Construction Contracts: Can't GCs & Subcontractors Contract Like Friends?

Construction contracts are oftentimes lengthy and complicated. The contracts underlying a construction project form the basis of the relationships between the signing parties, and provide an outline to how the project will go. A review of the contract not only provides insight into the work to be performed and its cost, but also the fairness of the parties, the allocation of risk, and relative bargaining power. Construction contracts can be used to carve out legal positions, limit rights, and require burdensome and difficult actions.

Let’s face it, nobody wants to bear the financial risk of a construction project. There are too many moving parts, and any of those variables can lead to financial exposure. Because of this, parties with more leverage, generally those at the top of the payment chain, can attempt to shift the financial risk by pushing it down the contracting chain. Wouldn’t it be better, though, if everybody negotiated fair contracts, and GCs and subs just got along? Of course it would.

Contentious Contract Provisions – These Can Be Fighting Words

There are several contract clauses that, to variable extents, signal a belligerence, or reluctance to approach the contract fairly. In short, certain clauses are viewed with disfavor by the parties with less leverage, and can even be seen as “fighting words” before the project even gets started. This starts the project on the wrong foot, and can result in situations that could otherwise be handled without too much fuss escalating quickly into bigger problems, or even litigation. These provisions include:

Some of these clauses have been disallowed by statute or court decisions, and others have been weakened in effect, but some still work to shift risk down the contracting chain. These clauses’ appearance in a contract, however, can signal that a party is attempting to shift risk and insulate itself at all costs – even fairness. Since friendships, good relationships, and respect are built upon a foundation of fairness, inclusion of these provisions in un-diluted or unexplained form is not beneficial to fair dealings and growing relationships between construction parties. While there may be sort-term benefit to the inclusion of this type of term in a contract, constant use of such provisions may not be beneficial.

Fairness Grows Relationships and Is Good For Business – Fully Exerting Leverage via Contentious Contract Provisions Doesn’t

Simply by contracting fairly and relying on the law’s built-in protections, GCs can begin the project, and the relationship with their sub, on the sub’s good side. It’s clear why these types of contractual provisions can be detrimental to the lower-tiered parties, and cause them to view the GC with distaste or resentment. The use of the superior bargaining position of being closer to the project’s money to leverage the inclusion of contract clauses to shift financial risk to the parties the law has attempted to insulate strains notions of fairness. In fact, GCs’ use of software platforms to hold-up payment to subcontractors is a big point of contention for many subs who are disinclined to seek out jobs for which they will be forced to use a platform like Textura. GCs have a legitimate interest in making sure work gets done properly, on-time, and for reasonable costs, but there is little need to force one-sided contractual provisions onto the lower-tiered parties. Just as protections like mechanics liens and prompt pay requirements protect the subcontractors, there are retainage allowances, and exceptions to the prompt pay statutes that ensure GCs are protected, as well. Simply by contracting fairly and relying on the law’s built-in protections, GCs can begin the project, and the relationship with their sub, on the sub’s good side.

It makes good business sense for GCs to form good relationships with the subs and suppliers on their projects. Pleasing the owner/developer, gaining a good reputation, and winning more jobs is at least partially dependent on the subs and suppliers contracted by the GC. Constantly forcing unfair contract provisions down the chain, and churning through the large pool of subcontractors may work for a while, or work for the largest GCs, but it not a sustainable, scalable, or fair model. If an upper-tiered party gets the reputation of strong-arming the lower-tiered parties into unfair positions, they may end up losing out on potential business, or finding it hard to find parties with which to work.

It’s not just fairness, or business-relationships that suffer from not contracting like a “friend”, though. Over reliance on this type of contract provision may also be a legally deficient position. Pay when paid clauses, are not interpreted to mean payment can be avoided indefinitely (even in the absence of payment from the owner the GC must pay the sub within some “reasonable” time), so holding onto payment based on tyhis type of contractual provision my open up a GC to financial exposure set forth by the strict penalty and interest provisions found in the prompt payment laws of many states. Likewise, over-reliance on strict and unchangeable lien waiver provisions/forms can result in the ineffectiveness of the waiver. This can result in significant problems for GCs relying on waivers that end up not waiving anything.

The take-away message is simple. Construction contracts, like pretty much everything else, work best when approached fairly and with an eye to strengthening relationships. Construction can be a win-win, and making sure GCs and their subs get along though fair contract negotiation is a good place to start.