9 Steps to Signing a Successful Construction Contract
Construction & Engineering
The construction business is risky enough without contractual unknowns. Lower your risk by using this checklist for reviewing contracts before you sign.
Have you ever signed a construction contract you wish you had read before signing? Often times, general contractors and subcontractors are so excited to get awarded a job, they’ll sign anything put in front of them. As a general contractor, I often see subcontractors sign our lengthy twenty page subcontract without reading it. What if it contains clauses making it impossible for them to get change orders approved, win contractual disputes in court, or give up their rights?
Do you read your contracts?
Many contracts I’ve been asked to sign contain many unfair clauses or terms which make it nearly impossible for us to get paid in a timely manner, finish the project per the plans, or hope to make any money. We were once asked to sign a general contract including a little clause hidden in the fine print: “The owner has no obligation to pay unless the bank funds the payment”. Luckily, before signing, we read the contract, met with our customer, and agreed to have this unacceptable payment clause changed to: “The owner is liable to pay for the work regardless of whether the bank funds or not.”
Unfortunately, most contracts and subcontracts aren’t awarded until the last minute when the project manager finally gets around to awarding them and has them typed, or permits are ready, or the funding is in place and the loan has recorded. This usually happens the day before your crews and subcontractors are needed out on the jobsite. Pressure is on to get started as fast as possible and sign the contract later. With this happening, there’s never enough time to read contracts in detail, have them reviewed by your attorney, and negotiate out all the unfair clauses before you start work. Signing construction contracts for new buildings, remodels or improvements without agreeing to all of the clauses in advance is like getting on an airplane without knowing where it’s going or if it has enough fuel to get to your final destination.
Contractors and subcontractors must take the time and effort to review every contract before signing them or agreeing to start work. Don’t sign what you haven’t read or agreed to. The old saying: “Trust me!” doesn’t work in your favor very often. For every project, large and small, go through each step of the following checklist before putting your pen to paper and celebrating a new job to start.
CONTRACT SIGNING CHECKLIST
- Review Your Bid
When you get the called that you are the successful bidder, don’t get excited and put the cart before the horse. Before gearing up to start work and sign the contract, review your bid carefully. Have your bookkeeper check the math. Have your field superintendent and foreman check the labor and equipment figures. Call your major suppliers and subcontractors to confirm their bids. Remember, only you decide if you will sign the contract and agree to all the terms. If all looks good, go on to the next step.
- Review Complete Plans
General contractors and subcontractors don’t always get to see the complete set of plans, specifications, addendas, general conditions, proposed contract format, and complete contract documents when asked to submit their bids. Before signing a contract, make sure you have access to and review all plans and project documents including: architectural, structural, civil, plumbing, mechanical and electrical plans; soils reports; addendum’s; finish schedules and the City conditions of approval.
A general contractor told me about an office building project he built where there was a conflict between the different project plans. The site concrete subcontractor poured the curbs, gutters, and sidewalks exactly as shown on the civil-grading plans. The next day, the architect asked the job superintendent if the rebar called out on the architectural plans and in the soils report had been installed in the freshly poured sidewalks. The contractor and field superintendent had never cross-checked the civil plans with the architectural plans or soils report. In addition, the architectural plans were never issued to the site concrete subcontractor. Who’s fault is this? The general contractor tried to blame the subcontractor for this problem, omission, and remedy. The subcontractor claimed they weren’t aware of the sidewalk rebar requirement. In the end, the general contractor was forced to remove all the sidewalks and repour them with the required rebar steel at a cost of $40,000. Was saving $50 by not giving the subcontractor a complete set of plans worth it? NEVER sign a contract without reviewing and cross-checking the complete set of plans.
- Review All Specifications
Because specification books are often 3 inches thick, many contractors only read the section that affects their trade. It is imperative, however, to review all specification sections before you sign a contract. You are contractually liable for all requirements included in the complete document. The general conditions section, for example, contains contractual requirements for jobsite safety, submittals, special requirements, cleanup, change orders, and how to get paid.
On a new school project several years ago, an asphalt paving subcontractor got a call from the project superintendent that the locker room floor was ready to pave. Unfortunately for the paver, the asphalt flooring was called out in the finish schedule section of the architectural plans and not shown on the civil or site plans! A complete set of plans, specifications, and the finish schedule would have eliminated this problem.
- Visit the Jobsite
Always send your field superintendent to the jobsite before you sign a contract to look for any unforeseen conditions, conflicts with the project plans, and logistic concerns that can cause you grief later. Every job looks different in person than they do on paper. Things to consider include:
__ Access __ Parking
__ Mobilization __ Staging area
__ Power availability __ Phone availability
__ Water availability __ Project office location
__ Storage yard access __ Soil conditions
__ Demolition required __ Clearing required
__ Neighboring property __ Protection required
__Hazards __ Street improvements
__ Location of underground __ Delivery issues
- Review the Job Schedule
Before committing to any project, make sure you completely understand and agree with the project schedule. Lost job profits generally can be attributed to improper scheduling of crews, poor supervision, and lack of field coordination. And a schedule that’s too optimistic will result in a crunch at the end of the project which costs everyone money. Be careful to verify your major subcontractor and suppliers can man the project to meet the schedule. Look for delay and damage clauses contained within the contract. Also look at how delay charges will be transferred through to subcontractors if they don’t perform. Consider issues like weather delays, strikes, material shortages, etc. when reviewing every contract. Verify how you can remedy situations where you are being delayed by the project owner or a subcontractor not performing as well.
- Complete a Project Checklist
When reviewing construction contracts, use this simple project checklist so you and your project team won’t overlook important items.
__ Scope of work __ Inclusions & exclusions
__ Plans & specifications __ Project schedule & manpower
__ Insurance requirements __ Bonding requirements
__ Payment procedures __ Cash flow requirements
__ Person(s) authorized to sign __ Change order procedures
__ Dispute resolution methods __ Notice required on issues
__ Delay, claims & protests __ Request for information
__ Shop drawings & submittals __ Meetings required to attend
__ Safety requirements __ Permit requirements
__ Site access, logistics & parking __ Special tools & equipment required
__ Contract close-out procedures __ Final payment procedures
- Verify Project Funding
Every general contractor and subcontractor has the right to know that projects have adequate funds to complete them plus a reasonable reserve for unforeseen changes and contingencies. So, always ask for proof of funding. It can be awkward to ask, so I often tell customers that my banker or bonding company won’t let us sign a contract without assurance there is money set aside to complete the project. Doing jobs without getting paid isn’t any fun.
- Read Complete Contract
Signing a contract prepared by someone else can be scary. The days of a handshake contract are long gone. Today, contracting is about contracts! If you don’t understand what you’re signing, you won’t stay in business very long. Many contacts contain clauses that are one-sided and unfair. Carefully look over contract clauses dealing with such issues as:
- Payment, retention & pay when paid
- Indemnification
- Authorizations, notices, approvals & administration
- Conflict resolution and disputes
- Arbitration vs. court
- Schedule issues:
- Failure to perform
- Delays and weather
- Acceleration & termination
- Liquidated damages
- Change orders & back-charges
- Cleanup & supervision
Every construction company must have a good construction attorney. Meet with your attorney at least twice a year. List out the most important "red-flag" clauses to look for and decide what you will and won’t sign. Remember, you have the right to sign only what you agree with. Never sign an unfair contract. If you are being asked to sign something you feel is unfair, meet with your customer and negotiate fair terms agreeable to both parties. If they won’t budge, it’s your choice. Weigh the risk of signing and agreeing to clauses that are unbalanced. Make your decision based on a clear understanding of what you’re in for. Some contractors review a contract and then cross out the inappropriate clauses or change what they don’t agree with, initial the changes, and then sign the contract. This is not a guaranteed way to win a dispute, and in some states this practice will not hold up in court.
- Execute Contract
The construction business is risky enough without unfair contracts. So, before you execute any contract, follow these 9 steps and start out every project on a fair and level playing field.