Contracts: Leveling the Playing Field
David C Phillips / April 2021
A 2020 survey of AWCI’s Construction Dimensions readers showed that a many contractors are concerned with contracts and the legal risks involved in doing business. We decided to find out just what these concerns were specifically, and how contractor members of the Association of the Wall and Ceiling Industry are dealing with them.
Our first question was simply a broad inquiry about attitudes and feelings about the contracts, or rather subcontracts, that are in use in the construction industry today. The response was unanimous.
Mike Taylor, executive vice president at Liddle Brothers Contractors Inc. in Tennessee and an AWCI past president, speaks for the majority when he says, “Most of the contracts we see are written to provide protection for everyone except the subcontractors. We are stuck with all the liability and very little if any protection.”
“They strongly favor the GC,” confirms Doug Bagnell, general manager of Olympic Interiors in Washington.
And Mike Hoffarth, vice president of estimating at Canyon Plastering and Drywall in Phoenix, adds, “Contracts from the GCs are generally one-sided and usually allow for few or no revisions to be made.”
“I wish there was a more level playing field between all the parties,” says Jeremy Barbosa, principal of Precise Drywall in Arizona, who has studied the subject extensively since he was confronted with his first contract 23 years ago, and has secured considerable success in negotiation. “The general contractor is responsible for the coordination of all the players and for creating an environment of cooperation, sequences and flow. These days, the goal of most GCs is to have zero accountability and none of their own money in the game. They create that environment with a well-written, lopsided contract.”
Steve Winn, director of credit at Marek in Houston, Texas, makes an important point about contracts: “People tend to sign contracts with the expectation that nothing will go wrong. But contracts are written with the expectation that something will go wrong. Otherwise, we could just shake hands and get to building.”
Dave DeHorn, chief estimator of the Brady Company/Los Angeles, differentiates between contracts with existing clients versus new clients. “We have negotiated contracts with our regular clientele,” he explains. “The terms have been discussed and agreed upon for some time, so defining the scope correctly is the main issue with the contract. However, when you have a new client, the boilerplate is put under the microscope for review by me or the general manager, as well as our risk manager. We compile a list of issues that we will deal with in a negotiation letter back to the general contractor.”
Bill Fritz, president of Mission Interiors Contracting LLC in Texas points out, “Contracts today, for the most part, are an overreach due to the prevalence of expensive lawsuits.”
“We all know the contracts are all slanted for the general contractors,” says Pat Arrington, Principal of Commercial Enterprises in New Mexico.
Gilly Turgeon, president of Green Mountain Drywall in Vermont, recalls a different era: “All of our contracts are with the GCs so it’s pretty much whatever they want, and they will pay you when they feel like it. When my father started this business 50 years ago, most of this work was by handshake.”
We next wanted to know what specific language or clauses in these contracts were cause for particular concern. We learned it’s clear that there is a high level of dissatisfaction with many specific points of language in subcontracts.
Taylor says, “All the language in our contracts causes me great concern, especially the clause that states ‘pay when get paid.’”
This particular point came up in practically every response to this question. Hoffarth says, “Most of the language is cause for concern, with major concerns being liquidated damages and prompt payment.”
Another key issue: “Insurance requirements for subs keep getting increased based on coverage and language that is detrimental to subs,” says Bagnell.
Fritz lists his main concerns:
“a) The clause requiring you to operate under the same conditions as the general contractor toward the owner, whereas you are never given the owner’s contract for comparison.
“b) The clause stating that you will not be paid until funds have been received by the general contractor from the owner.
“c) The clause stating you will provide additionally insured coverage for every contract connected to the project.”
Winn also provided a list of onerous clauses typical to subcontracts: “Pay-if-paid language and risk of nonpayment; lien waiver provisions; who pays for damage to our work; compensation for overtime or acceleration due to the fault of the GC or its other subs; directives to perform extra work without a change order; liquidated damages in excess of our direct role in causing the delay for which they were assessed by the owner.”
DeHorn mentions retention, and performance and payment bonds. “Retention is a tool to hold a certain amount of the subcontractor’s progress payment to make sure you stay and finish the project. However, sometimes the client will request a performance and payment bonds as well. This is another tool designed to ensure the subcontractor stays and finishes the project. It should be one or the other, not both.”
Roger Olson, president/treasurer/CEO of Sig Olson & Sons Plastering Inc., Moorhead, Minn., mentions, “The pay-when-paid clause causes me great frustration and concern. We are the only ones in the chain to whom this applies. We usually finance our jobs for the owner/GC for upwards of 45 days.”
Michael Mazzone, president of Statewide General Contracting & Construction (SGCC) in Hawaii, agrees: “I don’t like paid-when-paid wording. I always try and change it to a set number of days after invoice.”
“We dislike the insurance indemnity, non-subrogation clauses that force the sub to assume all liability for our workers, and agree not to countersue the GC, owner and or chain of those above us,” says Rick Wagner, owner of Richard Wagner Enterprises LLC in Lexington, N.C. “This has become a standard that I feel is unfair to subs. It forces us to carry large umbrella policies.”
Leveling the Playing Field
In an increasingly bleak subcontract landscape, tending more and more to push risk and liability down on the subcontractor, often accompanied by threats of “Sign it as is or we’ll look for another subcontractor,” the question becomes, How do you negotiate a fair contract without losing the job? We asked about the successful approaches to achieving an equitable agreement.
Barbosa offers some sage advice: “Read slowly, comprehend and understand before you sign. It all starts with wonderful intentions but if things go awry, it’s nice to have proper standing within the subcontracts so that you’re not left paying somebody else’s bill. If it comes to court or arbitration, the judge or the arbiter will look at the four corners of that contract that you signed. You had the opportunity to read it and to mark up and modify or negotiate. So, if you signed it without that due diligence, it’s very hard to now claim that it was unfair.
“I try to explain to a new client when we’re reviewing, after I’ve sent it back with all my mark-ups, comments and changes, that it’s really just about having equal standing. The GC and its subcontractors have to work together and be accountable to each other, to the project, to the end product, the quality, the cooperation, the sequence and the play along the way. I’m not being adversarial. I’m sharing risk in my approach.
“With the bigger GCs, you are usually dealing with a project manager, and often the response is, ‘We can’t accept any changes to our subcontract.’ My immediate reaction to that is, ‘I appreciate your quick response. Please put me in touch with the person in your company who handles this.’ Because clearly at that point you know that they don’t.
“It’s hard to push back and not accept ‘no’ for an answer, but it is the successful approach. You either find yourself with a general counsel for the company or one of the decision makers, so now you’re negotiating with the person you’re truly doing business with or someone who’s authorized on behalf of that person to negotiate these deals. Get them on the phone, say what your intent is, and don’t back down. They’re trained to push risk. So, if you push back, they have to come to the table. If they want to work with you, they’ll be willing to negotiate. You often find yourself horse trading. You concede on a point that is important to them, and they compromise on something else that is vital for you. Typically I get 95% of what I’ve asked for.”
Winn says, “Contacting the customer about the desired modifications first, rather than just marking up their contract and surprising them, makes for a better opening to the negotiation. We usually send a redline with the modifications tracked for ease of identification and to put them in context. We have a number of routine clauses we utilize. Some of these are for contingent payment/risk-of-nonpayment terms, OT/additional supervision, damage to our work by others, LDs and change directives.”
“I cross out and initial any reference to liquidated damages,” states Olson.
“I specify that the contract document refer to our proposal by date and proposal number,” says Arrington, reiterating a point that was made by many who responded.
“We always request that our detailed proposal with our notes is added as an attachment,” confirms Wagner.
Gilly Turgeon, president of Green Mountain Drywall in Vermont says, “We just make sure that our proposals are a part of the contract, and we let them know exactly what we will do and that any exclusions are not in the contract.”
“I always try to insert a 45-day or 10 days from payment to owner,” says Mazzone.
DeHorn says, “We write a letter to the general contractor requesting changes to the contract language. This usually results in a few emails going back and forth, a few phone calls or even a face-to-face meeting to resolve the issues. You will most likely not get all of the items changed that you want. That is OK. You have at least reduced the risk of the contract in favor of your company.”
It seems important not to take an adversarial approach to onerous contract clauses but at the same time, not to back down but to negotiate until a sensible compromise has been reached.
Should you hire legal help before signing a contract? “It depends on the size of the risk,” says Barbosa. “If it’s a relatively small risk, I wouldn’t hire an attorney—it’s too expensive. But if you’re negotiating a $500,000 or $1 million contract and you don’t really know what you’re signing, absolutely! Most attorneys for the average-size contract, for $3,000–$6,000, would help you through an entire contract review, talking about it with them, going back and forth a couple of rounds with the other side. It’s absolutely a good investment.”
Olson concurs on the advisability of seeking legal help: “It is important to vet your customers these days. Some of these contracts shouldn’t be signed. Figure some legal advice into your overhead. It is too bad that it has come to this. This said, I have many, many great customers who give me no concern whatsoever.”
“Stick to your demands,” advises Mazzone.
“I always try to approach negotiation with an expectation of positive discussion and have several times been rewarded with a willingness to work through the language concerns,” says Winn. “The terms of the contract generally reflect the experiences and concerns of the party who wrote it. These concerns are generally legitimate even if the language used is onerous. I have found that understanding and acknowledging their concerns when presenting ours builds the bridge to fairer language upon which we can both agree. Negotiation turns into a conversation.”
And Barbosa adds, “I think the situation has deteriorated as far as it has because the subcontractor class doesn’t push back hard enough on the onerous language and enforce its own perspective and risk mitigation on a sufficiently large scale for the GCs to back down and use more equitable contracts.”
Success seems to lie in careful study of a contract before signing, getting legal help where warranted, and negotiating in an equitable but insistent manner to change the onerous language, at least on the most important points, so as to achieve a (more) level playing field. And don’t back down.
David C Phillips, a freelance writer and photographer, is an original founding partner at Words & Images.