Best Practices – Commercial Terms – The Critical Commercial Terms You Need to Make Your Contracts Stronger.

With the start of the New Year, I’ve jumped right back into the deep-end with several projects that began towards the end of last year and grew hot over the break.

Each of these projects have required some amount of re-write of contract terms.  Coincidentally all of these agreements started on Vendor paper (or the Vendor’s form of agreement).

As I have completed my reviews (all around the same time), it became evident that the vast majority of these were lacking some of the same things.

Some were vague in their description of scope of work, others had poorly defined payment terms, others simply offered no contractual remedy in the event of a breach.

In previous articles we reviewed the differences between a scope of work and a scope of services.  Collectively these two pieces of information convey the scope of the agreement.

Of course this is the number one part of an agreement that needs to be right, but there are a few others:

Phases of Work

One of the most fundamental and in my mind most important elements of a construction contract is defining the phases of work.  I say this is “most important” because the phases of work help to organize the project and helps frame the rest of the agreement.

Keep in mind that each phase will have several sub-phases and tasks within it.  You should not try to define each task or have that much granularity in your agreement, but you should establish at a high level how the project will be performed.  In a previous article I shared the phases of work that I like to use and explained the tasks that are completed within each.

Payment Terms

When I say “payment terms” the first thing most procurement people think about is how many days after receipt of an invoice, the Owner has to issue payment.  While this is an important provision, it assumes that the Vendor’s invoice is correct.  Your contract could include language such as “corrected invoice” or “uncontested invoice”.  This language suggests the Owner has the right to review the invoice, but most agreements fail to document the steps the parties must take to validate, contest, or approve an invoice.

Payment terms in construction contracts should include some form of payment application process.  Typically this will include reviews and approvals from other parties such as the Architect.  Even when an Architect is not in the picture (as may be the case with an equipment install), your contract should include a period of invoice review which allows the Owner to validate levels of completion or confirm receipt of materials.

Such payment provisions should then address the rights of each party in the event of a dispute.  Good payment provisions should allow for partial payments in order to avoid creating a hard-ship for the Vendor.

Deliverable List

Establishing a well-defined deliverable list is another key commercial term that is often overlooked.

When we are talking about construction scope definition most people tends to rely solely on the design drawings, but as I have noted before the gap in construction happens when the scope of services is left undefined.

In design contracts, the deliverable for each phase of work should be defined as well.  It’s not enough just to define the percentage of completion for each milestone.  You should specify the types of drawings you expect to receive and the content the drawings should include in order to meet your expected level of completion.

Be sure to specify whether the Engineering drawings will need to be developed at an equal level of completion or if they may lag behind the Architectural drawings.

Regular recurring meetings

There are a number of recurring meetings that occur during design phase and during construction phase.  Defining what these meetings are is important for ensuring Vendors include these meetings in their quotes.  Defining these meetings also gives teeth to the agreement so you can ensure service levels meet your expectations.

Deliverable Milestones

Another common gap is defining milestones for a specific deliverable.  During construction, the most common and most critical is the baseline schedule.  I like to require that the baseline schedule be provided within 5 days of signing the contract.  This ensures that the contractor is creating a schedule and communicating key construction milestones early.  If you have other key milestones such as a move-in date for a specific area of work or if you have dates you need to meet during design, this is the place to include that.

Review of Drawings

Very few contracts ever actually define the Owner’s expectations for reviews at each design milestone.  In some cases Owner’s will simply receive the drawings, perform a review and respond back to the Architect with comments.  In other cases, the Owner may require a page-turn meeting with the entire design team (including the Engineers).  The cost difference between these can be dramatic and therefore should be defined your expectations up front.

Contractual Remedies

Most of the contracts I have seen fail to define what contractual remedies the parties have in case one fails to perform.  Obviously if there is a material breach of contract you may end up in arbitration or court, but for minor breaches, it’s good to define remedies up front.

One of the best examples I can think of is when an Architect commits an error or misses something on a drawing.  In most cases, the remedy is simply to have the drawing corrected.  We assume this means that the correction will be done at no extra cost, so why not state that?

Defining contractual remedies for small breaches is a great way to establish expectations up front for both parties.

Project Close-out

Close-out procedures are most often overlooked and neglected by Owners.  These commercial terms define so many critical final steps that you typically only regret once you realize you missed them.  Take the time to define your close out procedures in detail.  Consider things like maintenance training for newly installed equipment, RFiD equipment tags on new machinery, extra material stock for things like paint and carpet, and spare parts for wearable items such as filters.

Taking the time to review your close out procedures will ensure that you and your Contractor are aligned on what you need in order to make the final payment.

Closing

These are just a few of the commercial terms that are often missed or ignored in construction.

I’m certain there are more items that we could discuss, but I think this gives you a good start.  Of course, each organization is different and you need to consider your Company’s demands.

The key is to consider the performance you expect from your Suppliers and then define that for each phase of work.  This will ensure that your Vendors are clear on expectation and that you have your Company’s key performance criteria contractually defined.

What about you?  Are there other key areas you like to define?  What remedies have you included in your agreements?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

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