Issues Facing Contractors and Understanding Contracts - PODCAST TRANSCRIPT

Editor's note: The following is the transcript of a live interview with John Kenney of Cotney Consulting Group. You can read the interview below or watch the recording.

Intro: Okay, thank you, everyone for joining. I'm John Kenney with Cotney Consulting Group. Today we're going to not only talk about understanding construction contracts, we're going to talk a little bit about some issues that you want to make sure you get covered in your business. This finishes out our business segment we've been doing for the last year. One thing I want to make clear, this is not a legal presentation of understanding contracts. This is the business side of understanding it. Always recommend you deal with attorneys in your local area when you have specific needs on any kind of construction contract, but this will give you that knowledge that you need of what to look for.

So what are some strategies for mitigating liability and avoiding construction disputes? Because we're going to talk about this before we get into contracts because actually, if you can avoid ever getting into liability and mitigating liability and avoiding those disputes, you're always better off. So one, be proactive. A contract should never be an afterthought. You should be thinking about your contracts early on. A contract that is hastily signed at the last minute can have devastating effects that drastically increase constructions professionals' risk exposure, so not that it can, it will. You want to make sure you review these. You want to be intentional. While standard form contracts are sometimes viewed as beneficial, they can also be problematic and increase your liability of exposure. 

So don't simply brief over without any revisions because you may have signed a similar one before. What I mean by that is because it looks like the last one doesn't mean it is, so you want to make sure you go through it. Review, revise and modify, construction contracts are constantly updated. There's new legislations in the area that you're in. There's court decisions that [inaudible 00:01:49]. Prior dealings between parties and industry advancements have direct impact on the contract provisions.

Updated contract clauses can leave you unnecessarily exposed to significant liability, so if there was a contract clause that you glossed over because you're used to it, you got it all worked out and something has changed or doesn't match what the current statutes are, that can be a big issue for you. So you want to be constantly reviewing them, so again, treat each contract like it's brand new even if you've signed it before. Take the time to review it. 

Evaluate dispute resolution provisions, so construction contracts often contain this. We'll talk about it a little bit more in a minute. But you want to make sure that you're looking at that, and talk to your attorney of what is favorable to be in that terminology for you. 

Consult the contract regularly, so one of the biggest mistakes that we make in our industry is negotiate reviewing, negotiating and then agreeing and signing a contract and we do not get that information out to the people that are actually installing our work. So am I going to give them a copy of the contract? No, I don't expect them to be on that level of understanding the contract. That's what somebody that does your contract reviews are for. But we have to let them know what we can do and what we can't do, as well at what we should avoid at all costs. So we don't want to take ourselves down the wrong path in the field because we did not have the proper information to them of what to do, so that kind of sums this one up. 

Communicate early and often, so few, if any issues on a construction project improve by being ignored. Head in sand never works. You've got to take it head on. The sooner you tackle a problem, the less chance you have of it becoming a major problem or a fire that becomes out of control. So communicating with the other parties involved can make resolution more, make it easier and if you don't communicate, then you're going to be making it more expensive and more difficult to resolve. So again, always be looking for whatever you can do to come up with a solution to mitigate the issue.

Questions, concerns and uncertainty should be communicated as soon as possible in accordance with the terms of your applicable contract and minimize any future disputes. So whatever your contract tells you to negotiate and bring up any issues, notification, you want to abide by that and do it accordingly. 

Have a plan. You need to establish an internal communication plan. This plan should reflect the appropriate chain of command within your organization and take into account project specific requirements. For example, many construction contract require parties to identify an appropriate project representative. Some contracts require this person have the authority to act on behalf of the designating party, or you who signed it, during the course of the project. Others simply require this person to be the main point of contact. If a change order request is submitted to the incorrect individual, it can easily be rejected with or without notice to you. So again, chain of command is so important in everything we do, but have a chain of command for your communications. Who's in charge of your project? What authority levels do they have? And also, as important, who you're working for and who has authority limits to tell you additional work or give you direction or have communications with you and your team. 

Always keep your communications professional. Construction projects are stressful, roofing. When I mean construction, I'm talking about roofing in our instance. And it can bring out very strong emotions. I can tell you from personal experiences, I absolutely wanted to send a version of email to someone that I knew in my heart I cannot do, so you've got to be able to back yourself away, take a deep breath, walk away a little bit and then come back and draft something that is on the professional side to get your message across without alienating anyone. 

Communication that is sent in anger or frustration is going to contain personal attacks, foul language, false or unsupported accusations or incoherencies, so again, anything you do in haste or anger is not going to win your case at the end. Such communications are rarely, if ever, productive. They're just not worth doing. So my advice is take a deep breath, step away, gather your thoughts, come back and do a draft. Step away one more time and then review and send your final communication.

Document communications. With all turning wheels on a project, it's easy to use and rely on verbal communications whether onsite or over the phone. Verbal communications definitely offer you a quick and easy way to distribute information to necessary recipients. We do it all the time. It's not going to not happen. It will happen. But the problem is verbal communications get misunderstood, not remembered or incorrectly relayed down the line. Always think about it if I tell one person something and they pass it down to three other people, usually there are four or five other people, even for that matter, the person on the end is probably not going to get my version of the message. It's going to change a little bit. So what do you do? Follow through. If you're going to have verbal communications in our business, immediately follow through in writing to document what your conversation was and the outcome and the objectives of that conversation. And that way, there's no misunderstanding by any parties.

So getting more and deeper into the contracts, we're going to talk about different types, lump sum, unit price, cost plus, cost plus contracts with a guaranteed maximum price, design, build, construction management and job orders. Not every one of these you're going to come across, but you should understand it because there's going to be times you will see them. So lump sums, that is absolutely the single most used used contract in the construction world and in our roofing world. So bottom line is you, as the contractor, bear all the risk for loss for cost of completion. So think of it this way. Going out, I'm supplying a bid or an estimate for a project, whether it is residential, whether it's commercial, does not matter, public bid. I'm telling you what it's going to cost me to do your project.

You're going to get a contract with that sum on it. That's a lump sum. There's no changing it. I can't say I made a mistake. There's no cost plus. There's no TNM. That is what I'm going to complete your job per the scope that we agreed to. So usually competitively bid, but less flexible to negotiate terms when the government sends out a contract for competitive bidding. Privately, terms are always usually negotiable and you can get some in your favor. But when it's a government contract, very rarely are you able to get any of those changed, so buyer beware. Make sure you review it and you understand what you're going to be contracting to.

What's a unit price contract? It's a contract based on specific unit prices. Now this can go in conjunction a lot of times with our lump sum. You'll have in there for wood blocking, deck replacement, additional penetrations, whatever it may be. It's often done with different unit prices, so you may have that on there, I'm going to replace your deck at $7.50 a square foot. Wood blocking might be $11.50 a linear foot. Penetrations can be $1000 for that size curb. All examples of what we're looking at, at unit price. So you can also, especially in the service repair side of our world, you can actually have unit cost, unit price contracts for doing repair work, for replacing units and so forth. 

What's a cost plus? So you're not going to run into this too much, but sometimes the larger commercial contractors do run into this. Basically, what you're saying is it's a cost plus and the owner pays for the actual cost of the contract plus a flat fee. So bottom line is they're paying you and then we're getting a locked in percentage of what we're going to make on the project. Not too common on our end, but your general contractor and owner representatives and your construction managers, they work off of this all the time. But this is just to give you general knowledge of what it is.

Cost plus with a guaranteed maximum price, so you again will not see this too much on your end, but you may be asked to bid one of these, which is, it's going to be the cost plus contract with a clause stating the maximum price that will be paid. So it's kind of like a lump sum, but the point is they're going to tell you that there is no ... This usually knocks out all change orders and whatever it is, if I'm telling you, your price is $850,000 to do this project and the maximum price we have set aside in the budget is $900,000, then that means there's $50,000 in there for change orders, possibly could be bad deck replacement. So you need to be aware of these things ahead of time. You will run into these when you're contracting with a third party in between you and the owner.

Design/build, you're really not going to run into these on your end, but you can get invited to bid on a design/build contract. These are sometimes excellent projects for roofing contractors to get involved in with another party because you're working through the design process, putting in budgetary estimates and a lot of times, it is only the contractor invited in to work on this with an owner or a general contractor, so forth. So but what that means is the contracts going to be based off of the designs that you do. This often reduces cost and responsibility, as well as speeds up the project, so they're going to lean more on you for your professionalism as a roofing contractor to help design the specs in the best system by whatever their basic design comes up with.

Construction management contracts, you'll run into these if you're working for an owner that retains a contractor, architect or engineer. They basically have nothing to do with the cost being paid and they can be just reviewing your submittals, your plans and specifications, managing the budget or managing the execution of the work, so they don't have a whole lot of skin in the game, as they say. So there's two types of these contracts, and you want to know which one you're signing into from your agreement.

At risk means a manager may contract directly with the tradesman and suffers the risk of loss associated, so that's skin in game for them. Not at risk, the manager may take bids, but the owner contracts directly and bears the risk of change orders or they say risk of loss. 

But here's the important thing for you to remember. If you're working for somebody and not on risk, and they're a construction manager, I can tell you they have the authority to direct you to do things, but they're not going to help you as far as getting paid. So you've got to make sure that you're negotiating with whoever you're actually contracted with, regardless of who may have the authority for direction. 

Job order contracts, these are competitively big contracts with a fixed price for identified amount of work. Usually, they're used for bidding on many small projects at one time. They're generally used in the public setting as opposed to the private market. So you will run into these if you start to do public jobs like school work, municipal work and possibly even government work. This happens a lot where you're giving a schedule to price and there may be unit costs. But the nice thing about these is that you've got to make sure whatever units there are, you're confident and capable of if they only want to do one. You don't want to be pricing these as if you're doing 10 of them, and then you're only going to do one and then you lose money. So make sure you understand the quantities that you're bidding on if they do go ahead and award one of these, but you will run into these a lot on that type of work.

Standard form of agreements, so you'll run into different ones. The AIA, put out by the American Institute of Architects, you'll run into these from owner directs. We'll use these architects, the Architect Institute puts these together. They're usually not allowed to be redlined unless the institute agrees to it, which doesn't happen often. But I will tell you, in our industry, as far as signing a contract, they are probably the most neutral based to all parties. Nothing is ever positive for anyone, but they're kind of lower risk than some of the other ones.

The engineering, or the EGCDC, the only time you're going to see those is if you're doing government work for [inaudible 00:14:44] of operating engineers and so on. If you do, these are very, very complicated and put together contracts. And then there's another group out there that is associated with general contractors, which is again you can tell by that name if you see one of those, it is going to be favorable to a general contractor, not to you. So again, what you're going to come across is the other type, which happens most, is somebody else's contract that has been designed through their legal teams that are really meant to be one-sided advantage to whoever the owner is that issues them, so that's why you have to be cognizant of what's in these and guide yourself accordingly.

So we're going to talk about some of these 10 most important clauses, and I'll actually throw two more in to give us 12 to talk about. We're going to go through each one of these, some I'm not going to read them all of now, but we're going to cover what these actually mean so that you have the knowledge of finding these within contracts and it does make it a lot better when you're able to talk to an attorney that may be doing a review for you or somebody that's on your staff or calling up somebody for guidance on the legal side that you understand what these mean and you can give them some guidance of what you're willing to accept and not willing to accept on your end.

So payment closes and issues, types of necessary documents to get paid when you get into a hard contact. If it's your proposal, you're pretty much leading the path, but when you start signing someone else's contract, you've got to understand, you may have to put a schedule of values together, you have an application for payment. And it's going to tell you in the contract if supporting documents are required to get paid. Some examples are lien waivers, certified payrolls, schedule updates and possibly test results or reports. If any of these are in your contract and you do not supply them, you will not get paid and so you're going to hold up your own money.

Payment timing, parties should establish their own deadlines for payment. Must be mindful of state and federal statutes governing prompt. Don't just make the assumption when someone hands you a contract that it actually matches your state's statute. You may be able to get paid quicker by negotiating that in because your state statute has a law of when the payment is. This is something you should always negotiate. You want to be fair on this. It has to be fair to you. If you're not comfortable bankrolling a job for 60 to 90 days, then don't sign a contract with 90 day payment terms.

Some essential contract terms to look at, so statutes are law to consider. So these, you can get off of any state website that has statutes dealing with construction contractors. So this is just an example of one, timely payment for purchases of construction service. This is an example of what you might find. Prime contractor, which would be who you're working for as a GC, must, shall receive payment 25 days after the date in which payment requests or invoice is stamped. So if you're working for state government, then you're the prime contractor. If you're working for someone else that's working for state government, or under this law, that's what it is. So again, not going real deep in this and the legals, but they're going to have language that's going to say like this next one. If contractor receives payment from a local government entity, so we're doing public works, for labor services or material furnished by you, the subcontractor or suppliers hired by the contractor, by you, contractor must remit payment due to these subcontractors or suppliers within 10 days after they receive payment.

So if I'm a sub working for a general contractor, they're getting their payment 25 days after the date of their invoice, by law they have to pay me within 10 days of that. So that's why you want to make sure what your statutes are in your state before you sign these and get with your attorney and they'll be able to figure that out for you. But now you're starting to understand the things that are in there to keep an eye out for. 

Construction prompt payment law, so a lot of states have these. If the request for payment is incomplete or contains an error, the obligor has 14 days within which to return a request for payment to the obligee, which is you, for completion. Why is that important? Because a lot of contractors or owners will not send this back to you. They're going to not give it to you. They're going to just do the terms of the contract. So you want to know these things. Again, some other ones to look at is about punch list, how you do your terms, how you can do when it's completed, when you're going to receive your money. 

Retainage absolutely should be negotiated constantly on all fronts. You want to make sure that your retainage is not held past when it can be legally, and negotiate these terms that are in fairness. Don't necessarily think it has to be 10% because that's what the industry tells us. Other issues to remember regarding payment, every one of your states is going to be worded differently, but make sure that the contract you're signing is correct to the state you're working in, that you're bound to, that you're in. Very important in getting you paid on time. 

Some essential contract terms you're going to come across are payment by a certain date, pay when paid and pay if paid. So what do we mean by those? Payment by a certain date, what that means is a payment clause is seen most often in contracts between GCs and subs. This type of payment clause, the GC must pay you, the sub, by a specific date, often within 30 calendar days, but that changes from the date of your invoice, so that's not such a bad thing. That's negotiated down to days you can live with.

Pay when paid, under this payment arrangement, the date by which the GC must be paid must pay the subcontractors calculated in reference to the date the owner should pay. So example, payment is due within 30 calendar days of when your contractor that you're working for receives payment. So again, that set date's whatever you negotiate, so you need to know what? Does that mean you're going to get paid within 30 days? No. Of your invoice, absolutely not. That means you're going to be paid within 30 calendar days after they receive the payment. So it's good to know when they're going to receive the payment in their master contract so that you know when the clock starts ticking to get you paid.

Paid if paid, single most dangerous clause that's out there. This means if someone else doesn't get paid, they don't have to pay anybody down the line. Now different state languages definitely, whether they're enforceable or not enforceable, the language must be clear to enforce. This is absolutely a dead stop where you've got to get to that attorney and you got to figure out how it works in your state because this really puts all the onus and risk on you that you're not going to get paid if something goes wrong.

Contractors design responsibility, so basically, that means what are the design clauses in there that kind of shift responsibility, revealing design, shop drawing review, it lays out how long you got to get them in, what the review is. What's important about this is if you're sending your own proposal in for work, and that is what is accepted, there's no architect or designer, the design responsibility falls pretty much solely on the roofing contractor, so make sure you got proper insurances to cover you for that. 

Differing site conditions, what this means in a nutshell without going too deep into it so it's understandable, in layman's terms, this is going to tell you that you should've picked up something during a site review or known that there was a problem that you're not going to be able to get paid for later. So depending how this is written in there, this could really direct whether or not you're going to get change orders for different things that happen. What's an example of that? You didn't take the amount of core cuts out of a building that you should've and you planned on the whole job being metal deck mechanically attached. You find out you got sections of concrete, and now you've got to either pin it or you're going to have to use adhesive and totally adhere it and the cost goes up, you probably will not get paid for that because of this clause that's in the contract because it was up to you to find that problem.

Exculpatory clauses, they usually refer to pre-bid inspections. So they're basically going to tell you that you should've inspected your site, you should've inspected all the documents, whatever it may be. So this usually shifts some of the risk down the line more on to you as the contractor. 

Duty to discover obvious areas, so we find a problem, if you find a problem when I'm teaching estimating in that, we always want to teach our estimators to ask these questions in RFI. If there's something that doesn't look right, get clarification. Why? Because if it's something that you should've found in that process, you can't claim it later and try to get a change order correction to your contract or work lump sum. So again, very important to keep an eye out. 

No damages for delay clauses, so these are going to address whether you as the contractor have the right to adjust the contract price if there's any delays. You won't adjust it, but whoever you're working for will give you the advantage. Most states, no damage for delay provision are enforceable on private and public projects, so that's why it's so important to understand how these are written because these could basically ... Example, you've got 25 days to do a job, no problem. But because somebody ahead of you failed, you're now, I've squeezed your schedule down to 20 days. Well, now you can't do that without paying overtime or bringing in extra labor, so you're coming to me for extra money. If this clause is written correctly, it basically says, "You're not entitled to that," and guess what, you eat the cost of getting the job done at an accelerated schedule. 

Handling change conditions, so you want to pay careful attention to existing drawings. You want to note all errors, ambiguities on the plans, drawings, specifications and inspect the site because if you don't, it's going to be on you when it comes time to think you're going to get a change order. So this is that alternative dispute, so you're going to find one of these different types of clauses, negotiation, early neutral, mediation, moderate settlement conference, arbitration, mini trial, summary jury trial, rent a judge, all these different things exist out there in the legal world. It could be multiple, but you want to get with your attorney and make sure that what is most important to you in the state you're in, you have in there.

So of course, I always recommend you want some sort of negotiation clause because that allows you to hopefully come up with a solution to a problem without going into the next legal step. If that's not in there, it goes right to, say, trial. If there's a dispute, that's not good for you, the contractor. 

Liquidated damages, so you want to look at these clauses. Every contract that you're going to get into that you're not writing usually is liquidated damages. For example, if you don't complete, if you're held up, you hold someone else up, you could be charged X amount of dollars per day. Make sure you understand what you're getting yourself into with liquidated damages. They're also in public works as well. 

Delays and extension, a delay and extension clause identifies which party is responsible for any delays and whether delay entitles a contractor to more time or actually reimburse for cost. So again, you got to know how these are written to make sure that you have remedies when someone else causes you issues. So what are the four types? Non-excusable, within a contractor or a subcontractor's control, no extra time. So I make a mistake, my crew doesn't show up, that's a non-excusable delay. No one's going to help me out, pay me for it or give me any extra time. I've got to make it up. An excusable delay, that's something outside of my control. If that's in there and written correctly, I'm going to be able to either get more money and time or time or money without time, however it's written, but that's giving me some leeway.

Compensate-able delays, the owner bears responsibility, both extra time and money, so that basically says if it's a delay outside of yours, they list it as a compensate-able delay, then you're going to get paid both time and money for that. They may or may not be in there, that's why you have to know.

Concurrent delay, that's kind of a problem. That could be two or more of the above put together, which means one can actually override the other one. Again, that's where your attorney becomes a valuable partner to let you know what one actually has the authority to rule. 

Indemnification, under indemnification, a party's obligated to either directly pay or reimburse the financial loss of another party. Indemnification clauses usually contain the words defend, indemnify and hold harmless. You got to get your ... These got to get crossed out, you cannot have these in there because they're going to pull you into example and I've run into these over the years. That's why I know we don't do them. Something happens on a job site and someone gets hurt, or hurts, say, a pedestrian.

Has nothing to do with you, but if you got a clause in there that says you will defend, indemnify or hold harmless another party, such as the one you're working for, then all you contractors are going to be brought in and you're put into a pot to pay for whatever damages it cost to defend this and ultimately, the payout settlement. 

Notice of claim provision, so why are these important? If I have an issue on a job, this is going to tell me what I do to resolve it. This is going to tell me how I notify. This is going to tell me how they're going to notify me. You've heard of the thing, 24, 48 or 72 hour notice to correct. Depending on what's in there, if you sign something with a 24-hour notice to correct and I serve you with that notice, you have 24 hours from the service time of receiving that, whether it be email, whatever the contract says, that you're going to get it by to make a correction, pretty much regardless of what it is. 

Termination clauses, types of termination clauses, termination for convenience and termination for cause. You may see one, either or both. So what is termination for convenience mean? That allows an owner or contractor to terminate a contract for any reason, including convenience or even no reason. That basically says if I contracted you at any particular time during this, I can terminate the contract because I don't like you, because your truck's the wrong color. I know these are silly examples, but that's what it means, whatever it may be. 

Depending how these are written, you may get terminated and not get paid for any work you have in place, so you want to be careful of how that is and get favorable terms in there. Termination for cause allows an owner or contractor you're working for to terminate a contract under a specific set of circumstances that arise. So this will spell out if I'm termination for cause, it usually spells out the causes they're going to terminate by. So again, these are your kind of danger zones to make sure you understand.

Corporation by reference, so these are clauses that provide for various and other documents and writings referred to in a contract to be incorporated into the contract. So these may not necessarily be in your contract, they're referenced. And that reference will take you somewhere else that binds you to it. An example of that could very easily be a safety policy by a company that you do not have, but that means you're going to be contracted to it, so you're going to need to know what's in there if that affects your price and many, many other examples tie you to that. 

Flow down, flow down clauses typically provide that the subcontractor, you, shall assume to the general contractor or owner certain obligations that the general contractor assumes with the owner regarding your scope of work. So basically, what that means is you've got to know what's flowing down because they can flow down their liability onto you. And if you don't know exactly what that is by what's in their master contract, you're not going to understand the liability you've just agreed to. So again, you've got to make sure you're reading all these different documents and getting them reviewed.

So subcontractor exhibits, you're going to find this in all of your contracts that are out there working for people. You want to know what exhibit A is, that could be a scope of work and all the way down the line. These become bound as part of your contractual documents. So every one of these exhibits, you need to understand what's in them and you need to know what they tell you to do because they're going to become part of your contract. So that wraps this up today for understanding our contracts and legal services. Again, any questions, this is from a business standpoint of understanding, again, I want to just really stress the fact that you got to have an attorney involved when you get into understanding these. 

But this kind of gives you that nice checklist to understand what the be looking for in contracts so that when you get these reviewed, you're not sitting there not understanding what they mean to you because ultimately, it is your decision as a business owner or a project manager what liability that's been accepted that you need to manage. So even if you choose not to take the advice of an attorney, you may as well know what you're not accepting or you are accepting. So I don't know if we have any questions today, Alex or not.

Alex: I think we are all good. Thank you so much, John, [inaudible 00:32:46].

John Kenney: All right. All right, so that wraps this up for the end of the business series and we look forward to a new and exciting next year. 

Alex: All right. Thank you again.

Outro: Thank you. Take care, everybody.