Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.
Contracts are not always the most fun to read, but are certainly important for all of us in the construction industry.
As a subcontractor, you are bound to the contract once you have signed it whether you understand everything that is in it or not.
Let’s consider a few key provisions in a construction project agreement that can impact your bottom line more than others. With a goal of mitigating certain impacts along the way, addressing these items prior to signing your contract should be considered as a best practice in the industry, and, we hope, support your success.
Contracts are often tedious to read, to say the least. Any business owner can proceed at their own risk, of course. But, we want to share a few things for you to consider that might offer some support and protection.
Delays
What does the contract say? What is a reasonable penalty? Business owners should always confirm just what types of delay clauses they could be responsible for (e.g., liquidated and consequential come to mind), and since there are most always liquidated damages that could be charged to you for delay of a project, make sure your contract is clear about what those are.
As a subcontractor, you are bound to the terms and conditions of the prime contract between the owner (whether a public agency or private entity) and your general contractor. These can be referred to as “flow down” provisions when it comes to things like damages, warranty, etc.
Best Practice: Always ask for a copy of the prime contract if you are a subcontractor. Make sure you read that, too, for anything that could impact you.
Mobilization
What can you bill for, and when?
Sequencing of Scope of Work
What happens when another trade interferes with your work? What are your rights and responsibilities of putting your client on notice when you have these impacts? Can you be compensated for any additional costs relating to these impacts?
Material Cost Escalations (and lead times)
Does your contract allow for cost escalations? How do supply chain issues affect you and how can you mitigate some of that exposure?
Change Orders
What can you reasonably expect to achieve to cover OH&P?
The best practice for change orders is documentation from day one and early communication to your client. When everyone bunches up at the end of the job with a ton of change orders, the owner may have less of a pool of funds to draw from (for contingencies, etc.) than they may have at earlier stages of the project.
It’s important to know that the surety companies and underwriters are contract savvy as well and we do our best to understand what the obligations are within the contracts. You should expect some questions about some of these contract provisions which, at the end of the day, are intended to make sure you are best protected along the job’s progression.
There just may be something about the surety’s relationship with their principal and communication about these contracts which results in bonded jobs being more successful than non-bonded jobs. But, that’s a topic for another article and podcast!