Ask the Experts: 8 Tips for Navigating Potential Subcontract Headaches with Maegan Spivey
In part two of our “Ask the Experts” series with Maegan Spivey, we share how to best navigate and negotiate subcontracts. Maegan is a seasoned Contracts Specialist at Document Crunch, having reviewed hundreds of contracts in her prior careers as a general contractor, subcontractor and consultant. Let’s dive in!
In the intricate world of construction contracts, the ability to navigate and negotiate terms is a crucial skill for subcontractors. Redlining, or proposing changes to contractual terms, plays a pivotal role in shaping agreements to balance the risk and preserve profitability for subcontractors. In this blog post, we'll delve into the best practices of negotiating and redlining in the construction industry.
#1: Setting the Stage
Approaching negotiations with collaboration in mind is key. You can do this by simply explaining the rationale behind the requested changes. Leaving comments and language for the proposed change helps give context for the reasoning, facilitating a smoother (and faster!) negotiation process.
#2: “Plug Your Nose and Sign It” Contracts
In some instances, subcontractors encounter contracts where negotiations are futile. Termed as "plug your nose and sign it" agreements by the first construction attorney I worked with after becoming a contract manager, this is where a customer says you must accept the terms as written with no changes, despite less-than-ideal terms or just plain awful ones. While not ideal, these contracts are sometimes an unavoidable aspect of securing business, but it’s important to at least know the risks and then you can choose to accept them anyway.
#3: Flow Down Clauses and Prime Contracts
If your contract has flow down clauses, and you haven't read the prime contract, you haven't read your whole contract. Flow downs are a huge part of construction contracts. There’s usually a sentence in a subcontract that says something like, “All provisions applicable to Subcontractor and the Work in the Prime Contract are incorporated by reference.” Typically, it’s followed with, “In the event of any conflict between the Contract Documents, those imposing the more onerous obligations on the Subcontractor will apply.” So, you’re obligated by unknowns in the prime—unknown until you read them—and those unknown obligations win in the event they conflict with your agreement. It’s a lot of work, but it’s part of the contract. (Pro tip: Document Crunch can find these for you fast!)
For more information on flow downs, check out Making Sense of Construction Subcontracts here.
#4: Consequential Damages and Limitation of Liability
Pay attention to your consequential damages provision. If there isn't an exclusion for consequential damages (or mention of it!), the sky's the limit. The reason there is such a push for waivers of consequential damages is because you’re accepting a risk you can’t quantify. In construction contracts, when there is no mention of consequential damages, it means your customer can recover things like lost profits, lost business and increased operational costs (just to name a few!) if the project goes sideways. See the court case Perini Corp. V. Greate Bay Hotel & Casino, Inc., if you’re curious about consequential damages.
Another option is asking for a limitation of liability (or cap) if you can’t negotiate consequential damages out. It’s worth talking the strategy over with your construction attorney if you aren’t sure what’s right for you.
Besides consequential damages, indemnity can be another area that’s hard to quantify risk going in. It could easily add up to a large sum if not narrowed in scope or capped. Both items should always be addressed when reviewing a contract and added, if needed.
#5: Tight Scopes for a Solid Contract
Tight scopes are essential for a good contract. Thorough scopes and exclusions are what your terms and conditions are built on. If you have too many grey areas in what, when and how you’re delivering... you’ve built your castle on sand.
#6: Proposal Language Verification
Don't assume your proposal language made it into your contract. People underestimate the importance of their scope when the project goes to contract. Always check to make sure exclusions, job site must-haves and everything from the scope made it into the contract. If you do get your bid incorporated into your contract, check the precedence of that bid in relation to the other contract documents. If you get the bid incorporated but all the terms from the Ts and Cs take precedence, you’ve spent time getting something in that may not actually matter in the end. (The order of precedence is found in the contract itself.)
#7: Changing DocuSign Contracts
Just because it's sent over DocuSign, doesn't mean you can't change it. There’s a perception that because a sub gets a DocuSign, the other party has moved on or it’s a subtle hint not to negotiate. It may seem like trying to make changes to that document is making waves. The truth is, many people don’t negotiate, and they probably just assumed you won’t either. It's still worth an ask!
Subcontractors should feel empowered to seek more balanced terms and operational needs that align with their business through negotiation and redlining. Requesting changes is not only acceptable but often a necessary step in ensuring agreements that help a business run smoother projects and stay in the black.
#8: Insurance Section Review
If the insurance section is more than basic limits, send it to your insurance broker to review coverage. If you’ve ever seen a post by Drew Boyd on LinkedIn, you know that just because you have insurance, doesn’t mean you’re covered! Make sure you’re confirming coverage with your broker or risk manager based on what the contract says. The gap between what you’re on the hook for and what you’re insured for can be huge.
Empowering Subcontractors for Successful Negotiations
In the realm of construction subcontracts, success lies in the details. Remember, each piece of advice is a stepping stone toward a more informed, empowered negotiating experience. From deciphering flow down clauses, to challenging the status quo of the request, to accepting a DocuSign as is, the path to favorable subcontract terms is multifaceted and unique to your business needs, but there are many opportunities to take control through your contracts to manage risk for your business and keep the margins you estimated. Empower yourself with these tips and negotiate with confidence!
Maegan brings a wealth of expertise in the world of construction contracts and shares her invaluable insights and updates on LinkedIn.