March  15, 1996



Bulletin # 6: Contract Document Review

The Tidal Wave of Paper

It all starts with a phone call, a letter, or a bid package. A construction manager or general contractor is seeking a bid from the subcontractor for a new job. The project and bid process are on a tight timetable. The subcontractor has to review plans and specifications, develop pricing, assess the availability of materials and labor, look for problems and gaps in the specifications, and propose changes where the plans do not seem to make sense. The specifications may be very detailed, to the point of requiring equipment produced by particular manufacturers, and identifying the model of the equipment. They may also be more general, with only a description of the performance criteria required. The subcontractor may receive the plans and specifications, but not the subsequent addenda modifying the plans. The bid package may or may not include the subcontract form that the subcontractor will be expected to sign. There will be external and internal pressure to concentrate on pricing and delivering a quick and competitive response.

In that frantic period leading up to a successful bid, a contract is being formed. The subcontractor is using all of the information that it has received to put together an offer to perform the requested work. Once its offer is accepted (usually by the general contractor’s execution of the subcontract agreement), a binding contract will exist. Until the completion of the job and final payment, that contract will govern the subcontractor’s relationship with the general contractor and the rights and duties of the subcontractor in performing the work and getting paid. Careful contract review is critical to making certain that the contract is both fair and consistent with what the subcontractor expects. In any later dispute over the meaning of the subcontract, it will be assumed that the subcontractor carefully reviewed the documentation and fully understood the job. Misunderstandings based upon a sloppy or haphazard approach to contract document review will be no defense to a claim for subcontractor non-performance.

Scope of Work: The Missing Pieces and Gray Areas

From the subcontractor’s perspective, a bid package can almost never contain too much information. However, the volume of information also poses a challenge. Depending upon the size of the subcontracting firm and its approach to bidding, the documents for a proposed job may get routed to a number of different people. Presumably, the plans and specifications will be reviewed by someone with a strong technical background, as well as the ability and experience to price the project. It is absolutely critical that the scope of work, as defined by the plans and specifications, be reviewed for omissions, gaps, and ambiguous items. Where the plans and specifications do not identify which trade is responsible for a particular item (controls, fire wall penetrations, etc.) the subcontractor must seek clarification. If no clarification can be obtained, the ambiguous items should be excluded from the bid or identified as alternates, with a separate price for each item.

If the plans and specifications have obvious flaws that will impact the ability of the subcontractor to perform its work or affect the function of the HVAC system after its installation, the subcontractor should call the perceived flaws to the attention of the general contractor or project manager. To not do so is an invitation to fights over change orders in the middle of the project or disputes after completion of the project over whether a malfunctioning system is the fault of the architect, engineer, or the subcontractor. (Note: The subcontractor has to walk a "fine line" between offering engineering advice, which it should not typically do, and questioning aspects of a design.) Often, a subcontractor that raises legitimate issues concerning a design may ultimately gain an advantage in the bidding process.

Some subcontractors will respond to an unclear specification with their own specification, along the lines of the SMACNA Spectext. That approach is one clear way to delineate the work of the subcontractor and eliminate confusion over the "gray areas."

The Subcontract Agreement

The subcontract agreement itself must also be reviewed carefully, even if it looks like the "standard form." The insurance and indemnity provisions should be sent to the subcontractor’s insurance agent or consultant. Any bond requirement provisions should be forwarded to the appropriate bonding agent. The subcontract should be evaluated for "pay when paid" and other troubling provisions and the subcontractor should consider changing unacceptable provisions by deletion, handwritten or typed changes, or an addendum. Any changes to the body of the subcontract should be initialled by the subcontractor, with a line for initialling by the general contractor. Any addendum should be signed by the subcontractor and attached to the signed subcontract, with a cover letter indicating that the general contractor’s acceptance of the terms of the addendum is a condition to the subcontractor’s commitment to perform under the subcontract terms.

Most often, the subcontract will incorporate general conditions that are not necessarily provided along with the subcontract form. These are terms (which can sometimes cover many more pages than the subcontract itself) which govern many of the critical issues on the job site. On a well-structured project, the general conditions of the prime contract will also be imposed on all tiers of subcontractors, so that there is a uniform approach to insurance, indemnification, submittal of claims, and other issues. It is important the subcontractor understand what general conditions will apply to its work and the interpretation of its subcontract. A copy of the general conditions should be requested from the general contractor. The most common standard form of general conditions is the AIA A-201 (1987).

The Hidden Terms

Under the doctrine of "flow down" clauses, the subcontractor may find itself to be contractually committed to terms in the contract between the owner and the general contractor. In summary, a typical flow down clause will provide that the subcontractor is responsible to the general contractor in the same manner as the general contractor is responsible to the owner under the prime contract. Since the general contract will typically not be available for review by the subcontractor, it is important that the subcontractor protect itself by limiting the application of "flow down" clauses to provisions consistent with the terms of the subcontract and by indicating that the subcontract will govern where the subcontract and "flow down" provisions are inconsistent or conflicting. This can be done by a change to the subcontract form or by addendum.

The project may also require that the general contractor obtain and maintain a payment and performance bond, rights under which would extend to the subcontractor. However, in order to have effective access to the bond, the subcontractor needs to know whether or not a bond exists, the identity of the company that has issued the bond, and how a claim can be made on the bond, if necessary. This is often one area where the subcontractor has to make a determined effort to get the necessary information for its own protection.

Contract Review During Construction

The need for careful review of contract documents does not end with the signing of the subcontract. During the course of construction, change orders or construction change directives might be issued. These will have the effect of changing the contract by altering the scope of work and usually the price. The construction schedule may also be altered. If change orders do not receive the same degree of attention as was given to the initial contract, or if the subcontractor falls into the habit of implementing changes without written change orders, a project can quickly get out of control. The change order documentation should be treated, in all respects, as part of the contract and careful records of all changes should be maintained. Where clarification of a change order is necessary, it should be made in writing and a sign-off should be obtained as to the clarification.

Summary

A team approach will usually be the most efficient means to effective contract document review. The subcontractor’s technical and pricing personnel clearly have a primary role. So does the subcontractor’s insurance agent. Often, the subcontractor may choose to involve its legal counsel to advise as to subcontract terms or to make suggested revisions. While it is always hoped that good will and positive business relationships will carry the day, when push comes to shove, there is nothing more important than a fair and clear contract that is understood by the subcontractor and its personnel.

 

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