Construction Accounting Article -
Heads Up - A Checklist for Managing Contract Risk

Target Audience: Construction Companies, Construction Contracts, Construction Attorneys, Contract Dangers Interest

Taking every new contract to your attorney for review before signing it may seem inconvenient. Yet, no matter how experienced you are with construction contracts, obtaining a professional opinion can protect you from hidden risks.

That said, there are many potential contract dangers you can uncover yourself. If the owner uses a standard AIA form, these items will be easy to find. But if it’s a custom contract form, you may have to do a little digging. Here’s a checklist of a few key points to review to avoid getting burned:

• Is your ability to make material and equipment substitutions limited? If yes, what is the method for approving changes? It’s important to clarify this issue so you don’t get stuck paying more for substitutions than you had planned.
• Who and what are you required to indemnify? Be sure your insurance coverage is sufficient to meet the indemnification requirements. You don’t want to end up on the hook for something you hadn’t anticipated.
• If you have a dispute, what are the terms of resolution? Check to see whether the resolution method is one you’re comfortable with. Do the terms require a claim to be filed? What appeals are available? Are disputes to be settled by mediation, arbitration or some other dispute resolution method?
• How will change orders be handled and paid? Even if you’re not planning to "make it up in the change orders," you need to be aware of the process of getting paid for work that wasn’t initially planned — particularly when there’s a disagreement over price.
• What happens in case of a delay? You want to know ahead of time what you’re responsible for if you or one of your subcontractors is responsible for the slowdown. If the delay is someone else’s fault, the contract should allow for extensions to your work schedule and spell out remedies for any added costs.
• How are you going to get paid? Make sure that terms of payment are clear, so the owner can’t hold up your money. Specifically, the terms should explain how a dispute over part of your billing will affect the entire payment.

This checklist provides a good starting point for assessing risks in your contracts, but it doesn’t cover everything. Other items to consider include environmental responsibilities as well as contract alternates and allowances.

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