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Construction Programs & Results Inc

We Like to See The Good Guys Win!

Contract Language That Puts You at Risk

by Michael Stone

We want to share another note from a contractor facing a situation that others might be facing.Heavy-Handed Contracts in Construction #MarkupAndProfit #ConstructionContracts #ProtectYourself

I have been reading your books and blogs for a long time now and I don't see anywhere that addresses contractual liability costs and I can't figure out what is an appropriate cost to pass on. I am working on my first heavy handed contracts on some commercial jobs, and it really pushes all of the risk on us, the subcontractors.

The contracts are 40+ pages. My prices are fair and I don't have large margins but the liability on these contracts are large and heavy . . . How would I properly price the liability? I am so frustrated, that I am ready to just double my prices and leave it to chance. Any help would be greatly appreciated.

Over the years, I've seen contract language evolve, shifting more and more responsibility to general and specialty contractors. Some language wants to hold them responsible for almost anything that can go wrong, even if it's outside their control. Watch out for those landmines and avoid them at all costs.

Many RFP's (Requests for Proposal) include the statement that the contractor is responsible for all field measurements on the job. If you see that, take it as a warning that you better read the entire contract carefully. My question is, who drew the plans? Were they paid to draw those plans? If so, why is the contractor responsible for their measurements?

Another statement you'll often see is that the contractor must make all requested changes on the project as outlined by the owner or architect and must make those changes at cost with no overhead or profit allowed. Or, they must make those changes at cost plus 10% overhead and profit.

Walk away from any contract that includes this language. Trust me, those who add this language know exactly what they're doing, and it will cost you money. They'll start with a $300,000 job and add on another $450K, $500K, or more. It doesn't take a rocket scientist to see that you'll lose your assets. We talked about this a few months ago.

You might also see a statement that tells you how to price your work: Contractor may only charge 10% for overhead and 10% for profit on the job.

They know you can't survive with that level of overhead and profit, but they don't care about you and your company. They care about getting the job done cheaply as possible. If you agree to these numbers and go broke, they'll find someone to take your place.

Many contractors who choose to get involved with this pricing game shift overhead expenses to job costs and hope to come out with a profit on the job. Or, they'll find something wrong on the plans but say nothing in the hope that they can charge enough on the change work order to make up for the lost profit on the overall job.

Bottom line: If you don't think an agreement is win-win for both you and the person you're working for, ask them to revise it. If they won't, walk away.

And if you're in a corner and have to take the job because you can't pay your bills without it, it's time to go back to the basics. Read or re-read Markup and Profit Revisited and start charging enough for your work so you can keep your bills paid. Then you won't have to deal with one-sided contract language.

 

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