Built With Billd EP 4: Construction Contracts: What You MUST look out for
In episode 4 of Built with Billd, Chris Doyle sits down with Ernie Adams from Southwest Construction Services to talk through all things contracts. From what to exclude to what’s negotiable and more, Chris and Ernie dive into the specifics of what to look out for.
Chris: Hey guys, this is Chris Doyle with the built with build podcast today we have a great guest, Ernie Adams with Southwest construction services, Ernie, how you doing, man?
Ernie: I’m doing great. Thanks for having me on.
Chris: Yeah, so the story is Ernie is my introduction to commercial construction back years and years ago. He hired me for Southwest construction services and very much my mentor and coach I had been in residential for almost 10 years before that, but we were talking about interesting ideas and contract review is just such a big topic. And then someone said, Who’d be perfect for that? I said know exactly who it was. So, Ernie, we were just talking about this. You’ve been there 18 years. And I mean, I was trying to quantify at least what 10s of thousands of contracts.
Ernie: Let’s go ahead and say with that, I mean, heck, I lost count on your one. So yeah, we run through several contracts. We’ve got a whole team of contract managers that basically that’s all they do is we contracts in and they they they go over the boilerplate stuff and review it and send it to sales and management and executives to sign so you know, we haven’t we have enough flow that we have three, three people that that’s all they do for us.
Chris: Yeah. What’s interesting is once you’ve done it enough You almost don’t have to read it anymore you know exactly what to look at in about 30 seconds you can figure out what’s going on in the contract. What they may be trying to slip through what you know, you’ll redline and that just comes with just looking at tons and tons of documents and knowing exactly what to do.
Ernie: Yeah, the boilerplate verbiage is pretty much across the board for every contractor you’ll get a few you know, that slips and stuff into one exhibit and you know, the other exhibit. So, you kind of get a feel for where on let me look at this. Let me look at that. Let me just say and sometimes it happens sometimes it doesn’t, where you find some things but, but but overall, you know, you concentrate on the scope or projects specific exhibits, you know, the the scope of work, the liquidated damages, construction schedule, and, you know, plans specifications stuff like that you’ll be you’ll be okay.
Chris: So for those just real quick for those that don’t know, Southwest very well, do you want to talk a little bit about the kind of projects you do and size and the kind of types of projects?
Ernie: Yeah, I can do that. Um, you know, we established in 1993 by Tim Underwood and Charlie Stewart. We started off as a small solid division. Just doing some sawing and sealing work for concrete contractors and we moved on into the actual building caulking and waterproofing and air barrier stuff throughout the years. We have since grown to Southwest for its entirety as for you know, for everything’s about $70 million. We may touch 75 million this year in sales, but we have several different divisions of Southwest construction. We Southwest construction now is more of a holding company, if you will, we have a Southwest waterproofing, which is responsible for about 34 to 36 million of that 80 of 75 rather. And then the sawing division does about 15. We got a concrete division that does about 18. And then we opened up a demo division Southwest demolition services. Few years ago they do about 10. And then we have we just acquired about a year and a half ago, we acquired a landscape company where, you know, we call SLS now and the the big picture, Chris is we’re going to branch off into insulation. You know, we do a little bit of insulation as it relates to the building envelope, but we’re going to do a complete turnkey instance. division or company, maybe SAP was thermal or surplus insulation. We haven’t really got that far yet. But, but we’re working that and Charlie and Tim, talk to the executives, you know, eventually, we may just go for just the total building envelope and do a roofing as well. But I think that’ll be our acquisition rather than startup, I think we will find out what company has a good reputation and go try to join them or acquire them.
Chris: So the type of GCS, though you’re working with, are generally fairly sophisticated. At the same time, I would imagine 90% of your incoming businesses GCS you’ve already worked with.
Ernie: Yes. We, you know, we adhere to the 8020 rule. You know, 80% of our business comes from 20% of our customers. We were very relationship driven. As you know, that we still to this day, believe that, you know, we have good relationships with our customers in, you know, a lot of stuff that, you know, we want to work with the guys that want us to succeed as well. And, you know, if we have a good relationship with them, then a lot of this stuff we’re going to talk about with contract negotiation. It really helps out if you genuinely like the company and you want to work with them. And you want to work as a team and succeed together on the project. Absolutely.
Chris: Well, yeah, let’s do it. Let’s jump into this. The. So let me start with what it could you had talked about maybe three things that you would always exclude from a contract that you’ll see and it’s like an immediate red line.
Ernie: Yeah, you know, just 30 seconds before I came over to Southwest. I was actually a general contractor for about two years. So I was a part of developing the contract to send to the sub. And the general contractor just wants one thing they want their scope covered. They don’t want any curveball or anything hidden through the duration of the contract. So they use a lot of terms that are very, very generic. That is it. They’re basically just what’s a gotcha terms, you know, one of them, you know, in particular, including but not limited to. So, now they’ll use that so I so I would, when I see this as as a as a subcontractor, you know, we don’t bid just a broad stroke waterproofing, it’s very particularly heel, some waterproof things are done by the by the shower gas, some waterproofing material is done by the roofer, you know, so we were pretty black and white on what we propose. So therefore, we try to be creative, keep the contract as black and white as possible. So including, but not limited to clauses or generic clauses like that are something that we strike. Also, you know, the construction industry has been for a while, but they’re getting more sophisticated on change or limiting your change order percentages of what a contractor can make. Like they’ll say, Well, the only thing you can make here on this job is a five and five, which means 5% overhead and 5% profit, or 510 10, five, whatever, doesn’t matter, but they limit that. Well, you know, as well as I know that that subcontractor doesn’t have 5% overhead. You know, it’s way beyond that. So if I was to go by the letter of the law on that, I would be making I’d be losing money doing this extra work for you.
Chris: The original project amount, the change order ends up maybe being two or three x of the original. You get on those kinds of projects. Yeah,
Ernie: Well, yeah, especially public projects, you know, where you have to just every cost and all that You know, I’m not I’m not advocating that you load up, you know, money and make money, you know, you that’s where you make your profit and stuff on change orders and take advantage of the owner the GC, but you got they got to understand that look, I gotta, I’ve got to maintain, you know, a same percentage of overhead that I bid originally and and with a decent profit to make it worth my while and and so we we attempt to strike that now sometimes it gets sometimes it it goes through sometimes it becomes a no negotiating point. Also with that the change or continuation is what I call it. Basically now I don’t know if you were ever if you ever saw this, Chris, but they have a a clause in there like say I you know, they want me to do this extra work and I say okay, it’s $10,000 Well, they say well, that’s too much. And there’s a clause in there it says while you’re negotiating the price of this change work, you continue on, and do the work without the approved pricing. You know, what do you want me to do? You know, you want me to do the work and and say yeah, I’ll give you two grand for it.
Chris: Yeah, exactly.
Ernie: So, we try to strike that as well. And really, you know, I think I may have told you this before, you know there’s not a contract that doesn’t deserve to have something that doesn’t deserve to be marked up.
Chris: Let me hold on that point because I think a lot of contractors don’t have the authority and weight that Southwest may have. And they would be more timid to do that. Right. So to go in and say why because they’re going, Hey, this is my first contract with such and such a general contractor and I want them to think I’m easy to work with. I think one of the things that you would teach me is that it’s actually the red line that shows that you’re responsible Because of your redlining that you’re looking out for other things.
Ernie: Yeah, absolutely. Now, you know what surprised me when I came over to Southwest. You know, they were just signing contracts just just yeah, I’ll be offered I don’t even know if they even looked at them. They just signed them. I was, I was like, gosh, guys, what are you doing? You know, let’s let’s look at these things. It was it was the guy who brought me over Jason Littleton. And we we both came from GC side Well, that’s when we started reviewing the contracts and actually started marking them up and you don’t you know, there’s there’s a fine line between being difficult to work with and being you know, thorough in your scope and your contract you everything I try to tell my guys you know, when you the first strike you make that that’s not a hard line drawn in the sand. It’s it’s the first and that’s the start of the negotiation. Chances are, I may let it I might let it fly. You know, I may go hey, yeah, you’re right. You’re probably right. Yeah, this is probably not gonna have you know, it. I’ll let it go but you don’t be too stringent on that where you you just become too difficult to work with they’ll find somebody else but but you know, he also got just you know if you want if you want that job, just sign and go and deal with deal with any pushback that you have later. You know, that’s for small guys. Yeah.
Chris: Well so if you are in a position, what are some of the things that you would expect are always negotiable with a general contractor?
Ernie: Well, I think everything you know, going back to have in the relationship with the guys with the company everything in the scope specific exhibits are, I would say is pretty much negotiable. You can go in there go hey, yeah, I’ve got this but I don’t have this and if you’re in if you want me to pick that up and has been there, let me process it for you. Let me see if and absorb it. Or maybe we can negotiate a change order or something like that. Um, you know, let’s take
Chris: Let’s take an example here, because I think if you go through the process, a lot of times we read the contract stage, you’ve already that’s a buy signal, you’re likely getting the contract scoped out, oh, wait, I don’t have that in my scope. But you’re already there. So don’t be shy. My recommendation, don’t be shy about saying, I don’t have that. Let me price it for you. Because you’re, you know, maybe they go back and say, well, you’re not low anymore. Maybe that puts you out of contention. But you can always respond to that. But don’t i think that i think the overall theory behind this conversation is like, don’t be afraid to ask, don’t be afraid to mark up. Right. And then you can always respond to what they say back.
Ernie: Yeah, right in it. Yeah. Don’t be afraid and you know exactly what you said. I mean, a lot of these. A lot of these GCS now on these more complicated jobs before a contract is even released. They’ll have a scope review meeting. And so what they’ll have is, if they’ll have, I’ve seen someone, maybe just have the scope review exhibit that would be in their contract, and they send it to you. And you negotiate it, then. Yeah, so there’s so and so, and I appreciate those because that’s when you can hash out this stuff and say, Hey, I don’t have this, but I do have this. And then all of a sudden, after all that said, and then you have a clean contract. You know, another one that’s pretty easy. Well, it’s it I won’t say it’s easy again, it all depends on your customer but liquidated damages. You know, for us. We’re not a major player in the in the schedule of the job and we have some critical paths, responsibilities in our scope of work. But I would say that, you know, liquidated damages there have to stay in the contract somehow. And because it’s part of the general contract, General Contractors contract with the owner, right. But there’s a term in there there’s a clause in most of the says, directly or indirectly, which to me says, hey, look, indirectly if you’re part of the team and we eat LDS, well, you know, you’re gonna you’re gonna be, you know, charged a, what we feel is a portion. Well, I try to get that indirectly taken out. Yeah, look, I don’t have a direct I mean, you’re gonna call me when so and so’s done. And I’m gonna go in I’m gonna get my work done and get out. Yeah, yeah. I mean, you know, a concrete guy or a a dirt guy or a farmer or somebody that’s going to be there for three or four months that you know, so in a lot of times, you know, I have a pretty good record of negotiations. The indirect out.
Chris: So you’re probably if you think about the flow that back to insurance policies, your average decent sized project might be 300 $400,000, the concrete guy on that same project is going to be 5 million, maybe more. And so they’re their policies are going to be structured to handle a broader liquidated damages clause. Whereas Southwest I would imagine isn’t really set up that way, nor nor should they be for the reasons you’re mentioning. But a lot of grants and bonding side as well.
Ernie: Sure, yeah. And I’ll be honest with you, I can’t really recall there may be one, maybe two jobs since I’ve been here that we’ve been part of a liquidated damage where we hadn’t fought it in in one, you know, we had to, you know, fork over some money but, but I can’t remember because just like I said, we’re such a minor part in the schedule. Sometimes we’re not even on the construction schedule. And this is just generic scope. I mean, you know, strikes even just you strike out stuff that just not applicable or relevant flagman had already flagged me in, you know, hot work permit, you know, I don’t have that, but a lot of times I just leave that in because it’s not applicable.
Chris: So let me switch gears a little bit. What’s your experience when dealing with pay when paid and pay if paid type clauses?
Ernie: Well, okay, and I’m that’s I’m sure that’s a sticking point to pretty much every subcontractor around. Pay when paid, you know, we deal with this a lot. You know, our, our our basic, our turnaround time, our average turnaround time on payment is about 60 to 70 days. Yeah. And we’re one of the lucky ones where we have you know, enough cash flow. We have enough You know, you know, your bank credit, if you will, that we can, uh, we can, you know, we can ride that out or we can, you know, get that Tim said one time that if he if he dropped that down to 55 days, he tried to do backflips down, you know, 35 if we can get that because it it’s a substantial amount of money. Yeah. If we, if we just turn it around, I think, you know, I’m gonna get this number wrong but he said if we improve that by seven days or eight days and that then that equals another like $3 million of cash flow for Southwest Yeah. And that’s huge and so so the paid wind paid you know it that doesn’t release the general contractor from paying us regardless if the owner pays that you know, they but it what it does, it just doesn’t Hey, we were gonna have to pay you but there’s not a necessarily indeterminate amount of time. I mean, they say I think the law is a reasonable amount of time, but I’m not. I’m not sure what that is. So, you know, we have stuff that we haven’t paid for over a year. And right now, you know, dinner collection means that the pay is paid. That’s the one that we really look at when that partner says, Hey, subcontractor, you assume all risk on if the owner pays us or not. Now, I know that the Texas law does not like that at all at heard, aren’t they advocating to remove that completely? Or maybe that already happened? Yeah, I think I think a few years ago, maybe 10 years ago or something they worked on that clause where if it’s a paid if paid clause, it has to be clear that that the subcontractor is assuming the risk of payment. Now, even if it’s in the contract, I believe Leave that there have been case studies where the courts have pretty much thrown it out, especially if there’s documentation of, Hey, we instructed you to do this work, per the schedule per emails per directive. And you have your build on time, you have perfected your lane rods or your bonding and all that. Where there is, you know, I think that’s a clause that is a pretty weak clause. In my opinion. The problem is you have spent a ton of money just to get your money, but to be honest with you, you know, I bet you 80% of our contracts now are still paid if paid. Oh, wow. Really? Yeah. Yeah. So it hardly ever gets there, you know, mitigation or even litigate. It hardly ever gets to this stuff. And so, a lot of it’s, you know, hey, we’ll take 40 cents on the dollar or 80 cents on the dollar. It’s a negotiating tool because nobody really wants to get the lawyers involved.
Chris: Let me ask you a question about pay if paid. So pay if paid. If an owner decides not to terminate the agreement with the general contractor, then at that point, what it’s saying is, okay, we’ve terminated at x point in the project, and all future payments that would be owed for continued work would not be owed by by me, the owner and therefore subs wouldn’t be out. But if you’re staying up to speed on a project, pay if paid does not include if, or does it if the property owner says, I just generally unhappy with this, and I’ve decided I’m not going to pay?
Ernie: You know, that’s a great question. You know, when you say they decide they’re not going to pay the general contractor, but are they are you saying they want to continue with the job But they don’t want to use that general contractor.
Chris: Yeah, I don’t know how often that actually even happens though. Like, that’s almost an impossible scenario.
Ernie: Right? It’s very rare. A lot of times the owner will want to continue and finish and if he doesn’t have the money, then then they go, then him and the general contractor go into litigation. Now for us and I in Forgive me, I’m not sure if this is tied to the owner, but there’s a clause of termination for convenience. In the job. I want to say it’s either the general contractor and the owner. If they decide that, that look, we’re stopping the job, we’re not happy. You know, or we’re stopping job. We don’t have any more money. Something happened, you know, Coronavirus head or whatever, then we’re entitled to be paid what we have done up to that point. We lean on that clause to get our payment, you know, of course, we have to justify everything we have to go in and probably I think the one time that we used it, I had to submit work tickets since day one. So I mean, it was almost not worth it. But, you know, of course it was all the paperwork and stuff but but we had we had that clause fall back on if the owner or contractor just says, look, we’re just gonna we’re just gonna stop.
Chris: Let me ask you, this is a another point I wanted to bring up is how often do you see that these contract negotiations actually matter after the fact when you’re either on the project or you’ve completed a project and you are actually pulling up the contract and reading what it says instead of just new because a lot of times when something goes wrong on a project, you’ll just simply negotiate with the project manager. This is What we’re looking to do if we’ve got a subtle if you’ve got to do this, but how often do you literally pull up that PDF and say, What is the contract read?
Ernie: Well, we do it quite often. But it’s it’s, it’s more just to get a clarification of what, what, what they’re saying what they say we have what we’re saying we don’t have, you know, there are things that get that we miss that are in the contract, nothing huge, but, but you know, maybe maybe just some, just some small things over here. So over there that we just didn’t pick up if there’s any contracts in the contract. If it comes to the point where, you know, there’s a difference of like, interpretation, or Well, the intent was that this clause, or that this line item is is all inclusive, well, then we can go and say, well, we don’t build intent. A lot of times you just negotiate it out, and you do it within a meeting or two and and you end up getting on some of the costs they in, in giving us some of the costs and you go down the road.
Chris: Yeah, I always remember the feeling and I still have it because I deal with contracts for our business as well. But that feeling when you kind of rush over the contract and say what did I sign again? And then you see it and you go Oh, man, why didn’t I catch that.
Ernie: Chris, I get that all the time. We’re all looking at contract one of my opinions will come up to me says hey, they say we got this and I said, No, it’s clearly we don’t, and I look down and it’s black and white clears day and I let that thing slide off, how would I have not struck that?
Chris: Well, and I think a common approach there is just you know, just tell the customer tell your general contractor, Hey, I’ll be honest, I miss this. It’s in the contract. We’re going to do it. First of all, you’ll get some credit points for stepping up on it. But it also sets the tone for future change; order works it anything else. I can’t I can’t absorb anything else here. I already took a bust and I’m gonna fight our way through it, but just know that I’m pretty slim here.
Ernie: Yeah, I do that I do that. Every time that I have one of those I just worked out one couple days ago where we didn’t have some flashy and, you know, our cost was valid and you know, it really wasn’t in the contract. And so I had an argument. The problem was, I had a project manager who sat on it for four and a half months, never mentioned anything well, now they need that flashing next week. And now we’re just now saying, well, we don’t have it, and it’s a good customer, the cost is minimal. And I told the guy, Look, I said, I don’t have it. But if this was in December you and I’d be talking about it and getting money for it, but drop the ball. We’re gonna do this for you. We’re big boys, we can handle it. It does go a long way, you know, it makes the cut and makes the phone call a lot easier and out. Most times, I probably will get a favorable judgment on anything else that comes up later on. Like you said.
Chris: Yeah, and that next project, you know, as a project manager, you’re letting contracts and you’re you’re thinking yourself one, I’m trying to make money on this deal, too, right? I got contractors I want to negotiate price with but most importantly, I want to deliver a good project on time to my customer, the property owner. And if I’ve got a group that’s always complaining and always come back saying I don’t have this and isn’t able to step up when they make a mistake, then they’re less likely to pick you whether you’re high or low, you know,
Ernie: Yeah, they are customers don’t have time to mess with that. I mean, they’re, they don’t have time to mess with difficult contractors. They don’t have time to mess with, with, with with people that bother on the job, they they don’t, you know, they’re they’re under the plans are getting worse, the schedules are getting tighter and the jobs are getting more complicated. And and they, you know, they, a lot of times have one, two, or even three or four jobs to work with. And they just don’t have time for it now, in we want to be the one that we won’t be a part of the team, we want to be the ones that are easy to work with. And the ones that get the job done fast and incorrect. And for the most part we do that. Do we stumble? Yeah. But you know, that’s, that’s our main goal is to be a part of the team and help that pm out because he’s going to have another job here in about, you know, the next time and we want him we want to be a part of his team again.
Chris: Yeah, no, that’s fantastic. Ernie, this was great. I think our listeners will really appreciate being candid and honest here and things that can help them and negotiating and working with their general contractors with Southwest is doing it’s always was great to see you guys and I really appreciate you joining the podcast.
Ernie: No problem. But anytime, anytime you need me to come on, more than happy to. I appreciate you thinking about me. And I hope everybody’s safe and healthy. And we’ll get through this and we’ll continue on with the great market that we have here in Texas.
Chris: Yeah, absolutely. Well, thanks again. I appreciate it.
Ernie: No problem. Take care, guys.