Contracting with Confidence

Understanding Contract Terms and Conditions - Part II

Payment Terms:

The payment terms in a contract specify the amount of payment that the contractor will receive and the timing of the payments. Ambiguous payment terms can lead to disputes between the contractor and the client, which can cause delays, additional costs, and fractured relationships.

• Lump Sum: A lump-sum payment is a single payment made upon completion of the entire project. This payment type is most used for smaller projects with a well-defined scope of work.

• Progress Payments: Progress payments are made at predetermined intervals or milestones during construction. Typically, the payments are based on a percentage of the total contract value. The contractor must submit invoices or other documentation to support their payment requests.

• Cost-Plus: Cost-plus contracts are typically used when the scope of work is uncertain or when changes to the project are expected. Under a cost-plus contract, the contractor is paid for the actual cost of the work plus a predetermined percentage or fee for their services.

• Time and Material: Time and material contracts are similar to cost-plus agreements, but the contractor is paid based on the actual hours worked and the materials used.

• Retention: Retention is a form of payment that involves withholding a percentage of the total contract value until the project is complete. The retention is typically released upon project completion. It serves as a form of security for the client in case of defects or other issues with the construction work.

It's essential to understand the payment terms of a services contract before signing it to ensure that the terms are acceptable, and that the contractor will receive timely and fair compensation for their work.

Change Orders

Change orders are requests to modify the scope of work, which can impact the budget and timeline of a project. If the contract does not provide clear guidelines for change orders, contractors may find themselves in disputes with clients over the additional costs or time required for changes.

Change orders are administered by following the procedures specified in a construction or industrial maintenance contract. Typically, the process involves the following steps:

• Request: The client initiates a change order request by submitting a written request to the contractor.

• Assessment: The contractor evaluates the request and provides a detailed estimate of the additional costs, time, and resources required to implement the change.

• Approval: The client reviews and approves the change order request, including the estimated costs, time, and resources required.

• Implementation: The contractor implements the change and provides documentation, such as invoices or receipts, to support their payment request.

Change order disputes are a common and often contentious issue in the construction and maintenance industries. These disputes arise when changes to the original contract are requested, typically due to unforeseen conditions, design modifications, or owner preferences. New personnel learning about contractor management should know the key aspects of actual change order disputes in their industry and their company, as they play a crucial role in overall project management. Change order disputes can significantly impact a project's cost, timeline, and stakeholder relationships.

Causes of Change Order Disputes

• Scope Creep: One of the primary reasons for change orders is scope creep, where the project's requirements evolve beyond what was initially agreed upon in the contract.

• Unforeseen Conditions: Changes often occur due to unforeseen site conditions, such as unexpected soil conditions, buried utilities, or environmental issues.

• Design Changes: Design errors or omissions can lead to necessary changes in the construction process, triggering disputes over responsibility and cost.

• Owner-Initiated Changes: Sometimes, owners decide to make changes based on evolving needs or preferences, resulting in disagreements over who should bear the additional costs.

Contractual Issues:

• Lack of Clarity: Ambiguous contract language or poorly defined change order procedures can lead to disputes. Contracts must clearly outline how changes will be documented, approved, and compensated.

• Notice and Approval Requirements: Disputes often arise when contractors fail to provide timely notice of changes or obtain proper approvals as required by the contract.

• Pricing Methods: Deciding how to calculate the cost of changes can be contentious. Different methods, such as lump-sum pricing, cost-plus pricing, or unit pricing, can affect the final cost and result in disputes.

Documentation and Communication:

• Inadequate Record-Keeping: Proper documentation of change orders, including the scope of work, pricing, and approvals, is essential to resolving disputes. Inadequate record-keeping can lead to conflicting accounts of what was agreed upon.

• Communication Breakdown: Poor communication among project stakeholders can exacerbate disputes. Effective communication ensures that all parties are aware of changes and their implications.

Negotiation and Resolution:

• Mediation and Arbitration: Many contracts include provisions for alternative dispute resolution methods like mediation and arbitration. These methods can help resolve disputes more efficiently than going to court.

• Change Order Negotiation: Skilled negotiators can help parties find common ground. Negotiating fair compensation for changes is crucial to maintaining positive relationships and project progress.

Impact on Project Management:

• Time Delays: Change order disputes can lead to project delays as parties negotiate and resolve issues. This can affect the overall project schedule and may result in financial penalties.

• Cost Overruns: Unresolved disputes can lead to cost overruns, impacting the project's profitability and the contractor's reputation.

• Stakeholder Relationships: Prolonged disputes can strain relationships between the contractor, owner, and other stakeholders, potentially affecting future business opportunities.

 Preventive Measures:

• Clear Contracts: Well-drafted contracts with comprehensive change order provisions can help prevent disputes by setting expectations from the outset.

• Proactive Communication: Encouraging open and regular communication among all stakeholders can help identify and address potential issues early.

•  Document Everything: Maintain meticulous records of all project-related communications, changes, approvals, and costs to support claims or defenses in the event of a dispute.

Change order disputes are a significant aspect of contractor management in high-risk industries. Project stakeholders should recognize the common causes of these disputes, understand the importance of clear contracts and documentation, and be prepared to navigate the negotiation and resolution process effectively. By doing so, they can help minimize the impact of change order disputes on construction projects and develop valuable skills for successful contractor management.