February 2008: Business Building
Words: George Hedley
Business Building
9 Steps to Signing a Construction Contract
The construction business is risky enough without contractual unknowns. Lower your risk by using this basic checklist for reviewing contracts.
By George Hedley
Have you ever signed a construction contract you wish you'd actually read? Often, general contractors and subcontractors are so excited to get a job, they'll sign anything put in front of them. As a general contractor, I often see subcontractors sign our lengthy 20-page subcontract without reading it. What if it contained clauses making it impossible for them to get change orders approved, or win contractual disputes in court or give up their rights?
Do you read your contracts?
Many contracts I have been asked to sign contain unfair clauses that would make it impossible for us to get paid in a timely manner, finsih the project per the plans or make any money. We were once asked to sign a general contract including a hidden clause 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 the 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 gets them typed, 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 is never enough time to read the contract in detail, have it reviewed by your attorney and then negotiate all of 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 it. Don't sign what you haven't read or agreed to. The old saying, "Trust me" doesn't work in your favor 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
1. Review your bid
When you get a call that you are the successful bidder, don't put the cart before the horse. Before gearing up to sign a contract or start work, 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 well, go on to the next step.
2. 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, 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.
Never, ever sign a contract without reviewing the complete set of plans.
3. Review all specifications
Because specification books are often three 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 contracturally liable for all requirements, included in the complete document. The general conditions section, for example, contains contractual requirements for jobsite safety, submittals, cleanup, change orders and how to get paid.
Never, ever sign a contract without reviewing the complete specifications.
4. Visit the jobsite
Always send your field superintendent to the jobsite 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 on paper.
Things to concider 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
5. Review the job schedule
Before committing to any project, assure 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. 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 that 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.
6. Complete a project checklist
When reviewing construction contracts, use this simple project checklist so you and your project team won't overlook important items.
On the list be sure to include:
__ 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
7. 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 unforseen 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.
8. 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 are signing, you won't stay in business long. Many contacts contain clauses that are one-sided and unfair.
Carefully review contract clauses dealing with such issues as:
- Indemnification
- Authorizations, notices, approvals and administration
- Conflict resolution and disputes
- Arbitration versus court
- Schedule issues (failure to perform, delays and weather, acceleration and termination):
- Change orders and back charges
- Cleanup and 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 will not 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 is your choice. Weigh the risk of signing and agreeing to clauses that are unbalanced and then make a decision based on a clear understanding of what you are 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.
9. Execute contract
The construction business is risky enough without unfair contracts. So, before you execute any contract, follow these nine steps and start out every project on a fair and level playing field.
Best-selling author and professional speaker George Hedley helps entrepreneurs and contractors build businesses that work. He is the author of the "The Business Success Blueprint Series" available in eight workbook and audio CD sets. Contact him to present to your organization on his proven system to build profits, people, customers and wealth. Construction company owners are invited to attend his two-day Profit-Builder Circle boot camps. Email George at gh@hardhatpresentations.com to receive a free copy of his book, "Everything Contractors Know About Making A Profit," or signup for his free, monthly e-newsletter. For more information, call 800-851-8553, or visit his Web site and bookstore at www.hardhatpresentations.com.
George Hedley, HARDHAT Presentations, 3189-B Airway Ave., Costa Mesa, CA 92626, Phone: 800-851-8553, Fax: 714-437-1125