September 29, 2012

How a Contractor Can Better Manage Its Construction Contracts

Whether a contractor is acting as a prime contractor (having a contract with the project owner) or a subcontractor, contractors are often presented with a contract to sign with little or no opportunity to change its terms. Even if the contract makes commercial sense and the contractor is willing to enter into the agreement, the contractor still needs to evaluate the contract for risk and to identify the project requirements. Despite being told that the contract terms are “non-negotiable,” the contractor should recognize a very limited number of offensive contract provisions and attempt to negotiate changes to them. Such targeted negotiation is an effective method because the changes sought are limited and easy for the other party to understand and, therefore, cause little inconvenience to the other party in evaluating and deciding upon an answer.

Regardless of whether the contract is changed, the contractor should copy the key provisions of the contract and put them into a written guide, indexed for ease of reference, for use by field personnel. This makes it more likely that the work in the field will follow the contract requirements. Also, field personnel need to be aware of and understand the significance of any special project risks and/or requirements in order to better manage the project, for example, when written notice of a claim is due, who it should be sent to and what it must contain. Experienced project managers and superintendents certainly know their jobs, but in the absence of clear instruction are likely to manage the project in accordance with their experience; which may or may not satisfy the project requirements.

Most subcontractor agreements contain a “flow-down” provision. Typically, the contractor subcontracts work scope and contract requirements (flowing them down) to the subcontractor for the subcontractor to perform. The contractor needs to ensure that its flow-down provision fully transfers the risk and responsibility to the subcontractor. Be aware that state law can influence what risk is able to flow down. Specifically, in Pennsylvania, indemnity provisions do not flow down under a general flow-down provision and to effectively transfer this risk, the flow-down provision must specifically state that the indemnity provision flows down to the subcontractor. If a contract is subject to a flow down provision, the contractor must get a copy of the contract that is flowing down into its contract.

As a matter of practice, for each new project, the contractor should obtain the legal name of the project owner, the address of the project site, any bond information, and a copy of the overall project schedule. Also, to the extent there is anything out of the ordinary with insurance requirements, the insurance provisions should be coordinated with contractor’s insurance broker. This basic information is needed to properly set up the project file.

The contractor needs to have a standard subcontract agreement. This subcontract agreement will still have to be adjusted to fit the needs of any particular project. Time deadlines, key clauses, and insurance requirements must be carried through into the subcontract agreement. Having a standard form subcontract will speed up the process when engaging subcontractors and will establish the standard way your company does business. The standard form should be reviewed by legal counsel on an annual basis to ensure that it is consistent with the current state of the law. Getting your contracts right can make all the difference in a successful project.

For assistance in managing your contracts or answering your project-specific questions, contact David Scotti or anyone of our other lawyers on the C&W construction team. 

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