Multifamily housing developers and property owners invest significant time and money into site selection, entitlements and financing, but they often give construction contracts far less attention and time than they deserve. Despite the high stakes, it’s not uncommon for developers to hand over a “Frankenstein-ed” AIA contract (a legal agreement covering areas such as costs, timelines and responsibilities) that is stitched together from old deals, then ask their legal counsel for a “quick review” with minimal edits that won’t “kill the deal.”
As a construction litigator, I’ve seen how this shortcut can backfire. When disputes arise, they often trace back to poorly drafted contracts. Even the most “bulletproof” provisions can fail if they’re misaligned, contradictory or taken out of context.
A cautionary parallel comes from Johnny Cash’s song “One Piece at a Time,” where a Cadillac factory worker builds a car from mismatched parts. The result? A dysfunctional, embarrassing mess. Contracts built this way can lead to similar chaos — especially when problems surface at the worst time: project closeout, lease-up or conversion to permanent financing.
The following are some of the potential pain points to watch for when crafting a multifamily housing construction contract:
- Vague wording. Any key terms or industry jargon should be defined in the contract. Imprecise wording may leave the contract’s terms open to interpretation down the road.
- Missing or inadequate clauses. Your construction contract should contain sections covering payments, insurance policies, dispute resolution and how changes will be handled. The latter point is important because uncertainties in how changes are handled may result in unexpected increased costs for the owner/developer.
- Unclear start/completion dates or other inexact timetables. Uncertain timetables may lead to project delays.
- Improper risk allocation. The project developer or property owner needs to make sure their interests are protected. At the same time, putting too much risk on the contractor could lead to future litigation. The best solution is to find a balanced approach that works for all parties.
- Insufficient insurance details. Contracts should specify the types and amounts of insurance each party is responsible for, and what is covered. Questions to ask include: Are the indemnities covered? Is the owner an additional named insured?
- Inconsistent or conflicting provisions. This is a particular risk with the Johnny Cash contract. Such inconsistencies could lead to confusion or, worse, negate the protections the contract was intended to provide. This often surfaces with liquidated damages clauses and waivers of consequential damages that appear to cover similar damages but do not reference the other clause sufficiently enough to establish an order of priority or a course of action if one or the other is later found invalid.
A good multifamily construction contract will include a precise description of the project, a list of documents needed for the project (blueprints, specs.), a schedule of payment terms (spelling out invoicing procedures, due dates and penalties for late payment) and detailed information about the roles and responsibilities of each party involved. Real estate development is a balancing act involving lenders, investors, regulators and contractors — each with different priorities. Contracts are the tool for allocating risk among these parties. But when they’re cobbled together without a clear strategy, they often create more confusion than clarity.
To avoid a Johnny Cash contract, consider these best practices:
- Engage drafting counsel early — before negotiations begin.
- Use term sheets for early deal points; draft the contract later.
- Invest in pre-construction services to refine plans, budgets and schedules.
- Share your goals and risk tolerance with your attorney.
- Choose counsel who understands your project — including financing, investor obligations, regulatory issues and your desired level of design control.
- Plan for worst-case scenarios with built-in off-ramps and dispute resolution paths.
- Ensure key provisions work together — especially around delays, damages, change orders and dispute resolution.
- Use proactive dispute-resolution tools like dispute-resolution boards or neutral decision-makers to resolve issues mid-project.
A well-drafted contract won’t eliminate all risk, but it can prevent small issues from becoming costly, late-stage crises. Or at least it can give you a better vessel in which to navigate an unavoidable dispute with less cost and more certainty. Don’t let your next project ride on a patchwork agreement. Build your contracts with the same care you bring to your developments.
Daniel Wennogle is a partner in the litigation practice group of Womble Bond Dickinson