Before you sign a contract, do yourself a favor and check the wording – or include your own!
By William Atkinson
For some precasters, a contract with a customer is often an afterthought, and many precasters are comfortable simply signing boilerplate contracts that customers set in front of them.
Not a good idea, according to Christopher L. Grant, a Washington, D.C.-based attorney at law and general counsel to the National Precast Concrete Association. Grant, who has 30 years of experience in construction law, says, “Precasters may provide customers with written quotations stating little more than a spec of the product or scope of work, the price and the delivery date.” The problem with this approach is that the price may be based on certain assumptions you are making, but that you don’t make clear to the customer. If those circumstances change, you may need to make a price change or other changes, but then it could be too late.
Rather than signing the contract that is set in front of you, according to Grant, you could create a quotation form that has complete contractual terms embedded within it. In this way, both you and the customer will have an understanding and a written agreement related to all of the circumstances and details. In fact, it makes sense to include as many details as you can in the quotation, such as some flexibility in your delivery date, that you are offering your standard warranty, and that you expect payment within your normal payment terms.
“My view is that the contract should be created even before winning the business,” says Grant. “When you send a quotation or any preliminary offer to perform work, you should include the terms of a contract under which you want to do business.” These can be printed on the front or back of the quotation form or some other way. This tells the customer that these are the terms and conditions under which your offer is made. “Certainly, these can subsequently be modified, but the idea is that when you provide information on price, scope of work and so on, these are under your set of assumptions,” he explains.
According to Grant, most customers are not offended by this if you approach them in a civil and professional manner, and if you have a good rationale for your terms. In fact, he has found, most customers are impressed that you have given these issues some thought.
If negotiations with customers do occur, there are some instances where the customers may end up thinking about issues they haven’t thought about in a long time. “A lot of customers haven’t even read their own standard forms in a long time, so you may bring up some new issues for them,” he explains.
A good contract should identify all of the foreseeable problems in the relationship and establish rules that attempt to resolve these problems ahead of time. There are many topics that should be covered. Grant describes five of the most important:
- A contract should accurately define your customer after confirming that, as a specific legal entity, it has solid credit. Certainly, most precasters will do this with new customers. However, they may not bother to continue to do this every time with long-term customers. You should, though, according to Grant, especially in these economic times. “With the market we are in, this is more important than it has ever been,” he says. “There are a lot of customers and customers’ customers who are going broke and going into bankruptcy.” This can be true even for some large, well-established contractors.
You need to know who is the ultimate source for your funds. If you are “four places” from that source, you need to make sure that the source, and all of the “places” in between you and that source, are solvent. “One of my clients recently asked me to verify that the Bank of America is indeed making a loan to a customer of my client’s,” says Grant. “My client wants to be assured, with written documentation, that the financing that has been represented to it is actually going to show up.”
- A contract should clearly describe payment terms, and should state that those terms should not be dependent on when your customer (perhaps a subcontractor) gets paid from his customer (such as a general contractor). If you ask for this – requiring payment from a subcontractor whether they get paid or not – the subcontractor may “push back.” More often than not, Grant admits, you will not be able to get this, but there is still no harm in asking. “This can be the difference between profit and loss, if you also have the proper payment terms in the contract,” he says.
If the customer does want to discuss this issue, then maybe it should affect your price. After all, according to Grant, you are probably taking on more risk if you don’t require payment from the subcontractor whether or not they get paid by their customer.
- A contract may take into account price changes that may need to occur if the prices of raw materials fluctuate. “One reason people want a contract is because they want to be assured that the price won’t change – that you will take the risk for an escalation in your cost of material,” says Grant. However, if extraordinary circumstances dictate, as with the recent economic crisis, you could price a significant amount of risk into your contract (a contingency amount), or stipulate that the customer must be willing to share the risk with you: “I can give you a better price if you will share the risk with me.”
If you are going to include a clause like this, you should include as specific a definition as you can of what will trigger a change in your pricing. If you use a term like “significant,” all you’re doing is laying the groundwork for a later argument about how much is “significant.” Instead, you could say something like, “Our unit price by which we acquire this commodity is X dollars. If it goes up by X dollars or by 10 percent, then we will make an adjustment. We will take the risk up to 10 percent, and beyond that, we will share the risk.”
- A contract should contain detailed specs, and the warranty should be based on specs, not “fitness.” That is, as long as you deliver a product meeting specs, it’s the customer’s responsibility if it doesn’t meet his “fitness” requirements. “It is fairly common for contracts to contain the language, ‘a warranty of fitness for the particular purpose’ of the project,” says Grant. “This is a design issue, though. You are being asked to undertake design responsibility. You are not only agreeing to supply the product that the customer specifies, you are agreeing that you are also going to do the specifying – telling the customer what product he needs to suit his purpose. This, of course, entails a significant additional risk for the precaster.”
As such, you may want to remove any reference to a warranty of fitness for a particular purpose, according to Grant. “In my experience, in most cases, the customer will usually accept this,” he says. The warranty that then remains is a warranty of merchantability – that the product is new and will function without defect for a year, for example.
- A general observation: When developing a contract, gather all of the other written material that you and your customer have related to the project. Review them, make sure you are comfortable with all of the information, and make sure there is no conflicting information in any of the documents. Then make sure the contract lists all of the documents that are to be considered part of the contract.
Besides addressing foreseeable problems, a good contract should also establish sufficient rules and procedures to deal with unforeseeable problems when they occur. Options here include negotiation, mediation, arbitration and litigation.
What are the pros and cons of each? “My view on this has changed over time,” replies Grant. At one time, he leaned toward arbitration. However, he now recommends other options as well:
- The best first step is to engage in negotiation at the project management level. If this doesn’t work, it should occur next at the senior project management level. If this doesn’t resolve the problem, then the contract might specify that the CEOs of the two companies meet and negotiate.
- If this fails, then it can go into mediation. “Mediation has become a big industry,” says Grant. “There wasn’t much mediation 10 years ago. However, there are a lot of professional mediators around these days, and they are very good at what they do.” In fact, one of the mediators Grant uses has never in Grant’s experience failed to bring a case to a satisfactory conclusion, even though none of those involved thought it could be resolved by mediation. “Mediators get paid a lot, but they are cost-effective compared with other legal processes,” he says.
- According to Grant, there used to be a large gap between arbitration and litigation, thus making arbitration much more attractive. This isn’t necessarily the case anymore, though. “The gap between arbitration and litigation is much closer than it used to be,” he explains. “I used to be a big fan of arbitration.” He still prefers arbitration to litigation, everything else being equal. However, arbitration has become big business, but in so doing, it has become more complex, slower, more expensive and more fraught with legal rules – more like litigation. “At the same time, a lot of courts have cleaned up their acts and now administer their dockets quite efficiently,” he adds.
While the current economic times present problems for almost all businesses, there can be “silver linings” around the gray clouds. One of these, according to Julie Pace, a partner with the law firm Ballard Spahr Andrews & Ingersoll LLP in Phoenix, is that it is likely a good time for precasters to look over the standard contracts that they have been signing over the years from general contractors or others for whom they do work.
“Some subs have worked for general contractors for a long time, signed their standard contracts, and never looked at or questioned the provisions of those contracts,” says Pace. If there were some challenges or other problems that arose, they simply worked these out, and the contract never came into play.
Now, though, according to Pace, it is a whole new world. “With the economy the way it is, banks are pulling funding, and there is often no available credit,” she says. This makes it a good time to take a fresh look at contracts before you sign them. “Try to understand what is in the contracts, and read them with the understanding that something could go wrong in a project, regardless of how long-standing of a relationship you have had with the contractor.”
When some subcontractors have taken a serious look at their customers’ contracts for the first time, they have come to Pace and said with concern, “I had no idea this was in there!” In other words, given the tenuous economic situation, precasters need to know every detail that is in every contract they sign, because there is more of a chance that problems can arise in today’s economic climate – problems that could cause adverse economic problems for precasters who are not aware of what they are signing.
Pace has some recommendations beyond just reading the contracts that contractors and other customers present to you. “Always ask for a complete copy of the contract,” she emphasizes. “In a lot of cases, there are pieces missing, addenda missing, exhibits missing or things incorporated by reference.” In addition, make sure to determine the scope of the work: what you are and are not expected to provide and do.
Another concern that precasters have these days is getting paid. In fact, when Pace gave a presentation on contracts recently at The Precast Show in Houston, how to get paid was one of the most popular topics and triggered the most questions, such as:
- How can we make sure the owner of the project has enough financial backing to carry the project through to fruition?
- How can we make sure that we get paid?
- How can we get protection on the financial information? In other words, how can we make sure the owner has money?
One provision Pace recommends precasters add to contracts is the right to request and receive information from the general contractor about the owner’s financial ability to pay for the work.
Beyond the general scope of the contract, Pace recommends that precasters also pay attention to certain specifics. Some of the most important:
- General contractors like to have indemnification provisions stating that the subcontractor is responsible and holding the general contractor harmless for any fines, penalties, costs, injuries, etc. “However, it should not say that, if the general contractor’s employee is solely negligent for an action, the subcontractor should be responsible,” she points out.
- According to Pace, the most dangerous provision is one stating that the subcontractor will get paid only when the general contractor gets paid. “You want to try and delete that language and replace it with prompt payment provisions,” she says, agreeing with Grant’s suggestion. Pace also recommends looking into “getting paid provisions.” Determine if progress provisions should be made over the life of the project. “If it is a risky account, the general contractor should set up an escrow account,” she suggests. The general contractor should sign off on the work as it is completed, and the money is then available from the owner. You then get paid as the work is done.
- Pay attention to “notice procedures.” Every contract provides specific notice procedures, so that, if you have an issue with the contract, you need to follow certain procedures. If it states, “Fax a letter to this number,” you must do that rather than just talk to someone.
- If there is a retention provision, where the general contractor states that they will hold back a certain amount of money for a certain period of time, find out why it will be held and whether it will be put into an escrow account for you. For example, if the general contractor wants to hold $40,000 to $60,000 over the next two years to see if any workmanship issues arise, you need to know where that money will be held. “If the general contractor holds it in their general coffers and then subsequently goes out of business, you will lose your money,” she says. “Insist that the money be placed in an escrow account.”
- Watch for how many penalty provisions are in a contract. For example, general contractors may add $150 a day for cleaning up the site, $100 for an employee not wearing a hardhat, and so on.
- Subcontractors also need to follow their lien laws and perfect their liens, especially in this market, even if it risks making the general contractor upset, according to Pace. “I know a lot of subs who wish they had it to do over again, because they had all kinds of liens but didn’t do what they should have done,” she notes.
- There are numerous insurance provisions being required these days. “I suggest that these pages of the contract be copied and sent to your insurance agent to make sure they are acceptable and consistent,” she recommends. “If they are not, then you need to bring these up with the general contractor.”
- According to Pace, there will also be more immigration compliance provisions in contracts in the future. It is prohibited by law for general contractors to ask subcontractors to send I-9s to the general contractors. “However, there are some assurances you can provide to general contractors about what you are doing about immigration,” she adds.
- You need to have a way to terminate the contract, such as if you are not getting paid.
- Consider pricing changes. “If you believe that your costs for materials may increase during the project, you may want to use a ‘flexible cost-plus arrangement’ or ‘price escalation provisions,’” she adds.
- If there is a dispute during the course of the project that can’t be resolved between the parties themselves, Pace says arbitration may be an appropriate means to resolve it. “Look for members of the American Arbitration Association, many of whom do a lot of construction work,” she suggests. “This is faster and about one-third the cost of litigation. However, you must have this requirement in the contract.”
How easy is it to get customers to make changes to the contracts they ask you to sign? “It is important to realize that you can negotiate contract terms,” says Pace. “You can usually change things when you have some logic behind it.”
Here are her recommendations for renegotiating a contract:
- First, start with a list of minor technical corrections. For example, the contract might state that if the general contractor notifies you of a workmanship defect, you have two days to resolve it. “Two days doesn’t work on a weekend,” she points out. “Ask that it be changed to two or three business days.”
- After you have resolved technical corrections, move on to the material (more substantive) issues. For example, you may want to add a provision that, if the general contractor has a problem with your work, the general contractor is required to notify a specific hotline or person in your organization, instead of just verbally telling the foreman in the field. “Indemnification issues are other material issues that you can bring up,” she adds.
- If there are a lot of material issues that you want to address, Pace recommends selecting the ones that really matter to you the most and starting with these.
- Seek changes in person as much as possible, and focus on cooperation rather than an adversarial approach. “In most cases, general contractors don’t like to make material changes, because they have to go back to their attorneys or go through other procedures in their office,” she explains. She recommends trying to handle these changes in person rather than getting involved in a back-and-forth “writing campaign” that can escalate and eventually become adversarial.
After the contract is signed but before work begins, Pace recommends sending a letter to the general contractor stating: “We look forward to this project. We want to remind you that if you have any issues or concerns, here are the individuals in our company you can contact for safety, workmanship issues, etc. We want to address these right away, but we can’t if we don’t know about them. In addition, if there are any OSHA inspections, here is our designated person. Call this person as soon as someone arrives and wants to conduct an inspection.”
The information in this letter emphasizes to the general contractor that you have people available to deal with these issues. In addition, it reduces the chances that you will hear about such issues and problems months later, when the general contractor wants to hit you with a bunch of back charges and it is too late for you to research and respond to the claims. For example: “Two months ago, one of your employees backed a truck into one of our walls, and we had to correct it.”
“If the general contractor tries to come back at you months later on something like this, you can refer back to the letter about the work relationship on the site and explain that you didn’t get any calls,” she says. “Then, if you end up in arbitration, it helps your side to be able to show this letter, that you had a procedure, and that they failed to follow it.”
A final point: If there is a change order during the project, you should not start this work until it is officially signed. “Doing this has cost so many subcontractors so much money,” says Pace. They think they are helping out a superintendent or project manager, who promises it will be paid, who says it needs to be done today, and who says they don’t have time to wait for change orders, she explains. “If you do, you can end up getting hurt.”
The information in this article is for general information only. Readers should consult with their own attorneys first when considering specific issues related to their contracts or the contracts they are asked to sign by customers.
William Atkinson, Carterville, Ill., is a freelance writer who covers business and safety issues.