Infinite things can go haywire on a project, and your contract is what’s standing between you and an ugly dispute. The thing is, your ideal contract protections require client sign-off, so terms must be fair on both sides. You have to be firm and insistent about what you need, but flexible and relenting where necessary.
Billd held a Subcontractor Meetup where Drew Boyd, an insurance and indemnity expert, and Maegan Spivey, a Contracts Specialist with Document Crunch with experience on both the sub and GC side, shared invaluable insights into contract negotiation and risk management. We’ll delve into their combined wisdom to outline essential strategies for subs who want stronger contracts and project outcomes.
4 Tips for Frictionless Contract Negotiation
The key to a good contract is being bold enough to raise your hand and ask to change something that doesn’t work for you. But this process can feel uncomfortable for subs and GCs alike. Boyd and Spivey insist that negotiation does not need to be an adversarial process. Subcontractors can redline contracts without creating friction if they’re mindful about how they approach it.
Spivey and Boyd recommend the following tactics for getting contract changes approved:
- The Power of “Why”: Clearly communicate the reasons behind redlines. This fosters transparency and collaboration. Don’t leave them in the dark, clear rationale can help get them on your side.
- Ask for their “Why”: Ask for the purpose of any of their terms and redlines that you don’t want or understand. Understanding why can help you propose mutually beneficial compromises.
- Prioritization: Focus on the most critical changes. Avoid overwhelming the negotiation process with wants instead of needs. Prioritize what’s most important, and reserve your energy for those items first and foremost.
- Additions Over Redlines: If you can find a way to get your ideal terms with an addition instead of a redline, then push for that. Additions are usually more well-received.
After you’ve prepared a solid negotiation strategy, these are the most impactful areas of your contract that you’ll want to focus on:
Focus Area #1: Your Scope
A well-defined scope is crucial for avoiding scope creep and disputes over change orders. It’s complemented by terms & conditions, but if you don’t have a tight scope, terms & conditions won’t save you.
Spivey had these tips for share with subs:
- Turn Assumptions into Exclusions: Don’t assume anything about your scope or your client’s understanding of it. Anything you take for granted as an assumption should be written as a clear exclusion in the contract instead.
- For Example: Spivey once reviewed a subconsultant agreement for a party who was doing testing on a component of a construction project, with one mobilization per building. This agreement was missing clarity in a few key areas. It didn’t specify that there would only be one test per building, and that they weren’t going to do retest after retest until the component passed the test. This needed to be clarified in the pricing and scope. This assumption, left unchecked, could have caused conflict.
- Narrow Down Broad Language: Ambiguous terms like “other items incidental to this work” can lead to gray areas. If you don’t know what that means, the other party probably doesn’t either. Sync with them and work to replace that broad language with something that makes sense to you and accomplishes what they were looking for, within reason.
- Translate the Bid into Your Contract: After you do all this work to have a tight scope, make sure all the items from bid or proposal actually make it into your contract, with the bid acting as an official contract exhibit if possible.
Focus Area #2: Indemnity Clauses
Indemnity boils down to this: “you cover these expenses of mine, under these circumstances.” Those circumstances usually occur when you did something wrong, and that’s why you’re footing the bill. However, vague indemnity clauses can force subcontractors to pay for things and do additional work because of the performance errors of other subs. That’s something you need to check for in the wording of your indemnity clauses and swiftly correct.
Boyd recommended subs focus on the following:
The Problem Wording: Overbroad indemnity clauses will say the sub has to indemnify the GC or owner for anything “arising from,” “resulting from,” “connected to” or “connected with” subcontractor error or negligence. This wording has to be struck out because it can be broadly interpreted, putting you on the hook for any sub’s error or negligence on the project. Because trades are often so interconnected, you need to make sure you’re not indemnifying the GC for rework you have to do because another sub made a mistake. If you do have to do rework under that circumstance, you need to be paid for it.
The Rewording You Need: Switch “arising from,” “resulting from,” “connected with” or “connected to” with “caused or contributed BY subcontractor error or negligence,” making it clear that indemnification only applies when you, the subcontractor, are directly at fault. For instance, if drywall gets damaged due to a poorly executed roofing job, tighter language ensures the drywall sub does not have to foot the bill to redo their work because the roofing sub made a mistake.
The Problem Wording: Another phrase to be on the lookout for is “resulting from performance.” The implication is that you could have to indemnify simply because you performed any work on the job. So did every other sub.
The Rewording You Need:It needs to specify that your “wrongful performance” would justify indemnity.
Pro Tip: Get everything in writing. If you call your insurance agent to make sure you’re covered for something, don’t take your insurance agent’s word for it. Insist on receiving written documentation of everything they assure you of.
Focus Area #3: The Prime Contract
Prime contracts contain key terms that flow down into your contract. If you don’t read the prime contract, you’re missing part of your own. There may also be benefits in the prime contract that you want to ensure you get in full, like beneficial retainage terms.
What Spivey and Boyd recommend you look for in the Prime Contract:
- Schedule Clarity: The prime contract can help you better understand the schedule when you check out its completion dates and milestones. For example, a university might have a strict deadline for completing new dorms because students are coming soon – but that deadline might not be realistic. They may try to push you into performing overtime that cuts into your profit margin. You want to know how aggressive the schedule is before jumping into a project, so that you can budget for overtime or larger crews (or not take the project at all). Referencing the milestones/completion dates in the prime contract can give you clarity on how you need to approach the project timeline.
- Fairness in Mutual Clauses: Mutual clauses extend to both parties, but you need to make sure they’re setting forth fair conditions for both. For example, if they say the GC can terminate for cause or convenience, you need terms that state this doesn’t mean the GC can come in, take all your equipment and materials, hire someone else and still hold you responsible if something goes wrong. You need to think carefully about the long term implications of certain mutual clauses and specify protections for those what-if scenarios.
- Prime Contract Superseding Your Contract: Watch out for a clause that states the prime contract overrides all subcontracts. You don’t want to put tons of effort into perfecting the wording and terms of your subcontract, only to find out the prime contract has terms that nullify them, or worse, put you in breach of contract because you weren’t aware of them. For instance, if the insurance requirements in the prime contract are set at $10 million, and you assumed it was $2 million based on your subcontract, you might unknowingly be in breach of the contract. In a situation like that, the GC could withhold payment not only for that job, but also for unrelated projects. Pay close attention to these details.
- Retainage Benefits: Your GC has already hammered out the retainage details in the prime contract, and you can reap the rewards of that as long as you’re aware of the terms in the prime contract. A few things to look for:
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- Exclusions: You might be able to “write off” certain things on retainage, such as special material orders or stored materials.
- Final Payment Language: If the Prime Contract allows, switch “check for final payment upon project completion” to “final payment upon completion of subcontractor scope” in your subcontract. This ensures you’re not waiting around for the entire project to be done, which could take ages.
- Owner’s Discretion: Some Prime Contracts say that retention can be released at the Owner’s discretion. This is wiggle room for you to push for an early retention payment, provided you completed the job successfully and can make a case that you deserve it.
Bonus Tip: Don’t accept notices on Friday after 12pm
Boyd considers this make or break, advising subs to stipulate in their contracts that “Any notice delivered after noon on Friday is deemed to have been received at 8am the following Monday.” Executives and decision makers are often checked out early on Friday afternoons. They’re nearly guaranteed to miss Friday afternoon notices.
This can be detrimental with, for example, a Notice to Cure, which is just 48 hours. If that clock starts running Friday afternoon and no one sees it, time has already run out by the time they do on Monday morning. Boyd recommends switching “48 hours” to “2 business days.”
If a GC doesn’t let you make that very logical edit, it could be an indicator that you should walk.
Success for subs hinges on the delicate balance between collaboration and self-preservation. Boyd and Spivey’s collective expertise underscores the importance of well-negotiated contracts and strategic risk management. By adopting a team-player mindset, focusing on clarity of scopes and ultra-precise indemnity clauses, subcontractors can navigate the complexities of construction projects with confidence.
