Important Clauses In Construction Contracts – Part 2

In our last post on construction contracts, we discussed a number of considerations including: Scope of Work, Limitation of Liability Indemnities, Payment Terms and Certainty of Terms.

Since that post, COVID-19 impacted the construction industry and we wrote a specific post regarding "Important clauses in Construction Contracts in light of COVID".

These are important clauses and considerations for any construction contract; however, there are a number of other provisions that should be addressed. In this post, we will examine three provisions: Warranty Obligation, Change Mechanisms and Termination for Convenience:

1. Warranty Obligation:
2. When considering a warranty obligation, it is important that the warranty not be too broad, or too narrow. For example, a warranty against any defects in design, engineering, materials, construction and workmanship would be inappropriate in circumstances where the contractor was not involved in any design or engineering. The warranty should be limited in both scope, time and, if possible, the remedy included within the clause should be limited to the contractual warranty.
3. Change Mechanisms:
4. The contract should contain the mechanisms to govern approval or rejection of changes requested by either the owner or the contractor. The change mechanism should be defined, understandable and easy to administer. This provision should provide a right for the contractor to request a change order where considered appropriate, and include a fair mechanism to change the price and schedule, as appropriate. Both the contractor and the owner should consider the limits on change orders, for example, a contractor may want to limit large increases in scope of work. The approval process should be agreed upon by both parties to create an equitable mechanism for all parties.
5. Termination for Convenience:
6. Many construction contracts provide a party with the right to terminate the contract at will or for convenience. Termination for convenience allows a party to terminate the contract at any point during the scope of the project if they so desire. The contract often states that the compensation payable upon such termination is limited to payment for the work performed to the date of termination. However there are often other costs associated with the termination of a contract. Therefore, it is important, for example, for contractors to consider ensuring the provision provides for compensation for the work performed to the date of the termination as well as all costs incurred as a result of the termination.

These provisions are important and need to be articulated clearly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.