Why Your Contract Matters?
First, we will discuss why your contract matters and why it is important.
a. It is the rule book
It is the rule book that everyone will go to when there is a dispute about how to handle a change order, what to do if there is a conflict in the field, and how to deal with schedule issues. All of these things should be in your contract.
Read more about contracts: Construction Contract & Lien Basics that Will Get You Paid Faster: Part 1 - Construction Contract Basics
b. It is usually ignored until there is a dispute
If you have a written agreement, usually all of those terms and conditions and the details are ignored until there is a dispute. And when there is a dispute, someone is going to going to take out the contract, and start pointing to provisions, outlining who has what obligation to whom. And this rulebook or contract is going to become very important when there is a dispute.
c. It will almost always control the outcome of the case
Now, in the worst-case scenario, if this dispute were to escalate all the way into a legal dispute here people are suing each other, just know that the court, the judge, and the jury are almost always going to use the contract as the controlling rule and outcome of the dispute.
So, if you have to go to court and the contract says that all construction change orders have to be in writing, and you want to argue that there is a change order that is not in writing, and even though it does not comply with the contract, it should be paid, that is going to be an uphill battle.
Because the judge and the jury are going to like to just apply the simple rules that the parties agreed to in writing in their contract. So, remember that this contract is going to become very important and is very important if there is ever a dispute.
Now we will talk about the first three provisions that we would tell you are the most dangerous provisions in a contract. All of the provisions we will discuss are from the perspective of the subcontractor, meaning that these are typical subcontract provisions.
But just know that we have seen provisions like this between owners and contractors, and between subcontractors and sub-subcontractors. So it does not really matter where you are in the chain of contracts, the issue is what matters most.
No Right to Stop Work
Now a person may have a 15 to 20 page contract and say that they really want to do the work, but they do not know the top two to three most important items that they would want to change. By far, the number one item that we would change is not having the right to stop work if you are not getting paid.
a. Sample provision to stop work
Below is a sample provision of the language you should use in your contract:
This means that if you are not getting paid on the construction project, if they are not approving your construction change orders, you have to follow the dispute resolution process that is in the agreement, which is typically something like a meeting of the principals.
If that does not work then consider mediation, and if mediation does not work, then arbitration which is like a private court or litigation which is the court that you see on TV should be considered. The problem with these other two options is that it takes time to get to the finish line.
In the process of doing all of this, you have to keep working and keep paying your employees and your suppliers and delivering material. It can really drain the cash flow in your business because as you are fighting a fight, you may have to get a lawyer involved.
You are also paying a lawyer, you are still prosecuting the work, because if you fail to prosecute the work, meaning that if the other side is not paying you, you are just going to walk off the job if you have a provision like this. You technically do not have that right.
So how do you deal with it?
b. Sample provision to add as you negotiate agreement
Below is another sample provision that you would put in your agreement as you negotiate your agreement. You would identify the obligation to keep working and you would strike it and add something like this.
It is not that easy to get the counterparty to your contract to agree to the changes you want to make. What we can tell you is that owners will make more changes than you think but will not make any changes unless you ask.
The same is true for contractors. All contractors will tell their subcontractors that they do not make changes to the agreement. We are here to tell you that for every trade on every job, they are in fact making changes. Some changes are more than others based on relationships and the importance of that subcontractor.
Whether they can get another price from someone to do that work so that they can fit within their budget and availability of men and material, all of these things go into how much leverage you may have. But do not believe their position or their statement when they say that they do not make any changes to their contract.
If you do not ask you will not get, so as to this specific provision, we will tell you that the other side will probably not agree to 30 days. So, maybe it is 45 or 60 days. What is important is that it is not never. There is some point at which if you are no longer being paid, you have the right to stop work. It is generally a pretty reasonable position to take.
If you are negotiating with the other side, you are going to tell them that it is pretty straight-forward. You have bills, you have employees, you have insurance, you have overhead, and you have materials that you have to buy. If you do not get paid, then you cannot keep working or finance the job is what you need to communicate.
So you need to tell them that after a certain amount of time if you are not being paid, that you can stop work. Most people on the other side will tell you that is reasonable, and to see how you can negotiate these terms.
For example, there is a million-dollar appliance package for a supplier and the contractor and the owner’s position is that it is a very reasonable position, but they refuse to accept it. Under no circumstances could the other side stop working even if they are not being paid.
The other side at that point had to make a business decision on whether or not they were going to continue with the contract. They ultimately decide to continue the contract and accept that risk. What is important though is that they do it clearly with their eyes wide open. They understand that that is a risk they are going to take.
So, make sure that you try to include a right to stop work if you are not being paid.
Short Notice and No Opportunity to Cure
Now we come to another problematic provision in your contract that is very notice and no opportunity to cure.
a. Sample provision about violating a provision
Below is the provision so that you know what it looks like:
This standard provision means that in most sophisticated owner contracts as well as subcontracts with larger contractors, that says if you do anything wrong within one day calendar day written notice, the contractor can step in and deduct amounts due to you, and possibly even terminate you. One calendar day means that if you get a written notice at 4:30 in the afternoon you will have one calendar day, so effectively the rest of the day on Friday and Saturday to remedy the situation. It is unreasonable.
b. Sample provision to cure any performance issue, delay, or claim
Obviously, you need to know that this obligation exists in your contract. You need to try to remove it and here is a provision that you can use to counter that:
This means that if the contractor wants to issue a back charge, they need to issue you written detailed notice 10 calendar days before they do it. If they want to supplement your forces, they need to do the same thing.
What does this do? This gives you a meaningful opportunity to cure the defect before you get back charged, get supplemented, or before any payments are withheld. Again, it does not mean that they will not ultimately have the right to do it, but now you actually have an opportunity to fix the problem rather than effectively giving the contractor a “got you” to terminate or back charge you.
The third contract provision to watch out for is acceleration.
a. Sample provision to accelerate work
This is a provision that we find in many subcontracts:
This means that you have a method in which you are going to attack the work. Maybe you are going to start on the first floor and move up, then there will be a pause and you are going to re-mobilize later after certain work is done, and you have it all figured out.
The contractor comes in then and tells you that this is not what you are going to do and that you need to split up the crews into four parts. They tell you to have some people work in one place and some to work in another place, demobilize all of your material and then re-mobilize three times on this project.
If that is not the way you bid the job, now this project has become much more expensive to handle. And if you have a provision like the above text in your contract, then that means that any understanding you have about how you want to attack the work can go out the window at the discretion of the contractor. And you cannot ask for more money.
b. Sample provision to protect against schedule changes and delays
So what does a provision look like that would change that?
It is not that every version of these provisions we are mentioning will be accepted. The intent is for you to identify the issue, and recognize that if you do nothing the most onerous and stringent provision is going to be held against you. So, you need to identify and discuss it with the counterparty whether that is the owner, contractor, or subcontractor, and try to come to a resolution on how to deal with it.
Bonus – Not Getting it in Writing
Now we have a bonus provision that you should look out for. Another big mistake is not getting it in writing.
a. All agreements should be in writing
All agreements ideally should be in writing.
b. All terms, assumptions, and exceptions must be in the agreement
All the terms, assumptions, and exceptions because if they are not in the agreement, that you sign. They do not exist. Also, of significance is if it was in your proposal, but your proposal, quote or bid did not make it into the actual fully executed contract, it does not exist either.
So you cannot say that when you submitted your bid you had a whole list of exceptions, and that the other party knew it was part of your price. And when you look at the contract, none of those exceptions made it into your contract. Then none of those exceptions are part of your contract and you are going to have to live with the contract terms that you actually signed.
So, if there is a list of issues, assumptions, and exclusions that are critical for your contract, and they are the basis of why and how you bid what you did, you need to identify those and make them part of the actual written agreement that is signed by the parties.
c. Written agreements minimize ‘convenient memories’
We find that having a written contract does a long way to avoiding ‘convenient memories.’ This is the “I never agreed to that” position that the other side takes. It almost always goes away when your written agreement properly states what the parties agree to.
d. Estimates, bids, quotes, and proposals are contracts
Know that your estimates, bids, quotes, and proposals are contracts so get them signed. You also need to have some terms and conditions in them that are important and critical for you and your business.
For example, there is an electrician who submits a bid for about $500,000 on a renovation of a restaurant. He is a subcontractor who has a subcontract with the general contractor, and his bid had terms and conditions. He prosecutes about two-thirds of the work before the contractor comes back and says that he had not signed their contract yet and that he should.
The electrician says that he does not agree to the terms of their contract, that he already redlined it, and that they were not accepting his changes so he would not accept theirs. They already signed his proposal which had its own terms and conditions and they paid him for much of the work he did. He refuses to sign their contract.
They refuse to allow him to continue to work if he did not sign their contract, and he sought out an attorney who told him that unless he agrees to their terms that he should not sign their contract. He did not agree to their terms.
So, he was advised by his attorney to let them terminate him, because the termination will be improper. He has good and favorable conditions in his proposal that they signed, and that he has lien and bond rights for the work he did so far.
e. Exception: Sometimes no agreement is better than a one-sided agreement
Sometimes no agreement is better than a one-sided agreement. So, do not feel compelled to sign the agreement that is given to you. If you do not agree to their terms, you should not sign it, and if you do sign it, you will have to live by all of those terms and conditions.