Contractor or Risk Manager?

Ulf Wolf

January 2009

According to many, the 1997 AIA Contract, Version A-401, was about as fair as it got.

Since then, the efforts of architects, owners and general contractors—along with their attorneys—have been to push as much of the risk, responsibilities and liabilities as possible down on the subcontractor. As a result, no sub feels any great affection for the 2007 edition of the same contract, and few would consider signing it.

For as long as there is gravity, stuff will roll downhill, as one contractor put it—although he did not use the word stuff. So is this short-end-of-the-stick fate the subcontractor’s going-forward-and-permanent lot?

Hardly.

Recognizing that the subcontractor, these days, is as much a manager of risk as a contractor, there are indeed ways to reverse the direction of stuff and roll some of it back uphill.

The Nature of Contracts
However, before you put on your gloves and start pushing, let’s take a look at what a binding contract consists of, what elements make it enforceable under law.

The Legal Elements of a Contract. The elements necessary to form a binding contract, as a rule, are these:

• A legal purpose.
• An offer.
• An acceptance in strict compliance with the terms of the offer.
• A mutuality of obligation—also known as the "meeting of the minds.”
• Consideration.
• Competent parties.

Legal Purpose. First of all, for a contract to be binding, the objective, or the purpose, of the contract must be legal. For example, a contract to re-sell stolen goods is not binding on either party because its purpose is not legal.

The Offer. An offer is often defined as "a proposal to enter into an agreement with another person which must express the intent of the person making the offer to form a contract, and which must contain some essential terms—including the price and subject matter of the contract—and so communicated by the person making the offer. A legally valid acceptance of the offer will normally create a binding contract.”

Acceptance. Acceptance of an offer is an assent to the terms of the offer in the manner specified by the offer. Acceptance must not change the terms of an offer; if it does, the offer is in effect rejected, and recognized as such by law.

In fact, a material change in a proposed contract constitutes a counteroffer, which must then, in turn, be accepted by the other party for the contract to remain binding.

Mutuality of Obligation. Also referred to as the "meeting of the minds,” mutuality of obligation refers to the parties’ mutual understanding and assent to the language detailing their agreement. In other words, the parties must agree to the same thing, in the same sense, at the same time.

Unexpressed or undocumented intent is irrelevant.
To be enforceable, the parties must have agreed on the essential terms of the contract. However, parties may agree upon some contractual terms, understanding them to be in agreement and leave other contract terms to be made later. That said, full agreement on all contractual terms at the time of signing is the best practice and should be the norm. If you leave an essential term open for future negotiation, you really have nothing more than an unenforceable agreement to agree, which does not hold water as a contract.

Certainty of Subject Matter. In general, a contract is legally binding only if its terms are sufficiently clear to enable a court to understand each party’s obligations—normally, from the contractor’s standpoint, the scope of work.

The rules regarding indefiniteness of material terms of a contract are based on the concept that a party cannot accept an offer so as to form a contract unless the terms of that contract are certain—as in understandable by a reasonable person. Bottom line: The clearly defined material terms of a contract must be agreed upon before a court can enforce the contract.

Consideration. Consideration is an essential element of any valid contract and consists of either a benefit to the promisor or a detriment to the promisee. It is an exchange bargained for in return for a promise to perform some service.

The consideration may consist of some right, interest, profit or benefit that accrues to one party, or alternatively, of some forbearance, loss or responsibility that is undertaken or incurred by the other party. That means that money does not necessarily have to change hands for a contract to be legal.

Competent Parties. All parties to a contract must be competent and authorized to enter into a contract.

Unless all of the above elements are present, a contract is more than likely not enforceable by law. If so, you should either not sign it, or realize and understand that you do not have legal recourse should you be harmed by it.

The Handshake. Give the above, the recently departed and much lamented "word and a handshake” are normally not enforceable by law; it is only enforceable by one’s conscience—in many instances, a more powerful jurisdiction.


We surveyed contractor members of the Association of the Wall and Ceiling Industry to see what clauses should be included or excluded, or what other means they knew of, to provide the best protection for the subcontractor in his agreement with the general contractor. This is what we found.

Protective Clauses. Greg Vangellow of R.W. Dake & Co. in New York has been around this particular block a few times. He suggests, "A tangible payment clause is very important—not a paid-if-paid, or a paid-when-paid clause, but a paid when such and such has been completed, something definitive.

"I’d also like to see us granted a minimum of five days to fix things that may be wrong, not the current 24 hours, which is almost impossible to meet.

Dave DeHorn of Brady Company in California also brings a wealth of experience to the table. His suggestions include paying particular attention to the indemnity and payment clauses.

"The indemnity clause is crucial,” he says. "That’s the one that rolls the risk down from the general contractor to me. And whenever that clause says the general contractor is liable when found to carry sole responsibility for an event, I will suggest a change. Remember that the word sole means 100 percent and that degree of responsibility is almost impossible to achieve, much less prove.

"As normally written that clause means that even if the general contractor is found 99.99 percent at fault, and you are only 0.01 percent responsible, it’s all on you, since the general is not the sole cause of the mishap.

"We normally propose a change to that clause to reflect a ‘proportion of fault.’ If we’re found 20 percent at fault, we’ll pay 20 percent of the accident claim.

"Also, you have to define payment for tangible product delivered, which must not be contingent upon other payments, whether if or when.

"Basically, a contract specifies a provision of services for receipt of payment. So the third thing to really nail down clearly is the scope: Precisely what service are you providing?”

Gerald Roach of Forks Lath & Plaster in North Dakota makes a suggestion echoed by many others: "The best protection I know of is to have my proposal document incorporated into the contract as an attachment, preferably along with language that states that if there is any conflict, my proposal shall be the governing language. For the most part, my customers accept that.

"Our proposal, which contains our scope of work, clearly states what we are going to do—as well as what we are not going to do. This covers rubbish removal, etc., all of it stated in straight English.”

Dennis McDonnell of T.J. McCartney in New Hampshire says, "Of course, you want the indemnity clause to state that if you’re found responsible for a cost, you’ll only pay to the extent that you’re found responsible, not all of it.

"And get away from the pay-if-paid language—though that can be difficult to get rid of.

"The other clauses that we always take exception to and try to modify are the ones to do with schedule. They range from acceleration of schedule with no subcontractor compensation, to the general contractor reserving the right to change the schedule at any time. Look out for that. If you signed the contract with that clause intact, and the general now decides to push things up, you’re legally bound to comply.”

Lee Zaretzky of Ronsco in New York always attempts to make the project schedule a part of the contract, "as well as a clause allowing us to claim damages for delays not caused by us, which would include costs incurred during needed escalation to meet the original due date after such delays. The owners don’t want to hear about these changes, but they represent true value, dollars in you pocket, if you can get them included. They are worth fighting for.

"Change-order language should also be included, specifying how quickly they will be processed—which should be within days, not weeks or months.”

Kim Sides of Sides Drywall in Alabama also brings up liability and indemnity: "The contracts we are asked to sign nowadays contain liability clauses that are so vague that if someone is hurt on the job the general can actually use our insurance to cover it. The ideal situation would be that the general uses his insurance for his liability, and we use ours for our liability. We take care of what we bungle, they take care of what they bungle. "My requested change on the indemnity clause is always this: ‘only to the extent caused by the subcontractor.’

"Also, I don’t like doing additional insureds; never liked doing that. But it seems that is always required now, and you’re not going to get out of that, or at least I have not been able to.

"Of course, I will never sign a paid-if-paid contract. Never. Paid-when-paid I can live with.”

Contract Pitfalls
There are other things to look out for. Here are some of them, and how to steer clear.

Vangellow and DeHorn agree that the best way around potential pitfalls is to perform flawlessly in the first place. Says DeHorn, "The best thing to do is never get yourself in a position on a job where you or they have to resort to the contract. If you stay out of trouble, the contract never becomes an issue. It stays in the drawer.

"Of course, never pull out of a job; that’s terrible. That is a clear not only do you need to be alert to contract changes but also to what they call "additional provisions,” which are normally made part of the contract and keep growing in length.

"I see those additional provisions change from job to job, even if the contract stays the same. Ten years ago, those provisions were 20 items long; today there are 70 items. And as you read through them, you see: ‘ah, somebody got burned on this somewhere, and now they’ve included language so that won’t burn them again.’ Ever-growing.”

McDonnell adds that you should also be aware of the general contractor’s contract with the owner—known as the Prime Contract—which you own by inference from the contract you’ve signed with the general; be sure to read it, unless, of course, you can get that clause removed.”

Lee Zaretzky’s list of pitfalls includes "Pay-when-paid; pay-if-paid; excessive retention; being bound to the general’s contract with the owner; lack of a schedule; and unreasonable indemnification clauses.

"Also,” he adds, "I won’t sign a contract without having my attorney, as well as my insurance broker, review it.”

Pat Arrington of Commercial Enterprises, Inc. in Albuquerque brings up a more subtle point: "We should be reimbursed, or paid an extra percentage, if the general fails to supply experienced (only book-taught) superintendents and project managers, who only know how to check boxes.

"These guys don’t know the methodology of building and are pretty clueless about coordinating the trades properly. This will inevitably slow the project down and will cost you money. Some government contracts I’ve worked give you an extra 3 percent if the general supplies inexperience personnel. You should go for that clause when it applies.”

Arrington reminds us that, "The ASA approved the 1997 AIA contract and stated that this is about as good as it’s going to get. I agree with that.”

Vangellow likes one-stop shopping, too: "Ideally, to protect the subcontractor I would just like to see a standard contract that everyone is familiar with, which is proven to be equitable and fair, and which is universal. This way subs won’t have to spend money, resources and time to figure out where he’s going to get burned this time.

"I think the AIA forms work pretty well; I feel fairly comfortable signing one of those. I know it well enough now that it won’t trip me up. At least I know where to look.”

The Proposal as Attachment
Many of the contractors interviewed brought up this point as possibly the best protection available: Create a very detailed proposal document, then work at having it included in the contract as an attachment, and by reference.

Sides elaborates: "I try to include my proposal document into the contract in every single case; it doesn’t always fly, but yes, I try that in every single case.

"Make it as thorough as possible with a full and detailed scope of work. Then get it included in the contract as an attachment along with a clause in the contract to the effect that in the event of a conflict, the proposal document is the senior language. Then you’re well covered.

"Also, we list the A-401 on our proposal. It says that this proposal assumes a mutually agreed upon contract AIA 1997 A-401.”

Arrington echoes those sentiments: "Once the general has accepted the 1997 A-401, the best thing a subcontractor can do is to ensure that his detailed proposal—which should include the scope, any exceptions, any inclusions, any exclusions and any additional clauses—is made a part of the contract by way of attachment.”

Gravity Reversal
The best way to acquire contractual muscle is to perform flawlessly, on or ahead of schedule. Always. And once your good reputation precedes you, your requested inclusions, exclusions, exceptions and proposed revisions will be given full and thorough consideration by the general contractor.

The bottom line is that whenever the general needs you more than you need the general, you can call many of the contract shots, including always having your own proposal document made part and parcel of the contract itself.

And that provides firm ground to stand on as you push stuff back uphill.

Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.