Sage Advice US

Price and payment: Getting it right in your construction contracts

When it comes to construction contracts and the price you will charge for your work, there are certain things to consider beyond listing a figure on the first or second page of the contract. Obviously, the first thing to consider is whether the price mirrors the scope of work that you intend on providing. This is important whether you are signing a cost-plus or a stipulated sum contract.

But there are also some additional steps you can take to help avoid common price and payment issues later on in the job.

Know what is expected of you

Most subcontracts include a statement that says something like:
“The subcontract price shall be paid in exchange for the exacting performance and timely completion of the work and the performance and any and all duties and obligations set forth in the subcontract and the contract documents.”

This type of statement says that, as the subcontractor, you are being paid in exchange for fulfilling every obligation that exists in the contract. Those obligations can go beyond your stated scope of work and many times include “soft” obligations such as providing insurance, handling task coordination, and accelerating and decelerating work. Make sure you clearly understand those soft obligations, and negotiate any changes, before signing a contract.

Nail down unit prices upfront

My law firm currently represents a drywall contractor who is in a dispute over how much he should be paid for certain change orders and ticket work. The prime contractor had agreed that the work is an extra. That’s not the issue. The dispute is over how much should a drywaller get paid an hour.

To avoid this type of dispute, we typically recommend that the parties agree to a unit price schedule in addition to the lump sum. This can be done by including an exhibit to the contract that sets forth agreed-upon unit costs for the most common materials and labor being provided during the course of the job.  Also, it should be clear that any materials or labor not listed shall be billed at actual cost plus an agreed-upon percentage for overhead and profit. A provision such as “the subcontract price and all unit prices shall be deemed to include any and all taxes, insurance and bond premiums, storage, delivery, transportation, and overhead and profit” should give the parties comfort that the prices listed are not subject to further increase. Such certainty will also allow for better control of the costs on the job.

Stating the unit costs is critical as it minimizes surprises when it comes to the cost of extra work. Additionally, it takes much of the guesswork out of change orders as the only issue to determine is the quantity of the material or labor. Once determined, the cost of the change is the result of a simple mathematical calculation.

Watch the payment terms

Pay-when-paid (or pay-if-paid) contract provisions exists in almost every construction contract that comes across my desk, and it probably exists in almost every contact that you sign. This provision means that if the owner doesn’t pay the prime contractor, the prime contractor does not have to pay the subcontractor.

If you are a subcontractor, look for pay-when-paid provisions in your contract and be prepared to deal with them in your negotiations. You can protect yourself by modifying such provision by adding that they “shall be interpreted as creating a reasonable timeframe when payment is to be made and shall not diminish a subcontractor’s lien or bond rights.”

Head off broad lien release forms

Particularly for subcontractors, another payment provision to pay attention to is the requirement of providing releases in exchange for each payment. Make sure that the release form attached to your contract is not a broad release. If it is, the form can effectively result in the release of any and all claims, not just lien claims, in a given month. Many subcontractors have been unable to pursue claims for delay and unexecuted change orders by accepting a progress payment and unwittingly tendering a general release.

Though, you may not be able to overcome every price and payment concern in your contracts, at least understanding all associated risks, will allow you to make better business decisions going forward and reduce the potential for liability.