By Stan Bachman
Attorney, Morefield Speicher Bachman, LC
When it comes to the construction business, risks are high and profit margins are low, and there’s a very high risk you can lose money on a project. There are delays, cost overruns, and change orders, slow pay and the worse…not getting paid at all.
That’s when a carefully crafted contract can make a difference. I’m not only referring to the boilerplate provisions like payment dates, invoice due dates and contract amount. You need an attorney who is well-versed in state law and who has a lot of experience in the many facets of construction. Sound legal advice like that adds significant value – and ensures you increase your chances of staying profitable on the project.
Here are several areas where I believe you need to focus when negotiating up a construction contract.
Change orders can be easy, or hard. It depends on how they are set-up – and treated – during the project. But change order management starts with the contract. Be sure you understand and are ready and willing to abide by the change order terms in the contract. In most cases, major disagreements about change orders can be avoided upfront so long as the language in the contract is clear. There are many potential contract negotiation pitfalls, but here’s one simple one to address…make sure you don’t agree to unreasonable notification requirements subject to waiver if you fail to provide the notice. A clause that requires you to provide written notification for all changes in a very short, unfair time should be avoided.
Be sure to examine change orders carefully. The one area I see day in and out is the failure to address time extensions on change orders. It is very common to agree to a price on a change order, while not addressing the additional time required due to the change. Remember, as you negotiate change order clauses in contracts, and as you administer change orders during the project construction, be sure to think about and address costs, time and profit.
The Digital Age is Changing The Game
With mobile platforms and electronic communications pervading every area of business, there’s been a big change in the way approvals and other client interactions are handled.
Have you heard of the Uniform Electronic Transactions Act (UETA)? It involves electronic signatures and how other changes are approved. For instance, under UETA, which has been adopted in some form in most states, an email from a client requesting and authorizing a change order can be considered an electronically signed agreement. The UETA provides detailed and wide latitude to permit a change order to be set forth in digital signature formats.
Even if a contract stipulates that all change orders must be in writing, if a client deviates from that and issues verbal change orders, the “in writing” requirements will often be waived by a jury or judge.
Contingent / Conditional Payment Clauses
These are the meat and bones of many construction contracts. The “Pay When Paid / Pay If Paid” clauses allow a general contractor to withhold payments from subcontractors until he receives payment from the client. If you’re a sub, your situation can be made quite difficult if you’ve signed such a contract. A general contractor can invoke this clause and can hold payment or even refuse to pay because the client hasn’t paid him. It is a very rare contract that does not contain a pay if paid clause; be sure to consider the consequences, and give great consideration to whom you are agreeing to work for, their reputation in the business for fairness, etc.
Retainage is a way of life. Do what you can to minimize or eliminate it if possible. Try to get an early release of retainage clause. The maximum amount of retainage allowed varies from state to state, and from contract to contract. But, it’s also negotiable. Some early-in contractors like excavators are sometimes delayed payment up to a year, or until the entire project is 100 percent complete. This can put significant financial pressure on these contractors, and also undue pressure to file mechanic’s liens to protect their interests. Times are changing, and Federal agencies and even private firms are reducing the retainage amounts while paying early-in contractors sooner than later.
It is in your best interest to consult with legal counsel early in the contract to get the best terms possible. It’s always preferable to say “my lawyer” asked for this or that, keeping you from being the “hard nose” in the negotiations.
Please contact me about your contract prior to signing it. The financial risks could make or break your business. I was a general contractor and business owner for 25 years. One take away I have from looking back with 20/20 hindsight, there was never a contract I “had to have,” although at the time I thought otherwise and those contracts were often financial losers. In other words, I’d have been better off never having them. I know what you’re going through to manage a successful business, which includes managing your cash flow and risks. If I can be of service, please let me know.