Construction Contract Negotiation Part 1: A Lawyer’s Advice for Subcontractors
At some point in every subcontractor’s career, they’ve signed a subpar contract. There are countless reasons why, but they all have a common solution: upskilling subcontractors in the art of contract evaluation and negotiation. At every Billd Subcontractor Meetup, subs gather virtually to swap industry insights, and this one was all about contracts. These subs exchanged a wealth of information, giving each other ideas on what to add, what to redline, and how to get creative with contracts. In the interest of advocating for subs, Billd is now offering the proven contractual strategies that came out of this Meetup, from both our presenter James Carney and the attendees.
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Meet Our Expert
James Carney, JD has spent 14 years practicing construction law. A partner at Carlton Fields, he was rated in the top 5% of construction lawyers in 2021. No stranger to the industry, Carney often takes a hard look at past construction projects to see what could have been done differently to protect those involved. He’s represented the interests of subcontractors, GCs and owners alike, giving him a well-rounded perspective of all parties on a project. He knows what subs are contractually entitled to, and the mistakes that cause them to inadvertently waive those rights.
Carney gave a detailed presentation on how to adopt a proactive, protective mindset when it comes to your contractual rights. He covered risk mitigation strategies, contractual pitfalls (like accidentally waiving your rights), and how to approach negotiation in an effective but non-adversarial way. We’ll dive into his advice below.
How to Approach Construction Contract Negotiation
According to Carney, there are 3 things you want to convey in a contract negotiation:
- That you’re sophisticated professional who understands their rights and obligations
- That you’re a team player who will cooperate and collaborate
- That you’re not a pushover
That said, there are 2 broad goals to keep in mind:
- To negotiate and revise the terms in your favor (obviously)
- To get a better understanding of just what those terms are
He makes this point because your leverage to revise a contract will vary, but your ability to go through it with a fine tooth comb and understand just what you’re getting yourself into – that can be universally achieved.
Negotiation Best Practices, from a Legal Perspective
- Truthfully Gauge Your Negotiating Power – Your negotiation leverage will vary depending on the conditions of the project. That’s why it’s wise to exercise self-awareness and ask yourself how much contract negotiating power you have before you start redlining. Ask yourself who the owner is, or whether it’s a private or public job. On a public job, you’ll probably have minimal ability to negotiate the prime contract, which limits your ability to negotiate your terms with the GC. On other jobs, you may have increased negotiation power if you’re a specialized sub who provides a unique or important service, giving you more leverage to push back. There are also strategic considerations, like whether you want to work with this GC a lot, in which case it may be worth it to take on the extra risk from not-so-great contracts, if it will get you on the good side of that GC. Try to determine in advance how much back and forth you’re willing to go through with your contract negotiations. Think about the implications of fighting for the terms you want, and the risks of not fighting for them.
- Review the GC’s Prime Contract with the Owner – The prime contract will almost always be an official Contract Document in your subcontract, with flowdown clauses that affect both you and the GC. If you don’t evaluate the prime contract, you don’t have the full picture of what you’re signing up for. For example, the prime contract may establish notice requirements for any claims of yours that flow up to the owner, or set dispute resolution procedures that flow up to the owner. If you can get your hands on the prime contract, add an evaluation of it into your contract negotiation process.
- Negotiate Your Form Subcontract During Bidding – This gives the GC a chance to negotiate your requests with the owner while project terms are still elastic and responsive to edits. That said, some GCs are reluctant to provide you with a copy of the subcontract during the bidding process. If you can get it, it’s great to have. If you can’t, consider creating an addendum with your own must-have provisions, like price escalation. Include that addendum as a term in your proposal so that the GC can pass it on in his proposal to the owner. Avoid situations where the GC is locked into a contract, feels like you’re springing revisions on them, and wishes you’d given them more notice so they could negotiate your requests with the owner.
- An Associated Pitfall: NEVER Assume the Terms of Your Bid Made It into the Subcontract. Be very cautious about the fact that you included terms in your proposal, because they may be overridden by standard terms in general contracts. The bid is usually not considered a subcontractor document, and has no impact on your relationship with the general contractor. If on rare occasions your bid is included, always check whether it has been incorporated in full. Sometimes, bids are incorporated in a strictly limited capacity, for things like scope of work or unit prices.
- Call the GC and Let Them Know Your Intentions to Redline/Negotiate a Contract – Before you mark up a contract or add any provisions, pick up the phone and let the GC know. Create an open dialogue where you communicate your concerns and goals. They may actually offer certain reassurances to quell your fears. Even if they don’t, it’s good business to keep them in the loop, before they receive a few pages of redlines. Good partners will try to foster that communication on the front end. (Wondering exactly what to say after that call? Take a look at Billd’s Sample Non-adversarial Contract Negotiation Email)
High-Risk Contract Areas that Can Lead to Litigation in Construction
There are plenty of contractually dicey clauses that anyone in business should be on high alert for. But these 3 are particularly relevant to subcontractors, and have been known to cause the most issues for them.
- Scope of Work: Try to make your scope of work as clear as day, and snuff out any ambiguity. It’s better to know if you and the GC or owner disagree on scope interpretation early. To do so:
- Identify scope gaps that seem obvious.
- Focus on performance specifications that set requirements for your work. These are risky, because they create an opportunity for you to not meet these requirements. Identify those specifications, then ask:
- How will that performance be measured?
- Is it clear how compliance will be determined?
- Changes are one of the most frequently litigated issues on construction work, and scope ambiguity is almost always to blame. Carney urges you to seek clarification if you see anything unclear in your scope of work. Rather than having a change sitting out there until the end of the job, find out in advance if this is a dispute that will cause conflict, negotiation or litigation.
- Indemnity: Every contract has provisions that require you to indemnify other parties. The central question of contractual indemnity is: does it align with your insurance coverage?
- Work with your broker to ensure that your general liability coverage will cover you if you’re called upon for an indemnification obligation. Ideally it aligns perfectly, so that you can trigger insurance coverage and manage your risk.
- Get your broker involved early, ideally during the bidding process, to understand if there’s some outside risk that you want to build into your pricing, and if the project and its associated risks are worth taking on.
- Payment Provisions and Pay-if-Paid Clauses: You’ll always want to look for anything unusual about a contract’s payment terms. Ask yourself who bears the risk of nonpayment.
- Some contracts attempt to shift the risk of nonpayment from the GC to the sub. There is, of course, a distinction between pay when paid and pay if paid. Pay when paid is not interpreted as a complete shift of risk, it just establishes a payment waiting period. Pay if paid, however, makes the subcontractor’s payment entirely conditional on whether or not the GC gets paid.
- Understand how the law in your state and region is applicable to your contract. Some states prohibit pay-if-paid provisions, won’t enforce them in contracts, and the GC will still be liable to pay you. For example, Virginia just passed a law prohibiting pay-if-paid clauses. Maryland tried, but they received blowback from the general contractor community and scrapped the law.
In part 2 of this article, we’ll go over key ways to not accidentally give up your right to a claim.
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