Keep subcontractor eyes on the prize using contractual rewards
“The same old contract.”
Its a phrase I often mutter to myself when reviewing a general contractor’s agreement for a subcontractor client. At this juncture, I have a common response to these all so common contracts – stop the aggression, start the reward.
General contractor agreements are a one-sided affair. The vast majority of these agreements are probably unconscionable, to some extent. In a poor economy, general contractors who have work are in a favorable negotiating stance. Subcontractors are under a spell of virtual duress, haunted by the thought of turning away a job. So, they sign without a peep.
What they sign is designed with the sole purpose of punishment – not reward. In this day and age, you would think that the goal was to prevent conflict and promote excellence. Instead, we are often reminded of the unfair bargaining position subcontractors have against contract-wielding general contractors.
Don’t get me wrong, I certainly understand the necessity of advanced protections and security in contracts. General contractors often have to operate blindly with subcontractors, necessitating risk management in contractual arrangements. But, I genuinely believe that if general contractors begin utilizing more “reward” in their agreements – less disputes would erupt.
An good example is the seldom seen “early-completion payment.” This tool promotes efficient use of labor, effective scheduling and mistake-proof work. The goal for the subcontractor is to avoid hiccups that might prevent it from securing additional compensation.
One of my favorite construction law writers is Matt DeVries. Matt is an excellent construction attorney, LEED AP, and legal blogger in Nashville, Tennessee. Recently, Matt wrote an article promoting the creative use of contracts by contractors. His thesis centers around unique ways to “instruct” and promote performance.
Here is a helpful excerpt from Matt’s article: (please check out his entire article over at his wonderful blog, Best Practices Construction Law)
- Consider a cost-savings bonus. Many construction projects include a cost-plus price, which means the owner pays the contractor the cost of the work plus a fee for the contractor’s services. In this instance, the parties may consider including a guaranteed maximum price. To provide an incentive for the contractor to come in under budget, parties often include a cost-savings bonus where the parties split any savings.
- Consider an early completion bonus. Many times you hear about liquidated damages and penalties assessed against the contractor for delays in completion of the work. As an incentive to get the work completed before schedule, consider including an early incentive payment. But be clear in your words, as one contractor recently had to litigate the issues of an early completion bonus because the owner would not pay.
- Consider non-monetary compensation. Just as football coaches are thinking outside the box on their contracts, parties to a construction contract (whether owner, contractor, subcontractor or supplier) can be creative with the compensation. Perhaps this construction contract may be the basis of a supplier contract that includes other projects and bulk savings for materials. Perhaps the owner wants to negotiate a shorter warranty period with unit prices for certain repair and maintenance items.
Using an adversarial contract can project the image of a preemptive strike. Subcontractors often immediately back into a defensive stance, calling on attorneys early in the construction phases. A little more “reward” can ease the strain on the relationship between these two co-dependents.
