Focus, Construction, and Real Estate

Issues to consider when starting a construction project

Agreements early on will mitigate headaches at the end.

August 2, 2013
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The commercial real estate market is finally recovering in West Michigan.

Office, warehouse and industrial space is moving, and commercial development has picked up. All this has prompted an increase in new construction, which is being met with enthusiasm from architects, contractors, developers, realtors and owners.

As always, owners must carefully consider the financial aspects of each construction project — and the legal ramifications of the construction agreement — before commencing construction. Following are eight issues on which owners should focus:

Scope of work: The agreement must provide clarity on the nature and scope of the work. Ideally, the agreement should attach or reference detailed architectural plans and specifications to avoid any confusion or misunderstanding. Owners should be wary of lists of vaguely described items that create a lot of ambiguity — and room for disputes — later on. Depending on the type of agreement, owners should also carefully consider any limitations, alternatives or allowances associated with any portion of the work.

Standard of care: It’s very important the agreement identify the quality of the work to be completed. Owners should insist the work be completed in a good and workmanlike manner, free of defective materials and in compliance with applicable laws. In addition, owners should insist the work be completed in accordance with the standards and with the care typically employed by a contractor of similar experience and reputation as the contactor in question. Owners take great care in selecting a contractor and have the right to expect that performance standards are met.

Construction schedule: The agreement should specify a construction schedule, including crucial completion dates for specific portions of the work. Since time is money on a construction site, the agreement should clarify the consequences of missing target dates, including the possible inclusion of liquidated damage provisions or termination rights. Owners must understand the implications of timing delays and must also be realistic about the possibility of delays associated with unforeseen circumstances.

Definition of completion: Owners should be certain the agreement properly defines the concept of completion. Before the project is deemed “complete,” the owner should insist that: a certificate of occupancy for the project has been issued; all punch list items are resolved; all applicable warranties and manuals are delivered; and appropriate sworn statements and lien waivers have been obtained.

Punch list: At the time the contractor believes the project is complete, the owner should have the right to inspect the project and identify any incomplete or defective work, which results in the creation of a “punch list.” The agreement should require the contractor to correct or complete the items on the punch list within a specified length of time — and allow the owner to hold back funds sufficient until the punch list is properly completed.

Price and payments: It’s essential that the agreement contain a detailed and thoughtful protocol for making contract payments as they become due. The agreement should provide that any draw request must be approved by the owner or architect to confirm that the work has been done properly. Before any disbursements are made under the agreement, the contractor should provide the owner appropriate sworn statements and lien waivers to confirm that subcontractors and suppliers are being properly paid.

Insurance and indemnity: Owners need to make sure that the contractor maintains appropriate levels of insurance, including workers’ comp, employer’s liability, commercial general liability, commercial auto liability, umbrella liability and appropriate special form and — if applicable — builder’s risk insurance. Owners should insist that the agreement requires the contractor to indemnify and hold the owner harmless from any liability arising from any act or omission of the contactor and any construction liens associated with the project unless arising from the owner’s failure to pay.

Warranties: Owners must be certain that the agreement contains a strong construction warranty, including a duty on behalf of the contractor to repair or replace defective work for a minimum of one year. Owners should require that any warranty work also be guaranteed for at least a one-year period.

James J. Rabaut is a partner at the law firm Warner Norcross & Judd LLP and practices in all areas of real estate law. He can be reached at jrabaut@wnj.com.

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