I READ WITH INTEREST H. Kent Craig's column in July's issue of CONTRACTOR ("Shared risk/ reward project management hooey," pg. 44) on the subject of cost and risk-sharing by owners with contractors — specifically, the desire of owners to pass on risk responsibility at a far greater rate than they wish to share participation in profits. Maybe I've spent too many years representing clients on both sides of the table on such issues, but it is difficult for me to get quite as worked up about the unfairness of these practices as Mr. Craig was.
First, the entire concept of damages for delay may not be all that unfair. In some areas of commerce, the penalty for not meeting a contract's terms is no payment at all. In construction, it is extremely rare for this to happen because even if the $50 million speedway isn't ready for the scheduled NASCAR event, it most likely will be used profitably in the future, and it would be unfair to not pay the contractor at all. Thus, delay damages, including liquidated damages, are considered fairer to the contractor than the alternative.
Second, in most cases the contractor developed the contract price or cost estimate in the first place, either through a hard bid or negotiation. Thus, the contractor had the opportunity to decide what the right number was for the items for which the owner now wants him to be responsible.
Third, most contractors know a whole lot more about the cost of lumber, concrete, copper pipe and other supplies than owners do, and far more frequently make money rather than lose money, during their buy-out. Certainly, there are instances where prices suddenly spike or products become unavailable without warning, but this doesn't happen often and when it does, it generally only affects one or two products.
Cross out the language that you don't like, initial it and send it back.
Fourth, contractors asking for protection against price increases have to be prepared for their customers to counter with the other side of this argument: Let the owner have the benefit of any savings during buy-out, turning the job into a cost-reimbursement for materials, with the only risk left in the labor side. Most contractors I have worked with would not want to see this happen, as the chances of improving their margins on labor are much lower.
Fifth, except in public bidding, there are not too many situations in which a contractor or supplier can't qualify its bid to protect against later cost escalations. If yours is the best price, more often than not the other party will back off an unreasonable position in order to do business with you. There is, certainly,a risk that he won't, and that another guy who is willing to take the risk might get that job instead of you, but the answer is not to make it illegal for people to take risks. As we all know, eventually luck usually runs out for those who take too many risks, and they end up out of business.
I really don't mean to sound unsympathetic. Most of my clients are contractors and I know how many risks they have to run every day to make a living. I also see many one-sided contracts being pushed in front of them to sign on a "take-it-or-leave-it" basis. Rather than just complain about it, though, I suggest taking these actions:
- Unless the terms of the solicitation forbid any changes whatsoever, cross out the language that you don't like, initial it and send it back. You'll never know what you can get until you try.
- Read the rest of the contract. As often as not, I find that people who insert additional clauses haven't noticed that other, unmodified clauses contradict or at least confuse the change they have tried to make, and may even nullify it. In that case, you may not have to object at all.
- Check with your lawyer. If the penalty or other provision you don't like wasn't in the original bid documents, you may not be required to accept it as part of your contract at all.
- Offer an alternative. If there are damages for delay, ask for a bonus for early completion. Instead of all cost savings going back to the customer, offer to share them. Customers generally understand that creating a win-win situation is in their interest too.
- Talk to your state legislators. I see a lot of legislation get through that makes it illegal to require contractors or subs to agree to certain provisions (such as one-sided indemnities or payif-paid clauses), and it may be that with the help of your trade association, you can get rid of the problem.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to susan. email@example.com.