The construction business is risky enough without contractual unknowns. Lower your risk by using this basic checklist for reviewing a contract.
Often times, general contractors and subcontractors are so excited to get a new job they will sign any contract put in front of them. I have even seen contractors sign lengthy contracts containing clauses that make it next to impossible to finish on-time, make a profit or ever win a contractual dispute in court.
We were once asked to sign a general contract that included a little clause hidden in the fine print: “The owner has no obligation to pay unless the bank funds the payment.” Luckily, before signing, we followed our 9 Steps to Signing a Successful Construction Contract. We had that unacceptable payment clause changed to this: “The owner IS liable to pay for the work regardless of whether the bank funds or not.”
Most contracts are never awarded until the last minute. This often occurs the day before you’re needed out on the job site. Pressure is on to get started and sign the contract as fast as possible before you have adequate time to read it. But contractors must take the time and effort to review every contract before signing them.
For every project, large and small, go through each step in the following checklist before putting your pen to paper and celebrating a new job.
#1: Review Your Bid
When you get a call telling you that you are the successful bidder, don’t get excited and put the cart before the horse. Before gearing up to start work, review your bid carefully. Have your bookkeeper check the math. Have your field superintendent and foreman check the labor and equipment figures. Call your major suppliers and subcontractors to confirm their bids. If all looks good, go on to the next step.
#2: Review Complete Plans
Subcontractors don’t often get to see the complete set of plans when asked to submit their bids. Before signing a contract, review all plans and project documents including architectural, structural, civil, plumbing, mechanical and electrical plans; soils reports; addendums and finish schedules.
On an office building project, the site concrete subcontractor poured the curbs, gutters and sidewalks exactly as shown on the civil-grading plans. The next day, the architect asked the job superintendent if the rebar called out on the architectural plans had been installed in the freshly poured site concrete. The general contractor had never cross-checked the civil plans with the architectural plans, nor were any architectural plans ever issued to the site concrete subcontractor. Three weeks and $40,000 later, the contractor’s error was fixed. Never, Never, Never sign a contract without reviewing the complete set of plans.
#3: Review All Specifications
Because specification books are often 3 inches thick, many contractors read only the section that affects their trade. It is imperative, however, to review all specification sections before you sign a contract. The general conditions section, for example, contains contractual requirements for jobsite safety, submittals, cleanup, change orders and how to get paid.
On a school project several years ago, an asphalt paving subcontractor got a call from the project superintendent that the locker room floor was ready to pave. Unfortunately for the paver, the asphalt flooring was called out in the finish schedule section of the specifications, and not shown on the civil or site plans! A complete set of plans, specifications and the finish schedule would have eliminated this problem. Never, Never, Never sign a contract without reviewing the complete specifications.
#4: Visit the Job Site
Always send your field superintendent to the job site to look for any unforeseen conditions, conflicts with the project plans and logistics concerns that can cause you grief later. Jobs look different in person than they do on paper.
#5: Review the Job Schedule
Before committing to any project, make sure you completely understand and agree with the project schedule. Lost job profits generally can be attributed to improper scheduling of crews, poor supervision and lack of field coordination. And a schedule that’s too optimistic will result in a crunch at the end of the project, which costs everyone money.
#6: Complete a Project Checklist
When reviewing contracts, use this simple project checklist so you and your project team won’t overlook any important items. On the list be sure to include the following:
• Scope of work, inclusions and exclusions.
• Insurance requirements.
• Bonding requirements.
• Payment procedures and cash flow requirements.
• Person(s) authorized to approve field changes, etc.
• Project schedule and long lead items.
• Shop drawings and submittals.
• Meetings required to attend.
• Permit requirements.
• Site access, logistics and parking.
• Special tools and equipment requirements.
• Contract close-out procedures.
#7: Verify Project Funding
Every general contractor and subcontractor has the right to know that a project has adequate funds. So, always ask for proof of funding. It can be awkward to ask, so I often tell customers that my banker or bonding company won’t let us sign a contract without assurance there is money set aside to complete the project. Doing jobs without getting paid isn’t any fun.
#8: Read Complete Contract
Signing a contract prepared by someone else can be scary. The days of a handshake contract are long gone. Today, contracting is about contracts! If you don’t understand what you are signing, you won’t stay in business very long. Many contacts contain clauses that are one-sided and unfair.
Carefully look over contract clauses dealing with such issues as these:
• Payment, retention and pay when paid.
• Indemnification.
• Conflict resolution and disputes.
• Arbitration versus court.
• Schedule issues:
• Failure to perform.
• Delays and weather.
• Acceleration and termination.
• Liquidated damages.
• Change orders and back-charges.
• Cleanup and supervision
Every construction company must have a good construction attorney. Meet with your attorney at least twice a year. List out the most important “red-flag” clauses to look for and decide what you will and will not sign. Remember, you have the right to sign only what you agree with. Never sign an unfair contract. Cross out and change what you don’t agree with, initial the changes and then sign the contract.
#9: Execute Contract
The construction business is risky enough without unfair contracts. So, before you execute the contract, follow these nine steps to signing a successful contract and start out every project on a fair and level playing field.
About the Author
George Hedley owns a $75 million construction and development company and Hardhat Presentations. He speaks to companies on building profitable businesses, leadership and loyal customers. He holds three-day in-depth “Profit-Builder Circles” open to construction company owners in an interactive roundtable format every three months. His “Profit-Builder System” includes proven tools to always make a profit, build equity, create wealth, win profitable jobs, motivate your people and enjoy the benefits of owning a profitable company.
