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Spring 2016 IssueFall 2016
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Top 5 Construction Contract Clauses and Terms
1. Scope of Work
Most contracts will refer to the scope of work (SOW) as the defined set of requirements used as a basis for pricing and construction. In many cases the SOW is defined as the set of construction drawings the architect creates, and in some cases you may also see SOW defined through a line-item bid.
Tip: Make sure to review the SOW meticulously before executing the contract.
2. Incentives
An incentive, in its simplest form, is an agreement to provide extra compensation outside of originally agreed-upon price if certain milestones are met. Construction contracts structure incentives in a variety of ways, but most are tied to schedule and cost milestones.
Tip: An incentive can be used to try to shorten the schedule in the case of an impending lease expiration.



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3. Liquidated Damages
Liquidated damages, or LDs, can be viewed as the opposite of incentives in a construction contract. With LDs, one party reimburses the other party if certain milestones are not met. LDs ensure you are reimbursed for any delays in your project that delay your opening. In the contract, you’ll want to clearly define the delays so you can easily enforce this clause, and establish LDs as dollars per day or per week. The amount should reasonably reflect the amount of loss experienced by the contract date being missed, and they are often capped to limit the overall damages that can be charged.
Tip: LDs can also be an amount agreed upon by both parties, but make sure to define what triggers an LD to take effect.
4. Change Orders
Change orders typically have a negative reputation in the construction process, as they usually involve additional cost. Change orders are agreements between owners and contractors that define a deviation from the original scope of work, and the financial repercussions for it. Not all change orders will add to the construction cost – if the change order involves a simplification or reduction in scope of work, you may see a reduction in price.
Tip: Change orders can be avoided if you complete your due diligence during the design development phase with your Patterson designer and architect.
5. Retainage
Retainage is the ability to hold final payment on a contract until all work is completed in a satisfactory manner, as determined by the owner. How much retainage is seen in a contract can vary, but most often it is between 5 and 10 percent of the total contract.
Tip: Retainage helps ensure the contractor completes all final items in the punch list, as they won’t get paid the full contract amount until completed.