Key Considerations Before Entering a Construction Agreement: Ensuring Clarity, Compliance, and Conflict Prevention

Construction projects are subject to various legal and regulatory requirements, including local building codes, zoning laws, environmental regulations, and safety standards. However, it is essential for the parties involved to define their roles clearly, responsibilities, and expectations within the construction agreement. This ensures the agreement serves as a tool for smooth project execution, minimizing potential disputes.

In addition to the standard legal clauses in the construction agreement, both parties must ensure compliance with local regulations. They should also consider whether it is necessary to engage legal or regulatory experts to navigate complex compliance issues before entering the agreement. The drafting process offers a valuable opportunity for both parties to include provisions that protect their interests and eliminate any ambiguities.

Below are key considerations to take into account before entering a construction agreement:

Clear and Detailed Scope of Work:

The agreement should include a detailed description of the work to be performed, including specifications, materials, standards, timelines, deliverables, quality expectations, and any specific tasks. If changes arise during the construction process, these should be documented to ensure both the client and contractor share a mutual understanding of the work.

Budget:

Both parties must have a clear understanding of the financial aspects of the project. The agreement should define the total project cost, payment schedule, potential contingencies for unforeseen expenses, and who will handle cost overruns.

Payment Terms:

These may vary depending on the project’s size and complexity. These can include progress payments, milestone payments, or a lump-sum amount. A payment schedule with clear deadlines is crucial to prevent delays and financial disputes. Furthermore, provisions for late payments, interest on overdue amounts, and penalties for delayed work should be included to ensure accountability.

Risk Allocation and Insurance:

The agreement should clearly allocate responsibility for risks associated with the construction project, including provisions for insurance coverage to protect both parties. Insurance clauses should address various types of coverage, such as general liability, workers’ compensation, property damage, and professional liability. The agreement should specify the required levels of coverage and the process for filing claims to ensure both parties understand their responsibilities in case of accidents or mishaps.

Timeline and Deadline:

Time is a critical factor in construction projects, and delays can result in costly penalties and strained relationships. The agreement should outline a realistic timeline, including milestones and completion dates. It should also specify which reasons and timelines are acceptable for delays, such as force majeure events. Additionally, the agreement should define consequences for missed deadlines, including liquidated damages (pre-determined penalties for delays) or other remedial actions.

Dispute Resolution Mechanisms:

Despite careful planning, disputes may still arise. To prevent these conflicts from escalating into lengthy and costly legal battles, the agreement should include a dispute resolution clause. This clause should outline the steps to be taken if a conflict occurs, such as negotiation, mediation, or arbitration, before resorting to litigation. Mediation and arbitration are often preferable to litigation because they tend to be quicker and less adversarial, though they may not always be less expensive. By specifying these methods, both parties agree in advance to a structured process for resolving disputes, saving time and money in the event of a conflict.

Warranties and Guarantees:

The agreement should specify the warranties and guarantees provided by the contractor, including coverage for materials, workmanship, and overall quality. Many contracts include a warranty that ensures the project will be free from defects for a specific period after completion. Clear terms regarding warranties, the process for handling defects, and the contractor’s liability for repairs or replacements ensure that the client is protected. In Costa Rica, there is a minimum warranty period determined by law and various authorities, depending on the item. For more details, visit this link.

Termination and Exit Clauses:

Construction projects can sometimes face unforeseen challenges, such as financial issues or project mismanagement. It is essential to include clear termination provisions in the contract, specifying the conditions under which either party may exit the agreement. Common reasons for termination include breach of contract, failure to perform, or insolvency. The clause should also outline the termination process, including notice requirements and the obligations of both parties upon termination, to avoid confusion and legal challenges.

By including these key provisions, the parties can establish a solid foundation for the successful execution of the project. A well-drafted construction contract not only outlines expectations and responsibilities but also provides mechanisms for managing risks and resolving conflicts, making it an essential tool for a smooth and effective construction project.

If you require further guidance on crafting a construction agreement, feel free to contact Hillary Cruz Chaves at hcc@quatro.legal.

Disclaimer: The information provided in this blog post is for general informational purposes only and is not intended to constitute legal advice. While we strive to ensure the accuracy and timeliness of the content, laws and regulations are subject to change. For the most accurate and up-to-date information, please contact our office directly. Some images may be AI generated.