Going Over Contracts Could Protect the Company

Contractors should take time to carefully review and negotiate job terms before starting any work.

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Though it’s common for plumbing contractors pursuing projects to largely focus on securing the work and pleasing customers, it is vitally important to fully understand — before the work begins — the meaning and potential consequences of the terms baked into the contract or purchase order they are agreeing to.

Regardless of whether or not a company is in a bargaining position to meaningfully negotiate those terms, failing to appreciate what is being agreed to can mean the difference between a lucrative project and a messy dispute with potentially damaging financial and reputational fallout.

TAKING IT SLOW

Amidst the rush to win the work and secure the contract, prudent plumbing contractors of any size will first have an attorney or in-house contract expert carefully review the contract’s terms and attempt to negotiate away language that carries the highest level of risk.

While there are a host of potential pitfalls in contracts, those that bear the most risk should be the point of focus. And, while simply crossing them out is unlikely to be acceptable with most customers, there’s often some room to negotiate to subdue the risk.

It is first important to know exactly what’s being agreed to. “You must recognize that the contract you are signing often is not the full set of obligations that applies to your work,” says Andrew Glaab, a construction law attorney with the Boston-based firm Cohn & Dussi. He strongly advises obtaining the prime contract documents because subcontracts and POs often have “flow-down” provisions, meaning everything that contractually applies to the general contractor also applies to the subcontractors and suppliers working on the project.

“These obligations and limitations, which may only be in the prime contract documents but flow down to others, can be substantial in number and significant in their consequences.” Glaab says.

He offered the example of a prime contract being bound by liquidated damages that are uncapped. “If the manufacturer ships product late and a deadline is missed, that could trigger liquidated damages and quickly turn a job southward,” he says. Glaab suggests trying to limit the liquidated damages clause to a modest daily amount or an overall cap that does not exceed the profit figured in the job.

WATCHING THE CLAUSES

Another contract provision that bears notable risk is indemnification, which typically is written in conjunction with a “hold-harmless” clause. To “indemnify,” in its purest form, always means to be responsible for any judgments against the indemnitee (the party receiving the indemnification) and sometimes can include legal fees. A hold-harmless clause essentially waives any claim you might otherwise have against a party or a right of recovery against it.

“In many contracts we see today, indemnity clauses are broadly written and hold a subcontractor responsible for any judgments arising out of work performed by or material supplied by that subcontractor,” says Steven Siegfried, a professor specializing in construction law at the University of Miami School of Law. “At the very least, subcontractors want to limit the liability to judgments arising out of their own negligence because otherwise the clause can hold them accountable for something like poor quality-control by a manufacturer that results in serious damage or bodily harm.”

Siegfried also notes it’s optimal to include a cap on indemnity exposure, which “should not exceed the value of the contract.” A further suggestion he offers is to maintain an umbrella insurance policy that would cover most claims arising out of negligent acts. While no policy fully covers all possible claims, there’s a high probability that a good umbrella policy would in most circumstances cover a significant part of a claim to at least mitigate the damages.

NEGOTIATING THE MONEY

Payment terms of a contract or PO need to be digested and are another point of potential negotiation. “The (contract) language concerning payment can be crafty and should be reviewed carefully,” says Peter Stassi, executive vice president at F&G Mechanical, a Secaucus, New Jersey-based plumbing and mechanical contractor. “A lot of contracts will have language that stipulate payment to subcontractors and suppliers is conditional upon receipt of payment from an owner, and on some projects, that can really impede cash flow.”  

Stassi recommends trying to negotiate a cap on the amount of time any given payment can be held. Another avenue that sometimes works is to suggest a tiered discount tied to a quicker payment schedule. Under that scenario, general contractors can be incentivized to release payments within, say, 15 business days to save a percentage point or two off the contracted price.  

Ensuring the full scope of what’s included — and sometime more importantly what’s not included — in a contract is clearly spelled out in writing is extremely important. While this is within the domain of an estimator or project manager who is intimately familiar with the project’s scope, it is essential because sometimes specifications have items noted that need to be excluded or modified. “It’s one thing to discuss a specific scope with a purchasing agent or PM, but those discussions will be long forgotten if they are not put in writing in the contract itself,” Stassi says.

DON’T FORGET THE WARRANTY

Contracts typically carry a warranty for the work being performed, and it’s advantageous for the warranty period to begin running from the date the work is complete or approved.

“Contracts drafted by owners will often state that warranties begin at the completion of the project as a whole, but you may have no control over when the entire project is completed, and thus your warranty may be a lot longer than you anticipated,” Glaab says. He suggests aiming for clear and specific language that “starts the clock ticking on your warranty as soon as you have completed your work or within a reasonable time thereafter.”

IN WRITING

Those in the industry all agree that the No. 1 piece of advice when it comes to contracts is when in doubt, get it in writing.

“Oral correspondence can easily be forgotten, and emails and notes on proposals can be construed as not being part of a contract,” Glaab says. “It’s always better to err on the side of caution and ensure anything you want in a contract is there in black and white and anything you don’t isn’t or is at least modified so you can sleep well at night.”



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