Reading, understanding and negotiating construction contracts can be a very daunting task if not done with care and if there isn’t a complete understanding of the wording and consequences contained therein.
I have taught classes on understanding construction contracts, as well as led discussions at roundtables on this subject. One example of the dangers inherent in contract language was recently brought up in one of our sister publications when the Journal of Light Construction published an article on How to Deal with Pay-When-Paid Provisions. Although that article was focused primarily on subcontractors, this issue raises its head from time-to-time in the installed or construction services arena as well.
The issue is a clause in the contract provided by your builder to you – the sub-contractor who’s providing turnkey services. Essentially, it states that you agree to be paid for your work when and if the contractor is paid by the customer. While it sounds harmless enough, there is a hidden danger lurking in the legalese that, if not addressed, could tie up your money for quite some time.
A number of my clients throughout the years have been faced with this issue and, while sticky, have found ways to dealt with it up front and quickly.
The most common method is by inserting an addendum/clarification to a construction contract that arrives with a pay-when-paid provision.
The language you insert should clearly state the payment terms and expectations. Here is an example, in which you operate under the company name Bent Stick Lumber.
· Bent Stick Lumber is payment primary and not conditioned on 3rd party payment or BSL payment is paid after 7 days of payment from the owner or within 30 days after monthly AIA document showing percent of completion is submitted and approved.
· Payments will be processed on a 30-day cycle via AIA documents showing percent of completion and schedule of values.
· Definition of acceptance of work: Accepted when local inspectors sign-off and punch list is complete.
· BSL reserves the right to file liens, order work stoppages for not-payment, and pursue any and all legal actions necessary to cover our investment.
While this is not a complete list of addendums and clarifications, some or all of these may apply and help with payment negotiations. The last thing we want to deal with on a project is being held-up for payment from the contractor.
I would recommend that you have someone on-staff—if you don’t already – who is well versed in construction contract language. Make this person your primary officer in charge of signing off on each contract presented. For your more complex and higher-value contracts, perhaps a team of two or three should have the responsibility for reviewing and commenting prior to signing the document. More eyes are better than fewer, and a thorough review could save your company significant amounts of time, money and frustration.