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Contract Formation in the Construction Industry

Construction Industry

In most contracts, formation is pretty simple: two people exchange promises. Once the contract is formed, the agreement is either performed or breached. But not all contracts are so straightforward.

According to the law, the formation of contracts in the construction industry is slightly different. While all the normal elements of offer, acceptance, consideration, and mutual assent are required, the actions that constitute those elements are unique in the construction industry.

How Construction Contracts Differ

Let’s look at an example. Imagine a business wants to build a new office building.

  1. The first step involves the company sending out a “request for quote” or “request for proposal” to potential builders in order for the builders to submit bids. The law does not recognize this invitation as an offer. In fact, the offer is the actual bid submitted by the builder.
  2. Once the company has collected all the bids, it will accept a builder’s bid by sending them a purchase order. After the work is performed, or perhaps periodically through the construction period, the builder will submit invoices to the company in order to receive payment.

It is often at the acceptance stage of this process where things go wrong. Remember the blog post about emails, where we recommended not using informal language because that might actually form a contract you don’t want? The same thing can happen with construction contracts. You’d be surprised how even the biggest Fortune 500 companies agree to deals worth tens of millions of dollars because of miscommunication.

Often times builders interpret a communication from a company as permission to build and they go ahead and begin working. When the company objects, the builder still expects the company to pay, and a court may even enforce its demand.

Protect Yourself

So how do you avoid getting yourself into trouble, regardless of whether you’re a company or a builder? Make the terms of proper acceptance explicit in your proposal. If you are the builder soliciting bids, make it clear in your request for proposal or quote that the only way in which you intend to accept a bid is through writing, or through the issuance of a purchase order. The same tactic can be applied to builders. In order to protect yourself, state that any offer you make must be accepted through a specific means, such as a purchase order.

Construction contracts can be complex, but they do not have to be intimidating. Let the construction litigation lawyers at the Vethan Law Firm advise you on any construction law issue to help prevent problems before they arise.

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