There is no substitute for having a lawyer review your contract. In fact, I encourage all contractors to have lawyers review their construction contracts. However, I’ve practiced construction law long enough to know that doesn’t always happen. Understanding this reality, I’ve prepared a general field guide of sorts to assist contractors with reviewing construction contracts when they “go it alone” against my recommendation. I also note that this guide does not touch upon every contractual issue. For example, I don’t elaborate upon insurance requirements or indemnification provisions, both of which require close review.
Here’s what contractors should look for:
Scope of Work-Get the Wrinkles Ironed Out: Examine whether the scope of work in your proposal and the scope of work as defined in the contract match-up. Typically, the scope of work in the contract will be broader. For example, the scope of work in the contract may require the contractor to perform the work set forth in the proposal and any necessary work “implied” by the drawings. If there is a conflict between what is set forth in your proposal and the scope of work in the contract, seek to eliminate the conflict. Otherwise, the discrepancy could come back to haunt you.
Flow Down or Pass Through Clauses-Don’t Ignore This: Contractors/subcontractors need to understand what flow down/pass through clauses are. Such clauses incorporate the terms of Owner/General Contractor agreement and bind the subcontractor to the general contractor to the same terms that the general contractor is bound to the owner. Sometimes a prime contract requires general contractors to insert such a clause into all subcontracts. Wherever such a clause appears, it is important for subcontractors to review the prime contract in addition to the subcontract to fully understand the terms that the subcontractor is agreeing to. If there are conflicts between the prime contract and the subcontract, contractors need to seek clarity regarding which provisions control. By failing to review the general contract, a subcontractor risks agreeing to terms that it knows nothing about, including termination clauses, claims processing clauses, indemnification clauses, and dispute resolution clauses. I routinely advise my clients to insist on receiving a copy of the general contract and reviewing it before signing any subcontract that contains a flow down/pass through clause.
Pay-if Paid Clauses-We’re Talking Money Out of Your Pocket: Subcontractors should learn to spot pay-if-paid clauses under which a subcontractor bears the risk of nonpayment and to know the difference between this clause and a pay-when-paid clause, which is merely a timing mechanism. Pay-when-paid clauses do not condition payments to a subcontractor on the contractor’s receipt of payments from the owner while pay-if-paid clauses make the contractor’s receipt of payment from the owner a strict condition precedent to the subcontractor receiving payment. In other words, pay-if-paid clauses shift the risk of nonpayment from the contractor to the subcontractor. If words such as “condition,” “if and only if,” or “unless and until” are used to describe when payment to a subcontractor is due then chances are it’s a pay-if-paid clause. If you are concerned that the subcontract could be interpreted as a pay-if-paid clause, I strongly recommend consulting with a lawyer, because the analysis is a bit more complex than I’ve described. However, if you are seeing the words described above, that should serve as a warning that the contract may contain a pay-if-paid clause.
While I typically advise clients against agreeing to payment terms that use the words “condition,” “if and only if,” or “unless and until,” the reality is that many of my clients frequently agree to these terms because they don’t have the bargaining power to insist on their removal and they want or need the work. In such circumstances, subcontractors can lessen the potential impact of a pay-if-paid clause by adding a pay-if-paid clause into their subcontracts. It’s a pass-the-buck tactic, and I’ve actually had clients object to doing this out of a sense of fairness, but this is the age we live in.
No Damages for Delay Clauses-Typically Enforceable: Typically such clauses state that time shall be the only compensation for delay. Although such clauses are typically enforced, Pennsylvania law refuses to enforce such clauses where: (1) there is an affirmative or positive interference by the owner with the contractor’s work; or (2) there is a failure on the part of the owner to act on some essential manner necessary to the prosecution of the work.
Change Order Clauses-The Stumbling Block of Many Contractors: If a contractor does not follow the process to perfect and preserve its claim in accordance with the contract, the contractor may have a difficult time receiving compensation. Therefore it is vital that the contractor carefully examine and understand the contractual change order process.
One common issue that arises with respect to change orders is that the contract specifies that only a certain person or persons can approve change orders. During the project, contractors frequently receive approval for a change order from a field person, but not the person specified in the contract. Having received such approval many contractors/subcontractors complete the change order work only to have the owner/contractor refuse to pay for the change order work because the change order work was technically not approved by the individual specified in the contract. While we highly encourage our subcontractors to strictly follow the contractual change order process, our clients tell us that sometimes it is not feasible to engage in such a process because doing so will delay or disrupt the work. In such cases, we encourage our clients to document change order approvals as much as possible, especially via emails. If you get in a jam like this, you might want to consult with your attorney about what the email should say because I would word emails differently depending on the circumstances.
If a dispute arises, having a string of emails showing how the change orders arose, is better than relying solely upon your word that someone working for the owner/contractor orally approved the change order. Again, if that happened, send an email confirming it, e.g., “per the [insert person’s name]’s direction, Company XYZ was directed to do [insert extra work], which work is outside the scope of work of Company XYZ’s contract. Accordingly, such work constitutes change order work for which a Change Order will be submitted.”
Furthermore, don’t jeopardize your chances of being compensated for change order work by failing to give the required written notification for claims for compensation within the certain time period specified in the contract. Failure to provide such notice can result in a waiver of your claim. Finally, know how claims must be submitted and include all required information in your claims submissions.
Differing Site Conditions/Changed Conditions Clause-Exploring the Great Unknown: This clause comes into play when a contractor discovers site conditions that were neither known, anticipated, nor disclosed to the contractor. Typically, there are two types of changed conditions: (1) Type I conditions are conditions that materially differ from conditions that were disclosed to the contractor in the contract documents at the time of bidding; and (2) Type 2 are the conditions that are “unusual, unknown, and unanticipated.”
Keep in mind that if the contract also contains a site investigation clause, in order for the contractor to benefit from the differing site conditions clause to the maximum extent possible, the contractor should conduct a reasonable investigation of the site and review all relevant data.
Watch out for contracts that attempt to shift the risk of bearing the cost of differing conditions to the contractor by requiring the contractor to disclaim any claim for extras related to a differing site condition and watch out for contracts that don’t address differing site conditions.
Dispute Resolution Clauses-Who Is the Referee: Know what is required. For example, do you have to seek mediation before arbitration or litigation? Know where you are allowed to litigate or arbitrate. Also, pay attention to whether the owner/contractor has the sole discretion to elect to pursue the matter through arbitration or litigation.
This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice. Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.
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