It struck me recently as I worked on a multi-million dollar construction project that parties would be well served if they approached each contract (at least initially) like a construction contract. So, why do I say that, and what does it mean?
A construction contract is the beginning of a project and a process – one that requires (a) careful planning, (b) trust and cooperation by multiple parties, (c) segregation of duties, (d) faithful performance and execution, and (e) recognition that circumstances will arise that may be beyond the parties’ control and will require flexibility, problem-solving and often change. These factors are actually present in most projects and transactions – not just construction projects – which is why I think the construction approach makes sense.
Here are the most basic elements of a construction project/contract that I believe should be considered and addressed in most contracts.
• Scope/Nature of the Project – what are we doing here? This should be defined as clearly as possible (even where, as in the construction process, this will change and develop as the project progresses)?
• Responsibilities – what is each party required to do, how and when? Again, this should be defined as specifically as possible.
• Standard of Care/Performance – is there an objective or subjective standard which a party must meet (e.g., codes, industry standards, the best or accepted practices in the relevant geography, the other party’s discretion)?
• Legal Compliance – who’s responsible?
• Subcontractors – who will actually perform the work, and can it be subcontracted?
• Communication/Authority – who has authority to bind each party, and how do we ensure constant communication to avoid misunderstandings?
• Foreseeable Risks – if they’re foreseeable, define them, how they will be addressed, and who bears the risk.
• Unforeseen Risks – since they’re unforeseen, they likely can’t be defined, but you can still do your best to allocate responsibility.
• Changes/Change Orders – how will we handle changes? The best answer – see Communication/Authority above. If your deal has to be changed, communicate and make the change in writing as promptly as possible.
• Disputes – how will we (hopefully) avoid, and in any case deal with disputes?
• Insurance/Bonds, Indemnification and Guarantees – how do we protect against the downside?
• Completion – how do we know, and who determines, when a party has completed its task satisfactorily?
There are other elements of a construction contract, but hopefully you see my point – think construction.