The Construction Financial Management Conference (CFMA), which took place last October in Las Vegas, reported that a sluggish economic recovery and cash-strapped public and private owners are shifting greater risk onto contractors through onerous deal terms and non-traditional project responsibilities.
Contractors/ integrators need to educate themselves in understanding these new risks and ways to mitigate losses. The financial consequences of this risk-shifting are hitting subcontractors first since “they are furthest from the cash flow,” says Teresa Martin, vice president of Lockton Cos. LLC, Kansas City.
The subs borrow more as costs rise and payments drag out, she said in an interview with Engineering News Record. Payment provisions, retention, no lien clauses, damages for delay clauses and insurance requirements are among the contributing factors that are placing the (sub)contractor in a vulnerable position.
There’s a definite trend of owners shifting risk of nonpayment to their contractors and then on to their subs. Most harmful is the paid-if-paid payment clause making a general contractor’s payment to a subcontractor dependent on whether the owner first pays the general contractor. Not all courts uphold these paid-if-paid provisions, but nevertheless, litigation is taking up valuable time and financial resources. In this competitive environment, it’s not uncommon for a contractor and their subs to become hesitant to do anything during the course of the project that could “rock the boat.”
Commonly, this approach is due to the amount of work and assiduous effort that went into winning the bid. Consequently, they accept contract terms favorable to owners, are reluctant to submit change orders and rarely file claims all in fear of damaging their reputation and ensuring future work a near impossibility.
Protecting company assets and mitigating exposure to various liability issues are taking a back seat to an ever-increasing desire to securing the job, with the willingness to deal with any potential fallout later on. If something goes wrong and the parties end up in court, this approach can turn an otherwise profitable project into a losing proposition.
It’s no secret; the popular vote has drafting, negotiating and even reading contracts pretty far down on the food chain. Every day, contracts are being signed without being read. The pressure is on, and there’s no time to read what appeared to be a “standard” agreement. It happens more frequently that you might expect. Sometimes projects close without a hitch, final payment is received and the owner thinks you’re the only logical choice going forward. Things couldn’t have been better and you never looked back.
However, sometimes things don’t go as planned and you end up in front of a judge with the mistake of not reading the contract; left pray to all sorts of horrid clauses, waivers, disclaimers and provisions. In this scenario you may end up settling for pennies on the dollar or even losing your entire business.
Here are seven things you can do right now. For starters, (1) RTFC (read the bleepin’ contract); (2) review the agreement with an attorney for unreasonable terms and conditions; (3) pre-qualify your contractor and/ or private owner; (4) negotiate for equitable payment terms; (5) ensure there is a clear and comprehensive scope of work including milestones; (6) get change orders signed early and often; and (7) always insist on a certificate of substantial completion.
The best defense is a strong offense — whenever possible, send out your own contract. And send it early. Invest in having you and your team, with input from legal and accounting professionals, create a document that is well balanced and clearly fair to both parties. Now you can start on a level playing field and negotiate from there.
It’s all a balancing act … which takes experience and a little good old-fashion honesty to make it all worth it at the end of the day.