An Owner’s Checklist When Embarking on a Construction Project

Even the most sophisticated owners can become overwhelmed when embarking on a new construction project. Whether the project is new construction or a renovation, any construction project is loaded with risks for the owner. The best and most cost-effective way to limit these risks is to address the issues at the beginning of the project. To this end, the following provides a high-level checklist to guide owners on construction projects. While this checklist is by no means exhaustive, it will provide owners with a good start to ensuring the project proceeds smoothly.

1. Construction Contract. One of the most important ways to minimize your risks is to enter into a reasonable and well-drafted contract with your contractor. While the contractor may propose its “form” contract, the terms will inevitably be more favorable to the contractor. Instead, it is best to either use an industry-form contract (e.g., AIA, ConsensusDocs, etc.) or have a construction attorney prepare a customized contract that adequately protects you.  Below are some key terms to consider:
   • Price. Identify a fixed price or a guaranteed maximum price (“GMP”) for the construction. A costly mistake owners often make is agreeing to pay the contractor based on an “estimate.” This may—and often does—result in the owner being responsible to pay the contractor far more than anticipated.
   • Payments. It is common to make monthly progress payments as work progresses and to withhold 10% retainage until substantial completion. Advance payments or “deposits” should be avoided absent a good reason (e.g., contractor needs to purchase expensive equipment from a supplier who requires an advance payment). It’s also good practice to withhold a part of the final payment until the punch list is completed so the contractor continues to prioritize your project after substantial completion until it’s completely finished.
   • Scope of Work. Clearly defining the scope of work for which the contractor is responsible will limit the dreaded “change orders” during construction. If available, construction plans prepared by your architect and/or engineer should be utilized when defining the scope.
   • Insurance. Confirm that the contractor maintains industry-standard insurance (e.g., commercial general liability insurance), and require the contractor to name you as an “additional insured” on liability policies. The former may provide recovery if your property is damaged during construction, and the latter may protect you if you are sued for a personal injury or property damage on the project.
   • Time. When “time is of the essence,” expressly identify the contract duration and commencement date. If a delayed completion will create a major problem, like additional costs due to home or apartment rental during construction or property taxes for multiple homes, then it is worthwhile to consider liquidated damages. “LDs” specify an additional payment for which the contractor is responsible for late completion. In the alternative, and at a minimum, avoid a waiver of consequential damages.
   • Indemnity. It is common to include a clause requiring the contractor to indemnify you. In short, this generally means that if a third party brings a suit, the contractor may be required to cover your legal expenses and liability.
   • Project Team. While there may be an assumption that your contact with the contractor will be involved in and managing your project, this should be explicitly stated in the contract.
   • Termination and Default. One issue that owners face is an uncertain schedule or defective work. First, workers may not show up as scheduled or work at the pace promised. Second, the work is performed, but the quality isn’t as expected. If the contractor does not keep the pace or perform quality work, you need to be able to terminate the contract to work with someone else. The owner should also reserve the right to cancel the contract “for convenience” for whatever reason, like if the owner needs to change direction.
   • Change Orders and Claims. Owners should require that any claim for additional cost or time be submitted in writing within a defined period from the event giving rise to the claim (e.g., 7 days). No extra work, change order, or modification should be binding unless authorized in writing by you, the owner, before the work is performed. Work done without prior written approval should be deemed included in the contract price. This prevents unexpected cost increases and maintains control over the project budget.
2. Architect/Engineer Agreement. Similarly, we recommend that you have a signed contract with your architect and/or engineer based on an industry-standard form or an agreement drafted by a construction attorney. This agreement should: (A) state the price and payment terms; (B) clearly identify the scope (e.g, whether and to what extent the design professional is involved during construction, like monthly check-ins for general compliance with the plans or milestone quality checks); (C) avoid the classic “limitation-of-liability” clause, absent good reason; and (D) include indemnity.
3. Project Administration. A difficult, yet important, responsibility of the owner is to ensure that the project is properly administered during construction. This includes: (A) confirming that the contractor’s stated percent complete for a requested payment is reasonable; (B) ensuring that proper lien waivers and sworn statements are included with monthly payment applications to mitigate risks of liens; and (C) overseeing the quality and safety of the work. Often, it is worthwhile to engage an owner’s representative to assist in this process. In some cases, the architect will offer this as a supplemental service.
4. Project Funding. If the project is funded through a lender, you will need to ensure that your loan obligations are aligned with your construction contracts (e.g, payment terms, contract time, and insurance requirements).
5. Insurance. Separate from the contractor’s insurance, owners should maintain appropriate coverage for liability and property damage. Depending on the scope of the project, a builder’s risk insurance policy specific for your project may be worthwhile.

While any construction project is loaded with risks to owners, following this checklist should mitigate some challenges and headaches. To the extent needed, the experienced construction team at Clark Hill is available to provide guidance to help navigate this process.