Executive Summary. COVID and inflation in 2020, 2021, and 2022 have created challenging and unpredictable times for contractors. Owners should consider loosening contract provisions during this interim for the good of their projects.
I’m tired of hearing of these unique times. Seems ever since the Great Recession of 2008 when Lehman Brothers fell, every year since then has been a unique year in the economy. Well, it has been tough, don’t you think? How any restaurant made it is a miracle. To handle these times of challenge, project owners should consider what can be done to loosen their contractual grip on contractors. Because after all, don’t owners want their jobs built on time and for a reasonable amount of money? Of course they do. If owners can put the project as their top priority (versus making darned sure the the Contractor doesn’t take the Owner for a penny more than they should) projects can get done and everyone wins: Owner, Contractor, and taxpayer.
Contractor risks. Contractors care about two things, and probably in this order: cash flow and profit. Cash flow feeds a contractor this year and profit feeds it for years to come. Yes, safety is there and it’s important, but no one paid an employee in Experience Modification Rate (EMR) crypto tokens.
Owner risks. Owners get in trouble in the newspaper and with bond raters and with taxpayers when projects go over budget and come in late. This can be for a number of reasons, but a majority of the time many of these problems can be mitigated by fair contract drafting principles. I didn’t say give away the farm, I just said be fair.
Compromising terms is the goal. A contract can be fair to both parties by managing risks on both sides, the Contractor side and the Owner side. Below are three significant contract provisions that can turn a project from failure to success.
| Item | Contractor Effect | Owner Effect |
| Material on Hand – Make it Timely and Richer |
Paying material on hand has two benefits: (1) it helps cash flow the contractor, and (2) it allows quick procurement ahead of looming escalation. |
Owner pays “earlier” than normal. Owners, the Contractor’s not supposed to be a bank. At least not more than thirty (30) days. |
| Offer Realistic Schedules & Reasonable Liquidated Damages (LDs) |
Labor resources now are difficult to find and hold. If contractors know at bid time they cannot meet a schedule due to labor shortage, this impact is built into the bid price. This may be an acceptance of liquidated damages. So, an estimator may say, we just can’t get done in 500 days, it’s going to take 600 days: “…build in a cost in our job for 100 days at the LD rate of $5,000 – add $500,000 to our bid.” |
If a reasonable time is put into the schedule, then payment by an Owner (on bid day) for anticipated LDs can be avoided. Also, having a schedule with a bit of breathing room (just a bit, don’t double the duration!), can ensure a good-paced project finished within time and budget. Notice the suggestion was not to get rid of LDs, or lessen them, just get real with the schedule. |
| Allow Material Substitutions During the Project |
This can be a great time saver. If the specified Brand A is not available for 15 weeks, but Brand B is just as good and available in 3 weeks, a project delay can be avoided. Certainly, engineers cannot know the availability of materials when they specified them, so allow the Contractor to research the market at time of construction. |
Some procurement rules may prohibit lax treatment in the area of material substitution. But if possible, allow the Contractor to provide like materials. A credit can be offered, or more importantly, a loss in schedule can be avoided. Adjust bid documents to require escrowing of the Contractor’s bid calculations, or require certain materials to have their bid costs filled out on a line item within the proposal. |
My story. We work for contractors and owners. We do claim offense and defense. Many times these conflicts could have been avoided simply by the parties being fair to one another. Modifying the typical language for a short time can benefit BOTH parties.
Material on hand is always interesting to me because owners often force contractors into being a bank. Contractors have to pay for materials today and then often do not get paid for weeks or a number of months after the material arrives on site, or worse after it’s been long installed. I did a job once in eastern Washington state that didn’t pay for sewer pipe installation until the roadway base course was installed. Crazy. I just don’t find an approach like that to be fair in a contract. Having at least a partial timely payment is fair to both parties.
The material substitutions is a good one to maintain schedule. However, it’s good for Owners to have a check in place to make sure that they’re (the Owner) not getting take advantage of. For example, if the Contractor bids the job with Brand A for $250,000 and then builds the job with Brand B (via a substitution request) for $125,000, well that’s not in the spirit of the contractual language.
The material substitutions is a good one to maintain schedule. However, it’s good for Owners to have a check in place to make sure that they’re (the Owner) not getting take advantage of. For example, if the Contractor bids the job with Brand A for $250,000 and then builds the job with Brand B (via a substitution request) for $125,000, well that’s not in the spirit of the contractual language.
Work Safe!
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