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Don’t start work until a contract is in place

Karl OlesAfter moving to my current law firm several years ago, one of my first assignments was to review a client’s high-rise building project. Although excavation had been completed and work was beginning on the underground garage levels, no contract had been signed with the contractor. We got to work and negotiated a comprehensive contract before the work got back up to street level. Fortunately, no major crises appeared to throw the negotiations off track.

Unfortunately, it is not uncommon for contractors and design professionals to begin work even on major projects without a signed contract. Public agencies usually insist on signed contracts before any work begins, but private owners are sometimes in a hurry and think they will have more bargaining leverage once the contractor or designer has started work.

Starting any work without a contract is risky for all parties. The contract establishes critical elements of the agreement: What is the scope of work to be done? What price will be paid for that work? What are the time constraints for completing the work?

The contract also allocates foreseen risks: What happens if the work is delayed by some circumstance out of the parties’ control? Who is going to buy insurance? What happens if liens are recorded by subcontractors or suppliers?

It is easiest to agree on these critical terms at the outset of the project, when the parties are at their most cooperative. Agreement becomes much harder when risks have turned into problems or even crises.

Even though risks are known, it may be tempting to start working as soon as a new project becomes available. But it’s important to resist this temptation and get a contract signed before starting work. Following are two approaches that may help.

First, be prepared with a form of comprehensive contract that you are willing to sign. Various industry groups, including the American Institute of Architects, the ConsensusDocs organization and the Design-Build Institute, publish suites of contract forms that provide good starting points. The most flexible forms have provisions of general application and then blank exhibits into which particular project details (scope of work, schedule, compensation) can be inserted.

Finding an acceptable form takes some time. Most experienced construction lawyers will suggest changes to the standard forms to comply with local law or specific company circumstances, so it is prudent to take time now to prepare a form for future use. During this process, discuss with your lawyer the terms that are most often debated during contract negotiations, such as those dealing with indemnification, insurance, payment, waivers and termination. People who understand these issues ahead of time will be more effective negotiators.

Second, be prepared with a form of interim contract that you are willing to sign. Some projects involve site or schedule constraints, unknown subsurface conditions, the development of innovative building systems or other complexities that may delay the negotiation of a final comprehensive contract. However, those details need not prevent you from getting an interim contract in place.

An interim agreement can establish a partial scope and interim price (e.g., for earthwork) as well as general terms about insurance, a payment procedure, and the allocation of critical foreseen risks. It also can establish rules for resolving disagreements about more complex issues. For example, the contract could simply terminate if the parties cannot resolve all the issues by a certain date, or a dispute resolution mechanism can be put into place to resolve those issues.

Sometimes a party presents a “take it or leave it” form of contract that contains very onerous or even illegal terms. I have in the past couple of months seen three subcontract forms, from different parties, providing in effect, “even if we breach the contract, you can’t sue us for damages.” Provisions like this would not be enforced in many states, but a stubborn party may insist.

At this point, a party has three options. It can focus on the most egregious terms and try to get them changed, it can accept the terms and the associated risk, or it can walk away. A party that has its own forms and a good understanding of critical issues will be able to make the best decision in each case.

Karl Oles is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7535 or at kfoles@stoel.com.

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