Understanding and Negotiating Construction Contracts

The complexities of construction contracts are made easy with this thorough and readable guide

Construction contracts can be complex for both owners and contractors. For contractors, negotiating fair and balanced commercial terms in contracts is just as important as properly managing projects; a properly negotiated contract can mitigate unnecessary risk and unnecessary risk transfer. This, in turn, reduces exposure to financial liability for the contractor and for avoidance of contract claims and disputes.

Understanding and Negotiating Construction Contracts provides a comprehensive and readable introduction to the world of construction contracts. Providing, for example, coverage of the four most common types of contracts—lump sum/fixed-price, cost-plus, time-and-materials, and unit-pricing—it promises to reduce uncertainty and allow contractors to enter contractual negotiations with greater confidence to be able to achieve a fair and balanced contract. This updated new edition reflects the up-to-date best practices to understand how to better negotiate the commercial terms and conditions in construction contracts.

Readers of the second edition of Understanding and Negotiating Construction Contracts will also find:

Updated information on indemnity, insurance, and negotiation
An all-new chapter with a contract analysis checklist
Real-world examples drawn from small residential, retail, large commercial, and international projects

Understanding and Negotiating Construction Contracts is essential for construction professionals and college students studying construction contracts and the liabilities arising out of them.

Kit Werremeyer is owner and president of Southernstar Consultants LLC, Valrico, Florida, US, which provides training in construction contract negotiations and other professional services for engineering and construction companies both in the US and internationally. He has more than four decades’ experience in negotiating fair and balanced construction contracts, sales, major project development, and construction contract dispute resolution.

Acknowledgments

About the Author

Preface

Disclaimer

Introduction

The Goals of This Book

What Are the Benefits of This Book

Contractor & Owner Conventions

Private Contracts or Government Contracts?

Key Contracting Concepts

Two Types of Commercial Terms & Conditions

The Most Important Commercial Terms & Conditions

The Contracting Process

Excuses for Not Negotiating Better Commercial Terms & Conditions

The Concept of Risk Transfer

This is a Book Developed Just for Contractors

Chapter 1: Contracts: Basic Training

What Is a Contract?

The Steps to a Contract

Coming to the Party?

The Starting Point

“Here’s My Proposal”

“Consideration,” or Something of Value

The “Happy Test”

“Can That Person Sign This Contract?”

Call in the Enforcer To Close the Breach

A Contract Example

Strange Words & Long Paragraphs

Contracting Myths

Contract Negotiations

Chapter 2: Types & Forms of Contracts

Fixed Price & Fixed Schedule Contracts

Reimbursable Type Contracts

Combined Fixed Price & Reimbursable Contracts

Cost Plus Fee Contracts

Guaranteed Maximum Price Contracts

Target Price Contracts

Contracts with Performance Incentives

Form of Contracts

Some Final Contract Housekeeping—Definitions

Conclusion

Chapter 3: Scope of Work

The Scope of Work Matrix

Scoping Drawings

Conclusion

Chapter 4: Terms of Payment & Cash Flow

Cash Flow

Interest Rates

Periodic Progress & Milestone Payments

Conclusion

Chapter 5: The Schedule

Float

Time Is of the Essence

Extra Time, but No Money

Conclusion

Chapter 6: Assurances of Performance

Guaranties & Bonds

What Does “Failure to Perform” Mean?

What Is a Bond?

Forms of Assurances of Performance

Surety Companies

Some Language Considerations on Guaranties & Bonds

Types of Performance Assurances

Conclusion

Chapter 7: Insurance

What Is Insurance?

Claims Made vs. Occurrence

Types of Insurance

Important Issues Associated with Insurance

Additional Insured Status

Additional Insurance Basics

A Typical Insurance Clause in a Construction Contract

Safety

Chapter 8: Indemnity

Insurance & Indemnity

Indemnity Definitions

Transferring the Owner’s Risks to Contractors

Fairness Is Not a Consideration

Is an Indemnity Required in a Construction Contract?

Anti-Indemnity Legislation

Examples of Indemnification Clauses

Indemnification, Additional Insured Status, & Contractual Liability Insurance

Owners Love CLAIMS!

Negotiating Indemnity Clauses

Knock-for-Knock Indemnities

Conclusion

Chapter 9: Changes

Some Ground Rules

Protecting the Project Manager

Owners’ Directives

Constructive Changes

Payment for Changes

Sample Change Clauses

Major Contract Changes

Negotiating Change Clauses

Conclusion

Chapter 10: Disputes & Their Resolution

What’s a Project Manager To Do? A Short Story To Start With

Disputes—The Construction Contract’s Bad Actor

An Ounce of Prevention

Dispute Resolution Options

The Folks Who Negotiate, Mediate, Arbitrate, & Litigate

Dispute Resolution Clauses

Conclusion

Chapter 11: Damages

Breach of Contract/Failure To Perform

Contractors’ Financial Exposure

Actual Damages—A Silent Risk?

Liquidated Damages

Consequential Damages

Conclusion

Chapter 12: Warranties

A Workable Definition of Warranty

Warranty Issues

The Uniform Commercial Code

When Is No Warranty Appropriate?

Extended Duration Warranties

Limiting Provisions in Warranties

Pass-Through Warranties

Latent Defects & Warranties

A Sample Warranty

Conclusion

Chapter 13: Termination & Suspension

Termination for Cause

Termination for Convenience

Suspension

Cancellation

Conclusion

Chapter 14: Force Majeure

Negotiating Clauses

Sample Contract Language

Conclusion

Chapter 15: Other Contract Clauses

Site Conditions

Use of Completed Portions of the Work

Patent Indemnity

Secrecy & Confidentiality Clauses & Agreements

Owner’s Right To Inspect

Independent Contractors

Assignment

Acceptance & the Punch List

Advance & Partial Waiver of Liens

Final Waiver of Liens

Audit Rights

Severability or Validity Clauses

Venue & Applicable Law

Some Interesting Clauses to Close

Chapter 16: International Contracting

International Contracts

The U.S. Foreign Corrupt Practices Act

Letters of Credit

Split Contracts: Onshore & Offshore Contracts

Political, Religious, & Economic Risks

Overseas Private Investment Corporation (OPIC)

Legal Systems in Foreign Countries

Local Employees, Partners, & Agents

Offshore Companies

Currency Risks

Applicable Law

Joint Ventures

Joint Operations

Import & Export Considerations

Understanding INCOTERMS

The Export-Import Bank of the United States

Where to Get Some Help—Ask the U.S. Government

Lastly, Use the Right Paper Size!

Conclusion

Chapter 17: International Contracting

International Contracts

The U.S. Foreign Corrupt Practices

Act

Letters of Credit

Split Contracts: Onshore & Offshore Contracts

Political, Religious, & Economic Risk

Overseas Private Investment Corporation (OPIC)

Chapter 18: What's it Take to do Business in South East Asia?

Patience is Golden

Walk the Talk

Time and Money

Get Some Help

The US Foreign Corrupt Practices Act

Culture Shock

Center for Strategic and International Studies

Trans Pacific Partnership (TPP)

Backdoor to China and India

Have You Done Your Homework

Modern Business Environment in ASEAN

Special Section: The Socialist Republic of Vietnam

Resources for Business in South East Asia

Chapter 19: Some Final Thoughts on Negotiating Contracts

Why Negotiate?

The Concept of Standard Terms & Conditions

Risk Transfer Item 1: Get Rid of the Indemnity Clause!

Risk Transfer Item 2: Don’t Provide Additional Insured Status

Risk Transfer Clauses, Insurance, & Safety

How to Say No Without Aggravating the Owner

The Worst Contracting Word: “Reasonable”

The Best Contracting Word: “Notwithstanding”

Win-Win & Lose-Lose in Contract Negotiations—Fairy Tales?

Is There a Price for Bad Commercial Terms & Conditions?

Terms of Payment

Some Tips on Successful Negotiating

Three First (and Final) Suggestions

Resources

Glossary

Index

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Understanding and Negotiating Construction Contracts A Contractor's and Subcontractor's Guide to Protecting Company Assets

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Summary

Author Biography

Table of Contents

Supplemental Materials

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