Construction Law and Legal Definition

Construction, involving any improvement or alteration to real property (“real estate”), including demolition work to clear a site, is subject to all of the principles and doctrines of law, under the broad, general classification of Construction Law. The basic principles of law and equity affecting real property have evolved from a broad body of basic laws, regulations, standards, practices, custom, usage, codes and technology.

Construction law may embody improvements of all sizes and complexity from basic, residential work, to enormous, complex projects of hydroelectric impoundment and generation, city planning, and mass transportation. While construction law cuts across a broad spectrum of laws, it is still closely interrelated with many of the traditionally recognized principals and doctrines of the law, including: real property, contracts, torts, business organizations, labor, tax, and (possible) conflicts of laws.

Contract terms and definitions in construction contracts are very important, because they eliminate ambiguity and misunderstanding; they also govern the specific understanding and agreement of the parties to the contract, and provide the framework for interpretation and resolution of construct contract claims under the laws of each state.

Additional Definitions

Construction

Many successful small businesses decide to expand their operations either by purchasing, leasing, or building a new facility. In some instances, the business in question relocates its entire operation to the new facility. In other cases, the business may use the new facility to house excess inventory, maintain equipment, relieve office overcrowding, or open a new store.

For those companies that decide to expand via new construction, the experience can be an unsettling one, full of uncertainties. In fact, relatively few start-up businesses choose construction as their mode of entry due to the higher costs associated with it and the greater length of time involved from the breaking ground stage to the day when the establishment opens its doors for business. Established small- and mid-sized businesses are likely to be in a better position financially to launch a new construction project. Such firms have a proven track record—which can help them with financing—and already-productive operations that bring in revenue that can be used to defray the costs of construction.

A full assessment of the advantages and disadvantages of new construction should be undertaken before any decision is made to build new. Designing and building a new facility has the advantage of providing a company with exactly the space and arrangements to meet its needs. The obvious disadvantages are the delay in occupancy while land acquisition, design work, and building are going on, and the cost of overruns, common in large projects. Oversight responsibilities are essential but can also be very time consuming and distract from the primary business of a company.

Certainly, there are risks associated with construction. But for small- and mid-sized business owners that choose this method of expansion and/or growth—and plan wisely before, during, and after the construction phase—it can also mark the beginning of a bright new chapter in the company's history. A well-designed and built property can allow a company to generate additional revenue, reduce expenses, and/or increase efficiency.

SECURING A BUILDING CONTRACTOR

Some sources of potential building contractors include professional association databases, referrals from architects or fellow small business owners, and a competitive bidding process. "It is important to find a contractor that can build in your specific industry, whether it's a restaurant, health care facility, industrial plant, or technology center," Amanda Strickland wrote in the Dallas Business Journal. "Contractors tend to have niches."

A small business owner seeking to secure a good building contractor should concentrate on three factors:

  • The contractor's reputation in the community.
  • The financial condition of the contractor.
  • The status of currently uncompleted jobs by the contractor.

There are many warning signs to watch for when assessing potential contractors. Is the contractor known for subcontracting out large percentages of the total construction work? Does the contractor have a history of clashes with subcontractors? How long has the contractor done business in the area? What percentage of jobs does she complete on schedule? Does his previous work experience adequately match the sort of renovation or construction that your company needs? Does the contractor have a backlog of projects that could hurt her ability to meet your timetable? What sort of references can he provide? The answers to all of these questions can be either reassuring or cause for further investigation. In either case, the key is to make sure that you ask them.

One way in which small business owners can learn the answers to some of these questions is by requiring bidding contractors to submit a surety bond, which is basically a three-party contract between the contractor, the project owner, and the underwriting surety company. Surety companies will make an extensive review of the construction company before issuing such a bond. In addition, if the contractor signs the bond, he is basically guaranteeing his ability to complete the project on which he is bidding.

MONITORING THE CONSTRUCTION PROCESS

After the bidding process is completed and the building contract awarded, the successful contractor should be asked to provide a performance bond. Such a bond guarantees that the project's contractual provisions will be carried out. In addition, a payment bond should be secured which certifies that suppliers and subcontractors will be paid. Ensuring that the contractor and all of his subcontractors have adequate insurance (workers' compensation, general and umbrella liability, equipment, builders' risk, etc.) to address problems is another key to attaining peace of mind for the small business owner. Finally, the project owner needs to make sure that he or she continuously monitors the performance of the contractor.

SEE ALSO Buying an Existing Business; Comprehensive Environmental Response Cleanup and Liability Act

BIBLIOGRAPHY

Bolles, Dennis. Building Project Management Centers of Excellence. AMACOM Division of the American Management Association, April 2002.

Campbell, Melissa. "10 Steps Towards Getting the Right Contractor." Alaska Business Monthly. August 2002.

Lorenz, Daniel E. "Reduce Construction Risk with Management Systems." Memphis Business Journal. 20 October 2000.

Strickland, Amanda. "Choosing the Right Contractor for Your Project." Dallas Business Journal. 7 April 2000.

Hillstrom, Northern Lights

updated by Magee, ECDI