Construction Contracts

Construction contracts are read twice: once quickly, before signing, and once carefully, two years later, by lawyers. The provisions that determine the outcome of the second reading are rarely the ones negotiated during the first. Price and schedule get the attention. Notice, indemnity, flow-down, and termination decide the money.

The Law Offices of Albert Goodwin drafts and negotiates construction contracts for owners, general contractors, subcontractors, and suppliers in New York City.

Standard Forms and What They Actually Say

Most projects use a published industry form, from the American Institute of Architects or ConsensusDocs, or an owner-drafted agreement built loosely on one. The forms are reasonably balanced as published. They are almost never used as published. Owner supplementary conditions routinely rewrite the risk allocation, and a contractor reviewing only the base form is reading the wrong document.

The practical approach is to read the supplementary conditions first, then the general conditions, then the agreement, because that is the order in which the modifications matter. Confirm the order of precedence provision, which resolves conflicts among the agreement, the conditions, the drawings, the specifications, and the exhibits, and make sure it says what you expect.

Scope and Flow-Down

The most common subcontract dispute is about what was included. Two provisions drive it.

Scope definition. A subcontract that incorporates the plans and specifications and adds a catch-all obligation to perform all work reasonably inferable, or all work of the trade, has shifted the risk of ambiguity onto the subcontractor. Subcontractors should attach their own scope letter with inclusions and, more importantly, express exclusions and clarifications, and should ensure the order of precedence gives that attachment priority over the general language.

Flow-down. Subcontracts bind the subcontractor to the general contractor with respect to its work to the same extent the general contractor is bound to the owner. That is reasonable in principle, and it means the subcontractor is agreeing to a prime contract it may never have read. Ask for it, read the notice provisions and the dispute resolution provisions in it, and confirm what obligations are actually being flowed down. A liquidated damages provision in the prime contract, flowed down without a cap, can exceed the entire subcontract value.

Indemnity, and New York's Statutory Limit

Indemnity provisions in construction contracts are constrained by New York's General Obligations Law, which voids an agreement in connection with construction that purports to indemnify a party against liability for damage arising from that party's own negligence. The provision exists because indemnity was being used to shift the consequences of one's own fault entirely onto a party with no control over it.

The practical drafting response, which New York courts have accepted, is language limiting the indemnity to the extent permitted by law, or to the extent of the indemnitor's own negligence. A partially negligent indemnitee may enforce an indemnity so limited, recovering the portion attributable to the indemnitor. A flat full indemnity is at risk of being unenforceable, which means an owner or general contractor relying on one may end up with nothing.

Indemnity works alongside insurance, and the two should be read together. An additional insured endorsement can accomplish, through insurance, protection that a bare indemnity cannot, and the endorsement's actual wording matters far more than the certificate of insurance, which is not a contract and confers nothing. Confirm the endorsement form, whether coverage is for ongoing and completed operations, whether it is primary and non-contributory, and whether there is a waiver of subrogation. See Labor Law 240 and 241 exposure, which is where these provisions are actually tested.

Notice Provisions

Every contract contains them and they decide claims. Identify at the outset every notice requirement in the document: notice of claims, of delays, of differing site conditions, of extra work, of intent to terminate, and of suspension. Record the period, the required form, the addressee, and the method of delivery. Where a period is unreasonably short, negotiate it. Where it cannot be changed, build the compliance into project administration rather than relying on someone remembering. See change order and delay claims.

The Provisions Worth Negotiating

• Payment terms, including the requisition cycle, what documentation is required, and whether payment obligations comply with the Prompt Payment Act, whose protections cannot be waived. Strike or narrow any pay-if-paid condition, which is unenforceable in New York in any event. See payment disputes.
• Retainage, the percentage, whether it reduces at substantial completion, and the release timing.
• Change order pricing, including agreed rates for labor, equipment, and markup, so that pricing extras does not become a negotiation each time.
• Liquidated damages, the daily rate, whether there is a cap, whether there is a corresponding early completion bonus, and whether they are the exclusive remedy for delay.
• No-damage-for-delay, which should be resisted, and if unavoidable, narrowed to exclude delays caused by the other party.
• Consequential damages waiver, mutual, which protects a contractor from an owner's lost rent and financing costs.
• Termination for convenience, and what is paid on termination: work performed, demobilization, restocking, and whether any profit on unperformed work is recoverable.
• Termination for cause, the notice and cure period, and the right to complete with another contractor at the terminated party's expense.
• Suspension, and compensation for the cost of a suspension not caused by the contractor.
• Warranty, the duration, what it covers, and whether the obligation is to repair, replace, or pay.
• Differing site conditions, particularly on renovation and excavation work, where the absence of such a clause places the entire risk of what is behind the wall on the contractor.
• Insurance and bonds, including limits, additional insured status, waiver of subrogation, builder's risk and who carries it, and whether payment and performance bonds are required.
• Dispute resolution, the forum, whether arbitration is required, the rules, the location, and whether related parties can be joined, which matters enormously in a multi-tier dispute. See arbitration.

Contracts With Homeowners

Residential work carries requirements that commercial work does not, including a written contract with specified content, disclosure of license information, payment schedule requirements, cancellation rights, and trust treatment of deposits. A contract that omits them is both a licensing violation and a weakened position in any later dispute. See contractor licensing.

Owners and Developers

On the owner side, the priorities are different: a defined scope with a clear allocation of design responsibility, a schedule with meaningful milestones and enforceable liquidated damages, payment tied to verified progress with proper lien waivers, adequate insurance and bonding, indemnity drafted to be enforceable under New York's limits rather than overreaching and failing, warranty and correction obligations that survive completion, and a termination right that can actually be exercised. Owners should also address Lien Law compliance, since funds received for the improvement are trust assets in the owner's hands as well. See Lien Law trusts.

Before Signing

A review is inexpensive relative to a project. The items we look at first, in order: the payment provisions and any pay-if-paid language; every notice requirement; the indemnity and insurance provisions read together; the flow-down and the prime contract it incorporates; the delay and liquidated damages provisions; the termination rights; and the dispute resolution clause. That review takes hours and routinely changes the economics of a project. See also business contract drafting and breach of construction contract.

You can contact us by phone at 212-233-1233 or by email at [email protected].