How to Identify Red Flags in Construction Contracts

Construction contracts are relevant when it comes to the management of the construction process and to shield the parties from risk. However, the contracts formulated in an unsound way or taking an unequal approach would likely to result in many wrongful incidences and some times the project takes long to start being implemented because of these discrepancies. To protect your interest, it is advisable to look at signs during the appraisal stage. Effective recognition of such warning signs can be a bit tricky hence here is a guide on how to do it.

1. Vague or Ambiguous Terms

It is also important to note that when there are ambiguities or utterly undefined terms in the contract, there is most likely to be conflict. For instance, what one party might mean by ‘reasonable time or standard quality may not be similar to what the other party may be referring to. It is always helpful to substantiate a common term by searching for an accurate definition.

2. Unbalanced Risk Allocation

Usually, risks should be allocated proportionately between the contracting parties and this can only be achieved if the contract has been well written. If the contractor is totally exposed to these risks of delays, other incidents or alterations of the scope of work, this should be avoided. It means that the risk-sharing provisions must be fair and reasonable so that those doing business with the existing players are not bound to lose money.

3. Unclear Payment Terms

Avoid joining contracts that say little about payment structure or describe project phases in a very vague manner. It includes situations where the payments are to be made over a long period, whether the client is unable to pinpoint what else they need from the freelancer to make the next payment and situations where the client pays a small fraction of the agreed amount with the balance being paid once the project is complete. These can pose a lot of pressure on the available cash and result in cash problems.

4. Excessive Change Order Clauses

Alterations are quite a standard practice in construction projects, but contracts that give the client full control over the additions and modifications, without written agreement from both parties to the project scope may lead to increased costs. This is where they should search for clauses that provide guidelines on how changes may be implemented who must approve them and how costs are to affect the changes if at all.

5. Inadequate Dispute Resolution Mechanisms

When a contract fails to include a sound and reasonable clause on how to dispose of disputes, the process turns out to be lengthy and has high costs. Make sure your documented agreement also outlines how to resolve conflicts through mediation, arbitration or litigations and one that is fair and time effective.

6. Lack of Termination Rights

Exclusively negotiated termination provisions where the other party can cancel the contract without reason and without paying compensation are a problem. In the case of termination, both parties should have clear lines of accountability and responsibilities.

7. Unrealistic Deadlines

Avoid becoming overly focused on your timelines which sometimes can overemphasise the rate at which a project is completed, leaving no room for incidents such as harsh weather or a delayed supply of some materials among others. Sometimes the expected deadlines are actually impossible to meet and if you fail to meet them, you will be penalised.

8. Missing Force Majeure Clauses

A force majeure clause protects you from these risks in the event that they occur such as calamities or epidemics. Their lack means you are open to very real dangers. Do not leave areas of force majeure undefined in the contract or define them inadequately.

9. Overly Complex Language

Covers sometimes are full of complicated legal language and hide many unfavourable provisions. If the language used seems complicated it may well be so purposely, in which case it may be advisable to ask for further elucidation of the meaning or seek the opinion of a lawyer.

10. No Mechanism for Regular Updates

Construction projects are dynamic and should, therefore, be flexible, and their contracts, should, therefore, be reviewed periodically or updated as necessary. If the client deleted comments on periodic review meetings and status reports, later on, there would be confusion in the end result.

How to Mitigate Risks

• Hire a Legal Expert: A construction law expert can assist in examining the contract carefully.
• Engage Early: Disagreements should be attended during the negotiating stage where both parties agree to changes.
• Use Standardised Templates: In as much as this is possible, the best basis could be operating industry contracts such as AIA or FIDIC forms.

Identifying red flags in construction contracts is crucial for preventing disputes, delays, and financial losses. A careful review of the terms, with expert advice where necessary, can help protect your interests and ensure a successful project.

By staying vigilant and proactive, you can navigate potential pitfalls and build strong, equitable agreements that pave the way for project success. For more insights and expert assistance, explore our construction contract reviews services.