October 1, 2010

Hungry for Construction Work? Don’t Eat a Bad Contract


By Katie Jeremiah

Fall 2010

When project funding finally comes through, owners and contractors alike are eager for shovels to hit the ground. Owners are reluctant to engage in what they perceive to be time-consuming contract negotiations, and contractors are fearful that resisting unreasonable contract terms will give the work to someone else.

While an owner's threat to send the opportunity to the next hungry contractor may be real, a contractor should never sign a contract without understanding and negotiating certain key terms. Even a contract for a nominal amount of work or an insignificant price can expose a contractor to risk in excess of the contract amount.

Contractors under pressure to quickly execute contracts with minimal or no modification should pay attention to these important points:

Know the source of project funding. Pay attention to whether funding sources for a contract trigger prevailing wage requirements or the new E-Verify program required by federal projects and projects receiving federal stimulus dollars. Failure to meet specific requirements tied to the funding can jeopardize your ability to get paid and may even result in civil or criminal penalties.

Read the payment terms. Sometimes obscure language in a contract's payment terms can turn a simple payment term into a risky "pay-if-paid" clause. These arrangements can leave a contractor holding the bag if an upstream party does not pay. While many states have prohibited this arrangement, Oregon still allows it. When negotiating payment terms, remember to discuss retainage, including how it is withheld and when it is released. Make sure that any agreement requiring preliminary lien releases does not waive your right to put a lien on unpaid retainage.

Understand the indemnity arrangement. Contractual indemnity, designed to shift risk between the parties, has a tendency to be complicated and thus difficult to understand; it can be an easy way for owners to shift liability to a contractor for activities not within that contractor's control. If something goes askew on a project — even long after a contractor's obligations are fulfilled — an indemnity provision can require a contractor to assume risk for the actions of a party the contractor did not even know existed — actions completely unrelated to the contractor's own performance.

If a party is indemnifying you, indemnity is only as good as the party providing the indemnification. If a party is in poor financial health, you may want to consider an alternative method of risk allocation.

Know your limits: consult your insurance agent. Your insurance agent can confirm whether your policy covers the insurance obligations required under the contract. You should speak with your agent about the type of work you are contracting to perform — you could be nullifying your insurance policy by signing a contract that obligates you to perform work that is prohibited by law or otherwise excluded from the policy. For example, your policy may be invalid if the contract contains overly broad indemnification language or if you contract for work prohibited by law, such as the practice of engineering without a proper license. Just because you have insurance does not mean you are actually protected.

Read the contract. As obvious as this is, it cannot be overstated, particularly when the parties are in a rush to start the project. Contracts are frequently prepared by merging, cutting, and pasting from multiple sources. This practice often results in typographical errors, which can inadvertently result in the shifting of risk to an unwary contractor. A critical eye can identify these errors and other conflicting provisions that may have disastrous consequences.

If you are under pressure to execute a contract with minimal modification, remember that signing the agreement blindly can subject you to uncontrolled risk, particularly if it obligates you to assume risk created by acts over which you have no control. A contract may seem to be a 50-pound paperweight riddled with incomprehensible legalese, but attention to these important details — even for small contracts — will help ensure that you will be paid and avoid grave civil and criminal consequences.

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