Boards Must Be Savvy in Negotiating Construction Contracts

Standardized forms give contractors the advantage, but that can be shifted by …

NEGOTIATING COST CONTROLS

Any board involved in a large-scale project like a facade repair or energy-efficiency upgrade needs to know how to navigate the complexities of a construction contract. This includes everything from defining the scope of the project to understanding what funds can be held back to ensure the job is completed as planned. The complexity of these agreements, particularly when using industry-standard forms like those from the American Institute of Architects (AIA), can pose challenges for boards.

CONTRACT PROVISIONS. The first step in any construction project is defining the scope of work. An architect or engineer will need to draft detailed specifications, which will be incorporated into the final contract. The more thorough the specifications, the less likely the project will experience costly change orders or delays. The most commonly used contract forms for construction projects are standardized AIA forms. However, they are often designed to favor the contractor. Additionally, AIA forms may not reflect important provisions specific to New York law. We amend the construction contracts for the boards we work with by adding a rider, or supplemental document, that addresses missing or insufficient protections for the co-op or condo. For instance, boards will want to amend AIA terms when they are going to
face interest on late payments
to the contractor.

COST CONTROL. Without proper safeguards, projects can easily exceed budgets, so it’s important to negotiate contracts with price guarantees, such as stipulated sum contracts or guaranteed maximum price (GMP) agreements. A GMP contract sets a ceiling on the project’s cost, but contractors often include a cushion in case of unforeseen expenses. Without this price control, the board could face significant budget overruns. Change orders also alter the original contract price or project scope, and the key here is thorough project specifications. Boards should work closely with their consultants to ensure the project design accounts for material availability, as delays in securing certain materials can also lead to costly change orders. 

INSURANCE. Boards must ensure that contractors carry appropriate insurance, particularly in light of New York’s Labor Law 240, known as the Scaffold Law. This law holds building owners liable for falls or falling objects that cause accidents on the job, even if the owner had no direct involvement in the incident. To protect against these liabilities, boards should require contractors to carry action-over insurance, which provides coverage in cases where the building owner could be held responsible. Additionally, boards should ensure that the contract contains proper indemnification clauses. Without indemnification, the building’s insurance may not cover claims, leaving the board exposed to significant financial risk.

RETAINAGE. A portion of the contract price is usually withheld until the project is completed. This is known as retainage, and it provides leverage for the board to ensure contractors finish the job. Recent law changes have reduced the allowable retainage from 10% to 5% of the contract price, a shift that favors the construction industry and may leave boards with less financial security in case of project delays or disputes. To mitigate this risk, some boards are negotiating to hold back 10% of the payment for the first half of the project, then adjusting the retainage to comply with the 5% cap as the project progresses. To keep projects on schedule, boards may want to negotiate financial incentives or penalties based on the project’s timeline. For example, a contractor might receive a bonus for completing the job ahead of schedule or face penalties if the work is delayed. These provisions can be difficult to negotiate, but they are particularly valuable when the project impacts residents’ quality of life.