The Thin Red Line

By Bob Whitmore

A sharp manager can avoid pitfalls by making simple revisions to POs and other documents.

When Greg Stratis sits down with a purchase order, he has a pen in hand. But it’s not to simply sign off on the PO. He’s looking for unusually long payment terms, “pay when paid” language or obtuse legal language that he doesn’t understand. That’s when the red pen comes out. Stratis, plant manager at Shea Concrete Products in Amesbury, Mass., carefully reads all POs, subcontracts and waiver of lien documents. He changes terms and crosses out language that could negatively impact the company. And most of the time, his customers don’t object.

“Contractors have a tendency to change the terms from your original quote, so I’m not afraid to make comments and redline items,” Stratis said.

The first thing he looks at is the terms of payment. Shea’s terms are 30 days. If a contractor submits a PO with a 60-day payment period, Stratis will change it to 30.

“I might have a conversation with the customer to find out why they want 60 days,” Stratis said. “I just tell them we can’t do business like that. I might extend the terms to 45 days if I’m willing to risk a little bit longer, but other times I’ll just cross it out and change the terms back to 30 days.

“I try to make sense of the entire PO. If there’s some legal language that I don’t understand, I’ll just cross out the paragraph.”

If the customer asks about the deletion, Stratis simply tells them he can’t sign a document that contains something he doesn’t understand. If they balk at removing the legalese, Stratis will tell them he’s willing to have an attorney look at the PO if the customer pays the legal fees.

“Usually that quiets them down,” Stratis said, adding that most of the time his customers don’t give him much feedback on his changes.

According to Chris Grant, a Washington, D.C.-based attorney with more than three decades of construction industry contracting experience, changing the language of POs and other legal documents is something that some precasters avoid because they don’t want to offend the contractor or project owner. Grant serves as general counsel to National Precast Concrete Association.

“People assume that it will damage their relationship with their customer if they modify the customer’s standard form, but my experience is that this is not the case at all,” Grant said. “If you go about it in a polite and methodical way and you can explain the basis of the revisions you want to make, it doesn’t damage your relationship and you can get some revisions that substantially reduce your risk and make the forms more reasonable.

“I don’t mean to say that you will get all the revisions you request. Maybe you’ll get only two of 10, but those two could be the difference between profit and loss.”

Even if your customer objects, you can learn something from marking up the documents, Grant said.

“If your customer responds, ‘Hell no, you can’t modify anything,’ I think that tells you something about your customer that you need to know,” Grant said.

That occurrence is likely to be rare, he added.

“In my experience, you may actually enhance your relationship because your customer sees that you are reading the documents, that you know what you’re talking about and that you appreciate the importance of the documents,” he said.

Grant said he is frequently asked to make revisions on contracts that range from simple, one-page POs to complex contracts. In most cases, a precaster with a pen and a little bit of time can make revisions that can both protect the company and the bottom line. Here are four situations that Grant encounters regularly when reviewing construction documents.

Schedule changes

Customers include language that allows them to manipulate the schedule at their whim. The language states the contractor can change the schedule at any time without compensating the precaster.

“That’s very common language,” Grant said. “No damages for delay. No compensation for adjustments to the schedule.

“One of the standard revisions I make is that a change in the schedule is no different than a change in scope. That’s a change with a capital C – and you are entitled to compensation for a change in time as well as scope. You have to be able to show that it has cost you money – that it has damaged you – but if you’re damaged you are entitled to recover those costs.”

Indemnification clauses

An indemnification clause is language in a contract that directs one party to bear the monetary costs for losses incurred by a second party.

“I almost always have to revise the indemnification clause,” Grant said. “These clauses used to be quite limited but have become broader and broader over time. I now frequently see an indemnification clause that says a precaster has to indemnify the customer for costs or expenses arising from a precaster’s performance – language as vague as that.

“And of course that is completely unfair because it doesn’t include any requirement that the precaster has done anything wrong. In my view, indemnification should be limited to either a breach of contract or some kind of negligence on the part of the precaster. If the precaster has performed as required, there’s no reason to indemnify the customer for unanticipated costs that the customer has incurred.”

Condition precedent language

Known in simple terms as “pay when paid” language, the condition precedent language states the contractor has no obligation to pay the precaster unless and until the contractor receives payment from its customer (usually the project owner).

This is the language Stratis routinely redlines on POs received by Shea Concrete and one of the common revisions Grant makes. Eliminating that language doesn’t mean that the precaster gets paid on time without exception.

“If the precaster has done something wrong and that’s why the owner hasn’t paid, I don’t have any problem with that,” Grant said. “That’s business. But if the owner’s failure to pay has to do with another subcontractor or the general contractor’s own fault or the owner has run out of money, the precaster ought to be paid.”

Lien waivers

A lien waiver is a document that the precaster would routinely sign stating payment has been received for the work described in the PO (or other document) and that the precaster waives any other claim for nonpayment with respect to that work.

“That’s all it should say,” Grant said. “Some lien waiver documents will have three or four paragraphs of additional language. I’ve seen language that says, ‘I waive my lien and any other claim for nonpayment through a given date.’

“You don’t really want to do that. There could be unapproved change orders that occurred or retainage earned prior to that date. If the other guy wants to get tough later on, he can say, ‘Sorry, you’ve waived those unapproved change orders. You’re not going to get paid for those because you signed the release.’”

But what if the original quote clearly describes payment terms and timelines and other details? Doesn’t that cover you? Not necessarily. Stratis said payment terms and other conditions are clearly stated on the quotes Shea Concrete submits when bidding a job. Some precasters might assume the specs on the quote will be followed. What often happens, though, is the contractor will attach the original quote.

Stratis said, “and they’ll put a phrase on the PO that the information in the PO overrides anything in the quote.” What’s the strategy in that case? “I just cross it off,” Stratis said.

Bob Whitmore is NPCA’s vice president of communication and public affairs.

Chris Grant practices law in Washington, D.C. He has more than 30 years of experience in the legal and contractual issues arising in the construction industry. He serves as general counsel to NPCA and has written and lectured extensively on topics related to construction and governmental contracts law.