Construction is a simple business model. Someone wants something built; someone else knows how to build it; and the two agree on a value of the built project. The end. Right?
It should be that simple, but there are mitigating circumstances that cause the need for clarity for both parties on a contract—budget, schedule, scope and quality, just to name a few. It doesn’t matter whether you’re working for a developer, property owner, management company, general contractor or subcontractor, contractual clarity is how you stay out of trouble.
Unfortunately, too many contractors don’t know about (or maybe don’t even read) the contracts they sign or are being signed on their behalf by “responsible parties” in their organization. At the end of the day, the only person responsible is the shareholder whose name is on the document.
The Danger & Necessity
Contractors assume inordinate amounts of risk for what amounts to a relatively low financial payoff every time they enter an agreement with a client. “The what, when and how much of the deal are often the easiest parts to determine and assess.
Many other areas of a contract can cause issues, and the phrases and clauses that need to be reviewed most closely usually include: payment terms; indemnification; subrogation; primary and noncontributory; pay if paid; pay when paid; warranty; as per the plan specifications; the general contract; including all documents incorporated therein; is hereby incorporated into the contract, etc.
It’s your ass on the line for every aspect of the contract—from the simple to the complex. Too often, contractors pursue more work than they can feasibly handle. To win enough work, they bid a multiple of the actual amount of work desired, and oftentimes, those victories can come at a price.
Sometimes the profit margin is too low, or the performance obligations are such that, to complete the job according to the schedule, the contractor must commit to increased costs, such as expediting materials and equipment or using substitutes that can be delivered on time. These are the risks that contractors live with every day.
Yet, the biggest challenges arise when something goes awry on a project. It could start with the owner or developer. There could be cash-flow problems, bank funding/budget issues or many other problems downstream. You might be familiar with the saying, “stuff flows downhill.” Well, the farther away you are from the top of the hill, the more of a burden it becomes once the “stuff” reaches you.
It could be that the general contractor slipped up and won the work. Every victory has a habit of becoming a loss for someone, and it’s somehow usually downstream. The handshake agreement that we’d all like to live by is a thing of the past. Contracts are necessary should both parties get hit by the same bus. Someone else is going to have to perform on this project, and the only thing that survives is the contract. So, the contract must be clear.
Clearing IT UP
All of the contractual terms previously discussed are in all agreements. Those words, phrases and clauses are in documents written by the American Institute of Architects (AIA). They are in ConsensusDocs and probably every other construction contract that you have ever seen or signed. The real question is: How fair are they to you and your firm? Do you or your responsible parties push back and attempt to edit, inserting words like “reasonable,” “to the extent that,” “due solely to negligence,” etc.?
There’s an old saying, “Negotiate, don’t litigate.” Whenever a dispute or claim arises, it is often far less costly to resolve through negotiation—regardless of how right you are—not just in dollars and cents, but also your time and your employees’ time. Then, there’s your reputation at stake. Having principles and fighting the good fight are noble and honorable pursuits. As such, it’s better to be fair and clear the first time around.
When the negotiation option doesn’t work, it all comes back to the contract and the performance obligations: what, when and how much. Once litigation begins, those items are fairly reasonable to identify, and it’s the other language in the contract that can either help or hinder your case.
It’s a new year—a good opportunity to spend time and money with a qualified attorney and competent insurer to review your contracts. If you’re a general contractor, consult AIA or ConsensusDocs to research areas where contract language might be tweaked to your advantage or level the playing field.
If you perform in the private sector, develop a fair, streamlined contract. Subcontractors should consider having a professional review recent contracts and seek alternate language that can even the playing field without making the contract negotiation contentious.