You Win or Lose Before You Tee Off: The Importance of Construction Contract Review and Negotiation

I was very fortunate to get to play golf regularly with my dad. Every Saturday morning was the same, standing on the first tee in the dark and fog at 6 a.m., and a lot of loud “negotiating” back and forth on the numerous bets that would be placed and how many strokes each person would get or give. I was always a bit naïve and cocky. I did not appreciate the fact that it really didn’t matter how well I played if I did not negotiate the right bet before we teed off; or in other words, get a fair and reasonable number of strokes before we teed off. I learned quickly that “winning” was really done before we began playing.

The same strategy applies to construction contracting. A lot of the time, whether you win or lose on a construction project or job depends on what you do before you start work. Are there hidden risks that you did not consider because you just wanted to get the work? While getting work is important, so is staying in business; not getting stuck with someone else’s liability; not paying liquidated damages; having to pay another subcontractor’s union dues or payroll taxes; or after the project is complete, paying your profit on the job to an insurance carrier to cover a deductible or Self-Insured Retention as a result of a construction defect claim.

In this day and age, when margins are tight and owners are squeezing general contractors; general contractors are squeezing subcontractors; and some owners, general contractors, and subcontractors are finding themselves financially insolvent, it is absolutely necessary to have a reasonable and fair contract. No one should have to take on unreasonable and unfair risk. I know this is easier said than done, but you must try to get what is fair and reasonable so you do not regret the consequences after the project. So, before teeing off, please consider the following:

For General Contractors:

  • Make sure your subcontractors are paying materials suppliers, union dues, and payroll taxes (yes, you as the GC are responsible for unpaid payroll taxes).
  • Make sure subcontractors, and their sub- subcontractors are properly insured.
  • Make sure you and the owner are named as Additional Insureds and this documentation is up to date. This is especially important if the project lasts longer than the initial policy period.
  • Make sure you are fully indemnified if a subcontractor screws up his work or injures someone on the job site.
  • Should you have a mandatory arbitration provision? Should you incorporate American Arbitration Association provisions? We generally recommend against it.
  • Should you include a “prevailing party” attorney fee provision?
  • On Federal projects, you must have flow-through provisions advising subcontractors of federal law (as set forth below) and ensuring subcontractors’ compliance.

For Subcontractors:

  • Are there egregiously harmful terms in the prime contract that you are tacitly agreeing to? Have you received and reviewed the prime contract?
  • Are you on the hook for liquidated damages that you never considered?
  • Are you agreeing to provide insurance that you do not have, or that you are unable to obtain?
  • Are you responsible for project delays? Is the General Contractor allowed to accelerate your work without being obligated to pay your overtime wages?
  • Are you agreeing to a warranty that you cannot provide? Are you agreeing to warrant work involving other trades that you have no control over?
  • Are you agreeing to indemnify others whom you have no control over?
  • On Federal projects, have you protected your bond rights? Or have you waived them?
  • On Federal projects, have you complied with E-Verify, Federal Acquisition Regulation (FAR) Contractor Code of Business Ethics and Conduct requirements, Davis-Bacon Act (Prevailing Wage), Buy American Provisions of the American Recovery and Reinvestment Act, Contract Work Hours and Safety Standards Act, and the Copeland “Anti-Kickback” Act (which requires weekly payment of all laborers and mechanics)?

In all cases, we recommend that you have an attorney, well-versed in construction, labor and employment, and the pitfalls of litigation, review your contracts to ensure that when you get to the 19th hole, you have done the best job protecting your business and ensuring that your project is profitable.