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Commonly misinterpreted terms in construction contracts

A contract is a legally binding document that all parties should understand before signing, but that is not always the case. When signing a construction contract, contractors and subcontractors alike should make sure they clearly understand all the terms.

The Big Five

The five terms listed below are commonly misinterpreted and can be potentially damaging to your company. Before signing a contract with any of these terms, make sure you fully understand their implications.

Pay-when-paid verses pay-if-paid: These clauses indicate when a contractor will be paid. Pay-when-paid typically means that subcontractors will not get payment until the general contractor receives payment from the owner. This is fairly common, but the downside is you may have to wait a long time for payment depending on the terms. In pay-if-paid scenarios, the contractor will only pay the subcontractor if they get paid by the owner. If the owner does not pay the general contractor, the subcontractor will not get paid either.

Incorporation clauses: These clauses make other documents part of the contractual agreement, so if you are a subcontractor, your contract is no longer just relevant to your work. In essence, you could be committing to something that is not in your scope of the work and out of your control. If your contract has this clause, make sure to get all the other documents relating to the clause and review everything before signing.

Indemnification clauses: In this clause, if you are the indemnified party named in the contract, you are essentially getting a promise from the other party to cover your losses if they do something that causes you losses or if a third party files a lawsuit. It requires someone to take responsibility for liability in the event of a financial loss or lawsuit.

Mechanics’ lien: A mechanic’s lien is a security interest in the title of property. This clause allows you to place a lien against a piece of property until you are compensated for any labor or materials that improve the property. It is a remedy for nonpayment in cases when the contractor was paid and didn’t pay the subcontractor or if no one was paid.

Written change orders: This clause requires all change orders to be in writing. If an oral agreement for a change is made without written proof, proving the change was approved can be problematic. In the age of smartphones, sending an email or text to confirm a change is no longer a hassle and can be used when written approval is required.

Even if you have been in the industry a long time, you can still fall into the trappings of misinterpretation. If you don’t understand any of these aspects in a contract, having a professional review it might help save you from major expenses or litigation later on. If you are in need of an experienced attorney to review your construction contract contact Heekin Litigation Group today. We specialize in all aspects of Business, Real Estate, HOA and Construction Law. Contact us today for a free consultation.

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