By Karalynn Cromeens, Cromeens Law Firm, PLLC
I remember the first subcontract I ever read as a baby attorney. My exact thoughts were this thing is so bad you are better off burning it than trying to fix it.
It was so one-sided in the general contractor’s favor that it would be easier to start from scratch than to try to even out the subcontract I was reading. Not too much has changed regarding the form of most subcontracts, but subcontractors are taking more time to understand what they are signing and trying to negotiate better terms.
How did subcontract become so one-sided?
Having grown up in a family construction business and later becoming an attorney, I can see how these contracts became one-sided. As an attorney, you are taught to draft documents from the perspective of what is in your client’s best interest. Normally after an attorney drafts the contract, there is a negotiation to even out the terms of the contract. That negotiation rarely happened; subcontractors wanted to avoid rocking the boat. They just wanted to get the job and go to work. This lack of negotiation is how the standard terms of a subcontract became so one-sided, and that just became the standard.
What is the Job of a contract?
The true job of a contract is to describe the relationship between two or more parties so each party is clear on what to expect moving forward. If the contract is not written in a way that can be easily understood, then it fails at explaining what is required of each party and is destined to fail. Whatever needs to be said in a contract to explain the parties’ relationship can be said in plain English; very few things in a contract require legalese to be effective. A new idea in construction: write the contracts, including subcontracts, so that everyone can understand them, not just attorneys. If everyone can read the contract and understand what they are supposed to do, the parties’ relationships would be much more successful.
The First Step to Negotiation is Understanding What Risk Your Company is Taking by Signing the Contract.
Even if you take the time to read your subcontract, you may need to fully understand the risk your company will be taking by signing the subcontract. You need an attorney familiar with construction law to walk you through the risky parts of the subcontract. Because most subcontracts have the same risky terms, it will only take two or three times of an attorney review to determine what risk you are willing to take and what terms you want to negotiate. Once you understand the risk you want to eliminate, we can devise creative ideas to negotiate those terms.
How to Negotiate the Terms of the Subcontract.
First, let’s start with the idea that the general contractor expects some subcontract negotiation. A general contractor is more concerned when they hit send on a subcontract and get it back signed in less than ten minutes than when a sub has questions or things they want to be changed. Generally speaking, a negotiation is never just crossing a section out and saying you won’t sign it. It’s having a plan on how to meet in the middle. Also, explaining why your company is unwilling to take a specific risk is usually helpful. Most of the time, the PM or other admin who sent you the subcontract needs to understand the risk they are asking you to take.
Example:
The idea on how to Negotiate a Pay When Paid Clause.
You are awarded a job and receive a subcontract with a pay-when-paid clause.
You have already decided that this is a risk your company would like to mitigate. An optional response:
Dear General Contractor:
We have reviewed the subcontract and have the following concerns and questions:
- The subcontract contains a pay-when-paid clause; we realize that this could lead to our company having to cash flow this entire subcontract amount without getting paid. That is a huge risk you are asking our company to take. Are you willing to split the risk with us? If the owner does not pay you within 30 days of your pay application and the nonpayment is not due to our bad work, you will pay us 50% of our pay application amount.
Please let us know your thoughts. I look forward to working with you.
Thank you,
Subcontractor
To have a successful relationship, you must understand what the subcontract says and what is expected of your company. You need to understand the risk in the subcontract and your company’s risk tolerance, then find a creative way to meet in the middle.
Remember, when you negotiate the terms of a subcontract, it’s not just for you. It benefits all other subs and is a step in making the subcontract less one-sided.
About the Author
With more than 18 years of experience in construction and real estate law, Karalynn Cromeens has filed more than a thousand lawsuits to foreclose or remove mechanics liens successfully. Her family also owns a material supply company, providing Karalynn first-hand knowledge of the construction industry. This personal understanding, combined with her extensive legal experience, guides The Cromeens Law Firm’s true purpose— To protect and defend all that you have worked hard for and be your partner in business. She is also a best-selling author and podcast host for Quit Getting Screwed.
