The Importance of Reading and Understanding Your Construction Contract

Everyone knows that they ought to eat right and exercise; yet, far too few of us do it. Similarly, proper construction contract management requires a contractor to thoroughly understand their contracts but many fail to do so. Of course, the reason that contractors are often largely ignored are understandable. Most construction contracts have the same substantive provisions with which contractors are already familiar; the specific requirements for any given project will be discussed at the preconstruction meeting; and the more specific details of any contract tend to only really matter in the rare occasions that the parties end up in a dispute they cannot resolve on their own. However, the few instances that result in litigation may make having proper practices in place for every project worthwhile.

On a positive note, most contractors that I encounter are now reading their contracts before signing them, as opposed to only reading them after a problem develops. As obvious as this may sound, actually taking the time to thoroughly read a contract before a project begins is the only way to be certain that you will fully comply with all your obligations. In addition, reading a contract before signing can prevent a contractor from experiencing an unfortunate surprise.

Reading contracts carefully is important because not everyone can be trusted. The most egregious example of a contract that should have been read more carefully is one that contained a provision which said that 5% of each progress payment shall be retained. We are all familiar with retainage provisions, but this contract did not say that these monies would be retained until substantial completion or final completion. It said “retained.” END OF SENTENCE; PERIOD. When the contractor called to find out when its retainage would be released, it got told to “read your contract.” That money was never intended to be released—at least not according to the person who wrote that provision.

Moreover, it is not only the overly burdensome or unscrupulous provisions that will be discovered by reading a contract. More and more jurisdictions are strictly enforcing notice provisions. If a contract requires you to give notice of changed conditions within 20 days of discovery, the failure to do so may cause you to waive your rights to additional compensation. Of course, if you do not read your contract, you will not be aware of specific notice deadlines. Key project personnel should have a summary of all notice requirements for the project(s) they are supervising.

Reading a contract also allows a contractor to make knowledgeable decisions. Sometimes strictly following a contract’s requirements may not make financial sense. For example, a contractor may give notice of a changed condition and receive a verbal instruction to proceed with additional work, but most construction contracts state that no additional work is authorized without a signed, written change order. If the contractor is aware of the requirement for a written change order, the contractor can make the business decision regarding whether it is worth the loss of time and money that would result from waiting for a change order to be processed. If the person given the verbal order is trustworthy and the costs of the additional work is not significantly large, then the contractor may knowingly decide that waiting to perform the additional work is not in its best interests. Decisions being made by someone who is fully informed is one thing, but being surprised by what the contract requires after it is too late is another.

In many jurisdictions, failing to follow a contract’s termination provision is wrongful. Thus, a general contractor that terminates a subcontractor that routinely performed defective work may still be held liable for “wrongful termination,” if it did not allow the subcontractor the opportunity to cure, i.e. correct its deficiencies, if that right is stated in the contract.

The list of items that are important to recognize before a problem develops also include the requirements for substantiating a claim, obtaining an extension of time, dealing with payment issues, etc. There are quite simply a number of issues that need to be addressed as specified in the contract or rights may be waived.

If you should have any questions about what your contract requires, please give me a call at (203) 640-8825.

Scott Orenstein