Construction Audits:  Resources:  Construction Contract

General Ideas for Recommended Construction Contract Provisions

(Please consult with your attorney on these.  The information below is for illustrative purposes only.)

• Add language providing that if the Owner conducts a Construction Audit and finds more than a .5% discrepancy in the billing, then the general contractor agrees to reimburse the owner for all reasonable audit costs paid.

• Clearly define the general contractor's record keeping and reporting requirements in the audit provision, including possibly providing electronic data, if requested.

• Make sure that by making the “final payment”, you are not waiving your audit rights, as well as other important rights.  You may want to send a letter with your payment reserving certain rights.

• Ensure all sub-contracts are subject to the same procedures, including audit rights, bidding, etc., as contained in the construction contract with your GC.

• Ensure the GC has to submit to you full documentation of all sub-contracts, payroll costs, insurance charges (including self-insurance), bids, purchase orders, etc.

• Ensure excessive “cash rebates” accrue to the owner.

• Protect yourself against higher than market rates for rental equipment and hand tools.  Ensure the equipment is only used for reasonable amounts of time, and that in no event, shall you be required to pay any more for equipment rental than the actual cash value of the equipment, and that if you do pay that much, then the ownership of the equipment transfers to you.

• Ensure the general contractor can only charge you for actual payroll and overhead charges.  Define overtime pay and bonuses.

• Clearly define General Conditions and maybe add a cap. 

• Maybe limit or exclude allocations for “home office” expenses.

• If there is a “contingency fund”, define allowable charges and exclusions.

• Ensure the GC utilizes “arms-length” vendors or discloses any other relationships.  The idea is to ensure the highest level of ethical standards.

• Pay special attention to Change Order language.  Require all Change Orders to be in writing and clearly define whether they are lump sum, cost plus, unit price, etc.  Make special provisions if the work is provided by the GC, as opposed to a sub-contractor.  Clearly define allowable fees and costs for sub-contractors, sub-sub-contractors, etc.  Include a strict approval process and the right to review all actual costs incurred.

• Use the terms of the Architect’s and Engineer’s (A/E) contract to establish a "contractual" standard of care.  An example of a contractually defined standard of care clause is a provision that requires the designer to design in compliance with the owner's set of design standards, written instructions, and/or marked-up project document review sets.  If the designer fails to meet this reasonable and contractually established expectation, there is little room for the A/E to argue that the standard of care was met.  By doing this, you will greatly increase your chances for successful error recovery efforts when your designer did not incorporate your review comments into the design or failed to design to your published design standards.

• If applicable, specify how savings from value engineering will be shared.  Value engineering involves alternative technology designed to reduce costs without affecting the quality and functionality of the project.  Without such a provision, the contractor is likely to be the only beneficiary.

• Require that the owner, not the contractor, pays the sales tax.  The rationale is that the owner usually has a better understanding of its sales tax liability and can, therefore, significantly reduce sales tax costs.  The contractor may not have an equal incentive to reduce such costs.

• If you are adding on to an existing structure, pay particular attention to the insurance provision.  If your existing structure is somehow damaged by the renovation work, the resulting claim may end up with the owner's insurance carrier.  If your intention is that your contractor's insurance should cover these types of claims, then be careful to include the proper language in your contract.  Lastly, if your contractor's insurance will cover these claims, you may want to check with your agent to see if you may be eligible for a rate reduction due to this.

The above are intended for illustration purposes only.  Please consult with your attorney whether or not these may be appropriate for your respective circumstances.