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Know Your Contract – Keep Your Profits

For most contractors, every construction project begins with signing the contract and ends with getting final payment. A lot will happen between these two events, and to make the project as successful as possible, the savvy contractor will need to be very proactive, even getting involved well before signing the contract.

The "contract" most often includes  a number of different documents and are usually collectively referred to as the "contract documents".  They are not just the plans and specifications along with the agreement you sign, they can include anything else that may be designated as part of the "contract documents" in your agreement is signed, and almost always includes the prime contract for a subcontractor. 

Also, it is very important to know that your proposal or bid, and any exclusions or clarifications you included with it, will not become part of any contract unless they are specifically included and identified as part of the contract documents.

Think of the contract documents as the roadmap for the project, where every aspect of the work is addressed, including how to resolve problems. The contract spells out your rights and responsibilities, as well as your risk and your rewards.

1. Do Your Homework

Keep in mind that if the Owner or Prime Contractor really wants you to do the work, and they know and trust you, they may be more willing to negotiate with you on some of the terms. This is where getting involved early will really help you.  Even if they don't know you, and you are a subcontractor, know what the prime contract and other contract documents require, and be sure that you aren't asked to take on any more risk than the Prime Contractor. 

Getting some of the more oppressive terms revised is usually reserved for risk managers, senior executives, or the company attorney. The goal is to make sure the contract is a "fair" contract. If you can avoid falling into the "take-it-or-leave-it" trap, it will be to your advantage. But in reality, there really isn't a truly "fair" contract for both sides, because invariably one side has an advantage over the other. And if negotiations are out of the question, you need to be able to identify your risks, and then manage those risks.

Once the contract is signed, the easy part of is over and the real work begins because you’re legally committed to performing exactly what the contract documents require.  At that point, are you leaving the project's success in the hands of the project managers and superintendents? If so, that’s perfectly okay …… if they understand the contract documents thoroughly. If they don’t, then it could be a disaster waiting to happen.

Many people claiming to be conversant in construction contracts may think they know the terms and conditions but often they really don't understand them. In addition, many project managers don't even look at the contract until something is going wrong on a project.  The heat of the moment is not the time to try to figure out what the contract requires you to do, nor is it the time to let a new project manager take a crash course in construction contracts. 

So, then what do you do?

2. Really Know the Contract

This is easier said than done.  After winning the job, and before the project even gets started, make sure that all project management personnel thoroughly understand the contract documents. If they are not up to speed, get them training!  Expecting your project managers to get on-the-job training for contracts management is not a smart move. 

When you consider that, for many projects, they’re going to be responsible for managing millions of dollars, you can start to see the value in the well-used cliché "knowledge is power". The contract spells out exactly what you are expected to do to protect your rights. If your PM doesn't know, or forgets a key requirement, it could cost you.

3.  Manage the Contract

You should be able to pick out all the important clauses that need your special attention within a contract. These aren't "killer clauses" unless you drop the ball, and many of these clauses are used on a daily basis.  But some contract provisions are invoked only when an event happens. Do you know what that event may be, or do you even know how to identify that event in order to comply with the contract?  

Bottom line is – don’t manage your contract on autopilot. You must understand the terms, or otherwise risk missing critical deadlines and the opportunity to maintain your anticipated profit margins!



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