WE HAVE A GREAT CONTRACT, SO WHY ARE WE STILL DEALING WITH CLAIMS IN COURT? (Part 1 of a 3)

Part 1 of a 3 part series on risk management

Posted by: Josh Quinter (jquinter@kaplaw.com)

In my years as a construction attorney, I have had countless conversations with contractors who are frustrated by the "drag" created by litigation. Many of those with whom I have spoken have expressed confusion over the fact that their contract – perhaps even one prepared by a lawyer – is good and should be keeping them out of Court; and they cannot understand why they still find themselves in costly and time consuming litigation. This 3 part series will endeavor to provide some answers to this dilemma and some ideas about how to cut down on some of that frustration.

construction contract.jpgThe first issue to consider is the most obvious one: perhaps the contract is not as good as you think. If this ends up being part of the answer, the problem usually manifests itself in one of two ways. The first is that the contract was last updated 5 years ago or longer. The second example is that the contract is one prepared for another type of work. No matter which form the problem comes in, it has one common thread. The contract does not fit the situation.

Despite efforts by companies and lawyers to make the contracting process more efficient by developing form contracts, there is no perfect "one size fits all" agreement. To be clear, this does not mean that form contracts are bad. It means they come, like many other decisions in the construction business, with risk. Each project has its own unique elements and nuance. Using the same contract that worked for a company on a great project 7 years ago may not be helpful on a newer job; and that contract you borrowed from a company that successfully completes small residential carpentry jobs will be hard to use for a large commercial mechanical project.

So how does one make sure he or she has the right contract form? Here are a few things to keep in mind:

(1) Update your contract forms no less than every 5 years. The construction industry is fluid and changes regularly. This means the risks allocated in a contract change too and adjusments in the agreement have to be made to adapt to the realities of what happens in the field. In a best case scenario, consult an experienced construction lawyer when you undertake this effort.

(2) Don't pull that form off the shelf without thinking. Too often, companies use the same form repeatedly for jobs of all sizes and types. The $5 million and 15 month commercial project gets the same contract as the $5,000 and 2 day job. Each job has unique risks though. Have more than one form and use the one best suited to the project for which you are issuing the contract. As a general rule, the larger and more complex projects get more involved contracts than the smaller less expensive ones.

(3) As an additional caveat to number 2 above, don't be afraid to make some changes to the form once you have the right one. Consider the particular risks you have on the project and make sure the contract addresses them. For example, if there is a particular concern about injury on a job you should perhaps consider altering the language to your indemnity and insurance clauses. If there is a high risk of pay issues, you would tighten the language regarding payment.

(4) Remember that there are other elements to risk allocation that are part of the contract documents. These include things like safety policies, insurance, surety bonds, and other things that help manage risk. Be sure to understand how these work, how they are employed on a specific job, and how they help cover holes a contract cannot cover.

(5) Understand that even a good contract does not eliminate all risk and prevent claims. A contract is designed to allocate risk between the parties, not eliminate risk. A good contract provides a framework to deal with issues efficiently as they come up and to put companies in the best position to handle certain risks responsible for those same risks. Not even the best contract can ultimately keep you out of court all the time though.

Having a good contract is the first step to good risk management. There are a number of other best practices one can undertake to help manage risks and avoid claims and related litigation. In part 2 of this series, we will address the another best practice: leadership.

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