Daniel Lund III | Phelps
Construction contracts should be written “for breach” – hoping for the best but expecting that trouble may beset the project. In the same vein, it is vital to allocate risk through careful contract drafting on the front end.
What terms can be used in construction contracts to shift (or, in the case of insurance, absorb) risk?
- Indemnity clauses
- No damage for delay clauses
- Liquidated damages clauses
- Mutual waiver of consequential damages clauses
- Insurance provisions
What to look for in an indemnity clause:
- Is indemnity limited or very broad? This decides how much additional liability a party assumes or pushes off.
- Is there a duty to defend or to pay for a defense?
- Does the provision offend anti-indemnity restrictions for construction contracts in your area?
Plusses and minuses of a no damage for delay clause:
- It can be costly for the party the clause is enforced against, but beneficial to the party enforcing it.
When a liquidated damages clause functions well:
- The clause is structured correctly so it fairly compensates.
- Provisions are in place to contractually push down the loss to the responsible party or parties.
Will you benefit from a mutual waiver of consequential damages clause?
- Consider the types of damages that may beset you upon delay by the other party. If your potential attenuated damages are less than the other side’s, a mutual waiver of consequential damages clause may benefit you. For example, a contractor typically has lower risks of “consequential” damages than a project owner.
What insurance coverage is critical?
- Builder’s risk insurance covers risk of loss to buildings, structures and often related materials and equipment during construction.
- General liability insurance covers negligent acts of the insured.
- Professional liability insurance is necessary for any design professional and for any contractor who assumes responsibility for any professional service (including design) in the contract.
Construction contracts are clearly multilayered documents. Before entering a contract, avoid assuming unreasonable risks, and protect against and fairly shift risk where possible.