Your Contract: What It Should Have – Part 1

1. Licensee’s statement

Effective January 1, 1996 section 7030 of the business and professions coded was amended to revise the form of notice requiring at least 10 point type on all prime construction contracts as follows

“Contractors are required by law to be licensed and regulated by the contractors’ state license board which has jurisdiction to investigate complaints against contractors if a complaint regarding a patent act or omission is filed within four years of the date of the alleged violation.  A complaint regarding a latent act or omission pertaining to structural defects must be filed within 10 years of the date of the alleged violation.  Any questions concerning a contractor may be referred to the registrar, Contractors’ State License Board, P.O. Box 16000, Sacramento, California 95826.

Failure to include this written statement may constitute a cause for disciplinary action, but will not deprive the contractor of the right to recover for the work performed under the contract.

2. Description of work

Contractor will furnish all labor, equipment, and material to construct and complete in a good workmanlike, and substantial manner a ___________________________________(the “project”), on the following described property: __________________________owner will locate and point out the property lines to contractor, and will provide a survey if in doubt as to the boundaries.

Since the owner usually tells the contractor where to build, it is better to make it clear that the owner, rather than the contractor, is responsible in the event of an encroachment on adjoining land.

3. Forms; plans, specifications, permits

Normally the project will be constructed according to plans and specifications which should have been examined by the contractor and owner and signed by the parties.  The contractor will obtain and pay for all required building permits (although the owner can be required to pay for permits), but the owner will pay assessments and charges required by public agencies and utilities for financing or repaying the cost of sewers, storm drains, water service, and other utilities, including sewer and storm drain reimbursement charges, revolving fund charges, hook-up charges and other similar charges.

The parties should initial each sheet of the plans and specs the contractor has bid, so that future revisions may be identified as such.

3. Form: payment

Owner will pay contractor the sum of $__________ installments as follows:

If payments are to be made from a construction loan, owner represents that the construction loan fund is sufficient to pay the contract price and for all extra work that may be ordered by owner, and owner will do everything possible to expedite the payments.

If corrective or repair work remains to be accomplished after the building is ready for occupancy and has passed final inspection by the building dept.  The owner, pending completion of such work, may withhold payment of a sufficient amount to pay for completion of such work, but shall not withhold any greater amount.

If the contractor expects to be paid from a construction loan, the owner should see to it that the loan fund is sufficient.  The mere fact that the amount of the loans equals the contract price does not necessarily mean that the loan is sufficient, since the loan proceeds may be used to pay points, interest, title company fees, prior encumbrances and other items, in addition to the contract price.

Owners may be tempted to withhold payments, claiming they are not due until every possible minor correction has been accomplished.  This seems unjust if the owner, as often happens, withholds several times the cost of correction after the building has passed final inspection and is ready for occupancy.

Section 8812 of the civil code–requires that the retention withheld by the owner from a direct contractor or by the direct contractor from any sub, shall be released within 45 days after the “completion” of the project.

4. Labor and materials

The contractor shall pay all valid charges for labor and materials incurred by contractor and used in the construction of the project, but is excused from this obligation for bills received in any period during which the owners is in arrears in making progress payments to the contractor.

Should contractor fail to make any payments required under this paragraph, owner may make such payments on behalf of contractor and contractor shall reimburse owner for the amounts actually paid on demand

This clause is dealing with the requirement that the prime contractor must protect the owner against mechanic’s liens.

Suppose an owner fails to make the completion payment and the retention payment on a job, though the contractor has performed.  As a result, the contractor does not have the money to pay its subs and suppliers, who then record mechanic’s liens.  The owner settles the mechanic’s liens for fifty cents on the dollar, and takes assignments of the claimants’ rights against the contractor.  The contractor files suit against the owner for the balance due under the contract, and the owner offsets at one hundred cents on the dollar the claims which it satisfied at fifty cents on the dollar.  This could allow an owner to take advantage of its own wrongdoing because the mechanic’s lien claims might never have been filed had the owner not wrongfully withheld progress payments from the prime contractor

In order to avoid this outcome, the contract should provide:

If owner should wrongfully withhold progress payments from contractor, and if as a result thereof contractor is unable to pay for work or materials supplied to the job, and if owner settles such claims for work or materials by paying less than the full amount of such claims, then owner may not offset against contractor any more than the amount actually paid to satisfy such claims.

5. Contract, plans, specifications

The contract, plans, and specifications are intended to supplement each other.  In case of conflict, the plans shall control over the specifications, and the provisions of the contract shall control over both.

This clause comes into operation only if actual conflict exists.  It does not apply where part of the work is represented on the plans but not mentioned in the specifications, or vice versa.  An actual conflict only arises when the plans call out one material or process, and the specifications call out a different material or process for the same work.

When a contractor figures a job, it usually makes its take from the plans, and therefore, in the event of conflict between plans and specifications, the plans should control.  This paragraph is intended to resolve only conflicts and not ambiguities.  Such a provision favored by owners is:

In case of ambiguities in or between the plans, specifications, and contract documents, they shall be interpreted most strongly in favor of the better or higher quality material, equipment or process.

Another alternative clause would resolve ambiguities by decision of the architect:

Ambiguities in or between the plans, specifications, or contract documents shall be resolved by the architect.

6. Extra work

The owner may change the scope of the work required by the contract documents by adding or deleting work, materials, or equipment, and the contractor shall perform e work required under this contract as thus modified.  In the event of such changes, the contract price shall be equitably adjusted by written change order signed by both parties.  If the parties cannot agree as to the amount of the equitable adjustment, then the contractor shall provide the owner monthly with a detailed summary of the cost of extra work, including the cost of labor, materials, equipment and subcontracts, and the owner shall reimburse this cost, monthly concurrently with progress payments.  The monthly reimbursement shall include a markup of seven percent to cover job site overhead, field overhead, and profit.  The parties will continue to negotiate the final amount of the equitable adjustment to the contract price, and if they do not agree, the final amount will be determined by arbitration if arbitration is provided for in the contract documents otherwise by litigation.

It is imperative, to protect the interests of the owner, that the owner retain the right to add work to the contract.   The owner will also want to be able to require the contractor to perform the additional work even though the parties have not been able to reach agreement as to the price.  Otherwise the contractor would be able to exert tremendous leverage by refusing to perform extras except at unreasonably high prices.  The only alternative the owner would have would be to bring another contractor into the job to perform the changes, which would be costly, inefficient and disruptive.

On the other hand, the contractor should not be required to perform extra work, without compensation while hard bargaining goes on as to the cost of the extras.  Therefore, the clause provides that pending resolution of disputes as to the amount to be paid for extras, the owner will pay the cost plus a markup to account for overhead and profit pending resolution of the dispute.

7. Allowances

If the contract price includes allowances, and the cost of performing the work covered by an allowance is greater or less than the allowance, the contract price shall be increased or decreased accordingly.  Unless otherwise requested by the owner in writing, the contractor shall use its own judgment in accomplishing work covered by an allowance.  If the owner request that work covered by an allowance be accomplished in such a way that the cost will exceed the allowance, the contractor shall comply with the owner’s request, provided that the owner pays the additional cost in advance.

If the contract includes allowances a separate list should be attached and signed by both parties.

8. Delay

The contractor shall be excused for any delay in completion of the contract caused by acts of god, acts of the owner or the owner’s agent, inclement weather, wet or muddy grounds, labor trouble, acts of public utilities, public bodies, or inspectors, extra work, failure of the owner to make progress payments promptly, or other contingencies unforeseen by the contractor and beyond the reasonable control of the contractor.

9. Completion and occupancy

Owner agrees to sign and record a notice of completion within five (5) days after completion of the project.  If the project passes final inspection by the public agency but owner fails to record a notice of completion, owner hereby appoints contractor as owner’s agent to sign and record a notice of completion on behalf of the owner.  This agency is irrevocable and is an agency coupled with an interest.  Contractor may deny occupancy of the project to owner or anyone else until contractor has received all payments, excluding the retention payment, due under this contract, and until notice of completion has been recorded.

A notice of completion may be signed and verified by an agent of the owner to record the notice of completion, and thus get the normal 35 day retention period running.

Owners occasionally misunderstand the function of a notice of completion, and are reluctant to sign and record one because it might be construed to be an approval of the contractor’s work.  However, even if an owner disapproves of the contractor’s work, or part of it, the owner should still record a notice of completion as soon as possible in order to reduce the period of time during which mechanic’s lien claims may be recorded against the property.  By recording a notice of completion, the owner cuts down the mechanic’s lien period of subcontractors and suppliers from 90 days to 30 days, and cuts down the mechanic’s lien period for the prime contractor and subcontractors who deal directly with the owner from 90 days to 60 days.

10. Damage to project insurance

Owner will procure at its own expense, and before commencement of any work hereunder, a broad form all risk policy of insurance, including coverage for flood and earthquake, at least equal to contract price, with such insurance to name the contractor and all subcontractors as additional insured, and to protect owner, contractor, and subcontractors as their interests may appear, with loss payable to owner for the benefit of owner, contractor and subcontractors.  Owner will, as named insured, properly process claims with the carrier for the benefit of the owner, contractor, and subcontractors.   Should owner fail to do so, contractor may procure such insurance as agent for at the expense of the owner, but contractor is not is not required to do so.  Owner, shall upon request, furnish a copy of the policy to contractor.

If the project, or any part of it, is destroyed or damaged by accident, disaster, or calamity, such as fire, storm flood, landslide, subsidence, earthquake, or vandalism, any work done by contractor or subcontractors in rebuilding or restoring the project shall be paid for by extra work, for which contractor shall receive equitable compensation from owner.

Contractor shall carry workers’ compensation insurance for protection of contractor’s employees during the progress of the work.  Owner shall obtain and pay for insurance against injury to its own employees and persons under owner’s direction and persons on the job site at owner’s invitation.

The owner may have the contractor and subcontractors named as additional insured without an extra premium.  The owner should shop for the broadest coverage available under the provision, including flood and earthquake.  Projects under construction are especially vulnerable to damage, which may be covered even though contributed to by the negligence of the contractor or subcontractor.

It is important to provide that if the structure is destroyed before completion, the contractor will be paid for any work done in rebuilding or restoring the project.  Otherwise, the contractor might have to do so without additional compensation.

If the contractor or owner fails to carry workers’ compensation insurance, a building permit should be denied.  A statute provides that every county or city shall require each applicant for a building permit to furnish evidence of workers’ compensation insurance.  If the public agency issuing the permit fails to require a certificate of workers compensation, it can be held liable for injuries to the contractor’s or owner’s employees.

In one case, the county failed to require a certificate of workers’ compensation insurance.  A worker was injured and went without compensation because its employer became bankrupt.  The court held that the California labor code imposes a mandatory duty on cities and counties.  Where the agency is under a mandatory duty imposed to protect against the risk of a particular kind of injury, the agency is liable for injuries caused by failure to discharge the duty.