Dos and Don'ts of Construction Contracts

Credit managers of businesses, especially suppliers, involved in construction projects recieved a lot of valuable advice from James D. Fullerton, Esq. about how to structure contracts and credit applications during a recent NACM teleconference. As an attorney and president of the law firm of Fullerton

Fullerton said that when doing business related to a construction project, it is essential to be fully protected by a well-written contract. However, he mentioned that it still doesn't guarantee that problems will not be encountered. "Contracts are not going to solve all the problems and they're not going to prevent problems. Contract terms are about costs, terms and risks," Fullerton added. "You want to be sure you are one of the first people paid off if there are problems."

One provision that Fullerton recommended putting in sales contracts is one that allows for the payment of a sellers attorneys' fees if there is a late or nonpayment by the debtor. "Just having an attorneys' fees provision will make it more likely they will pay you rather than some other creditor." Another important provision in a contract is a trust fund agreement. In such an agreement, Fullerton said the customer agrees that all funds owed to the customer from anyone or received by the customer, to the extent those funds result from the labor or materials supplied by seller, shall be held in trust for the benefit of seller only. These funds are, therefore, held in trust for their beneficiary, which is the seller. And, pointing to another benefit of trust fund agreements Fullerton said, "It's a terrific defense of a preference case."

Another contract provision recommended is the right to verify funding. This gives the seller the right and opportunity to verify credit and funding before the obligation to ship the products. Fullerton also recommended including a provision in a contract that requires reimbursement of the seller in the event goods have to be stored for a period of time because of construction delays. "It is important to state a storage fee if you have to store goods before delivery. It's very hard to collect any storage fee if the buyer hasn't agreed to it."

Various provisions to limit damages were explained, such as including a contract provision that would limit the amount of damages to an amount equal to the price of the products delivered. He described a situation he encountered where a supplier sued for the value of products delivered to a construction project, which was $1.5 million. The supplier was counter-sued by the project owner for $3 million for damages related to the products allegedly being defective. However, because the supplier had contract provisions that limited liability to the value of the products and also had a contract provision that included reimbursement of legal fees, the project owner then sued the manufacturer of the products instead. "We got our money within 90 days and got out of litigation. That's what limitation of liability clauses will do for you."