Understanding Contracts: Top Five Contract Provisions
As a new employee of FTI’s Risk team, I brought 15 years of experience reviewing construction agreements, knowing customers like the back of my hand. I developed good working relationships with them to address the challenges that can accompany change orders, payments, communication, etc., and I could easily make a case to a project team or an executive leader on mitigating risk and why we should or shouldn’t move forward with a project.
Here at FTI, I am gaining traction to find that same knowledge with our customers. Often having a different point of view leads to questions, and being inquisitive helps us learn more about potential project risks and how to reduce that risk to be successful. For my first blog with FTI, I will review the top five contract provisions and questions I have received in my contract reviews and why you should pay close attention to these for your organization.
- What is the risk with indemnity? Indemnity is one of the more complicated provisions to understand in a contract and can often shift the risk and liability from one party to another. This risk shifting can include the negligence of an indemnified party, meaning you could be responsible for damages caused by a contractor or owner, or their officers, agents, employees, etc., involved in an incident on site. FTI is not an insurance company, and we always strive to alter this language to accept responsibility only for our own acts on a project.
- Verifying subcontractors are insured properly. When FTI hires a subcontractor to perform work, we need to verify they have insurance and can comply with the coverage limits requirements by a prime or our agreement with a contractor. Some smaller companies can find it difficult to secure the higher insurance limits required on a larger project. If our subcontractor does not, or cannot, secure the required limits and an incident occurs due to their actions, FTI would be held responsible for what their insurance can’t cover. In addition, we could be found in breach of contract, which may result in termination, additional damages and fees occurred by the owner, etc. It is important to verify any subcontractor hired has the proper limits before starting their portion of the work to avoid unnecessary risk, and we work with our project teams to navigate next steps if not.
- “No Damages for Delay” clauses. Like most organizations, FTI estimates and bids its work to be done efficiently within the project schedule. When there are “no damages for delay” clauses in a contract, contractors could be excluded from recovering costs due to a delay caused by another party. These delays could mean more than just lost time. If a company is required to demobilize and remobilize, there could be an increase in costs to complete the project on time, along with possible increases in equipment rentals and material. A “no damages for delay” clause can result in being able to request only a time extension and prohibit you from making a claim for any other associated delay costs. While some state laws recognize how unfair such provisions are and void the language, removing this provision from the contract permits us to seek to recover monetary damages when it is impacted by delays.
- “Pay WHEN Paid” vs. “Pay IF Paid;” what is the difference? “Pay WHEN Paid” has to do with the timing of payments, usually within 7 to 10 days after a contractor receives payment from the owner. These clauses are almost always enforceable because they only affect the payment timing. “Pay IF Paid,” or “condition precedent of payment,” shifts all risk for nonpayment to lower subcontractors. Again, many states void “Pay IF Paid” as against public policy due to its shifting of the risk to subcontractors who do not have the owner relationship. Simply put, an organization has the reasonable expectation to be paid for the work it performs, and contract terms should not impact those expectations.
- Urgency of contract review and signature. In basic terms, a contract is the understanding of what the parties have agreed to. When a contractor or an owner sends a contract stating they need it back in a week or less or says the terms are nonnegotiable, this should be a red flag. Organizations should always be allowed adequate time to review any legally binding document. Although it is not always possible, it may help to review a sample contract at bid time, especially on large projects, in order to recognize the contractual risks. There are several reasons when timing is important, including material escalation and lead times, but this isn’t always the case. When presented with a contract, it is entirely reasonable to ask for adequate time to review the contract to understand it fully.
Contracts are very important aspects of the relationships between FTI and its customers. Taking the time to review and understand the terms of each contract, including to question and modify those terms, is all part of the contracting process. FTI’s Risk team works diligently within that process to assist our teams to best understand the contract language. Doing so makes good business sense, and protects the project owner, general contractor and all subcontractors. Make sure your organization has processes in place to protect yourselves and your team members.