Commercial Construction Contract Documents
The principal functions of a construction contract are to establish the terms of the construction agreement, such as price, description of the project, commencement and completion dates, warranties, and allocation of responsibilities, and to create a system for building, approving, and paying for the construction.
This chapter contains two forms of commercial construction contracts, form 19-1, for not exceeding a stated guaranteed maximum price, and form 19-2, for a fixed stipulated sum. Each form is designed as a basic form. The contract form specifies construction costs, a description of the property on which the new improvements are to be situated, a description of the plans and specifications for the project, and a completion date for the work.
Each transaction should be examined to determine if additional provisions are necessary. The attorney may also wish to consider including additional provisions relating to such matters as work delays, responsibility for soil condition and design, loan commitment requirements, late charges, and delay damages, which are beyond the scope of this chapter.
§ 19.2Architect and Engineering Services
Forms 19-1 and 19-2 in this chapter are intended to be used for commercial construction projects that are designed by an architect with participation by the architect’s engineering consultants. The term Architect/Engineer as used in the contract designates the design professional for the project.
The statutes applicable to architects and engineers govern the types of design and professional services that may be provided by each. Some professional services may be performed by either an architect or an engineer, including the preparation of site plans and the depiction of building systems. See, e.g., Tex. Occ. Code §§ 1001.0031(d), (e), 1051.0016(b), (c). Certain plans and specifications may be prepared only by a licensed architect or a licensed engineer. See Tex. Occ. Code §§ 1001.0031(c), 1051.703. Some projects may be designed by persons who are not licensed architects or engineers. See, e.g., Tex. Occ. Code §§ 1051.606, 1001.056–.057.
§ 19.3Role of Architect/Engineer
The commercial construction contract (forms 19-1 and 19-2 in this chapter) designates the architect/engineer (“A/E”) as the owner’s representative and anticipates that the A/E will provide design services before construction and contract administration services during the construction phase. As part of the contract administration services, the A/E will, among other duties, carry out the following: give the notice to proceed, approve payment applications from the contractor, respond to submittals and requests for clarification, review the contractor’s construction schedule, determine whether delay is excused, approve or make reasonable objection to proposed subcontractors, review the contractor’s draw requests for payment, determine whether the project is substantially complete, prepare the list of correction items required (punch list) for final completion, determine whether to recommend the owner’s final payment, and receive information and documents on behalf of the owner, such as lien releases and affidavits of bills paid. The A/E is designated in the contract as the initial decision maker for claims made by the owner or the contractor.
The contract administration services specified in the contract are typical of those in industry-standard forms, such as American Institute of Architects construction contracts. However, the A/E is not a party to the construction contract. Therefore, the terms of the architect’s contract should be made consistent with the A/E provisions in forms 19-1 and 19-2. Alternatively, the architect’s contract can be drafted to incorporate the provisions of forms 19-1 and 19-2 by reference in describing the A/E’s obligations.
Three basic price structures are used in construction contracts.
Lump sum or stipulated sum is the simplest type of contract price. The contractor reviews the plans and specifications for the project and contractually agrees on a fixed price for the work. Unless the parties agree to change this stipulated amount, this will be the amount paid by the owner.
A unit price contract establishes a price for a given unit of work (for example, $13 per square yard of asphalt paving).
A cost-plus arrangement establishes the price to the owner based on the actual cost of the work plus a certain percentage of profit for the contractor. In cost-plus guaranteed-maximum construction contracts, the contractor guarantees that the cost to the owner will not exceed a maximum price.
§ 19.4:1Guaranteed Maximum Price
Form 19-1 provides for its contract price to be the sum of the actual cost of the work, plus the contractor’s fee, but not to exceed a stated guaranteed maximum price (“GMP”). Section F. of the contract specifies the types of construction costs that are reimbursable as the cost of the work. Paragraph F.5. requires the contractor to provide a schedule of values for the owner’s approval. The approved schedule of values will be used to determine progress payments, as provided in section J. The contract price, allowances, contractor’s contingency, owner’s contingency, and the amount of liquidated damages, if required by the owner, are to be set out in exhibit C of the contract.
Form 19-2 provides for its contract price to be a fixed price (the stipulated sum). As with form 19-1, this form of construction contract sets out in section F. the types of construction costs that are included within the stipulated sum. This is done to illustrate the type of construction costs included, for example, demolition costs, to permit the parties to confirm the scope of the work. Paragraph F.4. requires the contractor to provide a schedule of values for the components of the work. The schedule of values will be useful for the A/E and owner to confirm the progress of construction and in approving progress payments. Exhibit C of form 19-2 sets out the contract price and permits the parties to establish allowances and liquidated damages for unexcused construction delay.
Changes to the scope of a project should be documented through the use of a change order, form 19-13 in this chapter.
Sales taxes are the responsibility of the owner unless the contract provides for a stipulated-sum price, in which case the cost is the responsibility of the contractor as the consumer. Tex. Tax Code § 151.056.
If the contractor manufactures or produces and also places ready-mix concrete into the property, the concrete must be separately billed, with tax on the materials paid by the owner. Tex. Tax Code § 151.056(g).
Workers’ compensation laws apply to employer-employee relationships but not to independent contractors. Tex. Lab. Code §§ 406.121–.123.
Both property and liability insurance should be obtained by the contractor to insure the project, and the cost should be factored into the contract price.
Water and electricity should be provided to the lot line by the owner. If they are not, the contract should allocate the additional cost of obtaining service.
A survey should be performed before the commencement of construction, at the owner’s cost.
§ 19.4:4Construction Trust Fund Statute
The Texas Construction Trust Fund Act (Texas Property Code sections 162.001–.033) states that contractors agreeing to do more than $5,000 worth of work must put the owner’s funds for each such job in a “construction account” at a financial institution. Tex. Prop. Code § 162.006. The general contractor becomes a trustee for the funds received from the owner for the benefit of the subcontractors and suppliers on the project. Tex. Prop. Code § 162.003. The builder’s profit on a cost-plus contract is not considered a trust fund. Tex. Prop. Code § 162.001(c). Misuse of trust funds of $500 or more with intent to defraud is a third-degree felony. Failure to establish or maintain a construction account in violation of section 162.006 or 162.007 is a class A misdemeanor. Making a false affidavit that the contractor has paid the project bills is a class A misdemeanor with a possible penalty of up to one year in jail, a $4,000 fine, or both, and personal liability for loss or damage resulting from a false statement. Tex. Prop. Code §§ 53.085(d), (e), 162.032.
The attorney should also be familiar with the law of involuntary mechanic’s liens. See chapter 21 in this manual.
§ 19.4:5Owner Liability to Mechanic’s Lien Claimants and Owner Retainage or Reservation
The perfection of involuntary mechanic’s liens is covered in chapter 21 in this manual. Before contracting for residential construction, owners should become familiar with their potential liability for mechanic’s liens. Owner liability for properly noticed and filed subcontractor and supplier mechanic’s liens is the sum of two amounts described in Tex. Prop. Code § 53.084. First, an owner is liable for the 10 percent statutory retainage (or reservation, for original contracts entered into on or after January 1, 2022) owners are required to withhold from payments to the original contractor on every construction project. Tex. Prop. Code §§ 53.101–.103; Page v. Structural Wood Components, 102 S.W.3d 720 (Tex. 2003). In addition, an owner is liable for “fund trapping,” which means “trapping” or withholding remaining contract funds otherwise owed to the original contractor.
For original contracts entered into before January 1, 2022, withholding contract funds is required when the owner receives a mechanic’s lien notice letter containing language telling the owner to withhold payment from the contractor for the claim amount. Tex. Prop. Code § 53.056(b), (d). For original contracts entered into on or after January 1, 2022, withholding contract funds is required when (1) the owner receives a notice of claim for unpaid labor or materials or (2) the owner receives a notice of claim for unpaid retainage. Tex. Prop. Code §§ 53.056, 53.057. These newer notices (for contracts entered into in 2022 or later) are promulgated forms that contain language telling the owner to withhold payment from the contractor for the claim amount. See Tex. Prop. Code §§ 53.056, 53.057. Chapter 21 in this manual provides these newer notices as forms 21-18 and 21-20. If an owner receives a lien notice letter (for contracts entered into before 2022) or one or both of the newer notices containing the required fund-trap warning and fails to withhold payment from the contractor, the owner is personally liable and the owner’s property is subject to a lien for amounts paid after receipt of the notice. This fund-trapping liability is in addition to the owner’s liability for the 10 percent statutory retainage or reservation. Consequently, to protect the owner in case involuntary mechanic’s liens are asserted, the owner must do two things: (1) retain or reserve, whichever applies, 10 percent of the adjusted original contract price throughout the duration of the project and for the time after completion provided for lien claimants to file mechanic’s liens and (2) withhold the proper amount of undisbursed funds (“trapped funds”) from the contractor if a lien notice or either of the newer notices, whichever applies, is received from subcontractors or suppliers. Tex. Prop. Code §§ 53.081, 53.084, 53.101. If an owner fails to withhold the statutory retainage or reservation, the owner is nevertheless liable for the amount that should have been withheld.
Time for Withholding Statutory 10 Percent Retainage or Reservation: To protect themselves from mechanic’s lien claimant liability, owners should withhold payment of statutory retainage or reservation for at least the time allowed for claimants to file lien affidavits. Tex. Prop. Code § 53.057. This period of time is discussed in chapter 21 in this manual.
Owner Failure to Withhold 10 Percent Retainage or Reservation: If the owner fails to withhold statutory retainage or reservation, the claimants are entitled to perfect their claims by notice and affidavit within the longer deadlines described above (i.e., the fifteenth day of the third month following the last month of work or delivery). For original contracts entered into before January 1, 2022, no thirty-day or forty-day deadlines, under Tex. Prop. Code § 53.057(f), are applicable if the owner fails to withhold the statutory retainage.
Summary of Owner Reservation Withholding Period on Commercial Projects: In summary, for commercial projects, owners are liable to hold reserved funds for the longer lien-filing period provided by Tex. Prop. Code § 53.052, meaning the fifteenth day of the third month following the last month of work or delivery completing the project. See the chart at section 21.9:2 in this manual.
Commencement of construction is defined at section A.7. of the commercial construction contract to be the date on which a notice to proceed is delivered by the “Owner Rep” to the contractor. The inception date of a statutory mechanic’s lien is the date that construction begins or materials are first delivered. Tex. Prop. Code § 53.124. The owner and the original contractor may jointly execute and file an affidavit of commencement with the county clerk of the county in which the land is located. Tex. Prop. Code § 53.124(c). See form 19-12 in this chapter. An affidavit of commencement is prima facie evidence of the date of the commencement of construction and fixes the date of inception of the involuntary mechanic’s liens filed relating to the construction. Tex. Prop. Code § 53.124(d).
The affidavit should be executed and recorded within thirty days after the date of actual commencement of construction or delivery of materials. Tex. Prop. Code § 53.124(c). The owner and the contractor should not execute this affidavit at the closing of the construction loan lest a delay in recording cause the affidavit to reflect a commencement date before the recording date. The owner and the contractor should execute and record the affidavit promptly after the construction loan documents have been filed and construction has actually commenced.
Change orders occur on agreement by the owner and the contractor (sections A.5., “Change Orders,” and K.1., “Guaranteed Maximum Price and Contract Time” or “Contract Price and Contract Time” of the commercial construction contract). If the parties cannot agree on the adjustment to the contract price, the owner may require the contractor to proceed with the work by a written required change signed by the owner, in which case the contract price will be adjusted on a time and materials basis. Agreement may be documented by form 19-13 in this manual, the change order, which documents amendments to the commercial construction contract that may change the plans and specifications, adjust the contract amount, or alter the completion date.
In the commercial construction contract forms in this chapter, “Excused Delay,” defined at section A.15. of form 19-1 and section A.14. of form 19-2, combined with section G.1., “Construction Schedule,” and section N.6., “Damages for Owner’s Delay,” extend the completion date. Unexcused delays caused by either party can be made the subject of monetary penalties. See the construction contracts at section N.4., “Damages for Contractor’s Unexcused Delay”; section N.3.b.iv. and exhibit C, “Liquidated Damages”; and section N.6., “Damages for Owner’s Delay.” The contract price of the project may be adjusted for “Concealed Conditions,” defined at section A.8. and addressed at section C.6., “Reporting Concealed Conditions.”
The owner walk-through is intended to produce a punch list of items the owner wants completed or corrected by the contractor; see section J.6., “Final Payment.” Acceptance of work occurs only after inspection and approval by the owner; see section J.6. and section J.10, “Withholding Payment,” paragraph a, “Defects.” Evidence of completion must be provided by the contractor to the owner.
“Substantial Completion,” defined in section A of the construction contract, occurs when the improvements have reached the stage at which they are usable for the purposes intended, all governmental approvals have been obtained, and only minor or cosmetic work remains to be completed.
The owner may file an affidavit of completion with the county clerk of the county in which the property is located. See form 19-14 in this chapter. Completion is defined not as “Substantial Completion” as used in the contract but as “the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty work or replacement or repair of the work performed under the contract.” Tex. Prop. Code § 53.001(15). An affidavit of completion meeting the requirements of section 53.106 constitutes prima facie evidence of the date of completion. Tex. Prop. Code § 53.106(d).
If the affidavit is filed following the tenth day after the date of completion, the date of completion is presumed to be the date of actual filing. Tex. Prop. Code § 53.106(d).
For original contracts entered into before January 1, 2022, the owner must send a copy to the original contractor not later than the date the affidavit is filed and to each claimant who has sent the owner a notice of lien liability, not later than the date the affidavit is filed or the tenth day after the date the owner receives the notice, whichever is later. For original contracts entered into on or after January 1, 2022, the owner must send a copy to the original contractor and to each claimant who has sent the owner a notice of lien liability, not later than the third day after the date the affidavit is filed or the tenth day after the date the owner receives the notice of lien liability, whichever is later.
The owner must also furnish a copy of the affidavit to any person who furnished materials or labor for the construction and requests a copy. For original contracts entered into before January 1, 2022, the affidavit must be furnished not later than the date the affidavit is filed or the tenth day after the date the request is received, whichever is later. Tex. Prop. Code § 53.106(c). For original contracts entered into on or after January 1, 2022, the affidavit must be furnished not later than the date the affidavit is filed or the tenth day after the date the request is received, whichever is later. Tex. Prop. Code § 53.106(c).
Independent contractor status of the contractor reduces the risk of owner liability. Exxon Corp. v. Quinn, 726 S.W.2d 17, 19–20 (Tex. 1987). To help preserve the contractor’s independent contractor status, the owner’s control over the performance of the work should be limited.
Responsibility for the foundation is one of the most important risk allocation issues in a construction contract. Usually, the party who has the most control over the design of the foundation bears the responsibility for its performance.
§ 19.5Lien Wavers and Bills-Paid Affidavits
Forms 19-6 through 19-8 (referred to as exhibits G through I in the construction contract) together with Form 19-11 (referred to as exhibit L in the construction contract) in this chapter are statutory forms required for lien and bond claim waivers to document final or interim acknowledgment of payments.
The forms must be used verbatim, in lieu of any other form of lien release associated with construction payments. However, if a mechanic’s lien affidavit has already been filed in the real estate records, the form of release does not have to conform to these forms. Tex. Prop. Code §§ 53.281–.287. Blanket advance releases of all mechanic’s lien rights of the contractor should be enforceable, if expressly stated in the construction contract and if the contract is executed before commencement of any work. Tex. Prop. Code § 53.282(a)(3).
The contractor, on request by the owner and as a condition of payment to the contractor, must provide the owner an affidavit stating that all of the contractor’s subcontractors, laborers, and materialmen have been paid or identifying those not paid. See forms 19-4 and 19-9 in this chapter, “Contractor Bills-Paid Affidavit” and “Contractor [Final] Bills-Paid Affidavit,” respectively (referred to as exhibits E and J in the construction contracts). The affidavit may include representations regarding bills to be paid with the funds received and indemnity provisions. Tex. Prop. Code § 53.085. See forms 19-5 and 19-10, “Subcontractor Bills-Paid Affidavit” and “Subcontractor [Final] Bills-Paid Affidavit,” for forms of affidavit for execution by subcontractors, referred to as exhibits F and K in the construction contracts. A bills-paid affidavit must be signed by the general contractor as a condition for final payment. Tex. Prop. Code § 53.259.
There are significant penalties, both civil and criminal, for the making of false affidavits. The penalties may include a $4,000 fine, confinement in jail for a period not to exceed one year, or both, and personal liability of the person signing the affidavit for any loss or damage resulting from the false statement. Tex. Prop. Code §§ 53.085(d), (e), 53.259(c), (d).
§ 19.6Payment and Performance Bonds
The owner may require the contractor to provide payment and performance bonds by designating the requirement on exhibit D of the contract, form 19-3 in this chapter (“Insurance and Bond Requirements”).
The insurance requirements for the owner; contractor; and, if applicable, subcontractors are to be set out in exhibit D, form 19-3 in this chapter (“Insurance and Bond Requirements”), which contains sample insurance specifications and bond requirements. See the discussion of types of insurance and their use in construction projects in chapter 17 in this manual.
Chapter 151 of the Texas Insurance Code prohibits an indemnity in a construction contract, or in an agreement collateral to or affecting a construction contract, to the extent that it requires an indemnitor to indemnify a party, including a third party, against a claim caused by the negligence or fault, violation of a law, or breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier. Tex. Ins. Code §§ 151.102–.103. A provision in a construction contract that requires the purchase of additional insured coverage is void to the extent that it requires coverage that is prohibited under subchapter C of chapter 151.
The contracts contain at section R. two indemnities: the first is for claims other than employee claims, which is a “limited-form indemnity,” and the second is for employee claims, which is a “broad-form indemnity” as limited by chapter 151 of the Texas Insurance Code. See the discussion of these concepts in chapter 17 in this manual.
Sections M. and N. contain the default and remedies provisions. Paragraph N.7. also includes a waiver of consequential damages as an optional provision. Before selecting the liquidated damages option or determining the liquidated damages amount, the practitioner should consider the enforceability of such clauses. See Phillips v. Phillips, 820 S.W.2d 785, 789 (Tex. 1991); Garden Ridge, L.P. v. Advance International, Inc., 403 S.W.3d 432, 440 (Tex. App.—Houston [14th Dist.] 2013, pet. denied). In Garden Ridge, L.P., the court described the test set out in Phillips as follows:
“The test for determining whether a provision is valid and enforceable as liquidated damages is (1) if the damages for the prospective breach of the contract are difficult to measure; and (2) the stipulated damages are a reasonable estimate of actual damages.” Chan v. Montebello Dev. Co., No. 14-06-00936-CV, 2008 WL 2986379, at *3 (Tex. App.—Houston [14th Dist.] July 31, 2008, pet. denied) (citing Phillips, 820 S.W.2d at 788). Further, we stated:
In order to meet this burden, the party asserting the defense is required to prove the amount of the other parties’ actual damages, if any, to show that the liquidated damages are not an approximation of the stipulated sum. If the liquidated damages are shown to be disproportionate to the actual damages, then the liquidated damages must be declared a penalty. . . .
Id. at *3–4 (citations omitted).
Garden Ridge, L.P., 403 S.W.3d at 440.
Also, liquidated damages must be in lieu of and not coupled with or in addition to actual damages. A contract provision that “fixes liquidated damages without excluding additional liability for actual damages is not a reasonable forecast of just compensation and therefore a penalty.” Phillips, 820 S.W.2d at 789.
Paragraph J.10. authorizes the owner to withhold payment based on conditions that could result in loss or damages to the owner as long as the conditions remain uncured. The practitioner should consult the provisions of chapter 28 of the Texas Property Code, requiring prompt payment to contractors and subcontractors.
The contractor’s warranties are set out in section P. In addition to the customary one-year warranty against defects in labor and materials, section P. expressly provides a ten-year warranty on structural components, including the foundation.
§ 19.10Choice of Law and Venue
If a contract that provides for the construction of new improvements to real property located in Texas contains a provision making the contract or any conflict arising under the contract subject to the laws of another state, to litigation in the courts of another state, or to arbitration in another state, that provision is voidable by the party obligated to perform the construction. Tex. Bus. & Com. Code §§ 272.001–.002.
§ 19.11Instructions for Completing Forms and Inclusion of Exhibits
Each of the two forms of commercial construction contract in this chapter include exhibits A through C as part of the form. For efficiency, the additional exhibits D through O referenced as attachments in the contracts are included in this chapter as the following separate forms:
Form 19-3 Exhibit D (“Insurance and Bond Requirements”)
Form 19-4 Exhibit E (“Contractor Bills-Paid Affidavit”)
Form 19-5 Exhibit F (“Subcontractor Bills-Paid Affidavit”)
Form 19-6 Exhibit G (“Conditional Partial Release During Construction”)
Form 19-7 Exhibit H (“Unconditional Partial Release During Construction”)
Form 19-8 Exhibit I (“Conditional Final Release”)
Form 19-9 Exhibit J (“Contractor [Final] Bills-Paid Affidavit”)
Form 19-10 Exhibit K (“Subcontractor [Final] Bills-Paid Affidavit”)
Form 19-11 Exhibit L (“Unconditional Release on Final Payment”)
Form 19-12 Exhibit M (“Affidavit of Commencement”)
Form 19-13 Exhibit N (“Change Order”)
Form 19-14 Exhibit O (“Owner Affidavit of Completion”)