Today on the podcast, we hear from Seth Millstein, a construction lawyer in Seattle since 2004. His practice is devoted to construction litigation, providing counsel to owners, contractors, and suppliers, primarily relating to liens, bonds, defects, and contract matters.
In this episode, Seth discusses 10 contract clauses that can make or break a project. He also shares how to write a two-page contract without forfeiting your lien rights. This was recorded at the Master Builders Association’s Remodelers Council Dinner on June 23rd, 2022.
Listen to Seth's talk above or read the highlights below. To download a PDF version of his presentation, click here.
1. Warranty provisions
Most homeowners want contractors to achieve a certain performance threshold, and that’s where warranties come in. Warranties relate to what happens when the owner deems the work less than perfect and requests a repair.
Most consumers (and even some contractors) think there is an automatic warranty built into their contract by the state; however, this is not true in Washington. Because of that, Seth highly recommends including a one-year warranty in every contract. Having a strong warranty is a great way to provide customer service, maintain a good relationship, and avoid litigation.
Just as important as including a warranty, though, is outlining what’s excluded from it. Exclusions keep you, the contractor, protected if a homeowner calls out something you’re not responsible for. It pays to be as specific as possible here, which can be difficult when performance standards are subjective. The best thing to do, says Seth, is to tie warranties and exclusions to something objective, like a standard; for example, PDCA painting standards or simply “industry standards,’ if nothing more specific applies. No matter how vague or specific your exclusions are, though, this is a critical piece to have a legal expert weigh in on.
“Contractor fully disclaims responsibility for: 1) Consequential damages; (2) Manufactured products (which have their own warranties); (3) Work outside its scope; (4) Construction, design, workmanship of existing items, structures, etc.; (5) Obtaining permits unless otherwise specified; (6) When wood is replaced, Contractor is not responsible for any painting or priming, unless specified. (7) Ventilation is installed per code to the extent possible; not all homes have complete ventilation system though; Contractor is not responsible for resulting ventilation issues as a result."
2. Punch list and corrections
A punch list is, as the name implies, a list of tasks the job requires. A corrections clause, in conjunction with a project punch list, protects the contractor from any claims if the owner:
- Fails to produce a single punch list at the project’s conclusion or termination
- Hires a third party or executes any work on the punch list themselves
- Completes the work without giving the contractor an opportunity to complete or repair it
- Occupies the space where the contractor performed work prior to completion
- Uses the contractor’s work in any way
- Fails to allow an opportunity for documentation of the contractor’s as-built work prior to altering it
- Fails to provide notice as required
Including the punch list and corrections clause in your contract is another great way to ensure protection if an owner alters any of the work you’ve outlined as part of the project. The important thing to remember here is to heed Washington’s laws around notice provisions. In our state, if you don’t provide proper notices to your clients, you could end up being the liable party in any of the above cases.
“All work is accepted "AS IS" and any and all further claims against the Contractor are waived and barred if the Customer/tenant: (i) fails to produce a single punch list at the conclusion of the project or termination, whichever occurs earlier; (ii) contracts with a third party or self-performs any work in Contractor’s scope including punch items; (iii) completes the work without first providing Contractor full opportunity to complete or repair; (iv) occupies the space where the Contractor performed work prior to completion; (v) uses the Contractor’s work in any way; (vi) fails to allow opportunity for documentation of the Contractor’s as-built work prior to altering it; or (vii) fails to provide notice as required herein. The finder of fact shall strictly construe this and all other notice requirements."
3. Suit limitations and venue
In Washington, the rule for filing a suit is simple: For written contracts, any suit must be started within six years of substantial completion or termination of a project (whichever comes later); for verbal contracts, suits must be started within three years. These numbers are limits, however, meaning they apply if no limit is specified in the contract. When writing a contract, the contractor can reduce suit limitations within a "reasonable amount" (in Washington, "reasonable" is usually at least one year after the end of the project).
Here’s where you want to pay close attention to suit limitations: If you’re providing a one-year warranty in your contract, make sure you tie in the outer limit for suit limitations (three years for verbal, six for written contracts) to the same period. For example, you’d provide a one-year warranty and include verbiage stating all causes of action, including warranty, expire at the end of the one-year period. Additionally, make sure any work done during the warranty provision doesn’t extend the term of the warranty or the suit limitation period.
“All claims and causes of action against the contractor, in any way arising out of contractor’s performance under this agreement, are waived and forever barred unless filed in a competent court within the earlier of: one (1) year from invoice date for final payment or termination. Warranty claims/punch work, etc., if any, shall not extend this period. If suit is filed against Contractor, regardless of where the project is located, Washington law shall apply and venue shall be King County Superior Court.”
4. Milestones and escalation
Provide a rough project outline in your contract, calling out only the major milestones (i.e., when work will start, when work will be complete, and when specific phases of the project will be completed).
To protect yourself from unforeseen challenges and slipping deadlines, Seth recommends being slightly vague here—i.e., stay away from pinning yourself to explicit dates. Instead, outline where the completion of one phase triggers the start of another.
Seth also recommends including an escalation clause in addition to key milestone targets. For example, if you can’t meet the dates specified, the contract should state that the contractor will advise the owner (in writing) why the date isn’t possible and what the updated target date will be.
5. Guaranteed maximum price (GMP) and inspections
If your client has a definite or limited budget, including a guaranteed maximum price in your contract can help put their mind at ease. In these cases, or any case where you need to identify parameters, be sure to include an inspections clause in the contract.
“We have made visual inspections only of the work site and conditions. We have not done any testing (i.e., subsurface conditions). If unforeseen conditions impact our performance, we will notify you and issue a change order request as soon as possible. Under no conditions do we accept liability for others’ work.”
6. Change order provisions
Change orders are where most disputes occur, both on fixed-price and time-and-materials projects. In many of these cases, an owner requests a change and later claims they didn’t know what the change entailed or how much it would cost.
To avoid running into problems here, include a change order clause outlining how changes are initiated and priced, when payment is due, and any other specifics that will help avoid surprises. Make sure the initial scope includes enough detail to avoid “haziness” about what is considered a "change." These details should include specific information about quality, finishes, system details, tolerances, etc. The change order clause doesn’t need to be long—just specific. Additionally, a good practice is to include a sample change order as an appendix to the contract.
A best practice, according to Seth, is to document everything during every project, particularly immediately before demobilization. Disputes almost always arise when the owner thinks they're getting a certain quality item, but the builder has budgeted something different. If the dispute goes to arbitration or trial, the more specific your documentation, the less expensive and time-intensive for all parties.
7. Disputes and remedies
Writing a painfully clear disputes and remedies clause is the best way to protect yourself and your wallet. Your contract should spell out exactly what happens when a suit arises (and when)—but should do so in a clear, approachable way, so as not to put a client on the defensive.
In the absence of a disputes and remedies clause, and absent a statute, both parties will pay their own attorney fees, no matter the outcome of the case. This is called the “American Rule.”
"In the event of a dispute, the parties must meet in good faith and attempt to resolve their differences. If this fails, the prevailing party shall be entitled to an award of its (reasonable) attorney fees and costs, including experts."
8. Lien waivers and notices
Lien waivers protect everyone and no residential job should ever begin without a signed and dated waiver. They’re particularly important for owners, to ensure they won’t be liened by a sub-contractor down the road, even if they’ve paid the contractor. For the same reason, the final waiver from the contractor is also important, as are waivers throughout the project to ensure each payment is distributed to all parties owed.
At a minimum, an owner will want to be fully educated on his or her rights and remedies. Education is the purpose of the “Notice to Customer,” so every owner should read it carefully before signing. Again, providing the Notice with the contract does not mean the owner will be liened. It simply outlines rights and remedies and informs the owner about the contractor’s bond and registration.
Indemnification is when a contractor is sued by an injured employee, alleging unsafe work conditions. In Washington, contractors pay into a workman’s compensation fund, which protects you from liability if an employee is injured on the job and sues you. The owner, on the other hand, is not protected from suit, which is where the indemnity clause comes in.
An indemnity clause protects the owner in the event that an employee of the contractor sues them for injury. With a properly drafted indemnity clause, if the contractor causes the injury, and the owner is sued by the injured employee, the contractor takes on full responsibility.
Most owners will request the inclusion of an indemnity clause, which shouldn’t be cause for alarm or offense. According to Seth, an indemnity clause provides the owner an extra layer of protection and is a reasonable request.
10. Miscellaneous clauses to include
There are a number of other clauses you can include in your contracts to dial in a job and prevent possible problems from arising. Here is contract language to address Seth’s top 10 miscellaneous clauses:
- The parties had equal opportunity to draft, edit and amend this agreement. Its terms shall not be construed against either party as a result. Neither shall rely on representations, oral or written, made prior to executing this agreement, which is fully integrated. The parties agree that this document (plus attachments) represents the entire construction agreement.
- Customer is contracting with a legal entity, not an individual.
- If your house was built prior to 1978, lead paint testing must occur. The presence of lead is unknown until this occurs; remediation costs will be determined after results are known.
- Customer’s driveway and other points must be cleared for dumpster/dump truck access during the course of the project.
- Outlet access is required for exterior projects.
- Exterior work will not be performed during extreme or adverse weather conditions.
- If any portion of this agreement is breached Contractor has the right to decline further performance.
- Customer grants Contractor permission to use the project for promotional purposes, including posting images and photographs on the Contractor’s website and social media. Contractor agrees to conceal the identification of Customer and address of the project.
- Outline tool/material storage policy
- Outline a cancellation policy
11. Bonus: Additional insured
Owners can request that you include them as an additional insured (“AI”) on your commercial general liability policy. If this comes up, you may have to provide a certificate documenting that the owner is insured, and follow through with any other requirements from your insurance carrier.
This isn’t a clause to include in a contract, but all contractors should be aware of it—and be prepared to respond if a client asks. In some cases, it’s a reasonable request: If your work causes an issue that results in the owner getting sued by another party (a neighbor, for example), being additionally insured means they can seek defense and indemnity from your insurance carrier.
For more on the legal side of running a construction business, check out how to protect yourself from liability when hiring contractors and how to lower your insurance rates and decrease liability.