Haste Makes Waste with Construction Contract Awards
When project funding finally comes through, owners and contractors alike are eager for shovels to dig in. Owners resist what they see as time-consuming contract negotiations, and contractors fear that resisting unreasonable contract terms or taking the time to prepare proper preliminary notices will result in the work they want being awarded to a competitor. There�s not a moment to lose!
Not so fast. While an owner�s threat to hand a project to the next hungry contractor may be real, a contractor should never sign a contract without understanding and negotiating certain key terms and should never, never begin a project without preparing proper legal notices. Even a contract involving a nominal work and an insignificant price can expose a contractor to risk far in excess of the contract price.
If you are a contractor who is under pressure to quickly execute an as-is contract, you should pay attention to these important points in order to avoid stiff penalties and to ensure that you will be paid for the work you perform.
Preserve your right to lien�Verify who owns the property. State lien laws have numerous complex and technical prerequisites that often include the delivery of preliminary notices to property owners at the beginning of a project. You must ensure that the party you notify is the current owner of record. This is done through a simple call to a title company or the recorder�s office to verify the current owner of the real property. An error in the preliminary notice can result in the forfeiture of your right to file a lien and in some states subject you to penalties for the improper filing of a lien.
Watch for terms that waive workers� compensation immunity. Most states have workers� compensation laws that limit what an employee can collect from an employer for a workplace injury. To circumvent this limitation, injured workers look to impose liability on third parties, like project owners. The third party then looks to you, the employer, for indemnification. Many state workers� compensation laws provide employers with immunity from this type of indemnity obligation, but several states allow the statutory protection to be waived by an express contract provision. Read the contract carefully to ensure that you are not waiving this important statutory protection.
Recognize hidden warranty obligations. The sustainability revolution has produced a myriad of new contract provisions that may obligate you to meet subjective rating criteria. Project owners that aspire to achieve a specific rating through standards like LEED may include contract language that imposes liability on the contractor if the desired level of certification is not achieved. This type of provision may expose you to liability for missed tax incentives or lost lease revenue if a desired rating is not obtained on schedule. If a contract refers to a requirement like LEED, make sure that any performance obligation is tied to measurable, objective criteria and does not obligate you to guarantee performance to be determined by an outside organization.
Read the payment terms. Sometimes obscure language can turn a simple payment term into a risky �pay-if-paid� clause. Such an arrangement can leave a contractor holding the bag if an upstream party does not pay. Many states have prohibited this arrangement, but some states�like Oregon�still allow it. When negotiating payment terms, remember to discuss retainer money, including how it is withheld and when it is released. Make sure that any agreement requiring preliminary lien releases does not result in the waiver of your right to file a lien on a project for unpaid retainage.
Understand the indemnity arrangement. Contractual indemnity, designed to shift risk between the parties, has a tendency to be complicated; an owner can easily shift liability to a contractor for activities not within that contractor�s control. If something goes awry on a project�even long after your obligations are fulfilled�an indemnity provision can require you to assume risk for the actions of a party that you did not even know existed. You should consult competent legal counsel about indemnity provisions to ensure that the contract does not obligate you to provide indemnity for acts beyond your own control or acts that would not be covered under your insurance policy, or that the contract does not expose you to an indemnity obligation that may be prohibited by state law.
Also, remember that indemnity is only as good as the party providing it. If you are requiring a downstream subcontractor to indemnify you and that subcontractor is underinsured or in poor financial health, you may want to consider an alternative method of risk allocation.
Know the source of project funding. Projects that involve HUD or other grant funding may be tied to very specific contracting requirements. Pay attention to whether prevailing wage or E-Verify requirements are triggered. Failure to comply can jeopardize your ability to get paid and may even subject you to civil or criminal penalties.
Know your limits�consult an insurance agent. An insurance agent can confirm whether your policy covers the insurance obligations required under the contract. You should speak with your agent about the type of work you are contracting to perform. You could be nullifying your insurance policy by signing a contract that obligates you to perform work prohibited by law or otherwise excluded from the policy. Simply possessing insurance does not mean you are protected.
Read the contract. As obvious as it sounds, this cannot be overstated, particularly when the parties are in a rush to start the project. Contracts are frequently merged, cut, and pasted from multiple sources. This practice often results in internal inconsistencies and typographical errors which can shift unreasonable risk to an unwary contractor. A critical eye can identify these errors and other conflicting provisions that could have disastrous consequences.
A contractor under pressure to execute a contract with minimal modification should remember that signing an agreement blindly means uncontrolled risk. A contract may seem to be a 50-pound paperweight riddled with incomprehensible legalese, but attention to these important details�even for small contracts�will help assure payment and avoid grave legal consequences.