Troublesome issues that aren't in your contract

WHEN A CONTRACT arrives in the mail for you to sign, you read it, and take out your pen and start marking it up. Most contractors know bad language for them when they see it, and if they don't know exactly how to word alternative language, they can contact their attorneys for suggestions. But just as importantly, and more dangerous because it's so easy to overlook, is what is missing from the contract.

WHEN A CONTRACT arrives in the mail for you to sign, you read it, and take out your pen and start marking it up. Most contractors know bad language for them when they see it, and if they don't know exactly how to word alternative language, they can contact their attorneys for suggestions.

But just as importantly, and more dangerous because it's so easy to overlook, is what is missing from the contract. Some perennially troublesome issues that could be avoided by specific language in contracts are:

Interest on unpaid funds. If none is stated, a contractor can end up financing construction work because it is cheaper for the owner to stall the contractor than borrow money. The rate should be high enough to compensate the contractor for its borrowing and administrative costs in the event that payment from the owner is delayed.

Right to verify that the customer has funds to pay the bills. Some (but still just a few) form contracts give the contractor the right to demand evidence at the start of the job that the customer has money in the bank or arranged to borrow the full amount of the contract, and to receive similar information later if the contractor has reason to worry (such as slow pay or increasing scope through change orders).

Who decides when the work is done? Many contracts provide that funds will be released upon "completion," or similar terms, but don't go on to say how that determination is made. Will it be up to the customer? A thirdparty inspector? Or decided jointly by the contractor and the customer? Contractors end up spending many, many hours trying to meet unreasonable demands of their customers in order to get their retainage released.

Partial occupancy. It is now pretty typical for an owner to want access to at least part of the work before the rest is substantially complete, and some contracts even provide for partial occupancy (generally, to state that it doesn't constitute acceptance). But if this happens, how is responsibility for insurance, security, cleanup, access, utilities and other issues handled? Often, the owner does not intend to assume these responsibilities and even if it is willing to do so, some of them are not easy to segregate: If both the contractor and the customer have access to the same space, who's responsible for insuring that space? (See "Think through partial substantial completion," November, pg. 48).

Where will disputes be resolved? If you are an Ohio contractor doing tenant finish work in Alabama for a retail chain out of Montana, where will you have to go to collect your last $1,000? If it's Montana, you'll probably not spend the money to collect. Generally, the most acceptable middle ground is to provide that disputes will be resolved in the city where the project was built.

What insurance will the contractor provide? Although many owners have unrealistic ideas of what levels of insurance and types of coverage a contractor typically carries, just as often a contractor wants to provide less than is reasonable for an owner. Obviously, increasing coverage will affect the bottom line, so the time to work this out is before the pricing is finalized.

What constitutes an "acceptable" lien waiver, insurance certificate, surety bond, etc.? Many contracts require all these kinds of documents but don't say what will be acceptable. Not only can significant time be wasted going back and forth, but it is possible that the unclear requirements are ones that the contractor can't meet.

What constitutes a "force majeure?" It's easy enough to say that performance will be excused by events that are out of your control, but when they really occur, parties can have very different ideas about their severity or what to do about them. Is a price increase really something that a contractor shouldn't have to anticipate? How much does the price need to increase before it's an extra cost? How unusually severe is snow in April? The more that these events can be articulated and quantified, the fewer problems later.

What's incorporated by reference? Any contractor who agrees to be bound by terms that he hasn't seen should be ... I wanted to say "shot" but will settle for "sent to his room without dinner." This includes the frontend sections of a project manual (00700, 00800) as well as all those codes and other documents. These can add a lot of additional requirements to the work, which the contractor frequently only learns about when someone feels that they weren't met.

These are just a sampling of the many items that are frequently not addressed in a written contract. In some cases, a statute may provide a "default" position, such as the rate of interest on unpaid funds (the "statutory rate") or how disputes will be resolved (in court). Every state has different laws, however, and you can't assume what it will be. It is always in your interest to get agreements pinned down as much as possible, to avoid unpleasant surprises and wastes of time later on.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to susan.mcgreevy@ husch.com.

TAGS: Law