Owners Loosen Your Grip!

Oct 12, 2022 | Business Development, Learning Aid

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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