Concrete companies seeking work on private or public construction projects–whether as a contractor, subcontractor, or supplier–often place two priorities above all others: secure the job, then please the customer. Even if your company is desperate for more work, though, it is vitally important to understand fully, before the work begins, the meaning and potential consequences of the contractual terms you are about to enter into. Regardless of whether or not your company is in a bargaining position to meaningfully negotiate those terms before signing on the dotted line, failing to appreciate what it is you are agreeing to can mean the difference between a lucrative project and a messy dispute with damaging financial and reputational fallout.
Amidst the rush to win the work and secure the contract, prudent companies of any size will first have an attorney look over the contract’s terms and attempt to negotiate away language that is the most potentially damaging to them. Some of the terms most unfavorable to contractors and suppliers crop up time and again in construction contracts. They are “standard” terms usually drafted by the owner, owner’s representative, or project designer and are written to provide the maximum benefit and protection to those parties.
In this article, we identify five traps you should avoid before signing the contract, or if you can’t avoid them and are stuck with them, that you should at least avoid triggering and thus opening yourself up to their damaging consequences.
- 1.Get all of the documents and clearly define your scope
You must recognize that the contract you are signing often is not the full set of obligations that applies to your work. Obtain the prime contract documents (the prime contract and any addenda) as well as the project specifications to gain an understanding of how all of the provisions work together and how you might be bound by those documents.
The prime contract documents. Often the prime contract not only binds the general contractor (GC) to the owner but additionally contains provisions binding you as the subcontractor or supplier, even though you were not a signatory to the main agreement. This occurs in many prime contracts by virtue of a “flow down” provision stating that the contractual obligations belonging to the GC, as well as the limitations on the GC’s rights, “flow down” to everyone else who works on the job (subs and suppliers).
These obligations and limitations, which may only be in the prime contract documents but flowing down to others, can be substantial in number and significant in their consequences. For example, often a prime contract will contain a waiver of the right to seek consequential damages, or be bound by a fixed liquidated damage amount. Such prime contract language, in combination with a flow down provision, will saddle subs and suppliers with the same limitations.
If you do not have a complete understanding of what you are already bound by under the prime contract, you may be negotiating certain points in vain. Indeed, you may be bargaining for, and perhaps lowering your price, in exchange for certain purported rights that are without value because they are defeated by the language of the prime contract.
Specifications. Language in the prime contract or the subcontract or both often incorporates project specifications by reference, thus becoming part of your obligations. For that reason alone, in addition to properly calculating your bid or quote, obtain the specs and understand them before signing.
Carefully review specs to see if they contain terms or conditions that one might normally expect to find in the prime contract or subcontract, but are nonetheless tucked into the specs. Sometimes such unexpected terms, if not creating their own new obligations, might contradict language in the prime or subcontract. Failing to iron out such ambiguities ahead of time only invites trouble down the road.
Beware of specs written by someone unschooled in concrete work, who may use terms or describe standards and practices in a sloppy or ambiguous way. As discussed below, the more precise and accurate the terminology, the less chance that a judge or arbitrator could define language in way unfavorable to you later when a dispute arises.
Avoiding ambiguity. Stay away from jargon or vague words like “customary.” The common refrain often uttered by businesspeople when they negotiate a contract that “everyone in the business knows what that means” becomes an empty sentiment when projects go awry. When this occurs, there is no such unanimity among the dueling parties’ lawyers regarding the meaning of the imprecise contract. Suddenly, it means what will translate as the best result for the lawyer’s client. Defining terms clearly lessens the chance of litigation or, if the other side insists on litigating, increases your chances of success in court.
- 2. Limit Your Indemnification Exposure
Scrutinizing an indemnification clause in a proposed contract can make one’s eyes glaze over, but there may not be a more crucial contract provision to pay attention to during the negotiation process. These clauses generally contain the phrases “indemnify” or “hold harmless” or both. To “indemnify,” in its purest form, always means to be responsible for any judgments against the indemnitee (the party receiving the indemnification). Sometimes it also can mean that the indemnitor (the party providing indemnification) will be responsible for the legal expenses incurred by the indemnitee. A “hold harmless” clause essentially waives any claim you might otherwise have against a party or a right of recovery against it.
Again, it may be the case that you, as a subcontractor or supplier, have only a limited ability to negotiate the language of these types of provisions. But it is essential that you at least understand what it is to which you are bound. To the extent that you have any negotiating power, you should always seek to limit your obligations concerning an indemnification or hold harmless clause only to the extent of your own fault. This is what is called a “limited form indemnification.”
Avoid the two other common types of indemnification clauses: “intermediate form indemnification,” and especially “broad form indemnification.” Intermediate form indemnification requires the indemnitor to assume any obligation except where the injury or damage is caused by the indemnitee’s sole negligence. The broad form indemnification is the most dangerous type of indemnification clause, since it provides for an unqualified indemnification regardless of who is at fault. While several states have statutes that void the ability of an indemnitee to enforce a broad form indemnification, these clauses are not unlawful in every state. (See “Limit Your Indemnification Exposure” sidebar)
If you cannot avoid being subject to an indemnification provision but wish to proceed with the contract, at least attempt to require the other party to agree to a mutual indemnification clause. As a subcontractor, you would indemnify the GC or owner to the extent of your fault, provided that those parties also agreed to indemnify you to the extent of their respective levels of fault.
- 3. Do Not Waive Your Lien or Bond Rights
If a project or transaction goes south for any reason, a lien or a bond may be your only refuge for payment. It is critical that you do not waive your ability to collect payment via a lien or bond. While some states void such waivers as against public policy, not all states do. Courts will sometimes enforce these waivers, even where the court recognizes that the consequences are harsh (see “Do Not Waive Your Lien or Bond Rights” sidebar)
With the benefit of hindsight, to question why anyone chooses to waive such valuable statutory rights, it is understandable considering that a typical GC/owner form contract will include such a waiver of lien provision and that the contractor or supplier competing for the work might lack bargaining power. When courts enforce these or other types of inequitable provisions, it illustrates the kind of damaging mistake a party to a construction contract makes when it fails to pay careful attention to the terms of a proposed agreement or fails to negotiate revisions to those terms before signing the deal.
- 4. Don’t Delay the Start of the Warranty Period
If your contract includes a warranty on your work or your product, it is advantageous for the warranty period to begin running from the date your work is complete or approved. Contracts drafted by owners, however, will often state that warranties begin at the completion of the project as a whole. But you may have no control over when the entire project is completed, therefore your warranty may be a lot longer than you anticipated. Aim for clear and specific language that starts the clock ticking on your warranty as soon as you have completed your work or, depending on where you fall in the contractual chain, when it has been accepted by the owner, owner’s representative, or GC.
- 5. Every Lawyer’s Refrain: Get It in Writing and Put It in Writing
Get it in writing. All of the points you agree to be bound by on a construction contract should be in writing. But perhaps nowhere is this more important than in the context of change orders.
A GC, subcontractor, or supplier should always balk at proceeding without a written change order executed by all relevant parties. While most well-intentioned companies seek to follow this advice, acting on it each and every time sometimes doesn’t happen amidst the rush of completing the work and exhibiting good service. But taking action without a signed change order can be very risky when something on the project goes wrong. Even if the change was clearly agreed to orally by all involved at the time, without a signed change order it will be easy for a party you are fighting with later to assert that you engaged in an unauthorized act or went beyond the scope of what was agreed to. Also the change order may not actually be valid without a written sign-off by the GC, owner, or owner’s representative, even if no party can reasonably deny that the change was agreed upon by all concerned at the time.
Put it in writing. Pay close attention to all notice provisions within the contract (in terms of who has to be notified, how, and when). A careful company will follow such notice provisions to the letter and comply with all writing requirements. The lack of a timely notice or the proper form of notice, as harsh as it may seem, may result in the unwitting waiver of a party’s bargained-for rights. Again, once things have deteriorated into a full-blown dispute, your opponent is unlikely to give any quarter if you have made a misstep with respect to your contractual obligations, even technical or procedural ones like this.
Avoiding these five traps doesn’t guarantee a perfect contract, but will go a long way toward keeping you out of trouble if a dispute does arise.
- Benjamin B. Tymann and Jack S. Gearan are attorneys with Greenberg Traurig LLP, specializing in commercial and construction litigation.