by Walter J. Adams, Jr., Berkley Alliance Managers, a Berkley Company
Once again, the American economy is in flux. We’re all now in a wait-and-see game with a virus that is endangering the well-being of both individuals and businesses worldwide.
For some contractors, the projects scheduled before COVID-19 will move forward without delay. Others will be placed on hold or cancelled which will jeopardize the incomes and livelihoods of our nation’s contractors, subcontractors, engineers and architects.
As a result, the written contracts agreed upon between all parties have never been more important. Given the unpredictability shadowing the entire construction industry, plus state and federal regulations and mandates changing daily, every detail of every project should be clearly defined. Agreements that carefully state the risks, roles, responsibilities and rights of every participant, including subcontractors, are essential for ensuring successful, profitable outcomes during the best of times, let alone when circumstances are uncertain at best.
It’s all in the details
In order to avoid discrepancies, primes and their subcontractors should consider the standard form contracts published by reputable and credible organizations like the American Institute of Architects (AIA) and the Engineers Joint Contract Documents Committee (EJCDC). These forms are carefully integrated, cross-referenced and coordinated with other agreements to provide basic form agreements that outline the parameters of most projects. However, it must be remembered that even these documents often require the thorough review of industry experts as well as the possible modification of terms and conditions made under the guidance of qualified professionals.
In addition, when working with non-standard agreements, always make sure subconsulting agreements are consistent with the wording of other contracts outlining specific project responsibilities, services and deliverables. And, regardless of the relationship with the prime, subcontractors should never start work without a signed, written contract or interim agreement.
In fact, here are some of the terms and conditions that subcontractors should consider before entering into their next contractual agreement:
The Scope of Services
All of the services performed by the subcontractor during the scope of the project should be clearly-defined within the agreement. This includes the basic fees for these activities as well as the costs for completing additional mutually-agreed services.
Scheduling
A detailed schedule of services and deliverables is essential for ensuring positive, mutually-agreed upon outcomes. The ability to flexibly accommodate new circumstances and requests should also be carefully worded and added into the contract with as much forethought as possible.
Billing and Payment
Billing and payment issues are the sources of major disputes. All agreements should define payment schedules, billing cycles, the invoice approval and payment process, due dates, and interest and penalties in the event of late payments.
Dispute Resolution
All agreements should include dispute resolution terms. This includes spelling out how the dispute will be resolved by the parties as well as within the courts. Clauses should also be written carefully to define the terms of termination and the subsequent financial and liability responsibilities.
Indemnities should be mutual and based on comparative fault
In other words, the prime and the subconsultant should agree that each party will reimburse the other party “to the extent that each party is responsible for such damages, liabilities, or costs to the extent caused by such party’s negligent errors, omissions,” or breach of the agreement.
Legal Action Time Limits
The length of time by which a claim can be filed against the subcontractor should be clearly defined in the contractual agreement. Three-to five-year time periods are typical for most projects.
Furthermore, when in doubt seek the consult of reputable, certified professionals that possess in-depth construction industry experience as well as a deep knowledge of your firm’s specific services and specialties. Unfortunately, there’s often no going back after the agreement is signed and the challenges start to mount.
SIDEBAR
Things to Consider Before Entering a Subcontracting Agreement
- Select prime consultants with care
When you contract with a prime contractor, that firm becomes your “client.” And just as primes should prudently select their clients and projects, subcontractors also need to answer some key questions about a prospective prime contractor:
- What is the prime’s reputation for providing high quality projects and technical expertise?
- Is the prime known for fair treatment of its subcontractors?
- Does the prime have the necessary technical qualifications, staff resources and leadership to successfully complete the project?
- Is the prime financially stable? Does the firm pay its bills on time?
- Does the prime have a good relationship with the client?
- Does the prime communicate openly and frequently?
- Find out as much as you can about the project and the owner
Your contract may be with the prime, but it’s critical for you to understand key factors that will likely impact you and your ability to be successful:
- Does the owner have experience with this type of project?
- Are the owner’s project requirements, goals and expectations realistic and clearly defined?
- Does the owner develop quality projects?
- Is the owner financially viable?
- How is the project being funded?
- Does the owner have a reputation for being litigious?
- How was the prime contractor be selected?
- Billing and payment terms
- When should you invoice and how soon can you expect to be paid?
- Will the prime require a pay-when-paid or even a pay-if-paid arrangement?
- What happens if the project is delayed?
- What is your recourse if the prime doesn’t pay you on time…or at all?
- Review the related agreements
Obtain and review other contract documents referenced by your subconsulting agreement—the owner-prime agreement in particular. The terms should be unambiguous, consistent and not written to pass along the prime’s risks or responsibilities onto subcontractors.
- Communicate and document
Engage in ongoing communication with the prime and other project team members, as appropriate. Seek and give continuous feedback. Have a plan to memorialize in writing anything that pertains to the quality, schedule, or cost of a project. Retain those records in a safe place.
- Be a team player
Cultivate good relationships with the prime and other subconsultants. Foster a collaborative, problem-solving approach that facilitates common goals.
- Lean into problems
If you run into trouble, if you’re not going to meet a deadline or if you become aware of an issue on the project, advise the prime as soon as possible (and your insurer, if the situation could evolve into a claim), so you can work together to resolve it. If a problem related to your services becomes a dispute, vow to actively participate in the defense of your professional actions. If you stand with the prime in tough times, the more likely the prime will want to work with you again.
- Use a checklist to review subconsultant agreement terms and conditions
Key areas should address the project’s:
- Flow-down of obligations and rights of the owner-prime agreement
- BIM, CAD, digital practice protocols, if any
- Schedule
- Compensation, payment terms
- Insurance requirements
- Dispute resolution
- Suspension and termination
- Waiver of consequential damages
Information provided by Berkley Alliance Managers is for general interest and risk management purposes only and should not be construed as legal advice nor confirmation of insurance coverage. As laws regarding the use and enforceability of the information contained herein will vary depending upon jurisdiction, the user of the information should consult with an attorney experienced in the laws and regulations of the appropriate jurisdiction for the full legal implications of the information.
Walter J. Adams, Jr., is vice president and assistant claims manager at Berkley Alliance Managers, a Berkley Company. Walter has more than 20 years of professional liability claims experience managing architects and engineers and contractor’s professional liability claims. He is a licensed attorney in the state of New York and practiced law at a New York law firm where he handled professional liability, general liability and environmental coverage matters, as well as, construction coverage litigation. Walter holds a J.D. degree from Fordham University School of Law and a Bachelor’s degree from the State University of New York at Oswego. Walter can be reached at wadams@berkleyalliance.com.
