In both my construction law practice and in speaking to industry groups over the years, the most frequent questions relate to getting paid for work completed. Below are a few thoughts on that topic taken from an upcoming Seminar in Dallas, Texas, on May 16, 2017. BICA has been kind enough to provide a link to that seminar on its website.
Know (and, if possible negotiate,) Your Agreement: Understanding the meaning of the terms in your agreement can make the difference between getting paid and suffering a loss. The first step toward negotiating more favorable terms or, more importantly, eliminating unreasonable terms, is to carefully read, and fully understand, the terms and conditions set forth in the contract, particularly the various provisions that govern your obligations and risks, and the conditions for getting paid.
Define Your Work: First, you must confirm that what you intend to be your scope of your work is accurately stated in the contract. Many contracts contain a provision that defines the “Contract Documents” and often the definition of that term specifically excludes the bid or proposal provided by the contractor or subcontractor. If you intend to limit your scope of work to what was defined in your proposal, the proposal should be specifically included in the list of documents encompassed within the definition of “Contract Documents.” Also, make sure that a “primacy provision” (e.g., “in the event of a conflict between this Agreement and any other Contract Document, this Agreement controls”) does not render the contract controlling over any conflicting terms in your proposal or similar document. If there are critical assumptions or limitations that are not reflected in the contract or your proposal, you should consider preparing a separate document that lists any clarifications and assumptions. That document can then be attached as an exhibit to the contract and “incorporated by reference” into the contract (e.g., “the subcontractor’s list of clarifications, attached as Exhibit C, is hereby incorporated herein by reference as if fully set forth herein,” or other language to that effect).
Flow Down Provisions: Incorporation by reference can be a great tool for clarifying a contract, but it can also lead to a confusing collection of terms and conditions that become enforceable parts of the contract even though they are not actually set forth in the contract. One important example is “flow down” provisions that incorporate all of the prime contract documents into the subcontract. From a subcontractor’s perspective, it’s important to ensure that the terms of the prime contract that are incorporated by reference do not expand the scope of the work or saddle the subcontractor with risks not priced into the contract. Subcontractors should not assume that the provisions in the prime contract that affect their work are in lock-step with what they agreed to in the subcontract.
Risk Shifting Provisions: Provisions that shift risk of loss from one party to the other are common in construction agreements. These are usually placed in the contract by the upstream party, whether owner or general contractor, to place the risk of loss on the downstream party. Risk shifting provisions take many forms, such as “no damage for delay” provisions or “pay if paid” provisions, as well as provisions that make it difficult to recover additional costs for concealed conditions or extra work. Detailing the concerns and work-arounds for all of the possible risk shifting provisions that may be found in a contract or subcontract is beyond the scope of this short article. But a good start to understanding these types of provisions is to simply read your contract and discuss the concerns you have with the upstream party. You should also develop a relationship with a good construction lawyer who can provide guidance in navigating these sometimes confusing and often risky contract provisions.
Whether you are replacing the front door of a residence or building the steel frame for a 60-story building, the contract establishes how much you get paid, and what you must do to make that happen. Investing time, energy, and money into contract negotiation at the beginning of the project can often make the difference in whether your payment expectations are met at project end.
Previously a licensed architect, Steven E. Kennedy has three decades of construction law experience and recently was among the first group of Texas attorneys to receive board certification in construction law. The author wishes to thank Andrea Parisi of the Building Industry Credit Association for the opportunity to contribute this article to BICA’s new website. Mr. Kennedy can be contacted at firstname.lastname@example.org.