Contracting for Construction Projects

• Pages: 97-129

Contr acti ng fo r Co nstr ucti on Pr ojec ts 97

5.0 cont ract F ormati on

A. For P urpose o f Design Agreemen ts and Construc tion Cont racts

Construction transactions are complex. They involve multiple parties and are

technically complicated. Such transactions require heavily documented  nancial

arrangements, multistep payment procedures, and unique business terms and

conditions. Finally, construction transactions also are complex from a legal

standpoint. Therefore, it makes sense to prepare well-thought-out contracts to

memorialize the agreements among the appropriate parties in connection

with the design and construction of a project. The process of preparing and

negotiating such contracts often helps the parties arrive at a better “meeting of

the minds” and thereby diminishes the opportunity for disputes to arise out of

frustrated expectations. Furthermore, a contract provides a written record of the

deal between the parties to help unravel any disagreement that might occur.

5

Contracting for

Construction Projects

BRUCE MERWIN

C H A P T E R

97

The author thanks Jacob Fain, an associate at Haynes and Boone, LLP, for his valuable assistance in

the preparation of this chapter. The author also thanks Joe F. Canterbury, Jr. for permission to use

portions of his Texas Construction Law Manual, 3rd edition, with respect to Contract Formation.

98 CO N S T RU C T I O N L A W

The design and construction process involves reciprocal promises among

the many project participants. Owners, architects, and contractors are primar-

ily interested in ve considerations affecting their respective contracts. First is

the description of the scope of services or work for the project. Second is the

timeframe within which the project will be completed, often described as the

project schedule. Third are the parameters regarding completion of the project

within the owner’s budget, as amended by change orders. Fourth is the qual-

ity of the services and work, and various administrative matters that ensure

such quality. Fifth is the interest each party to the contract has in its respec-

tive rights and remedies in the event that the other party breaches any of its

promises. The design agreement and construction contract, in essence, should

be a roadmap to successful completion of the project and the establishment of

procedures for resolving disputes if problems occur during the design and con-

struction process.

To summarize, design agreements and construction contracts should both

recognize that the primary purpose of the contract is to do the following:

(1) inform each party what it must do and to what it is entitled, (2) inform

each party of its rights when the other party does not perform as promised, and

(3) reect the reality of contract administration and not require one party to

agree to procedures that will not likely be followed or will signicantly increase

the cost of construction. Each party’s attempt to protect its respective inter-

ests should not cause the design services agreement or construction contract

to get out of balance to the point that the contract terms themselves become

a more signicant risk factor than the value and complexity of the services or

work itself.

B. Contrac t Formati on Gene rally

What constitutes a design agreement or a construction contract? As dened

in BLACK’S LAW DICTIONARY, a contract is a promise or set of promises to which

the law attaches legal obligations or an agreement between two or more par-

ties creating legal obligations.1 For the contract to exist, there must be an offer,

acceptance, and consideration tendered by both parties.2 If either of the ele-

ments of mutual assent or consideration is missing, then there is no contract.3

Because of the complexity involved in a design agreement or construction con-

tract, for the most part, such contracts are written agreements executed by

both parties.

1. BLACK’S LAW DICTIONARY (8th ed. 2004).

2. Harco Energy, Inc. v. Re-Entry People, Inc., 23 S.W.3d 389, 392 (Tex. App.–Amarillo 2000).

3. Hubbard v. Shankle, 138 S.W.3d 474, 481 (Tex. App.–Fort Worth 2004).

Contr acti ng fo r Co nstr ucti on Pr ojec ts 99

It is possible to have an oral contract involving construction, and the par-

ties are not required to explicitly express their intent in writing. A meeting of

the minds can be implied from, and evidenced by, the parties’ conduct and

course of dealing.4 The contract, to be enforceable, must be reasonably denite

in its terms and must sufciently describe the essential elements of the agree-

ment. However, it may be difcult to establish oral agreements or contracts

based solely on conversations between the parties.

C. Commen cement o f Servi ces or Work Prior to Contract

Although not the preferred approach, owners often commence design and con-

struction activities prior to execution of contracts for design services or con-

struction work. Because of the number of issues that must be addressed in

design agreements and construction contracts, there often is great time pres-

sure on owners to commence design services while the balance of the con-

tractual matters is being worked out or the economic viability of the project

is being evaluated. When the advantages of accelerating completion of the

design may outweigh the risk of proceeding without having a full contract in

place, owners sometimes issue to an architect or other design professional an

early start letter or limited authorization to proceed. Recognizing the risk in

commencing design without a complete contract, an owner might build vari-

ous controls into such an early start arrangement by, for example, authorizing

performance of only a limited scope of design services with the hope that the

deal can be nalized prior to completion of the services for which an early

commencement is authorized.

Construction contracts are usually more complex than agreements with

design professionals and, on large or particularly difcult transactions, can

take months to draft and negotiate. The potentially adverse effects arising

out of delays in commencement of construction, therefore, are amplied. For

example, many projects require long lead-time items, such as materials, equip-

ment, or systems that must be specially fabricated. There may be a limited

window of opportunity to get onto a manufacturer’s schedule in order for such

items to be delivered to the site and available for incorporation into the work

as necessary to conform to the owner’s contemplated schedule. Any delay

could be costly, and an owner might want to commence the ordering of such

items while nal terms of a construction contract are negotiated.

Given the volatility in labor and material costs, it is often critical to the

owner to lock in prices for materials, reserve the use of equipment or produc-

tion time of subcontractors, or otherwise start the project prior to nalizing

4. Harrison v. Williams Dental Group, P.C., 140 S.W.3d 912, 916 (Tex. App.–Dallas 2004).