Look Out For Traps In Construction Contracts

December 10, 2002
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TORONTO, ON, Canada — Stanley Sklar is a member of the Construction Law Group of Chicago-based Bell, Boyd & Lloyd. He is a nationally recognized construction law attorney, and he had some interesting insights about construction contracts for seminar attendees at the recent ISH North America trade show.

He noted that there is a gap between the design business and the construction business. He suggested that contractors who are filling the gap protect themselves by purchasing “contractor design liability insurance.”

“Whether you like it or not, everyone is in the design business,” he said. “The question is: how do you protect yourself if you are in the design business?”

Disputes or claims usually arise over the issue of “the scope of the work,” he maintains, “but there is no insurance that covers defective workmanship.”

KEY POINTS TO CONSIDER

Sklar said it is important to be on the lookout for certain key words, clauses, and procedures. He listed several of them and passed along some words of advice.

  • Solely: “Never, ever sign a contract that includes the word ‘solely,’” said Sklar. “This may imply that you are solely responsible or solely negligent.”

  • Indemnification clauses: These are usually a part of every contract, but watch out, said Sklar. “As a subcontractor at the bottom of the food chain, you indemnify everyone above you.”

  • Lien rights: “Never, ever give up your lien rights,” Sklar said. “It is the only thing you may have that can save you. Set up a mechanic’s lien file. Include the dates that work has to be done. You either comply with those dates or you don’t, but there is nothing in between.”

  • Terminate: If there is a dispute over money, “never terminate your work,” Sklar asserted. “Suspend the work until you get paid.”

  • Days, not hours: “Do not deal with contracts that have wording involving hours,” he said. “Make sure the notice is keyed to business days, too. Get around disputes which may involve Saturdays or Sundays by using ‘calendar days’ in the notices.”

  • Source of money: “The owner has to provide information that there are sufficient funds available to complete the project,” Sklar said. “You have to ask for the information. If not, you waive the right. You can get a ‘set aside’ letter, which describes how many hard dollars are available for the construction.”

  • Retention policies: A general contractor can withhold a certain percentage of the fee until the work is done, “even if the owner has paid the general contractor and he doesn’t pass it along to the subcontractor,” he said. Sklar pointed out that some general contractors turn retention policies into “mini profit centers.” “You can tell who they are — they have a lot of money market accounts,” he added.

    WRITE IT DOWN

    Sklar emphasized throughout his seminar that it is very important to document all correspondence during a design or construction project and to save all paperwork, including:

  • Signed contracts;

  • Legal property information;

  • Bonding information;

  • Financing information; and

  • Miscellaneous items, including change order information.

    “The way to deal with a change order is that you must learn to document,” he noted. “The three most important words involving change orders are document, document, and document.”

    Sklar added that if a contractor is writing a letter to the general contractor for approval of a change order, the letter “should be written to the judge or arbitrator who will rule on the dispute three years later.”

    For example, he suggested that the letter state that if you don’t hear from them within a certain number of days, they therefore approve of the changes.

    For more information, contact Sklar at ssklar@bellboyd.com (e-mail).

    Publication date: 12/16/2002

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