New generation contracts can be compared to a slow leak in your truck tire. You ignore the leak and keep adding air until your driving down the freeway at 65 mph and your tire goes flat as a pancake. You knew it was coming but you chose to ignore the problem.
One of these new generation contracts hit my desk just before I left for Sitka, Alaska, to do some salmon fishing. I met up with 20 of my great co-workers in Seattle and we departed for the famous Talon Lodge, located on Apple Island, just off the coast of Sitka. Apple Island is not a place to think about work-especially when you are in the company of 20 of the most competitive fishermen you would want to meet.
As I reviewed the subcontract, I noticed a peculiar statement, which was a clear tip-off that it was a new generation subcontract.
"Subcontractor shall not be compensated for any delays caused in whole or part by the owner."
This is a very broad statement that would require, at minimum, some thinking or at most some advice from an attorney.
Specifically, what delays could an owner cause a subcontractor? If you're skimming a contract and you come across the phrase, "Subcontractor shall not be compensated for any delays caused in whole or part by the owner," it may not be a concern to you because you're focused on scope of work, price and payment terms.
What kind of delays are we talking about? Payment delays? Schedule delays? Delays in making decisions on things only the owner can decide? Because I was unsure, I called the general contractor and asked if it had the same language in the contract with the owner? The GC said it did not but that that language was put in all of our subcontracts in the event the owner does delay the project.
Three-hour tourTwenty of us piled into three different boats and headed out towards open sea. The winds were at 20 knots and the seas were running nine to 12 feet swells. The report came back over the radio that several people were extremely seasick. The captain asked if we should go out to the cape where the seas will be even rougher. I replied that if was safe, then could go.
A few of my seasick co-workers started feeling better and a few were in the throws of full seasickness, which seemed to help draw the fish. We were at the cape and the fishing was awesome. You could barely stand up but at times we would have three fish on at the same time. The captain and the deck-hand managed everything very professionally and safely. Not one of our seasick co-workers ever complained or even suggested that we bring them back to land.
The seas at the cape were rough, which made it difficult as well as dangerous, to stand upright on the deck. I was standing near the rail when a wave hit us from the front and then one hit us from the side. I grabbed the closest railing to keep myself from going overboard. The water temperature at the surface is 53 degrees and 10 feet below the surface it drops to 43 degrees. I was told that a normal healthy person would last 15 minutes in these temperatures.
I noticed in this type of environment people for some reason start looking out for one another. Co-workers would grab a person's coat as they walked the deck to help them along. Everyone was very aware of the dangers but also excited by the adventure.
RULES AND REGULATIONSSome GCs, on the other hand, may not lend a hand when the rapids rise. The GC can add language so that in the event the owner delayed the project, the subcontractor would not be entitled to be compensated, however the GC would be entitled and would not have to share compensation with subcontractors.
New generation contracts create "profit centers" for general contractors. "Subcontractor shall not be compensated for any delays, caused in whole or part by the owner." This language is a perfect example of how a GC can profit at the subcontractors' expense.
Another new generation contract profit center is retention and allowable mark-ups. If an owner withholds from the general contractor 5 percent retention until 50 percent of the job is complete and 0 percent thereafter, and the GC holds 10 percent retention from each subcontractor, the GC has created a profit center for himself.
A GC can incorporate a lesser mark-up rate for subcontractors into all its subcontracts, thereby negotiating a higher rate for the GC mark-up. New generation contracts not only create more risk for subcontractors, they create higher profit potential for GCs.
Profit centers galoreAnother GC profit center is, "the approval of any subcontractor submittal shall not be deemed approved if submittal deviates from the contract documents." This language could result in a big deduction at the end of the job if the subcontractor submitted products that were less expensive in terms of material and labor cost.
For example, if a subcontractor submits shop drawings that require lesser gauge metal studs at further spacing than indicated in the contract documents, the GC or owner could ask for a credit well after the work was installed.
The "subcontractor shall take necessary precautions to properly protect the subcontract work" is becoming the standard for new generation contracts. The boring boilerplate of these contracts requires subcontractors to protect its work from damage. This is a very broad requirement in that it doesn't tell you how long you have to protect your work from damage nor does it tell you how or from what types of damage.
Protecting your work from damage by other trades is nearly impossible and most important is the use of the word "damage," which could mean any type of damage including weather or water-related damage. As well, this is a get-out-of-jail card for GCs, as it relates to trade damage. The GC could actually refuse to pay for trade damage because the work was not protected in any way.
"The contractor may direct the subcontractor at any time to uncover work covered by the subcontractor at no cost to contractor." This language is another pardon for the GC. In the event one subcontractor covered the work of another trade, even though directed by the GC to do so, may end up being responsible for the removal and replacement of the work.
"The contractor may withhold payment if subcontractor fails to maintain as-built drawings." As-built drawings are simply a set of drawings kept on site that shows all modifications. If you sign a contract that requires you to keep an updated set of as-built drawings and fail to provide those as-built drawings at project closeout, you may have to negotiate a settlement.
"The subcontractor shall man the project in order to meet or exceed the project schedule. Subcontractor shall work overtime at its sole expense in order to meet the project schedule." Meeting the schedule as mutually agreed is a reasonable request, however to require a subcontractor to exceed the schedule is an opportunity for the GC to accelerate the schedule. A GC may receive additional compensation from the owner if the schedule is accelerated and not share compensation with the subcontractors.
New generation contracts include attachments that also further reduce the general contractor's risk and create profit centers for them. Attachments may require the subcontractor to provide heat, scaffold, hoisting or other items that are normally a GC cost. General contractors' know that most subcontractors don't read the entire subcontract.
Subcontractors should take the time to read their contracts and modify them until the contract matches their proposal. Don't assume that everything will work out in the end. Most legal decisions are based on the contract documents. If you have a bad contract, don't expect to come out smelling like a rose.
Our trip to Alaska was filled with adventure, excitement and a lot of laughter. It was great to get to know my co-workers better, as well as to compete against them for the biggest Coho salmon. It was my idea to have a fishing competition of which I did not win. I did win the snoring competition, which paid zero, yet there was great satisfaction knowing that I could be heard from the second floor.
Remember: Teamwork begins with a fair contract.