Using the Retrospectroscope to draft your contract

July 19, 2017

The retrospectroscope provides perfect 20/20 hindsight vision. If you had known what was going to happen, you could have reacted and done things differently. Let me suggest that’s the way you should draft your construction contracts. In a construction setting, that means anticipating potential problem areas on your job and drafting your contract to best deal with those issues. While it is impossible to anticipate every problem area on a job, there are certain aspects of the job where issues come up more often.

Use a written and enforceable contract for every construction project. Review the construction contracts your company has in place to make sure they are enforceable.  The use of estimates or invoices may not be enforceable if they aren’t signed by both parties. In order to be enforceable, a contract must include an offer and acceptance. There must be consideration (services or goods in exchange for money) and there must be a meeting of the minds as to the terms of the contract. The best way to prove a meeting of the minds is to have clear contract language regarding the terms and the signature of both parties on the document.

Scope of work and payment:  make sure your scope of work is set out clearly in the contract. A complete and detailed description of the scope of work will help to avoid disputes about scope later on. All changes to the scope of work, after the initial contact is signed, should be agreed to and documented by change order; no exceptions. Payment should also be set out clearly in the contract. If the work is to be done in phases, specific payment amounts should be earmarked for each phase. In drafting your contract pre-job, read the language as if there is a dispute on that issue. What does your contract do for you?

Attorney’s fees: Under the Georgia Prompt Pay Act, if you are working on a commercial job or a multi-unit residential job involving 13 or more units, and are not timely paid (for contractors, 15 days from contractor’s payment request to owner) (for subcontractors, 10 days from contractor’s receipt of payment from owner) you can recover your reasonable attorney’s fees if you have to pursue a claim for nonpayment and you win. See O.C.G.A. §13-11-8.

If you are working on a residential job involving 12 or fewer units, your contract should include a provision which awards attorney’s fees and expenses to the prevailing party. This provision ensures you are made whole if you are required to enforce your rights under the contract. Georgia law does not typically allow for the recovery of legal fees by the winning party, except when specifically allowed by statute or when there is an express attorney’s fee provision. Having an attorney’s fee provision in your contract will serve as a warning to those inclined to breach the contract that if they do and they lose, they will have to pay your attorney’s fees and expenses incurred in that dispute.

Interest on late payments: Under the Georgia Prompt Pay Act, if payment is not timely made under the Act (15 days for contractors and 10 days for subcontractors) interest shall apply to any outstanding balance in the amount of 1% per month. See O.C.G.A. §13-11-7. In order for interest to apply under this code section, the contractor or subcontractor must include notice to the person being charged interest of the application of this Code section at the time the request for payment is made.

Nothing in the Georgia Prompt Pay Act prohibits the parties from agreeing to a rate of interest different from that set forth in O.C.G.A. §13-11-7.

Georgia law allows interest at a set rate (7% per annum simple interest) if the interest rate is not specifically set forth in a written contract. Subject to applicable conditions and exceptions, Georgia law allows parties to a written contract to establish any rate of interest they choose.

If you are not working on a job to which the Georgia Prompt Pay Act applies, you should include a specific rate of interest in your contract, at least equal to what you could recover under the Prompt Pay Act. Include a provision in your construction contract that “time is of the essence” and include specific language which sets forth in detail what happens if payment is late. This provision should include the interest rate charged for overdue invoices, and how and when that rate is calculated.

Include a reminder regarding your interest rate policy on your outgoing invoices. This can give you a great tool to leverage if you want to encourage prompt payment on a past due invoice.

Dispute resolution: if you want to use an alterative mechanism to litigation for dispute resolution, such as arbitration, include that provision in your contract. The American Arbitration Association has a fast track program for smaller claims which is more cost effective and quicker than traditional litigation. Unless the parties have agreed to it in the contract though, you can’t compel a party to participate in arbitration.

Carson Law helps small to medium sized construction firms in all trades deal with the legal complexities of running a small business and a construction project in the building industry. This blog is dedicated to providing straightforward legal information designed to assist the construction practitioner with legal issues they are most likely to face on a construction job. Construction law and litigation is our focus, helping people is our passion. See www.Carson-Law.com; e-mail crcarson@ccarsonlaw.com or call 678 205 1537.