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Costly Contractor Clauses

August 30, 2017

To protect your company from unnecessary risk, remember to evaluate contracts carefully. In most cases, contracts protect both parties involved, but sometimes they can be used to take advantage of a contractor. Below are a few more “costly clauses” to look out for.

Lien Forms

Let alone everything else, lien forms can do more damage than anything else in the General Contractor arsenal. There are many types of lien release forms on the market, each requiring careful analyzation . You could sign an initial form and sign away all rights, including your right to retainage. There are or should be only two formats you need to be using.

First, the conditional lien waiver:

The conditional lien waiver will limit your lien to only the amount you have NOT been paid.

Second, the final lien waiver:

This form removes all rights to lien and should NEVER be signed until you have received your final payment in full.

Contingent Payments

A contingent payment clause will set terms on when you are paid. Two such clauses are “pay when paid” and “pay if paid”. The “pay when paid” clause requires you to wait until the GC is paid. This could delay your payment significantly. Most states allow this clause and assume that this means a “reasonable amount of time” while allowing your right to be paid. On the other hand, “pay if paid” forfeits your right to payment if an owner goes bankrupt or just refuses to pay. This clause should be struck out of any contract you intend to sign. There are a few states that have outlawed the “pay if paid” provision such as California and New York, never the less, you should thoroughly review your contract before signing. 

No Damage for Delay or Acceleration

Very few contractors understand delay or acceleration and the impacts of cost to the contractor. You have all seen this happen, for example, the steel is 6 weeks late but the completion date stands still, or the contractor suddenly has 200 men on the job and expects you to be completed in a day.

Each of these cause additional cost to you to cover additional mobilization, demobilization, more crews, overtime or cost to expedite at a later date. You can even get yourself in more trouble trying to accelerate a job which can result in loss of productivity, high overtime and job accidents. When an employee is hurt or worse, this could mean disaster for you, but that’s another article.

On the flip side, most GC contracts are in favor of the GC. They, along with the owner, are entitled to liquid damages if you delay or accelerate. Preserve your right to recover your additional expense in the case of scheduling delays or accelerations.

This site is for informational purposes only and does not contain legal advice.

 

 In this third part of our Costly Contract Clauses series, we will examine two more contract clauses that can really wreak havoc for a contractor.

 In Demnification (Hold Harmless):

In short, you are expected to protect other parties from your own negligence on errors. Make sure you pay for insurance to cover these rights.

Many of the contracts you will review will have hold harmless clauses but when they ask you to not only hold harmless the G.C. but the owner, design professionals, inspectors, visitors, and on and on, you may be trying to insure risk you and your insurance company are capable of. This kind of risk can leave you in a very uncomfortable position should something occur.

In many states broad form of hold harmless clauses are unenforceable. Some courts will not support transfer of responsibility for one’s own negligence to another party. Never the less, make sure you negotiate or change the clauses to accept only those rights you are able to maintain control over or for which you can provide insurance.

 Retainage:

Thanks to AIA (American Institute of Architects) that retainage even exists. The idea is to create an incentive for the contractor to complete punch lists and provide final documentation. Ideally, you want to negotiate no retainage in your contract. Most contractors (G.C’s) will not support this so negotiate the smallest amount or percentage you can submit a retainer bell in lue of subjecting each invoice to retainage.

 In Summary:

This list is not all inclusive of contract provisions that could cause you and your business harm. These phases (if indorsed by your signature) can cause significant financial harm to your business. Evaluate all provisions very carefully.

 Remember:

1. Everything is negotiable.

2. Sometimes it is better to walk away.

 

Are you expecting to get paid for changes you submitted and received approval for?

For most contractors a change order is a positive arrangement for additional work or a change to the scope. You are doing everything above board and never suspecting the general contractor or owner could potentially be manipulating the situation in their favor.

Did you read your contract? Did you have your attorney read your contact?

Charter Estimating can review sub-contractor contracts and give you a simplified report of one to two pages, on the average, indicating important dates, clauses issues, problems, etc. including actions you should take to avoid issues like being paid on time.

Below is a clause that may not readily stand out in your contact.  Reading the contract is highly recommended on every project!  You may find yourself not getting paid for any extras should the GC or owner exercise these clauses.

A common clause can read as follows:

  1. ”All change orders must be approved in writing before contractor installs or changes any work.” We have all read this.
  2. ”Sub-Contractor is responsible for obtaining approval in writing for all changes.”  This is easy right? However, there is missing information or at least the information is not readily interpreted or is it?

These examples and similar clauses are very dangerous clauses in your contract. To properly interpret this clause one must look at the words “approved” or “approval in writing.”  Who must approve? You, the project manager, the owner, YOU had better know!

 

The person who signs your change order may not be the person that can approve changes and that can even include the project owner!

To remedy this situation make a request in writing to your contracting party requesting the name of the person, title and contact information that is approved to sign and authorize change orders. There shall be no other person until you have the information in writing. The letter must be on the contracting company letterhead and signed by a principal of the company, i.e. president, vice president, owner.

 

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