the advice of a competent attorney licensed
in your jurisdiction for your particular problem. Any information contained herein concerning the law firm and its lawyers, as well as any past cases, is also
intended to provide only general information about the firm and its attorneys. Nothing herein is or should be construed as a guarantee, warranty or
prediction regarding the result of any representation. Nor does any endorsement or testimonial contained herein constitute, nor should it be construed as,
a guarantee, warranty, or prediction regarding the outcome of your legal matter or any particular matter.

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Construction Contract Issues for Owners of Residences

  • 1. For  General  Informa-on  Only   Owners  of  Single  Family  Residences     California  Only   Robert  P.  Hall,  Esq.   Senior  Counsel   Construction Contract Issues for Owners of Residences Repair and or Renovation General Considerations
  • 2. What  “legal  world”  do  board  members  live  with?   Why  should  an  owner  consider   hiring  an  aBorney  for  a   proposed  construc-on   contract?  
  • 3. Should  an  ABorney  assist  review  a  construc-on  contract?    Typically,  before  a  general  contractor  starts  “  on  the   road”  to  comple-on  of  a  major  reconstruc-on  project   based  on  design  documents  an  architect  has  prepared,   several  contracts  that  should  lay  out  the  “rules  of  the   road”  to  project  success  have  already  been  signed.    A   number  of  events  that  usually  arise  during  a  repair   process  can  have  significant  impact  on  an  owner  can   occur  without  an  agreement  prepared  by  counsel(see   road  map  slides  (end  of  presenta-on  below)  
  • 4. Renova-on  Repair  Contracts  Overview   What  is  a  Contract?   !   The  func:on  of  any  contract  is  to  record  the  terms  of  the   agreement  between  the  par:es.    A  renova:on/repair   contract  should  define  the  scope  and  price  of  the  product   and  services  to  be  provided  and,  among  other  things,   allocate  the  risk  inherent  in  the  construc:on  industry   between  the  owner  and  the  contractor  and  architect.   !   An  important  func:on  of  a  wriFen  contract  is  to  give  a   level  of  predictability  to  the  par:es  when  certain  events   arise.    WriFen  contracts  help  the  par:es  predict  what   consequences  will  flow  from  par:cular  events.    Stated   another  way,  from  a  draIing  perspec:ve,  the  par:es  need   to  ask  themselves  “what  if”  a  par:cular  event  occurs.  
  • 5. Renova-on  Repair  Contracts  Overview   What  is  a  Contract?   !   Examples  of  “events”  the  Owner  should  consider  to  be   covered  in  the  agreement  between  owner  and  contractor?     !   Contractor’s  crew  member  performing  elevated  deck  work  or  roof   replacement  work  is  injured  while  performing  their  work,  or   causes  damage  to  adjoining  areas  not  a  part  of  contractor’s  work;   !   Contractor  runs  into  unknown  condi:ons  aIer  the  repair  work   starts  and  then  contractor  requests  a  change  order;   !   Design  or  scope  has  problems  the  contractor  points  out  to  owner;   !  How  does  owner  and  or  architect  respond  to  these  issues?   !   A  contract  can  allocate  the  risks  and/or  respec:ve  responsibili:es   between  each  other  when  these  events  occur.   Note  this  list  is  not  exhaus-ve,  but  rather,  an  illustra-on  of  events  that  can  occur.  
  • 6. CLASSIFICATION  OF  CONTRACTS   Repair/Renova-on  contracts  can  be  classified   according  to  the  method  of  pricing  the  work.       General  approaches  include:   !   Lump  sum  contracts:   !   Cost-­‐plus  contracts  (or  costs  plus  a  fee);     !   Cost-­‐plus  a  guaranteed  maximum.  
  • 7. CLASSIFICATION  OF  CONTRACTS   Lump  Sum  Contracts  (Less  price  risk  to  Owner)   !   In  a  lump  sum  or  fixed  price  contract,  the  contractor   agrees  to  complete  the  contract  as  described  in  the   contract  documents  for  a  fixed  price;   !   A  fixed  price  contract  may  also  have  a  fixed  price  per  unit   for  each  of  several  items  of  work  that  must  be  done  (e.g.,   for  each  cubic  yard  for  fill);   !   Although  the  price  per  unit  (or  yard)  is  fixed,  the  total  cost  of  the   job  will  depend  on  the  amount  of  work  (or  yards-­‐units  that  must   be  done);     !   The  units  can  be  spelled  out  in  a  document  aFached  to  the   contract  or  the  bid  customarily  called  a  “schedule  of  values”  or  a   “schedule  of  unit  costs.”  
  • 8. CLASSIFICATION  OF  CONTRACTS   Cost  Plus  Contract  (More  price  risk  to  Owner)   !   A  cost  plus  contract  provides  that  the  contractor  is   reimbursed  (usually  on  a  monthly  basis)  by  the  owner  for   all  cost  of  construc:on,  plus  an  amount  to  compensate  the   contractor  for  its  overhead  and  another  amount  to   cons:tute  its  fee  or  profit.    The  fee  may  be  a  percentage  of   the  contract  price  or  a  fixed  amount  paid  in  monthly   increments.    The  advantage  of  a  cost  plus  contract  to  the   owner  is  that  the  owner  pays  only  costs  actually  incurred   in  the  prosecu:on  of  the  work.    One  disadvantage  to  the   owner  is  that  neither  the  contractor  nor  subcontractors   have  a  strong  mo:ve  to  economize.  
  • 9. CLASSIFICATION  OF  CONTRACTS   Cost  plus  a  guaranteed  maximum  price  (Price  risk   compromise  between  Owner  and  Contractor):   !   Comment:  a  contractor  may  be  mo:vated  to  economize  by   a  guaranteed  maximum  contract  price  so  that  the  owner   reimburses  the  contractor  for  costs,  overhead  and  fees  as   in  a  cost  plus  contract,  but  stops  paying  when  the   guaranteed  maximum  contract  price  is  reached.    
  • 10. Significant  Contract  Issues   Par-es   !   Make  sure  you  have  the  correct  party  you  are  contrac:ng   with  who  is  also  the  party  who  is  licensed.  This  is  an   Owner  due  diligence  issue;   !   An  unlicensed  contractor  who  performs  work  on  the   project  may  under  certain  circumstances,  be  considered  an   “employee”  of  the  owner,  with  significant  legal   consequences.  
  • 11. Significant  Contract  Issues   Descrip-on  of  the  work     !   Important  to  list  this  in  a  detailed  fashion.  Consider  a   performance  criteria  if  applicable;   !   Consider  mee:ng  the  contractor  at  the  site  to  discuss  the   scope  of  work  before  entering  into  the  agreement,  and  to   ensure  the  contractor  and  owner  understand  the  scope.   Contractors  pre-­‐job  inves-ga-on     !   Get  the  contractor  to  visit  the  site  to  become  familiar  with   condi:ons  that  should  be  included  in  the  bid.    
  • 12. Significant  Contract  Issues   Time  for  start  and  comple-on     !   Iden:fy  when  the  contractor  will  commence  and  complete   its  work;  and  on  site  work  requirements,  such  as  hours  of   opera:on,  clean-­‐up,  and  associated  owner  issues;   !   Who  is  going  to  regularly  check  the  contractor’s  work  to   insure  comple:on?    The  contract  can  spell  out  a  procedure   the  owner  wants  included  ensuring  contractor   performance  on  a  monthly  basis  before  payment  is   required.  
  • 13. Significant  Contract  Issues   Delay     !   Owner  will  aFempt  to  limit  delays  for  such  items  as   weather  and  or  material  problems  outside  of  the  control  of   the  contractor  and  contractor  will  want  extensions  of   contract  :me  to  account  for  these  issues.  Point  is;  contract   clause  should  cover  this  issue.   Permits   !   Contract  should  iden:fy  who  pays  for  and  who  is  required   to  “pull  them”  or  obtain  permits;  as  well  as  who  “calls”  for   permit  related  “building  department”  inspec:ons.  
  • 14. Significant  Contract  Issues   Requirements  for  payment  of  labor  and  material   !   Must  be  specially  nego:ated  to  correspond  with  owner   schedule;     !   Consider  use  of  joint  checks  to  protect  owner  in  case  the   general  contractor  the  owner  hired  with  does  not  pay  its   subcontractors;   !   Who  is  going  to  check  that  work  is  done  before  an   agreement  for  payment  is  made?  A  contract  condi:on   could  be  added  here  to  protect  owner   !   Owner  or  construc:on  manager?  
  • 15. Significant  Contract  Issues   Contract  requirements  for  payment  of  labor  and  material   !   Include  wriFen  provisions  that  at  the  :me  each  applica:on  for   payment  is  made  during  the  progress  of  the  job,  mechanic’s  lien   releases  are  provided  on  statutory  form  for  that  por:on  of  the   work  associated  with  each  payment  applica:on.   !   Someone  represen:ng  the  Owner  (i.e.,  Construc:on  Manager   and/or  aForney)  should  be  advised  to  track  lien  releases  from   those  sub-­‐contractors  and  suppliers  who  had  provided  the   required  20-­‐day  preliminary  no:ce.  This  is  the  only  way  the   owner  can  make  sure  at  the  end  of  the  job  that  all  required  lien   releases  from  sub-­‐contractors  and  material  suppliers  are   provided.  
  • 16. Significant  Contract  Issues   Extra  Work/Changes  and  Dele-ons     !   Contract  clause  should  not  allow  contractor  to  perform   extra  work  without  owner’s  wriFen  authoriza:on  in   advance;   !   Allowances—Note:  contractors  use  “allowances”  to  charge   the  owner  for  something  the  contractor  is  not  willing  to   offer  a  fixed  price  on.  Owners  should  carefully  consider   these  before  an  agreement  to  same.  On  some  projects   allowances  cannot  be  avoided;   !   Dele:ons/Modifica:ons-­‐should  not  be  agreed  upon  unless   in  wri:ng.  If  aForney  is  hired,  aForney  should  review.  
  • 17. Significant  Contract  Issues   Insurance  requirements   !   Contract  clause  –  requirement  in  the  contract  to  provide   no:fica:on  to  the  owner  when  contractor’s  insurance   lapses  or  license  status  changes;   !   Owner  should  consider  having  its  insurance  broker  review   all  insurance  provisions;   !   Find  out  what  type  of  insurance  the  contractor  is  offering-­‐ All  risk  insurance  versus  specific  perils  versus  claims  made.  
  • 18. Significant  Contract  Issues   Insurance  requirements   !   Who  pays  for  deduc:bles?     !   Cer:ficate  of  insurance  provided  to  owner  appears  now  to   be  a  standard  provision;   !   Owner  should  be  made  addi:onal  insured  on  contractor   policy  –  and  on  subcontractor’s  policy-­‐it  appears  in  today’s   marketplace  that  all  these  are  standard  requirements;   !   Insurance  amount;   !   Issue  to  consider:  should  it  cover  poten:al  risks,  or  just  the   contract  price?  
  • 19. Significant  Contract  Issues   Contract  clauses  dealing  with  correc-ng  defec-ve   work   !   Provisions  should  not  only  provide  that  the  contractor   warrants  his  work,  but  spells  out  what  steps  the  contractor   will  take  to  deal  with  problems  in  his  work  as  they  arise.   !   Industry  “form”  contract  language  does  not  go  far  enough   on  this  issue  
  • 20. Significant  Contract  Issues   Indemnity  (Owner  risk  shiXing  provisions)   Given  typical  owner  budget  limita:ons,  owner  should   obtain  contract  requirement  that  shiIs  responsibility   for  claims  made  arising  from  the  contractors  work  to   the  contractor  when  the  claim  is  submiFed  to  the   owner   Arbitra-on   !   Pros  and  cons  of  arbitra:on  versus  li:ga:on/aForney   should  explain/contract  clause  iden:fies  owner  choice  
  • 21. Significant  Contract  Issues   ABorney’s  fees  should  be  included  in  every  contract.   Lien  Issues  that  should  be  spelled  out  in  the  contract   !   Require  the  contractor  to  use  “best  efforts”  to  prevent   “others”  from  filing  of  any  liens;   !   Contract  provision  allowing  Owner  to  withhold  payment  in   the  amount  of  liens  actually  recorded;   !   Contract  provision  allowing  use  of  two-­‐party  checks  when   lien  issues  arise;   !   Contract  provision  requiring  lien  releases  at  progress  and   final  payment  points  before  owner’s  payment  obliga:ons   arise.  
  • 22. Significant  Contract  Issues   Termina-on   !   Terminate  for  convenience   !   Meaning:  no  reason  needed;   !   How  is  contractor  compensa:on  measured  –  owner  should  :e  this   down;   !   Terminate  for  default   !   Reasons:    Non-­‐performance  –  Bankruptcy  –  No:ce   !  owner’s  rights   !   Related  issues:  liquidated  damages  –  cost  to  cure.  
  • 23. Significant  Contract  Issues   Termina-on   !   The  owner  should  ask  its  aForney  to  nego:ate  with  the   contractor  provisions  which  would  allow  the  owner  to   terminate  the  contract  without  cause.    Many  owners   would  like  to  have  flexibility  in  being  able  to  “get  out  of”   the  contract  for  whatever  reason.    
  • 24. Descrip-on  of  scope  of  work   Communica-on  protocol  &   comple-on  dates   Contract  sum  &  payment   terms   Twists  and  turns  on  “road”  to  renova-on  repair  “success”   Contract  documents  
  • 25. Right  to  final  payment   Umbrella  “agreement  binding   all  other  contract  documents   (general  condi-ons  and  plans)   General  provisions   Instruc-ons  to  bidders   Twists  and  turns  on  “road”  to  renova-on  repair  “success”   Name  of  contractor  
  • 26. Owner   Admnistra-on  of  the  contract   Construc-on  by  Owner  or   separate  contractors   Twists  and  turns  on  “road”  to  renova-on  repair  “success”   Contractor   Subcontractors  
  • 27. Changes  in  the  work   Payments  and  comple-on   Protec-on  of  persons  &   property   Twists  and  turns  on  “road”  to  renova-on  repair  “success”   Time  
  • 28. Insurance  and  bonds   Miscellaneous  provisions   Termina-on  or  suspension   of  the  contract   Twists  and  turns  on  “road”  to  renova-on  repair  “success”   Uncovering  and   correc-on  of  work  
  • 29. For  General  Reference  Only   Board  Members  Common  Interest     Developments   Robert  P.  Hall,  Esq.   Senior  Counsel   Construction Contract Issues for Owners of Residences Repair and or Renovation General Considerations The information contained herein is not intended to and does not constitute legal advice, create any attorney-client relationship with anyone viewing it, or serve as a substitute for legal advice to a client by a lawyer on a particular matter. Accordingly, the general information contained herein should be considered an advertisement. You should not act or rely on any information contained herein without seeking the advice of a competent attorney licensed in your jurisdiction for your particular problem. Any information contained herein concerning the law firm and its lawyers, as well as any past cases, is also intended to provide only general information about the firm and its attorneys. Nothing herein is or should be construed as a guarantee, warranty or prediction regarding the result of any representation. Nor does any endorsement or testimonial contained herein constitute, nor should it be construed as, a guarantee, warranty, or prediction regarding the outcome of your legal matter or any particular matter.