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 will result in the work being awarded to a competitor.
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 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.
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. An error in the preliminary notice can result in the forfeiture of your right to file 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.
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 is not achieved. This may expose you to liability for missed tax incentives or lost lease revenue. 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. 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.
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.
Know the source of project funding.
Projects that involve HUD or other grant funding may be tied to specific contracting requirements. Pay attention to whether prevailing wage or E-Verify requirements are triggered.
Know your limits—consult an insurance agent. 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.
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.