Originally published by Matthew DeVries on Best Practices Construction Law blog
When a client asks about a particular contract provision and why it is “unfair” or “uneven”, we begin a discussion about risk allocation. You see, the contract is used to shift the various risks on the project to the party most appropriate to handle it.
In other words, you are negotiating about who takes the risk on a particular issue. For instance, the risk of performance is traditionally placed on the contractor, while the risk of payment is traditionally placed on the owner. That is why subcontractors feel that a “pay if paid” clause is unfair because it places the risk of payment entirely on the subcontractor who cannot control the payment process. What about the risk of escalation in material costs?
The United States Court of Appeals for the Federal Circuit Contract recently addressed this issue in a government contract dispute where the parties’ agreement required the contractor to pay for fuel at the prevailing rate. According to the court, this put the risk of rate increases on the contractor.
(read the entire article on Best Practices Construction Law blog...)
