Make sure the words don’t hurt you.
We’ve come a long way from the days when construction would begin with a simple handshake: “Sure, I’ll build your barn for you. Let’s see, that will be $1,000 including the wood.” “OK. Deal.” Handshake. A few days or weeks later, barn is up, the $1,000 has changed hands, and everyone is happy. Just imagine that scenario today!
Contracts have become very complicated, with teams of lawyers sweating over the language so that every single possible eventuality is covered in detail. Invariably, the contract is written in the favor of whichever party is writing it.
The subcontractor has to be sure that the contract is fair, that the important points are covered and that they are in agreement with all points. After all, a contract is just a statement of the agreement that is legally binding to both sides. At the same time, the contractor usually wants the job.
Contract Woes
We asked our AWCI contractors to share negative repercussions they have experienced from contract language. Here’s what we learned.
Nate Womble, senior project manager, framing and finishes for HRTLND in Iowa, said, “When reading through the contract, I hyper-focus on scope inclusion and exclusions. Although these are different for every job, there have been several occasions when the general contractor (GC) has added scope to my contract that was not bid. For example, I recently had a contract that stuck me with in-wall backing even though we had excluded it in our proposal. This should have been caught during signing but was not.”
Womble said another example is if the contract includes liquidated damages. “We recently had a project that was delayed early on by the roofing contractor due to material shortages,” he explained. “This then pushed our ceiling install start date back—but not the finish date. This caused us to be held partially liable for a percentage of liquidated damages.”
Steve Winn, director of credit at Marek in Houston, shared: “There was an instance where the prime contract contained professional liability insurance limits beyond what we carry and what is typical for our scope. We had to purchase the additional limits for both ongoing operations and tail coverage.”
“Contract language is never an issue until there is a problem on site,” said Shawn Burnum, vice president of operations at Performance Contracting Group in Missouri. “Then, it is the ‘rules book’ that was established before the job began. How well you negotiated or agreed to the rules will either support or hurt you in those debates. Examples can be who is paying for delays? Who is responsible for damage to our or others’ work? How fast can we collect our money, and how much can be retained and for how long?”
A North Carolina contractor recalled, “My workers’ comp had to pick up a large claim from one of my drywall hangers who was injured, clearly as a result of GC negligence. They had a core driller come in over a weekend and drill penetrations in the slabs and did not have them covered. On Monday morning, when one of my drywall hangers hit the hole, his foot went most of the way through, snapping his foot and ankle. He left in an ambulance with major damage, resulting in a sizable claim. It affected my workers’ compensation experience modification rate for three years and cost us a lot!”
It is extremely important to know your contract details before there is an issue on-site so that you can protect yourself, said Mike Mazzone, president of Statewide General Contracting and Construction in Hawaii. “Knowing the contract will also keep you from violating any section and allow you to keep your field informed so they aren’t doing scopes that are not in the contract. Over the years, we have discovered general contractors adding scopes of work that we didn’t cover in our proposal. Reviewing the contract and finding these items before we sign has saved us many times over the years.”
What to Watch Out For
There are certain things to always look out for in contracts. Meghan Slade, contracts specialist for Daley’s Drywall in Campbell, California, shared some helpful information based on experience at the company. “There are many terms we need to review before signing and agreeing to be bound,” she said. “At Daley’s Drywall before any contract is signed, it is reviewed by our contracts department, the estimator and project manager (PM) that bid the job, and for larger awarded projects, our executive team.”
Slade said terms that stand out during review process are:
Hiring requirements—Is this a local hire or Section 3 project? Prevailing wage where certified payroll is required?
Billing/payment requirements—Is there an early payment discount that you need to be aware of? If so, what percentage reduction will you be agreeing to in case of early payment?
Safety requirements—Does this contract include job-specific safety forms or specific safety personnel in addition to your standard safety program?
Insurance requirements—Does the contract include an owner-controlled insurance program (OCIP) or a contractor-controlled insurance program? If so, has the cost been included or excluded from the price of the bid? The general contractor/owner is required to disclose key OCIP information at time of bid. What are the limits?
Indemnification clauses—Are they reasonable, such as “only to the extent caused by the negligent acts of omissions of subcontractor,” or are they excessive, such as “arising out of your work”?
Womble said one issue they have seen is “paid when paid” or a “paid if paid” clause. “This means the GC can hold your payment until they are paid by the customer,” he said.
An Ohio contractor shared their experience: “We have a very captured customer base. Consequently, other than payment terms and retainage, contracts never come into play and are amiable. We do review documents of new or one-off clients prior to tendering a proposal and take exception to language beforehand as a condition of the offer. If this unacceptable, we will not move forward with or will withdraw the bid.”
The contractor said some “killer” clauses to look for include:
- “Pay if paid”
- Exculpatory language (if something goes wrong certain parties are relieved of liability)
- No damage for delay (owner or others cause a delay, additional cost incurred by subcontractor can’t be pursued)
- Liquidated damages
Winn shared a recent example: “We had one recently that said if there is any contract document the GC doesn’t have, then the GC is not obligated to provide it, but we were still bound by it. That’s a bold stance! Generally, we look for language that puts us at risk for things within the GC’s control and beyond ours.” That could include payment terms, delays, damage to their work or cyberliability.
“Insurance requirements, venue and prevailing law are other major concerns,” Winn said. “Then there’s audit. Audit is a scary word. From picking apart previously agreed rates to conducting lengthy audits, our money is held for months only to find they still owe us. This hurts contractors. Auditing is a reasonable practice which can be abused.”
Stan Kasper, president of the Rockwell Group in Illinois and Wisconsin, said, “The principal items we need to discuss and try to negotiate within the contract are liquidated damages (LDs), owner-general contractor agreements, and lien waiver language. We typically are fine with the owner agreement, but we do request a copy of it prior to signing our contract.
“Usually, the liquidated damages clause is in there, and if the time frames for completing our work are doable, we will agree to the LDs,” he continued. “The item that typically can be a deal-breaker is the lien waiver language. Our bank, our attorney and our bonding company strongly recommend that we do not agree to provide unconditional waivers prior to getting our check. This is not meant to be personally directed at a general contractor, but rather sound business sense to ensure payment.”
At Performance Contracting Group, Burnam said, “We have identified five ‘killer clauses’ that require executive level sign-off in our company to proceed in executing a contract. This protects the company as well as the employees who are deciding the level of risk we are willing to take on as an organization.”
The killer clauses are:
- Contingent payment clauses such as “paid-if-paid” and “paid-when-paid”
- No pay for delays, which can be a problem if a job requires significant overhead, travelers, etc.
- Waiver of job protections such as liens
- Non-proportional indemnity, where the company is taking additional risks above their scope
- Damage to their work caused by others where they are required to protect their finishes and not be paid for trade damage
All contract sections are important in their own way, Mazzone said. “The first thing I look for is payment terms. I want to know how I will be paid and when. I hate ‘paid when paid’ language because it leaves the door open to uncertainty of when I will be paid. With every new contract I try to have a time frame added to the clause. None of our vendors will accept a ‘paid when paid’ term from us. I feel subcontractors are not in this business to finance projects for the owner or the general contractors. Next, I review the scope of work to make sure nothing is being slipped in.”
Protective Measures
What measures can the contractor take to make sure the language of a contract is correct, accurate and fair and protects the contractor’s interests?
“The way that HRTLND protects itself is a three-step process,” Womble explained. “All contracts are scope-reviewed by the estimator of that job. The PM then reviews scope again, as well as general conditions and contract expectations. Lastly, it is reviewed for a third time by the COO of the company.”
“At Marek, we take a holistic approach to contract review,” Winn said. “Each customer and job can have unique concerns. Market conditions also have a bearing. If we negotiate terms from a strictly legal perspective or a sales perspective at the other end of the scale, we miss out on valuable input that maximizes our ROI. There is purpose and value to each of the various roles in a company. Some ignore this at their peril.”
Kasper said Rockwell Group typically has its contract administrator review the contract for legalese and the estimator for the scope and schedule. “If there is a need, we will forward it to our attorney,” he said.
At Performance Contracting, all contracts are reviewed by the legal department, Burnum said. “We also have approval thresholds that require larger contracts to be executed by senior management. The same applies for change orders and lien waivers that often try to change the baseline contract language, so caution needs to be taken.”
Mazzone said they have started using an artificial intelligence (AI) document review program for contractors, which can save time with contracts and specifications. “What attracted me to the program was its abilities to read the document and highlight what I need to review. It also converts legal speech and explains it in an easy-to-understand language. It’s a very exciting time in construction with all the technology available,” he said.
As AI continues to spread into all corners of industry and society, there will likely be an increase in AI platforms designed to identify critical risk elements in contracts and to simplify the legal language. While AI cannot replace the “eagle eyes” of experienced veterans, it might make the job faster, simpler and perhaps more accurate.
In the meantime, contractors must be constantly alert for damaging contract clauses as contracts continue to become more complicated.
David C Phillips, a freelance writer and photographer, is an original founding partner at Words & Images.
