CEP Contract Documentation & Legal Considerations 4 — Questions and Answers
Question 1: When a contract contains a 'pay-when-paid' clause in a subcontract, the general contractor:
- Must pay subcontractors within 7 days regardless of owner payment
- May delay subcontractor payment until the GC receives payment from the owner for that work (Correct answer)
- Must escrow all subcontractor payments in a trust account
- Is required to provide the sub with direct owner contact information
Correct answer: May delay subcontractor payment until the GC receives payment from the owner for that work
A pay-when-paid clause conditions the GC's obligation to pay subcontractors on first receiving payment from the owner, though enforceability varies by state.
Question 2: A 'mechanic's lien' filed on a construction project serves what primary purpose for unpaid contractors or suppliers?
- Forces the general contractor into bankruptcy
- Creates a security interest in the property to help ensure payment for labor and materials furnished (Correct answer)
- Requires the owner to replace the general contractor
- Stops all work on the project immediately
Correct answer: Creates a security interest in the property to help ensure payment for labor and materials furnished
A mechanic's lien encumbers the property title, giving unpaid contractors and suppliers a legal claim against the real estate to secure payment.
Question 3: In estimating for a cost-plus-fixed-fee (CPFF) contract, what cost risk does the contractor bear?
- All cost overruns because the fee is fixed
- Minimal cost risk since the owner reimburses allowable costs plus a fixed fee (Correct answer)
- Risk only on material price escalation
- Risk only on labor productivity losses
Correct answer: Minimal cost risk since the owner reimburses allowable costs plus a fixed fee
Under CPFF contracts, the owner bears the cost risk because the contractor is reimbursed for all allowable costs; the contractor's risk is limited primarily to scope of work and indirect cost allocation.
Question 4: Which document formally incorporates all contract documents into a single legally binding agreement?
- The notice of award
- The agreement (e.g., AIA A101 or similar owner-contractor agreement) (Correct answer)
- The invitation to bid
- The contractor's proposal
Correct answer: The agreement (e.g., AIA A101 or similar owner-contractor agreement)
The owner-contractor agreement (such as AIA A101) is the primary contract document that lists and incorporates all other contract documents by reference.
Question 5: What is the significance of the 'date of commencement' in a construction contract?
- It determines when the contractor must submit the first pay application
- It is the starting point from which the contract time is measured for calculating substantial completion (Correct answer)
- It triggers the architect's construction administration fee
- It establishes when the contractor's liability insurance must be purchased
Correct answer: It is the starting point from which the contract time is measured for calculating substantial completion
The date of commencement starts the clock on the contract duration, establishing the baseline from which substantial and final completion dates are calculated.
Question 6: A 'termination for convenience' clause in a federal contract allows the government to:
- End the contract at any time without cause and pay the contractor for work done plus reasonable profit on completed work (Correct answer)
- Terminate the contractor for any performance deficiency without compensation
- Reassign the contract to a different contractor without notice
- Suspend all payments for up to 180 days without interest
Correct answer: End the contract at any time without cause and pay the contractor for work done plus reasonable profit on completed work
A termination for convenience allows the government to stop work without contractor fault, obligating payment for work completed plus allowable termination costs and profit.
Question 7: Which type of contract delivery method combines design and construction into a single contract with one entity?
- Design-bid-build
- Construction management at risk
- Design-build (Correct answer)
- Indefinite delivery/indefinite quantity
Correct answer: Design-build
Design-build contracts place both design and construction responsibilities under a single entity, creating a single point of responsibility for the owner.
CEP Contract Documentation & Legal Considerations 4
When a contract contains a 'pay-when-paid' clause in a subcontract, the general contractor: