Who's Responsible For This Mess?
Working in the construction industry can often seem like a very difficult way to make a living, and it is. There are all the obvious difficulties—like performing the work properly, hiring competent employees, and properly pricing a job—but there are also many hidden dangers. Project owners also need to be aware of the hidden risks on construction projects. Whether you are a general contractor, subcontractor or an owner, do you know what risks you are undertaking in a particular project and did you properly evaluate those risks when agreeing upon a price?
In Ohio, a variety of statutes can affect risk allocation in construction, but often the contract still dictates the result. Indeed, a construction contract is primarily an agreement to allocate risk on a project. If the project burns down while under construction, who carries that risk? If the owner goes belly-up before paying for improvements, who's left with the bill? And what happens when the general contractor receives payment from the owner and skips town before paying subcontractors and suppliers? The answer to these questions frequently begins and ends with the language of the parties’ construction contract.
If you don’t know what your contract says or how these types of risks are allocated, there's a good chance you are the one at risk. Do not believe that construction contracts are "non-negotiable" or merely "boilerplate." Whether you are contracting for some relatively minor home improvements or a multi-million dollar commercial building, you need to understand and negotiate the most common areas of risk allocation.
From a builder's point of view, the risk of non-payment for work and materials may seem to be the most obvious and greatest risk. And overpayment for defective work is what many project owners fear the most. Construction contracts should detail payment terms to mitigate these risks and allocate the unavoidable risk appropriately. Payment terms should include the documentation required for payment to a contractor, the timing of payment, and whether there will be bonds or retainage required.
But there are many other risky topics that need to be addressed in a construction contract. For example, contractors on residential projects can effectively eliminate the risk of being sued for a breach of Ohio's Consumer Sales Practices Act merely by including the right language in their construction contracts.
There are a number of other common risks that should be allocated in a construction contract, such as the responsibility for various types of insurance, the limits of such insurance coverage, the ramifications of missing a completion deadline, whether a subcontract is pay-if-paid or pay-when-paid, dispute resolution procedures (such as arbitration or litigation), interest on late payments, change order procedures and requirements, and the details of any warranties covering the work. These are merely some of the most common and obvious construction contract terms addressing risk allocation.
As a builder, the details of these negotiable provisions could mean the difference between a profitable project and a financial disaster. As an owner, the stakes are at least as high if not higher. Make sure you understand the terms of your construction contract and the allocation of risk before signing the agreement.