Construction Contract Negotiating Paradigms
There are many preconceived notions about what
commercial terms and conditions can and can’t be
negotiated in a construction contract. Take the time to understand
these false notions and become a better negotiator of construction
contract terms and conditions.
By: Kit Werremeyer
President, Southernstar Consultants LLC
What’s a
paradigm? A paradigm (pronounced: pair-a-dime) is a pre-conceived
(ill-conceived?) notion about how things should be or must be or
have to be.
Some other definitions of a paradigm commonly
found are:
• A pattern or model of behavior;
• Thinking
inside the box;
• That’s just how things are and I can’t change
them.
What’s a construction contract paradigm? There are a
whole lot of them actually. They simply create negotiating hurdles.
Here are six commonly encountered construction contract paradigms
for Subcontractors to consider:
1. The General Contractor’s
terms and conditions are non-negotiable.
2. The General
Contractor will disqualify me if I take exception to his so-called
standard terms and conditions.
3. As a Subcontractor I have to
agree to all of the “flow-down” commercial provisions of the Owners’
contract with the General Contractor.
4. The General Contractor
says he has no money, so as a Subcontractor I have to agree to
paid-when-paid or paid-if-paid provisions.
5. All state
Anti-indemnity legislation will fully protect me as a Subcontractor
from broad form and intermediate form indemnities in the General
Contractors’ contract.
6. I am afraid to deal with the General
Contractor’s lawyers on commercial terms. They know more than I do
and I can’t out negotiate them.
Let’s dispel each of the
above six common construction contract paradigms.
1. All,
repeat all construction contract terms and conditions are completely
negotiable as long as what’s finally negotiated is not considered
illegal. For example: if the General Contractor requires you as the
Subcontractor to bribe the local municipal inspectors to pass
periodic construction inspections, that’s obviously illegal!! Don’t
do it!! But it certainly is not illegal to negotiate terms of
payment that yield a positive cash flow, or to delete a broad or
intermediate form indemnity, or to refuse to add the General
Contractor and/or Owner, or both, as additional insured(s) to your
general liability insurance policy.
2. All so-called
“standard terms and conditions” are negotiable; there is no such
thing as “standard terms and conditions”. Is there such a thing as a
“standard construction project”? Don’t think so. The concept of
“standard terms and conditions” is simply another negotiating
hurdle. If you are a safe contractor and one who finishes the job
on
time and for a competitive price, the General Contractor
will
negotiate with you. You add a lot of significant value to the
General Contractor’s project for the final Owner.
3.
Flow-down. The concept of “flow-down” provisions doesn’t hold any
water. It is just another negotiating hurdle for Subcontractors to
overcome. The contract between the General Contractor and the Owner
is their business, not yours. What the General Contractor agrees to
in the way of commercial terms and conditions with the Owner is his
business, not yours. If the General Contractor was willing to accept
some lousy terms and conditions in his contract with the Owner,
that’s his business, not yours. You didn’t have any say so in what
was agreed to between the General Contractor and the Owner. As a
Subcontractor you have a separate and distinct contract with the
General Contractor for the work you will perform, including all the
commercial terms and conditions under which you agree to perform
that work, notwithstanding any claim by the General Contractor that
you must agree to some or all the so-called “flow-down” provisions
from his contract with the Owner.
4. No money. It’s amazing,
isn’t it, how some General Contractors can continue to work in the
construction business and be successful with no money to pay their
Subcontractors. Paid-when-paid and paid-if-paid terms of payment
just mean the Subcontractor will receive his periodic progress
payments when or if the General Contractor gets paid by the Owner
for the work performed. Subcontractors
certainly are not charitable organizations. They cannot operate successfully for any length of
time on terms of payments that will cause negative cash flow for
their construction projects. All General Contractors have access to
funds to pay their Subcontractors on a timely basis so that their
Subcontractors can enjoy a positive cash flow for the work they
perform. Paid when paid or paid if paid clauses are good for the
General Contractor because he gets to build the job with the
Subcontractors money, not his. A payment dispute between the General
Contractor and the Owner could stop payments to Subcontractors
indefinitely. In your separate and distinct contract with General
Contractor, always insist on terms of payment that create a positive
cash flow.
5. Anti-indemnity legislation. As of the date of
this article 43 states have some form of anti-indemnity legislation
(state laws, called statutes) in place that may outlaw/allow broad
and/or intermediate form indemnities and/or insurance to cover the
risk transferred in the indemnities. Just because a state has some
form of anti-indemnity legislation in place doesn’t mean the
Subcontractor is protected from the risk transfer that takes place
in broad form or intermediate form indemnities in the construction
contract with the General Contractor. The paradigm is that
Subcontractors may believe or assume that they are fully protected
from inappropriate risk transfer arising out of indemnity provisions
in the construction contract for personal injury and property damage
caused by the negligence of the General Contractor and/or of the
Owner just because a state has a so-called “anti-indemnity” statute
in place. State anti-indemnity statutes that only disallow dangerous
broad form indemnities (indemnities that transfer up to and
including the sole negligence of the General Contractor and/or the
Owner) are worthless since the statute does not disallow equally
dangerous intermediate form indemnities (indemnities that transfers
all negligence except the sole negligence of the General Contractor
and/or the Owner). State anti-indemnity statutes that disallow both
broad and intermediate form indemnities are much, much better. State
statutes that disallow both broad and intermediate form indemnities
along with disallowing the requirement to provide additional insured
status insurance and change of venue and choice of law to cover the
risk assumed in the disallowed indemnities are the best and get the
gold star for good anti-indemnity legislation. When negotiating the indemnity
provisions with the General Contractor never believe or assume that
the risky indemnity the General Contractor wants will be ultimately
disallowed simply because the state has an “anti-indemnity” statute
in place. Always fully understand the coverage provided by a
particular state’s anti-indemnity statute before negotiating the
indemnity in a subcontract with a General Contractor.
6.
Subcontractors should never be unduly afraid to negotiate
construction contract terms and conditions with a General
Contractors’ lawyer. The paradigm encountered here is that the
General Contractors’ lawyer is better prepared to negotiate key
terms and conditions and is more knowledgeable about them and the
Subcontractor doesn’t stand a chance. Actually, it’s fairly easy to
deal with the General Contractors’ lawyer because, when it comes to
negotiating construction contract terms and conditions, lawyers are
predictable in their negotiating approach. A predicable person is
always much easier to negotiate with. You always know what angle of
the sun they are coming at you from and their negotiating positions
are always well known. So you can easily plan your negotiating
strategy ahead of time. A commercial representative—especially one
with lots of practical on the job construction experience—of the
General Contractor is likely to be a lot tougher to negotiate with
as he/she will probably be much less predictable on what he/she will
be willing to negotiate in the way of terms and conditions (that may
actually work to the Subcontractors favor!).
Don’t let these
paradigms get in the way of negotiating better terms and conditions
in your next construction contract.
©Southernstar
Consultants, LLC November, 2007, Revised January 2014
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