Five Essential Roofing Contract Provisions

Contracts can either be a roofing contractor’s best friend or worst enemy. It is critical that contractors are aware of the provisions within roofing and prime contracts (as subcontracts often incorporate prime contract provisions). Due to the importance of contractual terms and provisions, outlined below are five essential contract provisions that, if not properly drafted, can have harmful consequences to your business and bottom line.

1. Scope of Work Provisions

“Scope of work” issues compose a large part of litigation under roofing contracts. Scope of work disputes typically involve contractors seeking payment for work that was not in the original contract, followed by unhappy owners disputing whether or not they agreed to the work that was performed. Scope of work issues arise when roofing contractors find areas of the roof that need additional work performed in order to successfully complete a project but may not have been adequately referenced within the contract. For instance: when a roofing contractor is performing a contract for a roof replacement, and the roofing contractor — in the process of replacing the roof — finds rotted decking that needs to be replaced, the roofing contractor is likely, and rightfully, going to perform the additional work and charge for the additional material and labor costs. The additional charges can be ripe for disagreement due to the original contract failing to adequately contemplate decking replacement as an extra charge.

Well-crafted scope of work provisions are imperative to include in roofing contracts. If additional work is encountered during a roofing project, as we all know is typically the case, the contract should explicitly state that the extra work (i.e., replacement of decking, fascia, soffits, etc.) will be an additional cost. Just as important, the contract should also state the method of pricing for this extra work.

2. Indemnification Provisions

Indemnification provisions are another important component of roofing contracts. Indemnification is the compensation for damages (or loss) as a result of someone else’s bad acts or omissions. For the roofing industry, indemnification clauses are important because they limit a roofing contractor’s liability.

It is important to note that there are several different types of indemnification provisions within roofing contracts: standard indemnity, super indemnity, and those that fall in between. Standard indemnity is the indemnification of the customer for the roofer’s actions that cause damage to the subject property. Super indemnity includes indemnification from the roofer’s own actions that cause damage, in addition to indemnifying a customer of his/her own acts. For instance: if a customer goes on a roof after hours to move equipment around, tearing a hole in a tarp covering which later leads to water damage, the super indemnity provision allows the customer to make a claim against the contractor — even though the customer’s own act caused the damage.

Indemnification provisions are complex and heavily litigated. Individual states have specific statutes and rules that control indemnification provisions in construction contracts. Due to this, roofers must ensure contracts are sensibly reviewed to ensure that the contract and its provisions comply with applicable state laws.

3. Liquidated Damages Provisions in Construction Contracts

When there is a contract, and one party to the contract breaches it, the non-breaching party oftentimes desires a liquidated damages provision in the contract to limit its damage exposure. Liquidated damages provisions are created to compensate a non-breaching party for the damages incurred from another party’s breach of the contract based on a predetermined amount and can protect a roofing contractor from large losses.

In roofing contracts, liquidated damages are usually tied to timely completion of the work by the contractor — that is, if not timely completed, the project owner is able to collect liquidated damages from the contractor due to failure to complete the project within the set timeframe.

Liquidated damages provisions must be carefully crafted and generally must abide by the following:

  • The damages must be intended to compensate the project owner for the breach of the contract — the liquidated damages provision cannot be a penalty. Courts have found that if the stipulated sum for liquidated damages is too great in comparison to the actual contract amount, the liquidated damages provision will not be enforced.
  • The liquidated damages provision is not enforceable if the non-breaching party contributed to the breach.
  • Because liquidated damages compensate for damages caused during late completion of a project, liquidated damages cannot be sought after the project has been substantially completed since the owner is no longer accruing damages.

These general rules of liquidated damages are important for roofing contractors to be aware of because when a project owner withholds proceeds, the contractor will be ready to make proper arguments to secure payment and potentially void the liquidated damages provision. To void a liquidated damages provision, the contractor can argue that any one of the above liquidated damages provisions has been violated. By proving any of above, the liquidated damages provision may not be enforced by a court and the contractor can successfully collect payment.

4. No Damages for Delay Clauses

Owners try to include limitations of liability and disclaimers within their roofing contracts. This is done to limit a roofing contractor’s ability to collect additional compensation from work due to unexpected delays and other conditions. Typically, under no damages for delay clauses, the roofing contractor is given extra time to complete a project but is not compensated for extra costs incurred due to said delay. No damages for delay clauses have a wide breadth in that they cover delays whether they are caused by an owner or caused by acts of God.

No damages for delay clauses are for the most part upheld in courts of law. However, there are certain circumstances where courts have declined to enforce a no damages for delay clause. If it is shown that an owner has acted in bad faith, the owner defrauded the contractor, or that the owner interfered with the contractor’s ability to finish the project, courts have the ability to decline to enforce a no damages for delay clause.

No damages for delay clauses—which can be found within bid documents—are important for roofing contractors to take note of since it allows roofing contractors to accurately adjust both their bids and work according to the contract terms.

5. Retainage Provisions

Retainage — or the withholding of a predetermined percentage of each progress or final payment — is included in many roofing and general construction contracts. Owners and prime contractors withhold retainage until final completion of the project. Retainage provisions have dual purposes: (1) they are used as an incentive for roofing contractors to complete the project; and (2) are used as protection by the owner in the event of uncompleted or defective work.

Roofing contractors should be wary that retainage can deepen the impact of subpar estimating as 5 percent to 10 percent of the contracted price is typically not paid until final completion of the project.

About the author: David Keel is an attorney at Cotney Construction Law who focuses his practice in various areas of construction law, and he serves as General Counsel of Space Coast Licensed Roofers Association. Cotney Construction Law is an advocate for the roofing industry and serves as General Counsel for FRSA, RT3, NWIR, TARC, WSRCA and several other roofing associations. For more information, visit www.cotneycl.com.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Changes to Contractor/Subcontractor Agreement Can Have Profound Effect on Roofers

Whether they like them or not, most subcontractors and contractors have used American Institute of Architects (AIA) standard form contract documents at some point in their careers. Several options exist for those wanting to utilize standard form documents, like ConsensusDocs, Design-Build Institute of America, and the Engineers Joint Contract Documents Committee forms. However, the AIA, being founded in 1857 and having published standard form construction contracts for more than 100 years, is the most established of these organizations, and its form contracts are still the most prevalent and most commonly used forms for commercial construction projects in the United States.

The AIA updates its forms every 10 years and completed its most recent revision in late April 2017. The updates included revisions to several forms in its A-Series (Owner/Contractor Agreements), including its widely used General Conditions (AIA Form A201) and its standard Contractor/Subcontractor Agreement, AIA A401. While these are only a few of the AIA’s updates, these changes may be particularly pertinent to subcontractors and those working in the roofing construction industry. Some highlights of the 2017 updates to A401 follow here.

Designated Representatives and Notices

Both the Contractor and Subcontractor are now required to designate (in the space provided in Section 14.2) an individual who will serve as each party’s “representative” for the project. This requirement is set forth in Section 3 for the Contractor and Section 4 for the Subcontractor. Parties are permitted to change their designated representative only if they provide 10 days’ notice. This is significant for both parties because the updated form requires that notices — for example, notices of a party’s potential claim arising from the subcontract — must be made in writing and are valid only if served upon the designated representative. The new form allows notices to be made via e-email or other electronic means only if an electronic method is set forth in Section 14.4.3. Parties should remember not only to designate a point person who is prepared to serve as a project representative and an email address for notices, but they should also ensure that the other party has done the same. Failure to do so could result in notices not being made by the proper means and to the proper individual — which in turn could result in parties waiving potential claims.

New Contractor Responsibilities — With Limitations

Although it has long been a standard practice (both on AIA projects and elsewhere) for the Contractor to include the prime contract as an exhibit to the subcontract, the updated form takes this a step further and requires the prime contract to be attached to the subcontract as “Exhibit A.” If Subcontractors hold Contractors to this requirement, Subcontractors will be able to review all of the contract documents with greater ease before signing.

Furthermore, Section 3 requires Contractors to “render decisions in a timely manner and in accordance with the Contractor’s construction schedule” and to “promptly notify the Subcontractor of any fault or defect in the Work under this Subcontract or nonconformity with the Subcontract documents.” However, in Sections 3.4.4 and 3.4.5, the phrase “written notice” has been changed simply to “notice” with respect to the Contractor’s requirement to notify the Subcontractor of defective work as a prerequisite of finding the Subcontractor to be in default. Section 14 still clearly states that all “notices” must be made in writing to the designated representative. This change could result in debate over what Contractors must do in order to notify Subcontractors of defective work before they avail themselves of remedies for breach, such as withholding subcontract payments.

Contractors also now have additional duties to provide Subcontractors information they may need in order to preserve their lien rights. Section 3.3.6 previously required Contractors to provide Subcontractors “a correct statement of the record legal title to the property … and the Owner’s interest therein.” The revised A401 now requires the Contractor to request this information from the Owner if the Contractor does not have it and give the Subcontractor the information upon receipt; a corresponding section in AIA A201 requires the Owner to provide it to the Contractor.

New Subcontractor Duties and Concerns

The above requirement to submit lien information is perhaps balanced by revised Section 11.1.10, which provides Contractors additional rights to indemnification from certain lien claims. “If Contractor has paid Subcontractor in accordance with the Agreement, Subcontractor must defend and indemnify the Contractor and Owner from liens and claims from lower tier subcontractors and suppliers, including being required to bond off liens,” the new form states.

Another noteworthy change concerns alternates — alternatives to a base bid that provide for a change in the level of quality, or scope of the work specified in the base bid. Alternates provide the owner with the option to modify the project by accepting or rejecting the alternate. The newly revised A401 contains a new section, 10.2.2, which allows the parties to list alternates that the Contractor can accept after execution of the agreement. Subcontractors should consider carefully whether it is wise to include alternates under this section.

Payment and Retainage

Finally, subcontractors and contractors alike should familiarize themselves with the newly revised Section 11, which concerns progress payments. Sections 11.1.7.1 and 11.1.7.2 break down the calculation of progress payments into separate subsections for additions, deletions, and retainage. This includes additions for construction change directives and deletions to allow for defective work remaining uncorrected (assuming that Contractor has duly notified the Subcontractor of the issue). Other portions of A401 allow for additions and deletions in these scenarios, but they are often conditioned on the owner’s approval and other factors. It remains to be seen whether this section could change normal progress billing procedures.

Section 11.7.2 opens the door to retainage options other than the typical arrangement (where the Contractor simply withholds the amount the Owner is withholding). Newly added subsections allow the parties to designate items that are not subject to retainage, as well as set forth an arrangement for reduced or limited retainage. This new section (11.1.8.2) could be a helpful avenue for early finishing trades to propose release of retainage upon 50 percent completion of the project as opposed to substantial completion — or even a way for parties to negotiate the retainage percentage down.

The above are just a few highlights of changes to AIA Form A401. For additional information or questions, visit www.aiacontracts.org or email Caroline Trautman at ctrautman@andersonandjones.com.

 

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.