Balancing Risks Through Contract Language

The relationship between general contractors and trade subcontractors on any construction project is established for all intents and purposes, on the day that both parties sign their contracts. Due to the inherent nature of one another's position in the "food chain," subcontractors generally accept the contract terms and conditions with hardly a thought - rarely even reading through it and understanding what the terms mean and which ones have greater significance than others - let alone attempting to negotiate more favorable terms. This article takes a look at the significance of several key provisions found in most construction contracts, as well as suggested alternate language which, if accepted, will equitably balance risks associated with projects.

My first recommendation is to "condition" your bid or proposal on certain basic assumptions and desires. By "conditioning" your bid, you will establish prerequisites before a contract is formed. One suggested precondition phrase is based upon "mutually agreeable terms and conditions." This means that a general contractor cannot rely just on your bid number but must actually negotiate contract terms agreed to by both parties. This language accomplishes three important objectives:

  • Prevents a GC from bullying a subcontractor into signing one-sided terms because it removes the possibility of a lawsuit if you refuse to sign the subcontract;
  • Places you in a stronger position to bargain for more equitable terms; and
  • Signals that you wish to be treated as a professional on the project.

In addition to the above factors, be sure to "incorporate by reference" your scope letter, which not only spells out what work you intend to perform but also explicitly states what items are excluded. Absent taking this step, a subcontractor's bid (including detailed scope, exclusions, etc.) will have no binding legal effect.

It is vital to carefully read and understand terms in a subcontract prior to signing because each term has a potential job cost associated with it. Therefore, each term should be reviewed and its impact understood before execution. Once you read and understand the proposed contract terms, a trade subcontractor should make a list with two columns; one headlined "must have changes" and the other "desired changes." At the end of negotiations, you should evaluate how you fared, whether you achieved your desired goals and, if not, whether you are willing to assume the outstanding risks associated with the subcontract.

The following are key contract provisions which, if unchanged, could have significant negative impact on subcontractors, seriously impacting their bottom lines:

Contingent Payment Clauses

This is language which, in its most extreme fashion, obligates the subcontractor to strictly rely for payment of its invoices on the owner making payment to the GC.

Example: "GC shall pay Sub within ten (10) days receipt of payment from Owner for Sub's work. However, in the event of non-payment by Owner for any reason, GC shall have no obligation to pay."

This is enforceable in many states unless revised or deleted.

I suggest the following added language: "However, in the event GC is not paid through no fault of Subcontractor, GC shall pay Subcontractor within sixty (60) days submission of pay application."

Retainage - Your Profit on the Job?

Retainage should be kept to a minimum and no greater than that held by the Owner or the GC.

Example: "Retainage shall be reduced in equal proportion to the percent retainage held by Owner on the GC."  

Better yet, try to negotiate 5 percent retainage up front as well as release of retainage based upon "substantial completion." This reduces exposure of non-payment and helps with cash flow.

"No Damages for Delays"

This essentially means that regardless if you are delayed or impeded by others, you are not entitled to any additional sums for labor, materials, working out of sequence, etc. Since most subs bid projects based upon a specific schedule, sequence and duration for its scope, this type provision could cause severe economic harm. The following language may address this concern.

"In the event the schedule, sequence or duration of activities is altered from the original schedule through no fault of its own, Subcontractor shall be eligible for additional time and money per the change order process herein."

"Indemnification"

Subcontracts often require subcontractors to indemnify GCs for their own negligent acts. This is called "broad form" indemnity and results in the subcontractor being required, per the agreement, to defend the GC from lawsuits by third parties who have incurred personal or property damage. Although unenforceable in some states, I suggest you alter the typical clause by adding the following at the end of the clause: "but only to the extent caused by the negligent acts or omissions of the Subcontractor."

"Stop Work" Clause

This entitles a subcontractor to cease work, upon reasonable notice and an opportunity to "cure" in the event of non-payment. Absent such language, a subcontractor must arguably continue to perform while pursuing avenues for payment.

Example: "In the event of non-payment no later than sixty (60) days following pay application, Sub may cease work after giving ten (10) days written notice of intent."

Dispute Resolution

Be certain to have a fair and equitable means of resolving disputes. The laws and courts (or arbitration) where the project is located should be applied, not the home state of the GC (especially if no connection to the project).

The above information is not intended to cover all key contract provisions but merely to provide some ideas for contract negotiation. Once you have received the GC's final terms, it is best to do a risk-benefit analysis in order to decide if you have obtained sufficient reasonable terms to move forward and sign the contract. Sometimes the best business decision is to step away from a one-sided contract and let someone else have the "opportunity."

Michael P. Davis is a shareholder in the Atlanta office of Chamberlain, Hrdlicka, White, Williams & Aughtry. His construction law practice is centered on representing a wide range of trade contractors, prime contractors, owners/developers and design professionals. His work focuses primarily on construction contract disputes in state or federal courts, as well as arbitrations and mediations throughout the United States.

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