DRAFTING CONSTRUCTION CONTRACTS IN COLORADO

The foundation of any construction project is the contract. Contractual agreements allow the parties to allocate risk and control costs. Negotiating a good agreement begins with selecting the right type of contract for the project and ensuring that it contains the necessary language to protect your interests.

TYPES OF CONSTRUCTION CONTRACTS

WHAT ARE THE PROS AND CONS OF DIFFERENT TYPES OF CONSTRUCTION CONTRACTS?

• Stipulated Lump Sum Contracts. This most basic of price arrangement provides a fixed price for an entire project.
  • Pros: Makes it easy to compare bids.
  • Cons: May give contractor incentive to cut corners.
• Time and Materials Contracts. This contract bills material costs and labor at an hourly rate and is a good option when the scope of a project is unclear.
  • Pros: Reduces risk for contractors.
  • Cons: Increases risk for owners.
• Cost-Plus Contracts. The owner pays the contractor the actual cost of the project plus an agreed-upon profit. This type of contract is helpful in cases where the owner anticipates many change orders.
  • Pros: May be budget friendly for owners because of the predictability of costs. May give the parties clarity on who pays what and reduces the risk of disputes over “markups.”
  • Cons: Owners will not know the total costs going in. Contractors make their profit visible to the owner, therein inviting more negotiation up front about how much they should be paid.
• Guaranteed Maximum Price Contracts. This contract sets an upper limit on costs, with the contractor being responsible for overruns.
  • Pros: Prevents out-of-control costs for owners and lenders.
  • Cons: Parties must be sure of contract scope or risk running out of cash.
• Unit Price Contracts. Projects may be divided into fixed costs units, with each unit billed separately by contractors.
  • Pros: Flexible for all parties.
  • Cons: Owners will not know the total costs ahead of time.

CONSTRUCTION CONTRACT CLAUSES IN COLORADO

“To create a pay-if-paid clause in a construction contract, the relevant contract terms must unequivocally state that the subcontractor will be paid only if the general contractor is first paid by the owner and set forth the fact that the subcontractor bears the risk of the owner’s nonpayment.”

Main Elec., Ltd. v. Printz Servs. Corp., 980 P.2d 522, 528 (Colo. 1999).

The parties to a contract will negotiate most of its terms, but Colorado law does regulate some aspects of construction contracts.

1. Mechanics Lien – No Lien Clauses. Under Colorado law, any term of a contract that seeks to limit another parties’ ability to make claims or liens is unenforceable and void, unless the parties affected unequivocally agree to waive liens. C.R.S. 38-22-119. However, a lien waiver will be strictly construed by the court.
2. Contingent Payment Clauses. These clauses involve three levels of payment: Party B only pays Party C once Party A has paid B. Because of the risk involved for C, Colorado law requires contracts including this type of clause to be perfectly and unequivocally clear about the contingency. See Main Elec., Ltd. v. Printz Servs. Corp., 980 P.2d 522, 528 (Colo. 1999).
3. Prompt Payment Clauses. While Colorado law requires prompt payment for contractors on public works projects, the rule does not extend to private party contracts. Therefore, every private construction contract should set forth the timing of payment and interest penalties.
4. Retainage Limits. The parties to a construction contract may agree that the project’s owner will retain a portion of the payment due to a contractor until the completion of the project. Historically, retainage would be set at 10%. However, Colorado enacted a retainage law in 2021 that limits the amount held back to no more than 5%. The law exempts contracts between private owners and contractors for construction of single-family dwellings or small multi-family dwellings.
5. Indemnification. The parties to a construction are financially responsible for their own negligence and cannot have another party indemnify them for such negligence. For more information, see C.R.S. 13-21-111.5(6).

ELEMENTS OF A WELL-DRAFTED CONTRACT:

• Provides Incentives to encourage contractors to work efficiently
• States Expectations clearly and explicitly
• Provides Contingencies for unexpected challenges

CONTACT A CONSTRUCTION CONTRACT ATTORNEY TODAY

If you need a contract reviewed or drafted, or are in a construction dispute, the team at Volpe Law, LLC, can help. Call our offices today or contact us online to request a free consultation.

DISCLAIMER

The information contained on this website is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter. Laws frequently change and therefore this content is not necessarily up to date, nor comprehensive. Contact us or another attorney with any legal questions specific to your matter. You may request a consultation by completing our consultation request form.