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.
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 non-payment.
- 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.
How to Maintain Your Right to Make a Claim, and Not Accidentally Waive It
To figure out whether a sub’s claim has any backing, the first thing the owner/GC’s attorney will look for is passive waivers and active waivers. These two things are exceptionally important to construction litigators. Understanding passive and active waivers is critical to preserving your right to make claims on a project. It also helps subs establish a kind of “field-to-office gameplan” to ensure they’re monitoring and executing any potential claims with surgical precision.
Passive Waivers – Inadvertently Giving Up Your Rights
Here’s the thing, if you are not preserving your rights, you’re waiving them. A passive waiver means you waive your right to make a claim, not because of something you did, but because of something you didn’t do. This is what makes it a passive loss. Maybe you didn’t notify the proper parties in time, and the contract has notice procedures that say a claim is invalid if you miss that deadline. It means you inadvertently failed to preserve your rights to a claim. Notice procedures are in fact a common culprit of passive waivers.
Where Can Notice Procedures Be Found?
- The Subcontract – It specifies deadlines for providing notice on a claim. These timeframes can be as short as 48 hours, 3 days or 5 days; some are a little longer.
- Claims Procedures in the subcontract may specify requirements for the claims or notices themselves. For example: A claim for time extension may need a delay analysis. Or, your claim notice may have to be sent to a particular person.
- Lien Laws – Lien law will tell you whether you are a proper lien claimant in the applicable jurisdiction. It’ll identify deadlines for providing certain notices or filing suit on a claim.
- Bonds – Many public jobs require bonds, and those bonds may set requirements around claims. They tell you who can be a claimant, when suit must be filed, and when notices are required.
Does the Person in the Field Know About Claim Deadlines and Procedures?
Here’s the thing, the person in your office who knows the claim procedure/notice deadlines can be pretty disconnected from the person on the ground who knows the facts of the job. Carney often sees things slipping through the cracks for that reason. There can be a poor flow of information from corporate on how the field will comply with those procedures.
So you have to ask yourself:
- Does the person on the ground, who knows what’s going on with a project, know exactly what to do if the company ever needs to make a claim? Do they know the timeframe and deadlines?
- How do you capture the info necessary to make a claim? Is it daily reports? Who reviews them?
- To ensure that an issue gets converted into a proper notice and claim, do you have a specific internal procedure?
- If the same person who notes these issues is the same person trained to start a claim, great. If not, make sure that all relevant information is changing hands in a timely manner to communicate things like changes and delays, and to make sure that proper notice is sent within the set timeline.
If you have a disorganized process that makes it easy to miss notice procedures, you waive your rights. So establish a clear process to help you avoid any mistakes.
Be aware of what the subcontract says about the notice of claims procedure, like:
- Does it identify a particular representative of the GC who needs to receive notice?
- Is the delivery method specified?
- First-class mail?
- Certified mail?
- Hand delivery?
Carney has seen cases where the parties followed the notice procedure to some degree, but missed part of the requirements. Because of tough contractual language, they lost their right to pursue the claim.
Active Waivers – Consciously Giving Up Your Rights
Unlike a passive waiver, where you lose your rights because you didn’t do something, with active waivers, you lose your rights because you took conscious action to waive them.
The 3 most common forms of active waivers are:
- Monthly claim releases
- Monthly lien releases
- Executed change orders
Monthly claim and lien releases, and executed change orders are the first place a construction lawyer will look when a claim is made (right after they check to see if you failed on the notice procedure). They’ll find the latest lien release or change order, and may argue that any claims asserted before then, or events that could give rise to a claim, have been completely waived and released. That’s why it’s critical to be aware of them.
If nothing else: before you execute a monthly claim and lien release, do some internal investigation to see if you have any claims or notices to be given. Even if you might have missed the strict notice deadline (like 48 hours) on one claim, you want to be sure you’re not executing some broad release after that could result in you waiving any active or future claim rights.
Before signing monthly claim and lien releases, ask yourself:
- What exactly are you waiving? How broad is the release?
- Are you waiving conditional or unconditional rights? For example, are you being asked to waive certain rights in exchange for payment, or did they slip in an unconditional waiver, where you’re waiving rights regardless of whether you receive further payment?
- Can you preserve any claims you already started/gave notice for?
When it comes to executing change orders, ask yourself:
- Are any rights being waived by starting work on the change order?
- Does the change order include a through-date waiver, meaning you waive all claims through a certain date of work on the change order?
- By executing the change order, are you waiving all other claims even if they’re unrelated to the change order work? Are there reservations for cumulative impact, reservations for delay, or reservations for loss of productivity?
Even if there isn’t a place in the change order or lien release to identify reserve claims, handwrite it on there, Carney encourages. Make the GC come back and tell you to take it out if need be. At least then you created an opportunity for favorable terms and can decide for yourself, rather than inadvertently waiving your rights.
Contract negotiation is all about taking action to preserve your rights and being mindful of when your rights are being eroded. When it comes to contracts, it pays to not default toward a mindset of “the lawyer can handle it.” Being educated on your rights, your risks and negotiation strategies makes you a credit to the entire business that you run.