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