It is a common saying that construction projects are “problems in progress.” Subcontractors, who often are the ones financing the project through their labor and materials, bear inordinate risk that the financial impact of any problems will fall on them. If you follow the commandments below you won’t eliminate problems, but you can set yourself up to avoid some problems and minimize the cost and expense of resolving the problems that may arise.
1. Thou shall condition thy bid!
The financial success of a project for many subcontractors is determined in the earliest stage of the project: the bid. And while the value of a good estimator is obvious, the less obvious, but equally important, part of the bid is how you present it. Subcontractors who “condition” their bids on fair subcontract terms (and the principal risk assumptions they made in calculating their bid price) maintain the valuable leverage needed to walk away from a project if the customer will not give fair contract terms (particularly if the customer relied on that bid to win the job).
ASA has developed sample bid conditioning language its members can access. Review it on your own, and with your counsel, and use it or something like it to ensure you’ve conditioned your proposal for the work upon acceptable contract language.
2. Thou shall read your contract!
In the heady days after getting the call that you have ‘won’ the job, even the most sophisticated subcontractors can fall prey to charging ahead with the work without taking care to read the Subcontract they are given and confirm that its terms are consistent with your bid assumptions and conditions. This is begging for trouble. All the hard work you put into your bid, and that went into preparing a well-conditioned bid, is probably wasted if you agree to subcontract terms that differ from your bid conditions.
3. Thy duty to read extends to all contract documents!
Remember that a Subcontract typically consists of far more documents than the “Subcontract” you are asked to sign. A typical Subcontract probably ‘flows down’ the prime contract, incorporates plans and specifications, addenda and supplemental conditions. Read those so you aren’t surprised later.
And don’t forget that the “Subcontract Documents” also include documents that may not have existed, when you bid the Project, such as change orders, lien waivers, etc. Because the ‘Subcontract’ can be changed after contracting, it is very important that the care you take not only to read the Subcontract Documents before you sign, but that you scrutinize any document you later are asked to sign during performance.
Your right to additional time or compensation, your right to a mechanic’s lien or payment bond claim and a host of other rights can be affected or even waived by signing an overly broad change order, lien or bond waiver, or other document. Know that each clause in a typical construction document is there for a reason. If you do not understand it, ask for an explanation and do not hesitate to reach out to legal help early if necessary. A dollar spent on early advice is cheap insurance against a potentially huge unwelcome surprise later.
4. Thou shall become comfortable with using stickers (or stamps) to reserve your rights in lien waivers, pay applications and change orders.
Because the fine print of many common construction documents (schedule approvals, payment applications, lien/bond waivers, etc.) often contain surprises, ASA has created a set of simple tools in the form of “stickers” that prudent subcontractors can use and keep in their ‘risk management’ toolbox. The stickers deal with what should be non-controversial reservations of rights subs can affix to routine project documentation to avoid the inadvertent waiver of important rights. ASA’s stickers are available as a download to members for the following documents:
- Signed change orders
- Signed lien or bond waivers
- Signed payment applications; and
- Signed schedule approvals
5. Thou shall educate yourself about the project contractor and owner.
The importance of knowing the parties for whom you are working cannot be understated. If you are not familiar with the reputation of the contractor, owner and other project participants, ask around. What you learn might save you from a costly firsthand learning experience.
This means that when entering a subcontract you should not only consider what your contract says about payment terms, but should actively investigate the project’s financing and the reputation of those who control the cash flow in the tier or tiers above you. Many current industry forms like the ConsensusDOCs Subcontract Form expressly give subcontractors the contractual right to information about the owner’s project financing. Prudent subcontractors will exercise that right if they have questions or concerns about a Project they are considering bidding.
6. Thou shall not waive your mechanic’s lien and bond rights without payment.
Mechanic’s lien and payment bond rights offer vital payment security to subcontractors. They should not be waived without payment. It is a common belief, and a mistaken one in many states, that such rights cannot be waived either upfront (before starting work) or prospectively (by signing an overly broad waiver before work is complete). Think of your lien and bond claim release forms as receipts you give to evidence that you’ve received payment for certain work, but nothing more.
Understand too that mechanic’s lien and payment bond rights can be waived by inaction at the start or end of a Project. Many states require subcontractors and suppliers to take certain steps up front to preserve their mechanic’s lien rights through the filing and/or service on the owner and/or prime contractor of preliminary notices and other documents, and by putting tight time limits on when you must assert those claims.
If you inadvertently waive these important rights either explicitly (by signing an overly broad waiver) or inadvertently (by not taking the steps you needed up front to preserve those rights, or waiting too long to assert them at the end of your work) you have needlessly squandered valuable leverage and almost assuredly increased the time and cost to collect what you are owed.
7. Thou shall not perform change order work without written authorization.
Almost every Subcontract has a ‘changes’ clause that provides that the subcontractor shall not perform additional work without first obtaining a written change order. Most every proprietary subcontract form will go a step further and state that claims for additional work performed without prior written authorization are waived. In the heat of a Project, and the desire to ‘get along’ many subcontractors perform additional work on a ‘verbal’ directive. Though that may sometimes work out okay, it is a recipe for disaster. Many contractors have lost otherwise legitimate claims, even where there has been actual notice by their customer, by failing to dot the ‘I’s and cross the ‘t’s on what the Subcontract requires as a condition precedent to performing additional work.
8. Thou shall have a list of ‘killer clauses.’
Part of any good risk management practice is understanding the common risk shifting contract clauses in the industry and what they mean to your company. Each company may have a different tolerance level for the clauses, but because you will see the same clauses over and over again, it makes sense to spend time on your own and with your construction counsel to review the common ‘killer clauses’ (such as pay if paid, broad form indemnity, additional insured, no damages for delay, etc.) and decide what is or is not a deal killer for your company.
ASA has many resources that can help this process. You can make a contract review or negotiation process much smoother by in advance deciding what the sticking points are for your company, creating a ‘bottom line’ cheat sheet for management on negotiating tips and acceptable ‘compromise’ language or exceptions, if there are any, on some of these terms.
For example, a pay if paid clause may be a deal killer on most jobs, but perhaps you are less concerned with it on public jobs, or owners and/or contractors with a good reputation you know and trust. Though an absolute obligation to be paid quickly is priority number one, pay when paid language, giving your customer a reasonable amount of time to collect payment before having to pay you, may be a fallback compromise you can live with.
9.Thou shall understand your leverage.
Many subcontractors are cowed by the inequities of the bargaining relationship between them and their customer. And there’s no denying that often the subcontractor has far less leverage than its customer. But… you wouldn’t be talking to your potential customer unless you have something it wants, which means you have leverage.
The general contractor wants you to perform for the price you quoted (or *cough cough* a little less than that) and it (and the Owner) want reliable subcontractors they can trust to complete the project and do a good job. The problem comes when you are asked to accept risk that you hadn’t factored into your bid price. As long as you are prepared to walk, have properly conditioned your bid and your customer must pay more and/or use a less desirable replacement, you have leverage. Use it.
10. Thou shall be prepared to use your leverage
See Commandment No. 9. Subcontractors who remember these commandments, and implement procedures to follow them will minimize their financial risk and be better equipped to not only weather the inevitable difficulties that arise but to prosper. But if you aren’t prepared to use your leverage and accept that you may lose a job or two along the way, all the hard front end work will be for naught.