You Want to Expand, Now What?

The Business Matters columnist in the June print EPM outlines the important things to remember when developing construction contracts for large projects at ethanol plants.
By Joe Leo | May 22, 2017

More than any year I can remember, there is a significant amount of dirt being moved and concrete being poured in the ethanol industry. While all this expansion is exciting for the industry, for many of my clients this is the first time in many years they have negotiated large construction contracts. Thus, it may be useful to discuss key terms in construction contracts that are frequently overlooked. A proper understanding leads to successful construction projects and avoids unnecessary confusion and disappointment for all parties.

The procedure for requesting and approving change orders is important. As with any project, the scope of work can change during construction. Adding or deleting work from the original scope of work frequently includes an adjustment to the contract price and completion date. Well-written construction contracts include procedures for proposing and approving change orders, which should be followed rigidly. Many contracts include an integration provision, which provides that any oral agreements or other discussions not incorporated into the contract are ignored. As a result, if you do not follow the change-order procedure in the construction contract, there can be a dispute later regarding whether any discussions regarding changes are binding and included in the contract. 

One key aspect of negotiating any construction contract is providing assurance that the work will be completed in a timely manner and according to contract specifications. One way to ensure this is to retain a portion of each progress payment to the contractor until the work has been completed and inspected and any unfinished or unsatisfactory work has been fixed. It is especially important to keep a portion of each payment as retainage instead of simply reserving the last 5 or 10 percent of the contract price, in the event the contractor ceases work in the middle of the project. If you have not retained a portion of each progress payment, you may be searching for a new contractor without any funds available to compensate for any losses. 

Getting lien waivers from every contractor and subcontractor is imperative and requires diligence. Before making a progress payment to the contractor, confirm which subcontractors and suppliers will be paid for the work performed and secure lien waivers covering the work and materials for which you are making a payment. The last thing you want is to have a mechanics lien filed against your property because a supplier or subcontractor was not paid. Nothing hurts more than paying twice for work to resolve a mechanics lien and trying to collect that amount from an insolvent contractor.

Work with your insurance provider to confirm that you have the necessary insurance required by your construction contracts. Have the insurance provider review the construction contract to confirm that none of the terms violate your insurance policies or require an additional insurance rider. Many construction contracts require your insurance provider to notify the contractor if the insurance coverage is terminated or changed. In my experience, insurance companies will not agree to provide this notice to someone other than the policy holder. Carefully analyze any indemnification obligations under the contract and confirm they are not inconsistent with your insurance policies. Anti-subrogation provisions in the construction contract may violate the terms of your insurance coverage.

Finally, many construction contracts include dispute resolution procedures. While aiming to resolve disputes in the most efficient and cost-effective manner possible, they do not always accomplish those goals. Keep in mind if you have an arbitration provision in your construction contracts, the costs to commence arbitration, especially if the contract calls for multiple arbitrators to hear the case, can be expensive. Further, there are typically up front fees to commence the arbitration that can be costly. In some cases, using the court system instead of arbitration can be more cost effective.

Author: Joe Leo
Attorney, BrownWinick Law Firm