Risk Allocations in Construction Contracts

PALO ALTO, CA-In the world of real estate development, one of the most significant and often undervalued agreements is the contract between the owner/developer and the general contractor.  Drafting and negotiating construction contracts for commercial and/or large scale construction projects is, in its simplest form, an exercise in risk management. Each side jockeys for position on where and how to allocate risk; while, at the same time, managing those risks through a variety of mitigation techniques. 

A construction contract should clearly and unambiguously lay out not only the tangible terms such as the scope of work, the project delivery methodology, the project schedule, the project budget, the payment terms and the insurance coverage, but it also must address various foreseeable and unforeseeable risks that may arise either during the course of construction or after the project is complete. In an effort to streamline negotiations and reduce initial fees and costs, various organizations have developed form contracts including, but not limited to, the American Institute of Architects, the Associated General Contractors of America, ConsensusDOCS, the Engineers Joint Construction Documents Committee and the Associated Owners & Developers. While these forms are regularly used under the pretext of being fair and equitable consensus documents, it is critical to remember that the drafting organizations prepare the forms from the perspective of their own constituents.  For this reason, regardless of whether the parties use a form or sui generis contract, the documents must be modified and tailored to each particular project in an effort to allocate risk to the party who is in the best position to control or manage the same.  In some instances this may be the owner/developer and in others it may be the contractor. What is most important to remember is that, when it comes to construction, one size does not fit all.