Third in a series of articles addressing 10 key provisions in construction contracts.
Time may be an important element in any contract, but is particularly so in construction contracts. When is performance to begin, when is it supposed to end, and under what circumstances may the time for performance be extended?
In a construction contract, the concept of time is not the mere elapse of time from execution of the contract itself — rather, it is the period for performance of the construction obligations. These and other time provisions found in industry resources, such as those produced by the American Institute of Architects and ConsensusDocs, should be considered for inclusion in contracts otherwise drafted. What are some “timely” points for consideration?
Commencement in a Construction Contract
The commencement of a contract depends on multiple variables, and it’s critical to determine which option is right for a particular project.
Is the date that a contract is signed the point from which the time for performance should start to run? That may be fine if everything and everyone are ready to go. Have permits been received so that work on site may start? A contractor may not want the time to start running before it is in a position to actually begin work.
Three potential options for the date of commencement of work, according to Section 3.1 of AIA Document A101 – 2017 (owner and contractor, stipulated sum), are:
The date of the agreement;
A date set forth in a notice to proceed issued by the owner;
Another date or means of determining a date described in the agreement.
Owner issues, such as site access and project financing requirements, could make the contract execution date inappropriate as the commencement of the time for performance — in such circumstances, a notice to proceed from the owner may be suitable.
The third alternative prompts the parties to draft commencement language that suits their circumstances, which could be:
A specified number of days from execution of the contract, selected to allow time for mobilization or other events or that for one reason or another need to occur before work can begin.
A description of commencement tied to receipt of a permit (e.g., grading or building). While a contractor may actually be doing some contract tasks, such as mobilizing, ordering materials, entering into subcontracts, etc., usually the time for performance is based on a construction schedule that is dependent upon certain events, like the receipt of permits.
Completion in a Construction Contract
The time for the completion of work is typically described through a number of days or weeks from commencement, or by a specified date. The time for completion does not typically mean the end of all work, but rather the point of substantial completion. What will constitute substantial completion needs to be expressed in the contract. Substantial completion is defined by AIA Document A201 – 2017 (which provides general conditions that become part of the owner/contractor agreement) in Section 9.8 as follows:
Substantial completion is the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.
Note the “occupy or utilize” standard — as opposed to final completion of all work by the contractor. This standard is common (see ConsensusDocs 200 § 6.1.1), and reflects the fact that owners often occupy or utilize, and thus receive benefits of the construction contract, prior to the point when the contractor finishes every single item of work.
Parties and their lawyers may seek to define substantial completion with more objective specificity, such as by making the issuance of a certificate of occupancy a condition precedent to substantial completion. If so, the contractor will need to make sure that such event is within their company’s control. For example, certain landscaping may be required for a certificate of occupancy, and if the owner is self-performing or contracting with another for landscaping, actual substantial completion may be delayed even though the reason for the delay may be outside the scope of the general contractor’s work. There should be clarifying language for these types of circumstances.
Ascertaining the date of substantial completion is important. Warranties required by the contract documents typically begin on this date. Additionally, the date of substantial completion has financial consequences. It is fairly standard that a contractor is paid retainage, less a sum for outstanding punch list items, upon substantial completion.
Completion & Liquidated Damages
If the parties have agreed upon liquidated damages, the relevant point to start, or stop, liquidated damages is usually substantial completion. (See § 3.3 of AIA Document A101 – 2017, and ConsensusDocs 200 § 6.5.) Liquidated damages are a contractually stipulated amount the parties agree in advance will serve as damages for untimely completion of work and usually take the form of a specified daily amount that accrues for each day of work that continues past the contractually required completion date. Legally, liquidation damages must not be deemed to be a penalty, but rather a good faith estimate of actual damages. Negotiation strategies include:
Establishing a grace period (i.e., liquidated damages begin on the seventh day after the required date of substantial completion),
Some increase in the contract sum to account for the risk,
Increasing liquidated damages over time (i.e., $500 for the first 10 days, $1,000 for the following 10 days, etc.),
Placing a cap on liquidated damages (i.e., in no event shall liquidated damages exceed a certain amount), and
An early completion bonus.
Extensions of Time in Construction Contracts
Before a contractor or owner approaches legal counsel to draft or review a construction contract, a construction schedule has likely been developed, which naturally will be a factor in setting commencement and completion terms. The better the schedule, the better the contract terms.
However, because the schedule is based on assumptions, future events, and many factors (which may not turn out as anticipated), the contract should provide for extensions of the completion time. Standard time extension clauses do, but as with other “standard” provisions, attention should be given to ensure that project specific and non-standard circumstances are appropriately addressed in the contract.
The primary point is for the contract to acknowledge that events may occur outside the reasonable control of the contractor, and that this should result in extensions of time for completion. This may include:
Acts of the owner or architect,
Acts of a separate contractor retained by the owner,
Force majeure delays,
Adverse weather conditions, or
Other causes, such as certain unanticipated labor or material delays, and unexpected governmental delays.
The subject of weather delays may receive its own negotiated provisions, taking into account weather-included delays in the schedule, historical weather averages for the project location, how weather events will be measured and documented, the impact of weather events (precipitation, temperature, etc.) on the schedule, and other factors relevant to particular projects.
There’s also the subject of whether and to what extent the contractor or the owner pays for a delay that was outside of the control of either party. Contractors may seek to negotiate an increase in the contract sum by a daily amount of general conditions cost that will apply to any extensions of the contract time.
Time is of the Essence
Practically speaking, it is common for all participants in a construction project to think that time is important – of the “essence.” Benjamin Franklin is credited with the phrase that “time is money.” However, legally speaking, unless a contract includes language that “time is of the essence,” the law may not deem it to be so.