Construction Law: Construction Contract Checklist
In New Jersey, construction contracts, while routine and part of the normal course of business, provide numerous pitfalls for even the most experienced. Construction contracts are about risk allocation and acceptance between parties. Generally, construction contracts contain three broad components: 1) dynamics and objectives of the project, 2) project delivery and 3) compensation structure.
The following checklist details the necessary clauses for a construction contract. These clauses must be well-drafted and tailored to the individual project to ensure the contract allocates risk properly.
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Agreed-Upon Scope of Work
Analysis: The “Agreed-Upon Scope of Work” clause defines what a party has agreed to provide in exchange for the amount of money the other party has agreed to pay. Ideally, it will detail the materials, equipment, and services to be provided. Unfortunately, this section is often overlooked because the parties may be relying on the bid documents, which may not be incorporated into the contract.
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Payment Amount & Payment Type
Analysis: The “Payment Amount and Payment Type” clause details how the Contractor will pay the Subcontractor and in what form. Common examples include: Lump Sum, Unit Price, Cost-Plus, Incentive, and Guaranteed Maximum Price.
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Delivery
Analysis: The “Delivery” clause outlines the time frame for delivery of the product to the jobsite or the completion of the scope of work. Generally, a “time is of the essence” subclause is included to mandate certain dates and times for completion of the scheduled work. If necessary, the parties can add a penalty clause for delays in the “Delivery” clause or the “Delay” clause.
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Delay
Analysis: The “Delay” clause combines with the “Delivery” clause to allocate risk to a party for untimely delivery or completion. The “Delay” clause should be broadly defined to encompass all types of damages. Generally, schedules are included in construction contracts and “Delay” clauses can penalize a party for not adhering to the agreed upon “Delay” clause.
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Change Orders and Notice Requirements
Analysis: The “Change Order” clauses details how the parties may make amendments to the “Scope of Work” clause or other clause included in the construction contract. This clause requires a party to give defined notice prior to amending the original construction contract.
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Termination for Cause, Convenience, and Suspension
Analysis: The “Termination” clause determines how, when, why, and if a party can unilaterally terminate the contract.
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Indemnity
Analysis: The “Indemnity” Clause allocates risk between the parties; specifically, requiring the indemnitor to compensate or hold harmless the other party for loss arising out of the performance of the contract. “Indemnity” Clauses fall into three broad categories: Narrow, Intermediate, and Broad. The “Indemnity” Clause must comply with statutory provisions.
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Dispute Resolution
Analysis: The “Dispute Resolution” Clause explains how the parties must resolve disputes arising out of the performance of the construction contract. This clause commonly includes whether disputes should be resolved through arbitration or by the courts in a determined jurisdiction.
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Insurance
Analysis: The “Insurance” clause works in conjunction with the “Indemnity” clause to determine which party must hold insurance coverage to cover any events arising out of performance of the contract.
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Warranty
Analysis: The “Warranty” clause guarantees a party’s work. Contractors are routinely called on to provide warranties of the work they perform under a construction contract. However, careful drafting is required by the contractor's counsel to ensure that the contractor's warranty obligations are limited to responsibility for the contractor's own work and only continue for a set period of time.
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Subcontractor Approval
Analysis: The “Subcontractor Approval” clause covers the manner in which a party may sub out or delegate the agreed upon scope of work.
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Material Inflation Costs
Analysis: The “Material Inflation Costs” clause details how the parties will allocate risk for the expected or unexpected rise in costs of material due to market conditions.
Conclusion
Construction contracts must be properly drafted and vetted. They underpin an entire project and help parties understand their obligations to perform. While no two construction contracts are alike, the above checklist provides the appropriate framework for most ordinary construction contracts.
Karpus Law is a Newark, NJ based law firm focusing on commercial law including construction law. If you would like to speak to one of our attorneys, please contact (973) 645-9453.