The 10 Contract Provisions Your Project Managers Need to Understand to Protect Your Profit Margin
We often talk about how insufficient construction contracts can impact project profitability, but sometimes the problem is insufficiently informed project teams. Contracts are only as good as their execution, and all the negotiation in the world can’t make up for a project team that doesn’t know or understand what’s in their contract. Here’s a primer for construction project managers who want to understand the components of a great construction contract and where their team’s responsibilities reside within it.
As a construction manager, you may have been coached on the ins and outs of general contractor contracts from your in-house or outside legal counsel. You may have attended a lunch and learn that made contracts less painful and more impactful for you. Most project managers we know, though, learned the hard way. Many of them are quoted below. They had to ask “What does the contract say?” and deal with the pros and cons of that answer over and over again. Between on-the-job training and the advice of experienced construction attorneys, we’ve narrowed in on the ten most important contract terms for project managers to study and understand.
1) Scope: First and foremost, project managers need to understand the scope of the project completely, and understand the scope of their subcontractors’ work completely. Resolving any ambiguity as early as possible helps everyone stay on schedule.
“It’s more than just the one contract you’re reading that makes up the entire agreement and project scope you’re responsible for. You need to understand the flow down verbiage and references to the Prime Agreement in the subcontractor agreements also. If you don’t have them, request them.” - Project Manager
2) Substantial Completion & Work Hours: You’ll want to understand the envisioned completion and work backwards. What’s the substantial completion date and what milestones need to happen leading up to that? What are the work hours that impact that schedule? Additionally, what if you need subcontractors to work overtime to stay on schedule, what is within your power to ask of them?
“I remember building a facility in Atlanta and if we started up equipment before 7am we could expect a visit from the local police via a disgruntled neighbor. According to the contract, our work hours started at 7am (and not a minute sooner) and ended at 5pm sharp. This definitely impacted our schedule.” - Project Manager
3) Damages, Delays & Notice: Every project team should understand the risk level and liquidated damages associated for any project. They should also understand the liquidated damages exposure of the subcontractors. Is a subcontractor's claim for delays limited only to time extensions? What documentation needs to happen to secure additional work days if delays happen? Understanding the process and benefits available to you in unexpected circumstances is critical to avoiding profit loss and disputes.
“We were working on a hospital and were denied access to a few patient rooms due to increased levels of radiation, causing schedule delays. Another time it rained for a month straight and site work was severely impacted and even stopped.” - Project Manager
4) Payments: Every trade wants to be paid in a timely manner for the work they perform. Payments keep the project moving and relationships intact. PMs should internalize all payment terms around who, what, when, where and how draws should be submitted to the owner. This way payments get submitted, approved and issued in a timely manner that keeps construction going and subcontractors happy. Also make sure you know how the state you’re building in handles prompt pay laws, pay-if-paid clauses, and retainage holding.
“I had many situations where the sub I was working with could not pay their team on time because accounting took way too long to approve invoices and cut checks. I think PMs should be more aware of the contract's payment provisions because if a subcontractor really wanted to, they could sue for breach of contract if the payment was late.” - Project Manager
5) Changes: Like the process for payments, project managers should memorize the process for RFIs and change orders to ensure any deviations from the scope, schedule, or budget are mitigated quickly and efficiently.
6) Notice: Smooth payments, changes and notice often require strict adherence to the process detailed in the contract. What are the notification requirements if a contractor finds that an item cannot be delivered or work cannot be performed as required to maintain the project schedule? What decisions is the contractor authorized to make on their own versus notifying the owner? What does proper notice consist of?
7) Termination: Termination clauses detail what a GC or owner is entitled to do if a subcontractor fails to perform under their subcontract. How many hours of notice must be given? What happens to the materials left and work completed on site? Who covers additional costs incurred?
8) Warranty: Just like your cars’ extended warranty, how long is a contractor’s work guaranteed for? If a PM finds defective materials or faulty workmanship, what are the time restraints for getting it fixed and are there any limitations? What are the GCs rights regarding reimbursement or insurance claims if they doubt the quality of a subcontractor’s work or materials?
9) Safety: PMs should understand any health and safety requirements of the jurisdiction they’re building in and know if they are not liable for a subcontractor’s breach of those requirements. Fines or damages incurred by the subcontractor should be documented and handled per the contract.
10) Clean-Up: Project managers should know the contractual obligation of the subcontractors to maintain and clean their work space during and after construction. Cleaning and material removal can add significant costs and if these are already covered in the contract, PMs can be sure to hold contractors accountable.
Ideally, companies have processes in place to make sure project managers and superintendents review and approve contracts before execution. If your company doesn’t have a collaborative contract process, it’s time to take ownership and help initiate one. Companies also forget that PMs often have more project experience than the legal teams and executives signing the contracts. PMs can be the game changer and voice of experience in negotiating terms and conditions. The construction industry, and its contracts, will continue to evolve to meet current challenges, for example, subcontractors may finance more of future projects and GCs may get back to self-performing more work. The sooner PMs get involved in contract changes and evolutions, the better off they will be to execute them.
Ultimately, the legalese can make contracts difficult for all stakeholders to draft, negotiate and execute. That’s why we built Document Crunch. One Project Manager we interviewed said, “Taking the time to read the contract documents and unbury the information you need is the tough part. I’ve wished for “contract cheat sheets” for years and now I have that with Document Crunch. It’s why I’ve set up my contract templates the way I have.” And, with our just-released AI Chat solution, project managers have a 24/7 contract expert at their disposal to understand anything they need to know about the contract. Try Document Crunch and empower your project managers to help you execute better construction contracts.