Contract Review Blindspots for Construction Subcontractors

FEATURE

Contract Review Blindspots for Construction Subcontractors

by Patrick Hogan, handle.com

Contracts can significantly impact construction projects' profitability, and complacency can lead to wasted resources--even revenue loss. Many fail to be conscientious about reviewing contracts for various reasons--they may have been working with the same client for several projects now, or they've never had issues with their templated contracts, so they don't have a process in place for thorough reviews.

This can spell disaster, especially in construction, where a single project can spell the difference between a business still running and one that has to close down. Contracts are all about shifting risks. The most meticulous party–and, sometimes, cunning–will get the longer end of the stick. You don't want to be shortchanged. It doesn't mean you look at all clients with a judging eye--you just have to look out for your interests at all times. Granularly reviewing contracts is just good practice.

Here are some possible blindspots your company might be overlooking in the contract review process.

Waivers of lien rights

While conditional waivers are an essential component of mechanics liens laws, general contractors or clients could include wording in the contract equivalent to waiving subcontractors' right to file mechanics liens in case of payment issues. Watch out for the mention of unconditional waivers and stop payment notices--make sure that the inclusion of these lines isn't impeding your right to file an action in case you don't get paid. Of course, ensure you send the necessary preliminary notices to protect your right to file liens.

Protection against price fluctuations

Price fluctuations are a big challenge for the construction industry. The pandemic saw changes in raw material pricing that swung profitability for subcontractors in extreme directions. The prices you've used during the estimation phase won't hold up through to the start of the project. It's not unusual for general contractors to have clauses in their contracts outlining guidelines for any change orders or price adjustments if the prices of raw materials in the market change. Some indicate that the prices in the contract are guaranteed up to a 5% change in the market, but any more would allow for price adjustments. Make sure that any price fluctuation protection considers your situation--especially for lower-tier subs--and is not one-sided.

Required clearances for site visits

Here is where conscientiousness can pay off big time. With so many bids you have to send, it might be tempting to skip site visits. If something on the site can dramatically impact the contract price, it's best to know as soon as possible. Many contracts stipulate that getting into an agreement with the client or general contractor means that you've already inspected the site and considered external factors. This prevents you from adjusting pricing when the contract has already been signed.

Conducting a thorough site visit during the bidding phase is imperative–you get more information about the project and can also ensure that your bid allows for actual profits. Letting competitors know about any situation impacting pricing drastically also helps keep the bidding competitive.

Ambiguous language

While specific clauses can be blatantly one-sided and caught through cursory review, contracts are hotbeds for ambiguity. If everything goes as planned, these clauses may not matter at all. But clients or general contractors will not think twice about using restrictive language that's open to interpretation against each other or subcontractors if it plays to their advantage, especially when projects get hairy, which they can get.

Many of these one-sided clauses may not even hold up in court, but avoiding anything that could be a cause for concern when in court is best. Getting into litigation always equals wasted time and resources, which significantly impacts a sub more than major general contractors and clients.

Overhead costs–tools inventory

Ensure you've considered tool inventory when writing up your contract and estimates. Earmark funds for tools you anticipate needing maintenance or replacement during the project. Failing to include these will muddy your profit projection. Not including explicit wording that allows you to include tools in the pricing is not only bad business practice, but it can also backfire if you have to replace costly equipment in the middle of a project without accounting for costs associated with it when you write up your estimates and contracts.

These are just some critical areas to pay particular attention to when reviewing and drawing up contracts. The back and forth while finalizing a contract can also be a period of massive risk-shifting, so ensure that each exchange is thoroughly reviewed.

About the Author

Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors and material suppliers with lien management and payment compliance. The biggest names in construction use Handle on a daily basis to save time and money while improving efficiency.