A contract is a promise that the law will enforce. A contract can be asimple oral agreement in which one person promises to work for anotherin return for payment. Or, a contract can be a complicated documentincorporating a variety of supplementary materials and running hundredsof pages in length.

Construction projects usually involve several parties and require severaldifferent contracts. On a traditionally structured project, for example,there are separate contracts between the owner and the designprofessional, the owner and the general contractor, and the generalcontractor and the subcontractors. These contracts establish therelationships between the parties and define their rights andresponsibilities.

Contract Requirements

Legally enforceable contract results from the following elements:• Mutual assent• Consideration• Legal capacity to contract• A legally permissible objective

Mutual Assent

A contract is not legally enforceable unless two or more parties have agreed to be bound to its terms. This is called mutual assent.

Parties manifest their mutual assent to contract when one party makes an offer and the other party accepts that offer.

An example of an offer in the construction industry is a bid. In the bid, the contractor essentially states,

"I offer to build the project described in the contract documents,

according to their terms, for 'x' dollars." The owner accepts the offer by awarding the contract to the selected bidder.

An offer has been made if the party who received it (in legal terms, the

offeree) has reason to believe from the surrounding circumstances, and

from the words and actions of the party who made the offer (called the

offeror), that the offeror intended to invite the offeree's assent to a

contract. An offer creates in the offeree the capability to accept it and

make a contract. Once the offeree accepts the offer, a contract has

been formed.

A contract cannot be formed unless the offer is accepted exactly as

offered. Sometimes the response to an offer is neither to accept it as

offered nor to reject it completely, but to propose modifications to the

original offer. An offer that is modified by the offeree and proposed to

the offeror is called a counteroffer

CASE : Assume, for example, that an architect offers to design a new home for a potential homeowner. The terms of the architect's offer are that he will perform basic services up to the time when a building permit is issued for a fixed fee of $10,000. In response to that offer, the homeowner says that he will hire the architect if the architect performs services through the actual construction period, and for a fee of $9,500. The homeowner's response is the counteroffer because it contains terms different from those in the architect's original offer. The counteroffer terminates the architect's original offer. That is, the homeowner cannot change his mind and accept the original offer unless the architect agrees to allow it. The counteroffer is, effectively, a new offer that the architect is free to accept or reject.

A series of offers and counteroffers are often part of the preliminary

contract negotiations. This process narrows the disputed terms of a

potential contract and may eventually bring the parties to agreement and

the formation of a legally binding (enforceable) contract

Consideration A contract is not legally enforceable without consideration.

Consideration is the price, motive, or benefit that induces the parties to form a contract. For consideration to exist, both parties to the contract must intend to enter into the contract and must be willing to take on the obligations associated with it. Each party furnishes consideration to support his or her part of the deal. In a typical construction contract, for instance, consideration is a promise to pay money in exchange for a promise to perform work. Consideration involves a bargained-for exchange of something of legal value.

Assume, for example, that a painter promises to paint the house of someone to whom he is not related and to whom he owes no obligations. If that person promises to pay him $3,000 (which is not otherwise owed), the promises have legal value. The parties bargained and undertook to exchange promises to do something that they otherwise had no obligation to do.

Legal Capacity to Contract

A contract is not enforceable if one or more of the parties who entered into it did not have the legal capacity to do so. Incapacity arises if a party, at the time the contract was made, was either:

• Under age (less than 18 or 21 years old, depending on state law)

• Intoxicated so as to be incapable of understanding the nature of his

or her action

• Mentally ill

• Under legal guardianship

Legally Permissible Objective

Finally, the law will not enforce a contract whose objective violates a

statute (a law enacted by the local, state, or federal government) or the

common law (law derived from the law of England and developed

through court decisions).

A contract that requires one or more of the parties to perform an illegal act, therefore, is not enforceable.

An example of an illegal contract is one which requires an architect to

disregard fire codes or other building safety regulations.

Modifying Contracts

A modification is a change to a contract which is made after the contract

has been executed (signed by both parties). A change order is an example

of a modification to a construction contract whereby the parties agree to

a different price, different services, or perhaps a different quantity of

materials.

The parties are free to modify the agreement, but all the elements necessary for contract formation must be present in order for the contract to be enforceable as modified.The only element that is likely to be missing from a modified contract is consideration. For example, a contractor could claim that certain work was not required under the original contract, and subsequently refuse to perform such work unless a modification is agreed upon which would provide him with additional money. The owner may agree to pay thecontractor to perform the work. If the owner does not pay, however, thecontractor may not be able to enforce the modification, due to lack ofconsideration. If the work was, in fact, required by the original contract,the contractor already had a duty to perform it. By promising it again,he gave nothing of legal value in exchange for the owner's promise topay. The contractor had a prior existing duty to do the work and providedno new consideration for the modification.

to pay the contractor to perform the work. If the owner does not pay, however, the contractor may not be able to enforce the modification, due to lack of consideration. If the work was, in fact, required by the original contract, the contractor already had a duty to perform it. By promising it again, he gave nothing of legal value in exchange for the owner's promise to pay. The contractor had a prior existing duty to do the work and provided no new consideration for the modification.

Interpreting Contracts

One of the reasons for reducing a contract to writing is to document

what the parties have agreed to should questions or disputes arise. When this happens, it is necessary to look to the contract to interpret its

meaning. Therefore, it is important when preparing contracts to make the contract language as explicit as possible. Parties can then avert or resolve most disputes simply by referring back to the terms of their contracts.

There are two basic ways to interpret written contracts:

Look to the contract's intent and Apply standard rules of interpretation

IntentA fundamental rule of contract law is that parties are generally free to

contract on terms to which they can agree.

For this reason, when a judge or arbitrator interprets a contract, he or she first attempts to determine the parties' intent. To determine intent, judges and arbitrators look to the wording of the contract, to customs in the industry, to common usage of terms, to the parties' conduct, and to surrounding circumstances.

If a judge or arbitrator cannot discern the parties' intent, then he or she will apply other standard rules of interpretation to the contract, or fill in any incomplete portions as deemed proper

Standard Rules of interpretation

Implicit Terms and ConditionsThere are certain terms, however, that are frequently omitted from the express language of most construction contracts. Regardless, courts regularly infer promises on the part of the owner, design professional, and contractor.

Owners implicitly promise contractors:

• Cooperation and noninterference

• Access to the construction site

• Fair interpretation of the contract documents Accuracy in the information provided

• Adequacy of drawings and specifications

Conversely, contractors implicitly promise owners:

• Quality workmanship and materials • Timely payment of bills

• Compliance with building codes and applicable laws • Adherence to the progress schedule

Design professionals implicitly promise to exercise that degree of skill andcare which can reasonably be expected from similar professionalspracticing in the community.

Implicit terms (2)

Conversely, contractors implicitly promise owners:

• Quality workmanship and materials • Timely payment of bills

• Compliance with building codes and applicable laws • Adherence to the progress schedule

Design professionals implicitly promise to exercise that degree of skill and care which can reasonably be expected from similar professionals

practicing in the community.

CONTRACT PROVISIONS THAT MUST BE REVIEWEDFOR CLARIFICATION

1. Owner’s responsibility• Drawings and specifications (construction documents)• Site layout• Soil borings and site conditions• Environmental reports and approvals• Abatement of any hazardous material• Special studies (traffic, water, utilities)• Permits clarification• Utilities• Disputes with adjacent owners or municipality• Testing responsibility• Other areas where the owner has control and must submit the information

2.Schedule

• Type that has to be prepared

• Updates required

• Penalty clauses

• Substantial completion provisions

• Delays (not covered by force majeure)

• Extensions

• Delays caused by owner or owner’s subcontractors or

vendors

3. Costs• As defined in the contract

• Allowances and how to be used

• Definition of allowance items

• How will GMP be impacted by actual cost vs. allowances allocated?

• Contingency and how is it to be used and who controls it?

• General condition’s clarifications (what is included and what is excluded?)

• Inflation clause

• Costs covered by the owner

• Value engineering

• New regulations by municipal and government agencies

• Auditing of project by the owner

4. Change orders

• How defined• Method for developing costs• Approval process• Who signs off on any change orders?• Will labor rate

5. Dispute resolution

• Records that have to be kept

• Type of daily reports that have to be maintained

• Owner and CM/GC executive review

• Independent review board

• Mini trials

• Mediation

• Arbitration

• Other legal means, including litigation

• Notice provisions

Major parties in realization of contract

Communication Matrix in Traditional Contract

General Conditions

The plans and specifications are the legally binding description of what is to be constructed. (SCOPE OF CONTRACT)

The proposal form is where the contractor offers to perform the project for a certain price. Additional documentation must be added to the bid package that describes the contractual relationships between the owner and the contractor.

The general conditions are the portions of the bid package where these duties and obligations are defined. Although the language may seem legalistic, a construction contractor must understand all items in the general conditions for any project he or she

bids on. Requirements in the general conditions have a direct bearing on contract bid prices

There are many different topics that are included in the general conditions.They include wording that describes: The duties of the owner and contractor. The general

conditions provide explanations of what is to be provided by the contractor and owner.

General project requirements. Definitions of the project scope and definitions for the meaning of terms used in the contract, plans, and specifications are given in this section of general conditions

Frequency of payments to the contractor dur ing construction. Periodic payments to the contractor during construction are typically ca lled progress payments.

Method of measuring progress and calculating the amount of the progress payment.

How a contractor will be paid and the methods for calculating project progress are described in the general conditions.

For example, if the project is done on a lump sum basis, some method will be described that will allow determination of how much progress has been made in a particular billing period so that the payment the contractor is entitled to can be calculated.

Damages for late project completion. Damages or penalties for late completion of a project are described. Contractors are often assessed monetary liquidated damages on a per diem basis for completing a project later than the completion date specified in the construction contract.

Mechanisms for extending the project duration. Projects are often delayed. Often additional time, called a time extension, is given to a contractor to complete work if problems beyond his or her control have occurred that delayed the project. The method for requesting a time extension is described, as well as the reasons for which a time extension may be requested.

Mechanism for modifying the original design during construction. Construction projects must often be modified during construction. These modifications often involve a change of cost. These modifications to the project cost are called change orders and are negotiated between the owner and contractor. The contractual arrangements governing requests for changes to the original contract are described in the general conditions.

Inspection of the contractor's work. How and by whom the contractor's work will be inspected for compliance with the specifications and quality is defined in the general conditions.

Quality requirements. In the general conditions, sections are typically inserted that give the owner the right to reject work that he or she believes to be of substandard quality.

Owner's right to stop or suspend work. General conditions have clauses that allow the owner to stop or suspend work. This allows an owner's organization to stop a project if it runs out of money.

Responsibilities for permits. The general conditions define who is responsible for obtaining building and environmental permits.

Handling of claims. Claims are unresolved conflicts between the owner and the contractor. General conditions often contain clauses that define how claims are to be handled.

Insurance requirements. General conditions define liability and property damage insurance that must be obtained by the contractor to protect the owner.

Bonding requirements. Several bonds are usually required for a construction project. As we have discussed ea rlier, a bid bond must be submitted with the bid.

The contractor awarded the contract will typically be required to also obtain performance and payment bonds.

General Conditions – last slide

Definition of retainage requirements. Retainage is funds withheld from progress payments until the end of the project as an incentive for project completion.

The amount withheld is usually 10%. In a large project, this is a substantial amount and provides an incentive for the contractor to finish all work. Retainage is returned with the contractor's last payment. This requirement will be defined in the general conditions.

Reasons for contractor termination. The general conditions define the reasons a contract with a contractor may be terminated before the completion of the project.

There are many different topics that are included in the general conditions.They include wording that describes: The duties of the owner and contractor. The general conditions provide

explanations of what is to be provided by the contractor and owner. General project requirements. Definitions of the project scope and

definitions for the meaning of terms used in the contract, plans, and specifications are given in this section of general conditions

Frequency of payments to the contractor dur ing construction. Periodic payments to the contractor during construction are typically ca lled progress payments.

Method of measuring progress and calculating the amount of the progress payment.

How a contractor will be paid and the methods for calculating project progress are described in the general conditions. For example, if the project

is done on a lump sum basis, some method will be described that will allow determination of how much progress has been made in a particular billing

period • so that the payment the contractor is entitled to can be calculated.