Contract Language: Get It Right
What Do Yo Do When You Don't Like How the Contract Is Written? Change It!
Don Procter / June 2016
In a worst case scenario, a construction dispute can run down a path that no subcontractor wants to chart. There are things, though, that subs can do to limit their exposure to risk—starting with the contract they negotiate with the general contractor. As any sage subcontractor will tell you, contract language can be the difference between making a profit or losing money on a job.
Here is a review of some of the tips several experienced wall and ceiling contractors across the United States told AWCI’s Construction Dimensions.
Pay-If-Paid, Pay-When-Paid. In most states pay-if-paid language is a concern (in several states there is legislation that prohibits PIPs) because it puts the subcontractor at credit risk to the owner, rather than the GC. Negotiate it out, if possible, say experienced subs, and if GCs won’t budge on the language, consider whether the risk is worth taking—or walk away from the job. If you are prepared to sign a contract with a PIP clause, verify through a credit check that the owner has funds to pay you.
Robert Abney of F.L. Crane & Sons says while the contractor has maintained long-term relationships with a number of GCs in the five states in which the company operates, very few don’t include pay-if-paid language in their contracts. Abney is president of the contractor’s divisions in Nashville and Memphis, Tenn. F.L. Crane has 12 offices and has been in business more than 60 years.
Ideally, contract language should state that the subcontractor does not accept risk for the customer’s (GC) receipt of payments from any source. Furthermore, payments to subs should never be based on or subject to the customer’s receipt of payment for the sub’s work. In a perfect world, payments are made within 30 days of invoice, say experienced contractors.
Failing that, pay-when-paid is alternative language to try to negotiate into the contract, suggest some subs. It stipulates that GCs must pay in a reasonable amount of time, and while that is often not as soon as 30 days, it usually ensures subs of payment within 60 to 90 days.
Suspension of Work. In Mississippi, legislation allows subcontractors to stop work for nonpayment, but the contract might determine the terms of payment. Insert language “that allows relief” or notification when the owner’s payment has not been met, advises Abney.
Pamela A. Hepburn is a Certified Construction Industry Financial Professional and vice president of OCP Contractors, Inc., one of Ohio’s largest interior contractors. She lists a number of the contract clauses to strike out when possible: limiting OCP’s right to file a mechanic’s lien in the event of non-payment; stipulating that the contractor is only paid when the GC is paid; transferring the owner’s credit risk to OCP; unreasonably limiting the sub’s mark-up on change requests; holding retainage at a higher rate or for a longer period than the owner is holding; requesting that OCP defend or indemnify the owner’s or contractor’s negligence; imposing liquidated damages for delay outside of OCP’s control; requiring endless mobilization or phases at no additional cost, or requiring cleanup or a punch list to the contractor’s or owner’s satisfaction, which can be very subjective.
Professional Reviews. Hepburn builds a solid case for why subs should employ risk managers to review all subcontracts. Abney concurs but says beyond in-house staff, F.L. Crane is prepared to have a contract reviewed by outside legal counsel when language is complex.
One subcontractor says that larger GCs are the most apt to present complex contracts that can force the subcontractor to continue to work whether that sub believes it is fair to continue to work or not. If language revisions aren’t made, a sub can be facing unlimited risk. At the same time, GCs face limited risk with the owner because of the way the GC chooses to word its contract.
Hepburn says she has had success striking language that can put OCP out on a limb. “I’m always able to remove a waiver of right to lien,” she says. “I always request verification of the project financing and if that isn’t available, insist that they move the pay-if-paid clause and any transfer of risk of owner’s credit.”
She adds that she is “generally successful” extending notice requirements if they are very short durations and appear unreasonable to follow.
“Our customers are usually reasonable when I explain why a particular clause gives me heartburn. I never mark up their contract without having a discussion with them first, and I always ask for a few more changes than I really have to have, just so I can give them something back in the negotiation,” Hepburn points out.
No Damages for Delay. Subcontractors should note that language concerning damages for contract delays is negotiable and can be revised to their benefit. In Ohio, damage-for-delay clauses are not enforceable, but Hepburn still asks to have them removed.
She says that any clause in the contractor’s agreement with the owner “is difficult, if not impossible, to change.” The worst clauses are from the contractor, however, not the owner. “An upfront waiver of lien rights or defense of someone else’s negligence, and pay-if-paid without project finance verification would all be reasons we wouldn’t work for that contractor,” Hepburn says. “For those clauses that remain unchanged after negotiation, I discuss each specifically with the project managers so that they can follow notice requirements and can act quickly if it looks like an unfavorable clause could be coming into play.”
Mutually Agreeable Schedule. Contract language should define a mutually agreeable schedule, points out Abney. Strike out language that stipulates the GC has the right to manage the schedule as it sees fit. “It is not conducive to a partnership and has costs associated with it in the event that the delay clause isn’t there,” Abney says.
When a project is delayed—sometimes because of an owner but more often due to lack of coordination by the GC—subs often do not have the ability to recover costs for an accelerated schedule. When possible, strike out language that stipulates out-of-sequence work, Abney adds. “When I bid,” he says, “we assume it is a customary flow of sequencing. Deviations (out-of-sequence work) are a change of scope and should be reflected in a change in price.”
Negotiate language to “clearly define” a stipulated liquidated damages amount for a project delay, Abney advises. Be wary of contract language that tacks on “damage for loss of use” for each day of delay because that is an unknown amount that could put the subcontractor at greater risk.
ASA Valuable. Travis Vap, CEO and primary owner of Denver-based South Valley Drywall Inc., says the American Subcontractors Association and its local chapters are valuable resources for subs. It offers a 22-week course on contracts, covering everything from how to identify language that works against you to how to negotiate favorable terms. Too many subs don’t take advantage of the service though.
“A lot of time we (contractors) negotiate in a silo,” says Vap, noting that too often subs sign contracts as-is.
Concealed or Unknown Conditions. Vap says an area that subs should be concerned about is concealed or unknown conditions language that usually is located in the general contract documents and incorporated by reference into the subcontract. This language can impact specialty contractors by forcing them to assume the risk for unknown concealed or subsurface conditions.
He says ASA recommends language like this: “Subcontractor’s obligation to examine documents, the project site and materials and work furnished by others is limited to notification of customer of any defects or deficiencies that a person in the trade of subcontractor would discover by reasonable visual inspection. No testing beyond reasonable visual inspection shall be required. Subcontractor is entitled to rely on the accuracy and completeness of plans, specifications and reports of site conditions provided to subcontractor.”
Hepburn says a recent trend in OCP’s world is a clause stating that if the sub proceeds with its work, that means it has determined the suitability of the work that came before the sub and it therefore waives any claim for additional costs if the sub’s work must be removed to fix work previously installed. “I argue that a carpenter hanging drywall cannot be expected to know if an outlet or switch was properly wired or if plumbing is correct, and that clause is removed,” she says.
Sole Negligence. Abney says he is able to “negotiate out” terms such as “sole negligence” on the majority of contracts. That is important because it could leave the subcontractor at risk of being negligent for something it didn’t do. “We do not mind being accountable, but only to the level that it is attributable to us,” he says.
Plan for Worst Case Scenarios. While you may have good faith in your GC being reasonable, what happens if that GC gets someone to manage the contract, or the GC’s point man for the job is transferred, or the GC is terminated and the contract is transferred to the owner or another GC?
Change Orders. Extra work done in one month is assembled for a change order but the length of time for change order to be initiated varies—in some cases 90 to 150 days to recover the cost. Assemble the documentation for change of scope quickly in an effort to see payment as soon as possible, advises Abney.
Language Flow. Vap says it is in everyone’s best interest to have the contract language aligned as it flows from the owner all the way down to the specialty contractor. ASA recommends ConsensusDocs because it is the only standard contract developed by a diverse coalition of more than 40 leading industry trade associations. It has members from all stakeholders in the design and construction industry.
But observers note that sometimes GCs simply change that flow (language) because of previous experience that might have left them exposed to risk.
Work Suspension. In the event of a work suspension by the owner, a GC or sub because of nonpayment by the GC, contract wording should indicate that the GC’s (customer) liability to the sub is for payment in full for work performed to date of suspension, costs of delay, demobilization and remobilization as well as an equitable adjustment to the schedule.
Vap says some subcontractors note that GCs have increasingly created hard-bid contracts with little room for negotiation. “If you want to work in a negotiated world, you have to work with a fair contract,” he says.
Indemnity. Contract language concerning indemnity and risk transfer is a big concern for many subcontractors because the dollar figures associated will often exceed the value of their contracts. Strike the language from the contract when possible, says F.L. Crane’s Abney.
A number of subcontractors have had success negotiating terms concerning indemnity or “hold harmless” obligations to extend only to claims relating to bodily injury and property damage (other than to the sub’s work). This applies only to part of any claim resulting from negligence or an intentional act by the sub or its subs, their employees or others whose acts may be liable.
Defining additional work is important, says Vap. ASA states the “subcontractor may be impacted because it may find it does not have clear entitlement to prompt payment for extra work ordered by the general contractor.” In addition, the “subcontractor may find the payment for additional work is delayed because a formal change order has not been issued.”
40-Hour Work Week. Abney says subs should be wary of language that uses the word “provide” employees with a 40-hour work week, instead of a term such as “based on” a 40-hour work week because many subcontractors pay their employees hourly and the work is contracted on a project schedule.
Understand Retainage Laws. Experienced subs say it is important to know state laws; a case in point is concerning retainage. Unlike some states, Colorado has laws for public (5 percent retainage) but not for private work, points out Vap.
A GC should not be able to deduct more than it is deducted by its client (owner), and the subs should be allowed to substitute a security such as a retainage bond, which is in the interests of the owner as well, in lieu of retainage being held to avoid cash flow problems. These are terms a number of subcontractors have found success negotiating. It is important because retainage can be held for 200 to 300 days, resulting in cash flow deficits for the project’s duration.
Abney says in Tennessee retainage is limited under state legislation to 5 percent. For any project where the prime contract is over $500,000, the retainage must go in an interest-bearing escrow account for the subcontractor.
Lately, Hepburn says OCP has seen a lot of contracts that stipulate a schedule of values line item of a certain percentage of the contract for closeout and punch list, etc. “This language is often included in the scope review and agreed to by the estimator before the award of the contract,” she says. “Because those activities don’t occur until the end of the project, it acts as additional retainage.”
Making things worse, she adds, they hold retainage on those line items when you bill them. “We’ve spent a lot of time educating our estimators around the issue of work scope meetings and troublesome language added in the pre-award process,” Hepburn says.
Contractor Back-charges. One subcontractor says that if there is a contractor back-charge, the sub needs to be notified quickly. Second, that sub should be given reasonable time to correct deficiencies before costs are chargeable. Furthermore, back-charges should be invalid unless billing is prior to the 15th day of the month following the charge incurred.
In addition, payments withheld under a claim of subcontractor default shall be reasonably calculated to cover the anticipated liability, and all remaining payment amounts not in dispute shall be paid promptly. While a number of subcontractors have successfully negotiated favorable contract language here, unsavory GCs may use back-charges as a form of profit.
Abney says contractor back-charges should be negotiated on the front end of the project.
Contract Problems Not New. While many of these contract problems are not new to the industry, long-time subcontractors in some regions have observed an increase in problems relating to contract language. One subcontractor indicated that is partly because GCs are shifting roles to operate more as contract management firms, which push more responsibility onto their trade contractors’ shoulders. GCs that still self-perform in such areas as carpentry tend to tie loose ends, which smooths the path for their subcontractors.
Vap says his company is fortunate because most of its work is repeat business, so making sure the contract is amenable to both parties is important from the outset. Striking unreasonable charges is paramount to avoiding disputes with your GC later that could strain or end an otherwise solid relationship. “Make sure your contract matches how the general contractor acts,” Vap advises.
Don Procter is a freelance writer in Ontario, Canada.