In this course you will learn the basics of construction contracts and key terms that are often included agreements. We will address key payment provisions that should be carefully considered and evaluated in contracts as well as dispute resolution options and how to best draft them to suit individual needs. We will also cover the types of key disclosures to make in construction contracts to stay in compliance with state regulations.
Brian Pezzillo - Hello, my name is Brian Pezzillo. Today we're gonna be discussing construction contracts. We're gonna be talking about a number of the different types of contracts that are in existence. The differences between them, the pros and cons, as well as certain provisions which arguably cannot be enforced in certain jurisdictions. So we will cover those main topics. The goal being in one hour is primarily to really make everybody aware of key issues related to construction contracts. This can be a very complicated area. It varies jurisdiction by jurisdiction so some of what we talk about will apply in one jurisdiction, but on another and I'll try to highlight those areas where the issues are jurisdiction dependent, and you need to be aware of what is happening in your jurisdiction and laws are constantly in a state of flux. And some of these, some of the issues that we're gonna talk about today have and will continue to change.
To give you a little bit of background about myself I've been practicing law now going into my 26th year for pretty much all of those years, I have practiced in the construction area. I represented everybody from own small mom and pop subcontractors and suppliers, up to the large owners and developers as well as subcontractors and general contractors. So that as we talk through the issues today, I'll kind of try and point out, the perspective that we need to have on contracts, because obviously the interest of a general contractor is not necessarily the same as that of a subcontractor. And so the contract documents will perhaps wanna be worded differently depending upon what vantage point you're coming at it from. But what I always like to tell people is construction contracts are the beginning and it's kind of like the foundation of any building you build. In addition to having practiced in this area for a while, I am an arbitrator with the American Arbitration Association and I serve on a number of their panels, including the construction panel and the large complex construction panel. And through that, I've seen a, a variety of different issues that have arisen. I can pretty much tell you every time that a dispute arises, we end up coming back to the contract. And so it is imperative to, to get this portion of a project done properly. So with that, and kind of jumping into the different areas of contract law and construction contracts, I always advise my clients pay particularly close attention to your contract. The reason being is it, it is something that you have control over.
So there'll be a lot of aspects to a construction project that you simply can't control. You may not be able to control the actions of a subcontractor or a supplier with whom you don't have a contract. If you are a supplier or a subcontractor, you can't control the actions if an owner once the project begins. What you can do though, is protect yourself by having a good contract in place that hopefully anticipates unknowns that always end up arising on a construction project and offers protections for you so that you can respond in a manner that is appropriate to protect your interests, whether you're the general dealing directly with an owner, or whether you are a supplier that is removed by multiple tiers from that relationship. No matter what, you still need to be able to, to protect yourself and anticipate events that might occur. So when we talk about the different aspects of a construction project, and ultimately what you want, which is a completed project and money. I always try to tell my clients that, as we can see on the first slide, when we talk about remedies in the event of non-payment, you really have three different types and that's a mechanics' lien, a contract and or personal guarantee that might be on that contract and potentially payment bonds. And payment bonds certainly are your exclusive remedy on a public works project. More and more I have seen private developers require the use of payment and performance bonds on projects. If you are representing an owner and you have an interest in protecting the project, this is an area you might wanna include in the contract.
So while we are not gonna be discussing it in great depth, you do wanna note that protecting the project from an owner's point of view can be done with the contract in requiring a payment bond. So that in the event you have an unpaid subcontractor or supplier, the bond will come into play. And rather than having the, the project encumbered by a mechanics' lien that bond would serve a security. Typically that would be the owner requiring that from the general contractor. Along those same lines, general contractors can pass this down along to sub contractors as well and require their subs to have payment bonds posted. Oftentimes for the amount of their contract, if it's a lump sum contract. And that way, if you have an unpaid sub to a sub or unpaid material supplier, there's a bond for them to go after.
Rather than encumbering the project with a mechanics' lean, which then is gonna get into issues where if you're a general, the owner is certainly gonna look to you for indemnification and defense and require you to defend the project from that mechanics' lien. May not be a situation you want to get into, certainly not one you wanna get into, but you may not have much of a choice if someone further down the line is unpaid. So while we won't necessarily go into great depth about that, be aware that although, payment bonds we typically associate with things like Miller Act claims or Little Miller Act claims on federal projects or state projects, respectively, they do have a role and they're playing an increased role in my experience on private works of improvement. If that's something you wanna do, and something you wanna look at to use that as a tool to protect the project, again, we're gonna write back to the contract and making sure that that is a requirement in the contract. And oftentimes it will be framed in the, in the manner of giving a general or a higher tiered subcontractor, the option to require somebody downstream from them to procure a payment bond. But we're gonna focus primarily on just the kind of straightforward contract language. And if you have any personal guarantees that typically comes into play more with purchase orders and with suppliers requiring a personal guarantee of a subcontractor, not something to be overlooked. And we're gonna talk about that. And even maybe some ways where there could be a personal guarantee, you don't even know it.
So as you can see, I've tried to put this next slide in bold letters, never forget your contract. All too many times, I have seen this where somebody has started to work without a written contract. That to me is just a cardinal sin, not to be confused with a cardinal change, which we might have on a construction project, but a cardinal sin in not having the document, the agreement written in a written document form. The reason being people's recollection and their opinions change with time. And therefore, I'm here in Las Vegas, Nevada, and that's my primary area of practice. I'm also licensed in Colorado, Arizona, and New Mexico. And I'm active in each of those states. Out here in the west sometimes it's still the wild west. People still operate on a handshake deal. It's becoming less common, but it is still there. You can imagine the issues that arise with that. It's great if the project gets built and there's no problem, no issues.
However, once you run into an issue and one party decides I haven't been paid, or the product's been delayed or there's disruptions on the project, all of a sudden they're gonna have a very different recollection of what the agreement was. And when it's verbal it's he said, she said. So always have your contract always have it in writing. Many times people have the contract and it doesn't get signed. Clearly you want a signed contract, that's the ideal. But if you don't, but it's the contracts gone back and forth and via email and people have acknowledged it and they've performed pursuant to it. Even an unsigned written contract is gonna have a lot of enforceability. I just recently sat as an arbitrator in a case that was very similar to that. Where both parties did not execute the contract, but it was very clear both parties performed pursuant to that contract and there was correspondence going back and forth that made it clear the parties were agreeing to it, absent to that contract maybe wouldn't have applied and what was kind of a bad case to begin with would've been even worse.
So when we look at the contracts right away, I usually will try and tell my clients, there's a couple of key critical clauses you wanna just highlight and make sure you look at and, just right off the bat and that's things such as anything related to payment. So for instance, what do you have to provide in order to receive payment? Do you have to provide lien releases for yourself? Do you have to provide those lien releases for lower tiered contractors and suppliers? Which releases? Many states will have, if not most different types of releases. Conditional and unconditional, progress and final. So there's, that's four different types of releases, your unconditional progress release your conditional progress release your unconditional full and final release and your conditional full and final release. Oftentimes the way I structure that in a contract is, is kind of a multitiered system. And it's every month there'd be a payment application date in requiring payment to be released the party making the application.
So if you're the general contractor, the subcontractor making application for payment must give you the proper payment application and a conditional progress payment. I'm sorry, a conditional waiver and release for that month's work. Once you've paid, the conditional waiver and release will typically be treated as unconditional. That's from month number one, once you get to month number two, you're require two releases. So I kind of call this the two release system. And that is just as before with application number two, the subcontractor has to provide a conditional waiver and release for month number two's payment application. And an unconditional for month number one, which should have been paid. And it'll go that way throughout the entire project will it be two releases, a conditional for the current month and an unconditional for the prior month, right up until the point where you get to the very end where there'll be, ultimately a final unconditional waiver. Take a look at at key issues like unknown claim waivers. So different states will have different rules in terms of what can be put into a contract. In Nevada for instance, there's no unknown claim waivers, meaning that you cannot force a subcontractor or a lower tiered contractor or supplier to waive unknown claims. That is not the case in all states. So be aware of what can and cannot be waived, where I'm at here in Nevada, we have a specific, no waiver of mechanics' lien, rights law. Different states handle that differently. We have a statute directly on point. Other states have done this through case law, and it'll be a state Supreme court case that says that no provision of a contract can require a prospective waiver of a mechanics' lien. Meaning, and I still see this all the time, a boilerplate language that says subcontractor, you agree to waive any and all mechanics' lien rights to the project regarding any payment issues that may apply.
Now in Nevada, that would be absolutely stricken. Other states still, will allow that waiver. So you have to, again, look at that from different perspectives. That's something you probably wanna have in there. If you're a general contractor it helps you because now, you know your subs and downstream subs and suppliers, won't be liening the project. If you are a sub or a sub material supplier, or you're representing one you don't want that in there. You wanna preserve that mechanics lane, right? Cause that's one of your most powerful tools to get paid in the event of a non-payment situation. But again, know the law of the state. So for instance here in Nevada like I said, we don't have that. We borrowed that law after California, which also prohibits mechanics lane waivers, a number of states prohibited that a number have either never addressed it or stated that yeah, it's freedom of contract we will allow it. Take a look at any sort of waivers for delay acceleration, disruption or impact damages. Here in Nevada you cannot put a waiver like that in a contract. I've not seen too many other states that would follow that line of reasoning. They typically will have, a no damage for delay clause in there or acceleration. But again, check your state, know what is permissible. It raises some issues.
So for instance, consequential damages, there's a question here in Nevada. Is that really still valid? I will, you in contracts, the waivers are there. They're gonna be there. They're gonna continue to be there until the Supreme court here really makes a concrete ruling in terms of whether they can be included in contracts. And oftentimes it's gonna be fact dependent. And I left kind of the, the best for last, which is pay if paid clauses and pay when paid clauses. I think everybody probably knows what that is if you've done any construction work, but if you don't, pay if paid is what it sounds like. I the general contractor only have to pay you the subcontractor, if I receive payment from the owner, if I don't receive payment, you don't get paid. The magic language you will see on all pay if paid provisions is, payment from the owner is a condition precedent to payment, to the subcontractor. And that it'll vary a little bit. So if you're a subcontractor and you have a sub, sub subcontractor, it may read, payment from the general contractor is a condition precedent payment to you. Condition precedent is that magic language you're looking for. Many courts have held. If you do not have conditioned precedent in the language you do not have a pay if paid clause. So make sure you draft the contract properly. If that's what you want in there. Now, some states have ruled pay if paid is void. Other states have ruled pay if paid is absolutely valid. We're gonna tie this into something here in a few minutes.
We're gonna talk about, and that is choice of law provisions. Be really aware of those when you're taking a look at a contract, if a review of a contract, the reason being is, obviously if you are a general contractor, you're gonna try to make the contract subject of a state that would enforce pay if paid. Some states such as Nevada being one of them will actually have statutory prohibitions on that and will state that you cannot make a construction contract here subject of another state's law. So what if you don't have a pay if paid clause? What if you don't use that magical language condition precedent? Well, most courts that I've encountered will turn that into a pay when paid clause. The difference is, and on the surface it kind of looks like that's really the same, because let's say you're hypothetically the general and the owner doesn't pay. You could argue, well, I pay when paid and I've never been paid. That gets interpreted by courts as really creating a timing provision. And so the obligation will become, you must pay when you are paid or within a reasonable period of time. What's a reasonable period of time? Fact dependent changes by each case. In my experience, six months is a kind of a common amount of time, nothing magic about that six months. It could really vary I can easily see situations that could say 12 months. I could see some that say 60 days, maybe 90 days. It really just depends and a lot it'll depend upon the nature of the project as well.
Here in Nevada, our largest projects, as you might guess, are hotel casinos, multi-billion dollar developments. They take years to build, that's gonna be different than an office building or a tenant improvement. So take a look at the specific facts. When we get into contracts, some of the preliminary matters that you really want to take a look at here would be thing such as, are you licensed? Do you need to be? If you need to be licensed and you're not licensed, oftentimes that will render the contract void here in Nevada, we call it void ab initio. If you are not properly licensed, your contract is it is treated as if it does not exist. So before you insert drafting the contract be aware, does your client, or if you are the client, does the work that's being contracted for require a license. And then if so, does the party you're representing have the proper license? If you're a supplier, typically you don't have to have a license. If you're a contractor, a general contractor, you're gonna need to have a license subcontractor the same thing. Subcontractors, get a little bit trickier sometimes because there's a lot of subparts to subcontractors. So plumbing, electrical, all of those sorts of things, would be different sub licenses so be aware of that. Just as an , if you're not a licensed contractor, many states state that you cannot record a mechanics' lien. Even negotiating a contract if you're not licensed yet is oftentimes prohibited. Here in Nevada it's actually a criminal action as it is into other states. And theoretically you could go to jail and there have been some people here who on the extreme have gone to jail. There are also some jurisdictions that if you are properly licensed for a certain period of time, will give a preference on public works projects. So just be aware of that. Along that same line, take a look at your jurisdiction do they require licensed limits? Some do some don't, some would just say as long as you're properly licensed you're okay. Others will say that you have to be licensed and in a specific dollar amount, meaning that.
So in Nevada where I am, there's a licensed limit. Let's say it's a million dollars. That means that if I'm a contractor with a million dollar licensed limit, I cannot intern into a contract that is for 1.5 million. My cap, my contract cap is at $1 million. There are other things out there. If you find that the contract wasn't interned into properly, or the licensing was wrong, things like unjust enrichment. Maybe you had a proper license, but you didn't have the proper sub license it was a specialty license. Take a look at that. We won't get into great depth a about that, but I just wanna make you aware that the inquiry doesn't necessarily end. If it turns out that a contractor is not properly licensed. Discipline for these sorts of things is typically available on most state contractors, boards, websites. Sometimes it's gonna be a state contractor's board down in Arizona. We call 'em registrar of contractors. I think Washington state calls it licensing and professions. So get a little creative sometimes maybe when you're looking for the licensing information of a contractor, cause from states will, will actually just physically house that in different areas. Also on your contract, make sure you have the right party's name and you know who you're dealing with. That sounds really kind of crazy, but you need to know who your customer is. And a lot of times, particularly in this industry, fictitious business names, DBAs get used. You don't wanna accidentally enter into a contract with somebody that you know about who's got a bad reputation and I've seen that happen many, many times.
Check here you have to register fictitious business names or DBAs with the each individual county. Other places it's with the secretary of state others it might be with the licensing board, just check, you really wanna make sure you have the right party. The case I mentioned that I recently arbitrated was kind of funny, probably not funny for the parties, but as kind of the arbitrator I was watching it. They couldn't figure out who the right parties were. They had named different people with similar names and it actually took a while for the parties to figure out who had actually entered into the contract and developed the project. In order to assure who had, that we had the correct parties before me for the arbitration and they didn't do that at the time they entered into the contract. There were multiple companies that had very, very similar names, but then there might have been a, business entity one business entity two LLC. And on the contract, it said business entity, and it didn't indicate which one was being, it was entering into that contract.
So those little things do matter at the end and they do create inefficiencies in expense in the event of a dispute. So what goes into the contract itself again, make sure you have an accurate name, make sure you've got the license number or numbers. It is not unusual for general contractors to also hold subcontractor designations as well. That can be very important in a lot of states, Nevada, for instance being one of them where you must list your license number on your contract. If you don't, it is a violation. It's not the death penalty of contractor violations. Here it would result in a citation and a small fine. I've seen a citation shoot in a $50, fine, for getting to put your license number on a contract. The only thing is that does become public record and it is out there on a website and people can look at it. Most people would look at it and not even be concerned about it. Quite frankly, most people would never gonna are never even gonna look at it at all and not do a search, but the optics of it are there. And if you do public works or your client does public works type contracts, and you ever have to list any discipline, that's gonna have to go onto the bid documents. So just be aware of that.
Monetary limits, I mentioned licensing monetary limits that exist. Some jurisdictions do require those limits to be put right on the contract. So it will be, I have a B one commercial license with a $5 million monetary limit. Not all jurisdictions do that, but again, just check, dot your Is, cross your Ts. Verify that whatever that monetary limit is, the contract amount does not exceed it. Just on that point, there are different jurisdictions that handle this in different ways. Some will say that as long as the original contract was within the license scope and limit, if a change limit bumps above that, you're okay. Others say that is not okay. Some jurisdictions, Nevada being one of them will allow for a one time limit increase. So if I have a $5 million project and it's gonna be five and a half million, I might be able to bump my license limit up for that one particular project to say 6 million to account for the base contract work and then kind of a contingency of any change or to work. And it's very important make sure you define what work is going to be done. It's that has been one of the biggest disputes that I've had to deal with both as a litigant and as an arbitrator. Is contracts that are not clear and they don't delineate what it is the parties have to do pursuant to the contract. And you get into the argument of no, I'm not gonna approve a change order.
What you're asking additional money for was part of your original scope of work. The contractor comes back and says, no, this is an add. You gotta pay me extra money, or I'm not doing X, Y, Z. Make sure that the scope of work is as detailed as you can get it. Without being so detailed that you exclude other things that might go along with, with the original scope of work. So you wanna really take a look at that very carefully. Special notices, different jurisdictions have got different requirements for these. Some jurisdictions require the use of a special notice. So for instance, here in Nevada, residences are treated differently than commercial projects and we have what's called a residential recovery fund. Homeowners oftentimes in various jurisdictions will be treated in that fashion and they'll be given an additional protection.
So this is an example of the language that you have to have here in Nevada. Payment may be available from the recovery fund if you're damaged financially by a project, performed on your residence, pursuant to a contract, including construction, remodeling, repair, I won't read the rest of it. You can see it there yourself on the slide. And if you don't have that warning on there, you can be disciplined and I've seen people disciplined for that. So you definitely wanna be aware of those, those requirements. And different states will have different notice requirements. Oftentimes the notice requirement is statutory or it'll be part of an administrative code, and you can literally just cut and paste the language into the contract. And that's what you should do. Be aware on this sort of a topic that you're also looking at the type of work being done. So residential work is one type. A lot of times here in Nevada, actually we had a, some new regulations pass dealing with the solar industry. That requires special treat on solar contracts. Pool contractors, we used to have a huge problem here with pool contractors. So there were special, special notices that had to be used if you fell into one of those categories. Different states, again may have different types of those. So take a look at those, this next slide here I've entitled notice to owner. This is something that for, and I'm only using this as an example that it's Nevada specific. But this is something that you have to give to an owner on a, a construction project. And you'll see there that, if you're a general contractor, then this is for general contractors.
You have to give a list of suppliers who are gonna furnish anything of $500 or more. Why the $500? Well, here, that's the lowest amount of a contract that's legal. So if you enter into a contract for less than $500, even if you don't get paid, you don't get a mechanics' lien. That's why we do that here. Also make sure you get lingo, correct. It sounds, different states have different terms of art. So I'm referencing general contractors cause we all understand what that is. That's the same thing in most places as a prime contractor, but you will see the term prime contractor in a lot of statutes, not general. So when you're looking at construction statutes, as you go through, look at that definition section. Sometimes we skip that but I think we all know as lawyers, we can't. The terms of art means something and they're very important. So take a look at that and then incorporate, that language into your contract as closely as you can. So when I'm drafting a contract, unless I'm getting a lot of pushback from my client, I for instance, will use the term prime contractor. Or I'll just say prime contractor in general contractor used interchangeably. The reason being prime contractors are the term's actually used in our statutes. And so it's important to make clear each party's designation so you know what statutes apply. So that nobody ever looks at a statute and looks at your contract and says, we use a general contractor and general contractor never appear in the statutes. So there's, real reasons to take a look at that. And as you can see this sort of a notice, it is kind of warns a property owner, hey, you're gonna get preliminary pre-lien notices. Don't worry about them. That's just a notice to tell you that people are out there working.
This is the rest of the, of that warning. And we won't read it that'll definitely put you to sleep. But it does just point out that as an example, that a lot of states will require you to advise owners of their legal rights, particularly on the residential side. And it will require you oftentimes to put down contact information for the state's contractor's board or registrar of contractors, whatever terminology they use. So it's really important. And one thing I did wanna kind of point out too, because again, this sort of notice is to protect the, the owner of a project. And if you look at on this slide, number 10 here, the very last paragraph, a contractor is required to include the contractor's license number on all of his or her advertising vehicles, bids, contracts, et cetera, et cetera. This is a board actually telling people what your legal obligations are if you are a contractor. The reason I point this out is I have seen people actually take that and they didn't otherwise know what their rights were or what a contractor's obligations were. And if the project had gone off fine, no big deal, they move on with their lives everybody's happy.
But if they decide they're upset with their contractor, for some reason, they come back and actually pull this document up. And maybe their real issue was a workmanship issue that the workmanship was just really poorly done. But then they actually start throwing in all of these things and then they'll say to the, when they file a contractor's board complaint, oh, and by the way, the contractor didn't put his number on his license, didn't have his license limit on his license. And all of a sudden what started out as one issue suddenly blossoms into six issues that the contractor has to deal with, with the contractor's board. And you can see here in the next to last line. Here, you've gotta give the website of the board. And it's really telling people how to file complaints. Sometimes that's a bad thing it almost comes across as encouraging it. But it is the law and that's what has to be done. So check your jurisdiction and know what specific disclosures have to be made.
So when we talk about the agreement, like, so here on this slide 11. It's important It's kind of funny because you have to explain particularly to contractors, legal terms of art, cause they don't know what they are. So I've had a lot of people tell me, particularly suppliers they'll tell me I don't have a contract I've got a purchase order. I don't have a contract I've got a credit application. And you have to actually explain to everybody, whatever your agreement is, it's a contract. Contracts come in different forms as lawyers we know that contracts are actually pretty easy to form, right? I mean, there's not a whole lot that goes into a contract, offer, acceptance, consideration. First year law school type type stuff. Other people who are not lawyers don't understand, they think of a contract as being 20 pages of single spaced, tiny print.
Well, that's one kind. In fact, I've got one sitting on my desk right now that I'm gonna be reviewing pretty soon and those are painful. Yep it's a definite contract. What they don't understand is a one page purchase order that just sets forth. I'm purchasing drywall in this amount for this price signed here. That is a contract. You can call it a purchase order, but it is a contract. And it can be important when talking to clients to explain to them that what they're entering into, what you're drafting for them is a contract. So whether what you're drafting is a 20 page single spaced small print, typical lawyer contract, or whether it's a one or two page credit application or a purchase order, it is a contract and it needs to be explained to the client that what they're entering into is a contract and they have obligations under it. So when we talk about the contracts again, kind of just a refresher, what do we need? Name, customer, contact, address, phone number that actually comes into play quite a bit and make sure it's accurate and make sure when you have, if you're drafting this contract and you're drafting it from the perspective of somebody else signing it as the customer, you check their information to make sure it's legitimate. I have a case right now for a tenant improvement in a hotel casino. Parties entered into the contract. Everything looks good when you read the contract. Is are dotted, Ts are crossed.
Only problem is the customer in this particular situation, doesn't actually exist. They listed their name. We'll call it ABC company, LLC. There's no ABC company that exists in the state of Nevada, it does not exist. So what you end up with is, possibly suing a fictitious entity and its principle. Maybe you have to allege alter ego. You can see though that now the lawsuit that you, if you're not paid, that you're starting is starting to get more convoluted. And you're starting to add in some wrinkles that maybe could have been addressed at the contract writing stage. Have a valid address and phone number, why? Well, in part to be able to serve 'em with a lawsuit later, if you need to. And two so for just for contact information so that if you're sending a notice that maybe is required into the contract, if you need to show, Hey, I adhere to the contract. I sent an RFI, a request for information. Here's the address I sent it to you. This is the designated address within the contract. If you didn't get it, I'm sorry, but I followed the contract to the letter. Make sure license numbers are on there. Some people do want to have contractors bonding information. So different states require license of bonds. That can be used as a payment remedy as well. So in other words, it's like security. The contractor goes out. If they abandon the project, for instance, then the customer could make a claim against the license bond and say, "Hey, I've been damaged."
Now the license bonds typically are not huge. So it's gonna be a limited recovery, but it's something. If you're drafting a contract for a supplier, you definitely want this information because many times, not always, but many times supplier claims may not be huge. Now I've certainly had some that are in the millions. So it does happen. But if you supplied $15,000 worth of concrete, you didn't get paid, if you know who the, that subcontractors bonding company is, you can go make a claim in many jurisdictions against the bonding surety who issued that bond. And if the bond amount happens to be $15,000, maybe you get paid in whole. And that can be really important. If the contractor, for instance went bankrupt or skipped town, or just has no assets. And again, license numbers and bond numbers should be in there. What to be included in a contract? This is very much jurisdictional dependent. I've kind of mentioned some of these earlier on, but just as kind of a review waiver of mechanics, lien rights here in Nevada you can't do it. Subjecting the contract to the law of other states.
So I left a blank there, cause it'll be depending on where you are so here, we would have a provision that would say subjecting the contract to the law of a state other than Nevada is prohibited. Arizona has a similar provision, not all states do. I would say probably most states don't have that, but be aware of it. Waiver of delay damages, waiver of rights under Prompt Pay Act. Many jurisdictions have now enacted prompt payment acts, which set forth payment requirements in terms of timing. And you cannot waive a party's rights under those prompt pay acts.
So if your state has one, there's a really good chance that it is not waivable. And we kind of talked about consequential damages and pay if paid clauses. Pay if paid, just because that's so important. I wanted to highlight one more time here, very jurisdiction dependent. That's why that's in red on the slide here we're on 13. And the reason being is it's been interpreted as limiting a subconscious ability to get paid for work already done. And it can be viewed this particular case out of Nevada. It was actually used to prevent subcontractors from placing mechanics in its own projects. And so it was ruled as being impermissible. I mentioned pay when paid clauses and it's a timing mechanism.
Again, under prompt payment acts a lot of times there's going to be a clause that was acquires subs to be paid within a particular particular period of time. Here in Nevada by way of example, if the general contractor got paid by the owner within 10 days of receiving payment, the general has to pay the sub. And if that sub gets paid and they have a, a sub to a sub type relationship, they've gotta pay their sub subcontractor within 10 days of being paid. Be aware, this, this gets used in contracts all the time, the use of joint checks. It's a good thing to have as a general rule. Just so in case you're not familiar with it. The joint check rule is, if you endorse a joint check, you're deemed to have received the total amount of payment from the joint check. Now that has caused problems in the past cause I literally saw somebody write a $500,000 check once and they put on every subcontractor they were aware of who worked on a project it was seven people. Handed it over and said you guys fight about who owed what money.
The problem is multiple parties actually signed off on that joint check. And before the law changed here in Nevada, even if they didn't receive a dime outta that joint check, they were deemed to have received the face value. So in that case, if they were owed $500, they were deemed to have received $500,000. It prompted a change in the law here in Nevada. Different states again, this is gonna be jurisdictionally dependent, will handle this in a different way. And so joint checks are very commonly used. There can be limitations for instance, such as using only two parties on joint checks and they have to be in privity, which is the rule here in Nevada. Meaning you can write a joint fund, the general I can write a joint check to the electrical sub and the electrical supplier. I can't write a joint check to the electrical sub and the plumbing supplier. They don't have a contract with one another and so that won't work. Completion is very important. The reason this is typically defined in statute, but if it's not define it in the contract or, and if it is defined in statute, you may wanna still use the definition in the contract itself.
The reason is it starts people's timelines running for recording mechanics' liens. And so it's really important. And as well as for things, other things such as warranty work and things of that nature. Always be aware and this is something you have to determine in your contract if there's multiple buildings, is each building a project or all the buildings put together a single project? That can be determined by your contract. You can contract it out in different ways. The key there is and one of the reasons it's so important is again, time to record a mechanics' lien usually is tied to the end of the project. So if it's a multi-building project, but it's all being done under one contract, the time to record a mechanics' lien may not be until the last building is completed. There were issues that I've seen where that, that came into play for home builders, where they ended up with track homes. Maybe they were building 2000 homes. Well, if I supplied material to home number one, and it was all done under one contract, my time to record a mechanics' lien and enforce it, didn't actually start until home number 2000 was completed. Not what you really want. So you might wanna address that in the contract, there's different types of contracts when we get to that. The fixed price also known as lump sum contracts is the most common. I'm going to build you a building for $1 million. Entire project it is for a price. The thing you have to be concerned about nowadays, and then many of you have probably seen people running into this or price escalation problems.
So you might wanna put in a price escalation clause, and there's a million of them out there. I mean, you can actually just go Google one and we'll come up with some, but some are you know, will say something to the effect like our supply chain has been severely weakened. All bids are subject to review at the time of award and may be subject to an adjustment to reflect any price increases and or lead times from our suppliers. This is typically tied to like a significant increase in material or equipment. You may wanna have a provision in there though that defines what is significant. You might wanna say something to the effect of a, a change in price of material is significant if it's increased by 20%, from the date of the proposal to the date performance. Maybe it's 30%, maybe it's 15, good luck negotiating. A 15% increase that's probably a little low. 20% percent's probably a little low too, but if you had like a 50% increase, that's pretty significant. We've seen that throughout the pandemic, there's issues, right? We've gone from a pandemic to, kind of a war setting in the world. There is always these unknowns that are gonna happen. So having kind of a safety net clause in there, I think is really important. And by the way, if you're a general contractor and you're going to agree to something this like this, you can also cap it. You can say the amount of increase is capped at 10% of the original budgeted price for the item. So that you have some protection as well and a sub doesn't say, well, prices doubled a 100% increase. Maybe you put something in there and says, well that's great. I'm gonna give you a 20% increase, but nothing beyond that. Cause that's what we put in our contract. It's a point of negotiation, but I think it's a point that gets overlooked too many times. Time and material, right? It's for an it's appropriate for an unclear scope. I don't really know what I'm gonna have you do. I've had clients who are kind of on call on the building of a hotel casino. They don't have an overall scope they kind of fill in when something unexpected comes up and the regularly contractor has already used up all their man power they just don't can't get to it. So it results in a daily or hourly rate. You get a reimbursement from the contractors. I don't like just plain old T&M contracts cause they typically can be very expensive if you're the owner or the general, but you can do, you can mix and match, right? You can do a time and material with a GMP guaranteed maximum price. So that says, I'm gonna, I'm employing you to go out there and do this one item on a T&M basis.
But the maximum amount I'm gonna pay you is $50,000. Good for limited scope extras things of that nature, not major portions of a project, just be careful of licensed limitations. It some people have tried to use this as a means of getting around licensing limitations. So if I've got a $50,000 license limit, but I wanna do $200,000 of work on a project. And then I enter into four time and material contracts that typically is not going to work. That's oftentimes referred to as contracts stacking, and it will get you in a lot of trouble with different contractors boards. There are, there's another type called cost reimbursement contracts also known as cost plus. So basically you're reimbursed for the costs. So if you don't know what the cost of something's gonna be, maybe this is something if you're a sub, you wanna use. This way, you could set a, a price for your labor and then you get reimbursed for actual costs. If that's the case, one of the really important things to be aware of is what is gonna be required to verify the costs. Do you need actual receipts, proof of payment all of those things can be used. All of those things should be appearing in the contract. If you don't put it in the contract, it doesn't exist.
Next type of contract is a unit price contract where you divide the project in a separate task and each task is priced individually. Again, be really aware of contract stacking issues because I've seen this happen many times and I've seen boards take a really dim view of it. So you've gotta be really, really cautious. So with regard to like kind of the we've talked about the different types of contracts. When we talk about key provisions, again, the name, your name, the name of whoever you're entering into a contract with. The name of the owner and their contact information, get all this up front. The reason I just, I say that is on the back end. When they're, when disputes arise, people scramble to find this information. If you include it right up front, you'll have it it's easy to find. People are also far more likely to give it to you. So if you're a subcontractor when you say great, here's our subcontract general contractor, I'm entering into it with you. By the way, though I wanna list the owner and the owner's information here. They're gonna be more likely to give it to you when there's no dispute than later on down the road if there is one. And quite frankly, you can tell 'em listen, I just want the information cause I've gotta send my preliminary notice. Now here in Nevada, you have to send a preliminary notice or you don't get a mechanics' lien. And you can actually be disciplined for not sending a preliminary notice. I'm not gonna lie to you. I've never seen anybody actually disciplined, but when subs tell me, "Hey I'm getting a lot of pushback from the general." I tell them, "Hey, you tell the general, here's the statute" "I have to send a preliminary notice" "or I can be disciplined." "If you won't give me the information" "well, maybe I have to report you to the board."
A 100% of the time we've gotten the information. Again, a good description of the work particularly if it's gonna be a longer project, you've gotta have a good schedule and a completion date set. Oftentimes there's going to be issues with the completion date and maybe being tied to liquidated damages. So knowing what that completion date is, is imperative and knowing what the schedule is. So that if there's a schedule bust somewhere, if something happens, there's delays, you would have a good cause of submitted change order. if you're a subcontractor or if you're the general contractor even. If there's a delay on behalf of the owner, that would allow you additional time so that you can complete the contract and meet an amended completion date. Always be aware of termination provisions for cause provisions. You've breached the contract they're gonna terminate you for breaching.
Maybe there's a cure provision. It's not unusual to have a 48 hours 72 hour cure provision in there. That says you have to come out and fix something if you're in breach. The other one to be aware of is for convenience, very, very common in construction contracts, not as common in other con types of contracts though. So this catches like kind of non-construction practice commissioners by surprise sometimes. And this means I can terminate the contract just for my convenience. I don't like you project got canceled. I wanna go with somebody else. I don't really have a good reason, but I'm just gonna terminate anyway, falls under termination for convenience. That provision will say, what do you get paid for? Which is normally you get reimbursed for all of the work you've done up to the point of termination.
But you may wanna have some additional language in there, right? So upon presentation of the termination for convenience, it's effective seven days later, it's effective immediately. It's effective 30 days later, I've seen all of those. I've also seen things that will say you, I'm the general, I'm giving you a notice of termination. You must take steps immediately to terminate all of your other downstream contracts. Oftentimes if you are a subcontractor, cause generals do this all the time. You wanna have, what's called a flow down provision, always incorporate all of your obligations in your contract and put them on your downstream subs or suppliers. So if I'm a sub, cause you would say to your sub to a sub, any obligation I have to the general contractor in our contract, you are, is by incorporation included in our contract and you have to abide by it. Generals, do the same thing and will state any obligation that I have towards the owner subcontractor you have towards the owner and you have towards me. If you're a sub, particularly you want to include those things so that you don't get caught having obligations that you don't have backup for.
Basically this is kind of passing the buck. You're passing along liability. And as far as you can essentially to cover yourself until you're the last person in line. Breach provisions I mentioned times to cure what are the remedies if any?
Acts of God, that's certainly become far more important in today's world. You're gonna have to define what an act of God is. You might state COVID is an act of God. You might wanna state a pandemic is an act of God. This has taken a lot greater importance nowadays and different states have now started there's been a lot of litigation about what is an act of God because of the pandemic. Take a look at your state how's your, your state ruled on what is an act of God or not. And keep that in mind.
Change, order procedures are hugely important. What is subject of a change order and what is not? Oftentimes the only thing that's permitted in a contract is a change order for an extension of time, but not an increase in dollars if there's a delay. If there's some argument, maybe in some jurisdictions, that's not really permitted, but be aware of that. Take a look at that. How do you do it? What's the form. A lot of times contracts will have specific change order forms. Who do you submit it to? How soon do you have to submit it after a change event? Some require within 10 days, some 30, some are silent. Take a look at that.
Indemnification provisions, just be aware. Some states have anti indemnity laws that, basically will state that, If I'm the general, I can't pass along 100% my liability to a subcontractor for my own negligence or my own recklessness. Some states don't. So that is really a jurisdiction by jurisdiction issue and they're treated differently state by state as well. So take a look a careful look at that. We've talked about licenses. Always be aware of any insurance provisions on a project and make sure is in the contract. So it's clear the type of insurance somebody has to have. For some projects, also access to the property will be very important. I've had some clients work for instance, at airports, where there are security concerns. If there's a particular access to property type of procedure, a security procedure that needs to be addressed, make sure that is in the contract as well. If you have a marshaling yard, where is it gonna be? The hours of operation? I obviously I've dealt with hotel casinos. They don't want you in there working when the tours are there. So you're gonna need to be aware of that. I had a contract recently come across my desk that I thought was very interesting, cause I hadn't seen this very often. But they put right in contract that it was anticipated that the scope of work for the subcontractor would not be performed in one smooth scheduling and that it was expected they would have to mobilize to the site demobilize and then remobilize and they specifically said, you do not get extra money for it. So if that's the case, make sure that's in there. Payment terms we've kind of talked about that obviously the total amount of payment. Timing, some states require it within a certain period of time some don't.
Adjustments and change orders. We kind of just talked about that. Conditions precedent, the waivers and that's what I was talking about earlier. The I like the two waiver form where releases have to be given, be given every month, a conditional one for the current month, unconditional for the prior month, that's already been paid. Also make sure you're using the correct forms. Many states will have a statutory form of waiver and release if they don't okay. You might borrow another state's. But check and make sure you're using a proper one. So for instance, here in Nevada, we have a statutory form. I know up in Utah, they have a statutory form. So make sure you're using the statutory form. It's kind of a, if they have a statutory form, there's no reason not to use it cause you can't get it wrong if you're doing what the statute says, it's my attitude. A big one withholding of payment. When can you withhold payment? And what are the statutory rights or obligations of parties? This goes back to the prompt payment acts I mentioned earlier. A lot of those acts will specifically state what you have to do and what notices have to send if you're gonna withhold payment from somebody. So you wanna really be aware of, of what the legal obligations are and kind of incorporate that into the contract.
Finally, I've mentioned some of these contracts don't get signed, but you obviously prefer to have a signed contract. And as general rule, electronic signatures are acceptable. There's both federal law on that. Like the e-sign act as well as a lot of states have adopted that as well. So we've got about five minutes here or so, and I wanted to talk about an issue that comes up fairly often that's dispute resolution. Parties have started kind of they've become a little bit more, I think knowledgeable about the differences between arbitration, mediation, court. The contract is absolutely the place you have to address this. If you don't address it at all, the presumption is you're gonna go to court. It's important clients understand court is not 'Law and Order'. It is not what they see on TV. It's long, it's drawn out. With COVID many states are running years behind trying to clear backlogs of cases that got put on hold. So if you're gonna go to litigation, these are the things that I kind of tell my clients there's benefits, it's structured. You've got a jury, if you want one, I very rarely want a jury cause I'm just afraid I'm gonna put 'em to sleep with construction. There is a right to an appeal which can be important and the filing fee is usually smaller, but it is time-consuming with discovery and things of that nature it's very expensive. And depending upon your state, the judge's experience, may or may not be good. Just in that, you could have a judge whose background is medical malpractice. They don't know mechanics anymore from a hollow ground. If you had a med mal case, man they're perfect it for you.
So with arbitration, you can pick people who have specific experience. And it's important to explain that to them, that you're trying to avoid court. It has to be contractually agreed to unless your court system has rules, which some do that require mandatory arbitration for dollar amounts that are under a certain limit. If it deals with a mechanics' lien, most of the jurisdictions I've operated in say that that will not go to arbitration cause they don't want an arbitrator deciding title to property. So that should remain with the court but double-check your jurisdiction. If you choose arbitration, you'll see I've put on this slide here on the slide 29. Ability to make your own rules in all caps. The reason I do that is this is one of the most underutilized tools I see. So for instance, you can submit something to the American arbitration association where I serve and there's rules. I'm familiar with the rules I'm familiar with construction it's great, but you know what? Maybe you wanna dictate like how fast or how slow the arbitration goes. You wanna dictate how much discovery is or is not gonna be permitted. You can do that. Arbitration is a function of contract.
So if you say in your contract, there will be no written discovery. I as an arbitrator, have no authority to overrule that and say, well we're gonna go ahead and have some, cause I think it's appropriate. I would have to follow what your contract says. If your contract says, it's going to go to arbitration and an award must be granted within 90 days, that is the timeline and different associations, will handle things slightly differently, but they will then find somebody who's got time to have an arbitration within 90 days and get a ruling issued. You can put all that in the contract, but nobody ever does. There's always this natural knee-jerk reaction to just go default to the set rules. Really look at that. It's a real option for you to control the procedure more. And I just think it's, I think it's underutilized. And then of course, obviously once an arbitration is done, it can be reduced to a judgment. Is it less expensive? Hard to say, cause if the arbitration has a lot of discovery, and you are paying for an arbitrator, sometimes it is, sometimes it's not. I do think it's faster. One of the big benefits to me is that you're getting an experience somebody experienced in a specific issue that you need so. With that said, kind of your call.
Mediation, I all, be careful of mediation clauses. Like here in Nevada, we actually have a case that says if mediation was listed as a condition precedent to any dispute binding dispute resolution, then if you don't, we actually had a case go to the Supreme court here where a party skipped mediation, initiated a lawsuit. Summary judgment was granted because they did not treat mediation is a condition precedent. And the court here said the remedy is, is dismissal or granting of a summary judgment. Not staying the action to go back to mediation like oftentimes is done with arbitration. That can have huge impacts if a summary judgment was granted cause that's on the merits. So you may lose a lot rights. I do incorporate mediation clauses in most of my contracts. I think they're useful. It could lead to an early resolution of the matter, particularly if there's gonna be a continued relationship, there's no guaranteed resolution, but just be really, really cautious of that condition, precedent language.
And then finally, we're right at here at the one-hour mark, I'll just end with the final thing I always tell my clients is help yourself and help in by doing and do so by helping your lawyer. Contact your lawyer and I tell clients this right upfront. Talk to me, if you don't talk to me, I don't know what's going on. Tell me everything, the good, the bad, and the ugly it's attorney-client privileged. Okay but if you think by not giving it to me, you're hiding the bad and the ugly. You're not, you're just delaying it. And then it's much harder to deal with down the road. Give me every document you have related to the project. Don't gimme the ones you think are relevant. That's our job as lawyers, right? We'll tell you what's relevant, but give us everything so we can deal with it. And the final one I tell clients is, please if you settle a case, would you tell me, cause I'm gonna keep working on it if you don't tell me you settled. And I've had that happen with a couple of clients who said, "Oh, I settled it the last month" "and you how do you not know?" "Cause you're my client you didn't tell me."
So whether that said, we'll go ahead and wrap up here. Those are kind of the highlights of construction contracts. I hope we've been able to talk about some useful issues that you'll be able to incorporate in the future. My contact information is on the slides. If you have any questions whatsoever, please don't ever hesitate to reach out to me. I'd be happy to bounce ideas around or answer any questions if I can. But with that I hope you have a great day and I hope this provided some useful information.