As was stated in Part I of this article, whether you negotiate your own subcontracts or rely on your lawyer to do the heavy lifting at contract time, a savvy subcontractor should understand the basic purpose of common subcontract provisions, and be prepared to negotiate for fair and commercially reasonable terms. While most sophisticated subcontractors are skilled at negotiating the core terms of a subcontract—scope of work, price, and time—a few simple but less obvious tweaks to common subcontract terms and conditions can go a long way to protect a subcontractor from unfair results when a dispute arises.
From the desk of an experienced construction lawyer, below are the last two of the top five “boilerplate” provisions that subcontractors too often overlook during contract negotiations, along with tips on language to include and to avoid. Follow this link if you missed Part 1 covering Delay/Liquidated Damages, Payment Terms, and Indemnity provisions.
- Changes & Claims
Beyond a basic reminder to read and confirm the change and claim processes align with the process the parties actually intend to use—a point too often missed by subcontractors and generals alike—the following negotiating points and questions can help you achieve more fair and practical procedures, and ease the consequence of technical failures.
Strike Forfeiture Language. While it is not unreasonable for the general contractor to require early notice and an opportunity to address potential change orders and claims with reliable information, it is not reasonable to strip a subcontractor of an otherwise valid claim for extra time or compensation simply because the subcontractor has not strictly complied with the often complex, overly technical, overlapping, and sometimes conflicting provisions governing written notices and claim documentation. To avoid this result, you should search for and strike terms such as “strict compliance,” “condition precedent,” “waive,” and “forfeit,” and consider adding a provision such as the following:
Notwithstanding anything to the contrary, a party’s failure to provide any notice strictly in the time and form required shall not result in a waiver of an otherwise valid right or claim unless, and only to the extent that, the party entitled to receive such notice demonstrates actual harm resulting from such failure.
Require Executed Change Orders for Extra Work. A strict pre-work Change Order requirement protects the general and owner against claims for extras after the work is completed. It also protects the subcontractor from being directed to perform extra work without prior agreement on the cost and time adjustments. However, it can also be a trap where the subcontractor performs time-sensitive extra work in good faith based on clear direction, but the contractor later denies the requested Change Order. As a subcontractor, this means it is important for you to be firm in requiring signed Change Orders before you perform any extras. If you cannot agree on your entitlement or cost, demand a formal Change Directive.
Include a Clear “Change Directives” Procedure. A good “Change Directive” process will require a written Change Directive when Change Order terms cannot be agreed, specify how interim compensation will be determined, and dovetail with the Claims provision. Again the key for you as a subcontractor is to demand that the general follow its own procedures and issue a formal directive before you commence any extra work.
Remove Advance Change Order Limitations. Does a signed Change Order automatically waive all related rights and claims? What about cumulative impacts, which might only arise or are only identifiable when change orders become excessive? Is there any limitation on the time or money you may receive for certain types of changes? As a subcontractor, you should any such advanced limitations in the subcontract documents where possible, and instead address specific issues in the individual Change Orders to be issued during the work.
- Dispute Resolution
While there many are other important subcontract terms that come into play more often, the Dispute Resolution provision makes the top 5 here because most subcontractors overlook it as a possible item for negotiation, yet it can have important long-term consequences.
Keep It Simple. As a general rule, the more mandatory steps in the dispute resolution process, the more costly it will be for you to enforce your rights as a subcontractor. While it may be desirable to try to resolve disputes initially at the project level, then through direct executive negotiations, and then by mediation before finally commencing litigation or arbitration, each of those steps takes time and costs money. Where feasible, you should negotiate to make these aspirational, not mandatory prerequisites you must fulfill before litigation or arbitration.
Litigation vs. Arbitration. While there is no one-size-fits all option, you should understand the differences between litigation and arbitration and recognize that this is often a negotiable term.
Arbitration is a private resolution process where an experienced lawyer, industry professional, or panel hears the case and renders a binding decision. Generally, the parties agree on the arbitrator or panel’s qualifications, if not the individual arbitrator(s). The arbitration hearing typically occurs within 6 to 12 months of filing. Discovery is usually more limited than litigation. The process is less formal. The proceedings are not public. Appeals are usually more difficult than in court.
By contrast, litigation is an open public process where a judge and/or jury decides the case. Judges are generalists and not usually construction specialists. Trial is often scheduled 12 to 18 months from filing. The discovery process is formal and can be extensive. All filings and proceedings are public, unless sealed by court order. Appeals are relatively common and can take years to resolve.
The important point here is to consider which process best suited to the types of disputes most likely to occur on your project, and negotiate for that process when appropriate. On a complex project with novel means and methods where the most likely disputes will be highly technical, arbitration may be a better option for all parties. On a simple but financially risky project where the most likely disputes relate to payment issues, the formality of the litigation process may be more desirable.
While you should always read your subcontract carefully and understand your rights and obligations, engaging in active negotiation with a general contractor on key terms such as those above can not only reduce your risk as a subcontractor, but it can also help all parties avoid potential disputes down the road, and set a beneficial tone of professionalism and conscientiousness to carry forward into a successful project.