It was supposed to be their dream home. But six months after moving in, the Fitzgeralds noticed water stains on their dining room ceiling which worsened into leaks. The contractor who built it insisted the roof warranty had expired. After threatening legal action, the Fitzgeralds paid thousands out of pocket to repair defective roof work the warranty should have covered.

Situations like this are all too common when key contract provisions meant to allocate liability aren’t properly handled. Construction delays, disputes, and defects can quickly derail a project, resulting in serious financial consequences like liens, lawsuits, and damaged reputations. As an attorney advising construction clients, you have the power to prevent such nightmares.

Three provisions that deserve special attention are indemnification clauses, liquidated damages, and warranties. Negotiate these sections carefully, and you can avoid major headaches down the road.

Indemnification Clauses: Defining Responsibilities

Indemnification clauses allocate financial responsibility should something go wrong on a project. A good indemnification clause clearly defines each party’s risks and liabilities. Without clear specificity, your client could end up on the hook for damages way beyond their agreed-upon role.

Aim to spell out each party's responsibilities precisely. For example, a subcontractor could indemnify the general contractor for issues stemming directly from their work. Go beyond just general references to “expenses” or “loss” by listing specific covered events.

In many cases it is also fair to make indemnification reciprocal between parties. The more involved that the owner is with construction, the more appropriate it is for the contractor to demand mutual indemnification. Limit overbroad clauses that make your client liable for every possible incident.

You can also carve out exclusions for liability arising from negligence by other parties. In addition, most states have anti-indemnity statutes that provide that an owner, contractor, and/or design professional may not be indemnified for either their negligence or sole negligence and that such indemnities are void when included in construction contracts. Anti-indemnity statutes vary by state and best practice is to consult the relevant statute(s) before drafting or negotiating an anti-indemnity clause.

Liquidated Damages: Setting Reasonable Sums

Liquidated damages are a specified dollar amount the contractor pays if it delays project delivery. These clauses help quantify damages upfront instead of leaving it up to a court’s judgement later, exposing the responsible contractor to liability for all damages incurred by the owner because of the delay. But the amounts must be reasonable and proportionate.

Liquidated damages provisions often require the contractor to make a per diem payment for each day the project is delayed. To build a solid liquidated damages provision, thoroughly assess potential losses if the project goes south. Consider extra costs to complete work, rental expenses, and lost revenue. Explain your estimate in a justification document, knowing unrealistic sums can be deemed unenforceable down the line.

Also, beware of setting liquidated damages so high that they become punitive in nature. Courts frown on disproportionately large sums clearly designed to strong-arm compliance, not compensate for actual losses.

Warranties: Managing Defects and Claims

Warranties provide assurance that any defects discovered within a set time frame will be remedied by the contractor. But vague warranties can create headaches for your client down the road. To optimize these provisions, dig into the details.

Clearly delineate which types of warranties are being provided. Express warranties directly state assurances like “the roof will be free of leaks for 2 years.” Implied warranties don’t state the promise outright but are implied by operation of law. Most states impose an implied warranty of workmanlike construction, whereby a contractor must provide work of good quality, in conformance with the construction contract and free of defects. For a home, most courts will find an implied warranty of habitability. Finally, many states impose statutory warranties on new home construction.

Set definite scopes and durations for any express warranties. A warranty extending to “all aspects of work” is ambiguous. Instead, list specific components covered, like electrical systems, plumbing, foundations, etc. Set reasonable warranty periods for each - a year for finishing work, electrical/HVAC systems, or major structural elements. In addition, many construction contracts specifically disclaim and waive implied warranties. These waivers and disclaimers are more likely to be enforced if they are typed in capital letters and bold face type.

For claims, outline precise notice procedures and reasonable deadlines for the contractor to inspect and remedy issues. Limit vague “reasonable time” language by stating exact response times like 14 calendar days. Reasonable exclusions like normal wear-and-tear or improper maintenance can also be detailed to prevent unfair warranty claims.

With indemnification, liquidated damages, and warranties, the devil is in the details. Carefully crafted contract language clarifies responsibilities, so your clients avoid costly construction liability pitfalls. Your clients will rest easier knowing their risks are contained.