5 Tips for Construction Contract Reviews

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You will encounter many various types of contracts in your tenure as a contractor or subcontractor.

Many times you don't really get a say in the contract type, be it lump sum, time & material or unit price. BUT you can ALWAYS tweak the terms. Even when your counterpart initially tells you otherwise.

Here are a few contract terms you need to keep an eye on. Pay attention to how it can tilt the terms in your favor, or at least back to even.

1) Compensation for Delays

Make sure your firm will be entitled to extended overhead costs if the prime, client or preceding subcontractors encounters delays. The first step to this is to know what those extended overhead costs are. Here is a great article that goes into great depth on this. In order to make sure you're covered, you need to know what verbiage to include in your contract. A few easy ones? Overtime rates, escalations on material/equipment/labor, office leases, retaining talent and loss in productivity due to longer work hours. The whole point here is to put it in ink. That will make everyone's life so so so SO much easier when something does happen (and it probably will). And don't forget to describe what sort of event will trigger this compensation for delay (hint, hint - it starts with sched and ends with ule).

Related: If you want a MUCH more in-depth dive on the topic of delays and schedule updates, go take our course over in the Frontline Mastermind library

2) Capped Overhead & Margins

Many contracts these days have capped markups for change orders to the client, which, whether you're the prime or a sub, will also cap your ability to mark up your change order proposal past those caps. First, make sure you know what those caps are so you don't get surprised. Second, understand (and define if needed) when those caps are used. If I'm a second-tier sub and am preparing a proposal for a piece of work for the prime, but it's not a change to the client, I should not be capped on O/H and margin. If the owner asks for additional work, which I have a part in as the same second-tier sub, I will be capped.

everything is negotiable whether or not eh negotiation is easy is another thing

3) Payments

This one always floors me. We're ALL in business to make money (and we do that by building stuff). That's the whole point. KNOW WHAT IT TAKES TO GET PAID. If you're not getting paid, you're not making money (but you're definitely spending it!), and you won't last long. Step one; Know how you are going to get paid and what it takes. Are you set up on net 30 payments? What about how long it's going to sit on the Business Manager's desk? How many people have to approve it before it's processed? Step two; Identify which of these steps in the process you can tweak to your favor. Can you negotiate a smaller retention? How about a net 14 day payment? How about early release on retention? As a contractor, you're pouring money into your company and operations. Know how you're gong to get it back.

4) Retention

Make sure you know (and plan for!) the money that is being withheld from each invoice. Its in the contract, so it shouldn't be a surprise. Make sure you understand when you can get the money ("after the project is complete?! I was done 6 months before that!") and what its going to take. This can be a pretty penny so keep an eye on it. I've seen a few firms successfully negotiate this out of their contract (that is level 10,000 Master Negotiator Status) but if you can't get it removed entirely, trim it down, or try to get it sooner.

Related: If you want a MUCH more in-depth dive on the topic of delays and schedule updates, go take our course over in the Frontline Mastermind library

5) 'Other' commitments

Meetings, design reviews, schedules, reporting, etc. This can be a big time suck for you, your PM or even the craft hands. Be sure to find out what is really required of the construction team before locking anything in. This comes into play more often when a small/medium sized firm is playing with the big dogs. The large firms out there have meeting after meeting. To list a few - daily coordination, weekly schedule, daily safety/toolbox, monthly schedule, design coordination, design reviews, cross-discipline coordination, claim reviews, change order reviews, cost/labor recap, etc, etc. You get the picture. Make sure you know what is expected of you. And put it in your contract to protect you against getting roped into even more meetings.

Bonus Tip:

It's time to use all those tricks you learned years ago when you read all those books about negotiating. Negotiating is a necessary evil. I personally do not enjoy it (probably because I got out-negotiated at some point). But, if it's don’t right, everyone can win (I know, sounds cheesy). But keep these few things in mind. Where are you negotiating? Over the phone? Stop that. Take the time to meet in person. Where are you meeting? Their office? Yours? Starbucks? How about over lunch? Take time to foster a relationship. In my experience, it's night and day watching two friends/acquaintances negotiate terms compared to a two new guys who met 5 minutes before and haven't taken the time to small talk, at least for a little bit. The will probably cost you a few cups of coffee or even some pancakes. I will guarantee you it will be worth it.

Hopefully this goes without saying, but consulting an attorney is always the best idea when it comes to anything contractual. An attorney who has your interests in mind. There are lots of people willing to help. Lean on mentors, past partners or consultants. It will be well worth the initial investment if you do.