Chapter 10 - EXHIBIT 10A • DRAFTING CONSIDERATIONS FOR CONTRACTORS
| Jurisdiction | Colorado |
Notes on Use: Contracts between owners and contractors are often divided between the principal agreement itself, which contains the chief negotiated terms between the parties, and a separate set of "standard" terms and conditions. The checklist below is focused on drafting the terms of the principal agreement between the owner and the contractor. This checklist is intended to be used in conjunction with "General Conditions - Contractor's Considerations" to constitute a complete review of the contract.
Also note that there are special considerations related to "stipulated sum" or "fixed price" contracts that are outlined below. If the cost-plus contract you are reviewing also includes a Guaranteed Maximum Price, it is essential that the review include both this checklist and the checklist for stipulated sum contracts (together with the checklist for general conditions).
___ Identification of Owner
___ Determine the type of entity and the status of the owner's registration with the Secretary of State or other responsible business registration office.
___ Determine whether the owner is a governmental or quasi-governmental agency. Special contracting rules may apply to such entities, and it may not be apparent from the name of the entity whether or not the entity is a government agency.
___ Where appropriate, determine whether the owner is a subsidiary, parent, or other affiliate of the real party in interest that has been created so as to shield the real party in interest from liability.
___ Property Issues
___ Confirm that the owner with whom the contractor is contracting is the record owner of the property.
___ Ensure that the property described in the contract as the location of the project is described in sufficiently detailed legal terms to enable the contractor to file liens or otherwise to utilize the property as security.
___ When the "owner" is a tenant, confirm the contractor's ability to lien the property - this may include ensuring that the owner of the property has consented to the improvements or has not posted or otherwise protected the property against liens.
___ Contract Documents
___ Ensure that the enumeration of the contract documents includes all documents on which the contractor has relied in agreeing to terms with the owner. Many contracts are written in such a manner that the "Contract Documents" section includes (or can be read as implying) a merger clause, under which all previous representations, promises, negotiations, and terms are merged into the written contract.
___ Assess the extent to which bid documents should be (or will be) included as part of the final contract documents. Bid documents can add unexpected terms to the contract, and should be reviewed in connection with the final contract to ensure consistency. This is especially true with respect to government projects where an apparent successful bidder has an opportunity to negotiate the terms of the contract.
___ Contract Time
___ Ensure that the stated date of completion is fixed from a stated or definable time of commencement. If the time of commencement is to be fixed by the future issuance of a Notice to Proceed, the contract should not state a specific date for completion. By using a floating and indeterminate start date with a fixed date for completion, the contractor could lose valuable working time.
___ Ensure that the contractor's only time commitment is to complete the work by a specified (or readily calculable) date. In particular, the contractor should not be bound to adhere to a particular construction schedule. Any schedule should be furnished only for the informational purposes of the owner and not as a promise to perform in accordance either with the time limit set forth for particular tasks in the schedule or in the sequencing of the work to be completed. By incorporating a schedule into the contract documents without this clarification, the owner may claim scheduling rights (and ownership of float) that the contractor wishes to retain.
___ Ensure that the contract is clear that any "float" belongs to the contractor. Courts have disagreed as to who is entitled to the benefit of additional or uncommitted time in the schedule, and by leaving open the prospect that an owner can claim the benefit of such additional time, the contractor loses potentially valuable acceleration claims (or has its delay claims undercut).
___ Funding
___ Determine the sufficiency of the funding mechanism through which a private owner intends to finance its project, and verify that the contract provides adequate protection to the contractor in the event the owner is unable to finance the property. This may include a pre-construction assessment of the value of the equity in the property, financial disclosures or guarantees from the owner, or other means of verifying financing.
___ When the owner is a government entity, research applicable finance and spending limitations so as to ensure that adequate funding is committed for the project, including funding mechanisms for any reasonable changes that may be made during the course of construction. Many government entities are limited in the amount of money they may commit to capital projects, either by spending limitations or by laws that require pre-construction authorization of funding. A contractor's failure to recognize such funding limitations may put it in the position of facing barriers to its collection of payment.
___ Price. In a cost-plus contract, the principal goal should be to draft clear terms defining the costs that may be charged to the owner. Several specific terms deserve special attention:
___ Self-performed work. When the contractor contemplates performing a portion of the underlying scope of work with its own forces, the contract should be clear in allowing the costs associated with such self-performed work to be recovered as part of the contract costs (as opposed to being considered part of the overhead for which the contractor is compensated separately). In defining recovery for self-performed work, the contract should be careful to distinguish those elements of the contractor's internal costs that can be charged as separate cost items for self-performed work, such as labor burdens.
___ Small-tool allowance. The costs of work should include some basis for compensating the contractor for the use of its own small tools that are consumed over a period of years. This allowance is typically charged as a percentage of costs rather than on a periodic rental schedule.
___ Contractor-owned equipment. The contractor should be permitted to recover some costs for use of large equipment that the contractor owns. Typically, the parties will agree to a schedule of values that will set forth hourly, daily, or other periodic rates that may be charged to the owner.
___ Overhead. The contract should make a specific allocation of field overhead that can be recovered as part of the underlying cost of the contract, which ordinarily excludes any component of home office overhead (home office overhead is usually recovered as part of the "plus" component of a cost-plus contract).
___ Supervision. The owner may well assume that the cost of on-site supervisory personnel is borne by the contractor as part of its overhead, and not as a separately recoverable item. To the extent that the contractor has priced the contract by assuming that it will be entitled to recover its costs for field personnel and supervision, this expectation should clearly be delineated in the contract so as to leave no question as to whether (and which) field personnel and supervisory personnel are a reimbursable cost or a non-reimbursable component of overhead.
___ Specific Exclusions. Ensure that specific exclusions that the owner seeks to be carved out from allowable "costs" are consistent with the remainder of the cost structure.
___ Treatment of Contractor's Rebates, Refunds, Discounts, House Credits for Volume, etc. Established contractors very often work out concessions from suppliers that grant the contractor certain benefits in consideration for continued purchases. These concessions may include volume-based rebates, credits to house accounts, price discounts, refunds, or other monetary compensation for the parties' continuing business relationship. The contract should specify which monetary benefits are the sole property of the contractor. In some cases, such as discounted...
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