Chapter Corner

Top 10 Specialty Contract Provisions to Include, Exclude, or Modify

Posted in: Features, April 2017

Specialty contracts control the relationship between a specialty contractor and a prime contractor or, in some cases, a project owner. So it is important for specialty contractors to negotiate their contracts to be, at least, mutually beneficial to the parties and, if possible, favorable to the specialty contractor. Of course in reality, some parties take a hard line on their contracts and refuse to negotiate, which might lead one to question the advisability of entering into a relationship with such parties. In any event, when negotiation is possible, consider the following points:

Include Coordination and Supervision Obligations

The duty to coordinate and supervise work is one of the most important obligations of a prime contractor. Because trade and specialty contractors generally do not contract with each other, they do not exert control over each other, such as enforcing schedule deadlines and coordinating work in a sensible sequence. The failure to properly perform these key functions can wreak havoc on a specialty contractor’s job performance. It is, therefore, a good idea to expressly impose the obligation of coordination and supervision on the prime contractor. This is true; even though in some states the law imposes the obligation even if not stated in the contract.

Include Schedule Obligations

The duty to establish and maintain a schedule is another typical obligation of a prime contractor. But many specialty contracts expressly or implicitly allow the prime contractor to modify the schedule at will, sometimes causing hardship and additional costs to the specialty contractor. This is particularly true for specialty contractors at the end of a job, such as electrical and mechanical trades. To limit the associated risk, specialty contracts could include a provision that requires scheduling activities to be coordinated with specialty contractors and other trades, with their input being ncorporated into each schedule and update. Some contracts go further and require scheduling in a manner that allows the specialty contractor to efficiently perform its scope. By including such provisions, a specialty contractor would have more leverage to obtain additional compensation or other concessions when schedule changes have negative impacts.

Include Payment Deadlines and Interest

If the project owner or prime contractor needs financing, the place to go is a bank - not its specialty contractors. But when they withhold or delay payment without justification, the project is funded off the backs of specialty contractors. To remedy this problem, specialty contracts should include payment deadlines and, if payment is not received on time, the imposition of interest. The interest rate should be high enough to encourage prompt payment, but not higher than applicable usury laws.

The federal government and some states have prompt payment statutes. If these statutes provide sufficient protection, then it is not worth using up any scarce negotiation leverage on a payment deadline or interest provision. But if the statute is inadequate or requires incorporation of the statutory provisions, such as the federal government’s prompt payment statute, then it is necessary to include them.

Include Termination or 4 Suspension Provisions for Specialty Contractor

Most specialty contracts allow the project owner or prime contractor to terminate for cause or for convenience, but few extend the privilege to specialty contractors. Those who have the bargaining power should consider including a provision that permits the specialty contractor to terminate or suspend the contract for certain important defaults. Though most states permit termination for a material breach of the contract, it is not always obvious which breaches rise to a material level. So termination or suspension provisions permit the specialty contractor to identify certain defaults that permit it to suspend work or terminate the contract and end the relationship. Such defaults may include failure to pay beyond a cure period; a repeated failure to pay on time; excessive delays; or failure to perform supervision, coordination, or scheduling activities.

Exclude Delay Clauses

Specialty contracts are known for draconian delay clauses, such as the infamous no-damages-for-delay clause or other exculpatory clauses, which eliminate liability for wrongdoing, such as delays. These clauses encourage inefficiencies and desensitize project owners and prime contractors to the impact of delays on specialty contractors. After executing a contract with such delay clauses, a specialty contractor must either live with the provision or find an exception in the law, which is usually not an easy task. The best course is to eliminate the clause altogether.

If striking the clause is not possible, consider modifying it to allow compensation for delays caused by the project owner or prime contractor or even its other trade contractors. Or in a contract with a prime contractor, permit recovery of delay damages to the extent such damages are recoverable from the project owner. Just be sure to require the prime contractor to assert such pass-through claims.

Exclude Conditional Payment Provisions

In addition, consider striking conditional payment provisions, which are commonly referred to as pay-when-paid or pay-if-paid clauses. Such clauses delay or preclude recovery of payments unless or until the upstream contractor is paid. These clauses are sometimes inequitable, because the specialty contractor may not be the cause of the delayed or withheld payment.

If striking conditional payment provisions is not possible, then consider limiting them. For instance, allow payment to be conditioned upon receipt of the upstream payment, unless the delay or withholding is not due to the specialty contractor. Or again as long as the specialty contractor is not at fault, allow the payment to be withheld only for a limited period of time, even if the upstream payment is not received.

An additional factor to consider is the availability of payment bonds and liens. In some jurisdictions, conditional payment provisions are no defense to payment bond claims or lien claims, so it is less important to exert bargaining power attempting to strike or modify them.

Exclude Pay Application Waivers or Lien Waivers

Many specialty contracts require the specialty contractor to submit certain waiver forms along with their applications for payment. Typical pay application waivers require the specialty contractor to waive all claims or lien claims through the date of the pay application. Failure to submit pay application waivers or any attempt to carve out claims will invariably result, at best, in a delay in payment. The key complaint about such clauses is that if the specialty contractor has performed the work, it should get paid – without having to waive its potentially valid and valuable claims.

To avoid such unfair results, these clauses should be eliminated. If eliminating them is not possible, expressly permit the preserving of claims on the waiver form. As with conditional payment provisions, also consider the impact of lien laws, which may require certain formalities before lien rights can be waived.

Exclude Work-Continuation Clauses

When disputes arise, some contracts require the specialty contractor to continue slogging forward. These clauses usually are designed to keep the project moving forward even though the parties may have disputes or claims. Yet the high point of a specialty contractor’s bargaining power is during a project. For instance, when the specialty contractor claims nonpayment, a threat to suspend the work gets everyone’s attention. Thus, to avoid giving up such bargaining power, exclude any work-continuation clause. For best results, also include a suspension clause, noted above, that expressly permits suspension of the work as a result of certain defaults, such as nonpayment.

Modify Written-Change-Order Clauses

Projects will always have changes, and the project owner or its prime contractor should have the right to order reasonable changes within the general scope of the original project. But written-change-order clauses preclude payment for changes unless the change is ordered in a signed, written document. While at first blush this may seem reasonable, the project owner or prime contractor may not always issue a formal change order when they direct a change. The specialty contractor should not take a loss for following the directive. To avoid such losses, the clause could be revised to permit recovery upon showing some evidence that the project owner or prime contractor requested it (e.g. a confirmation email) or such changes were required to accomplish the work. Or it could be softened by removing language indicating the specialty contractor waives compensation or that a signed, written directive is a condition precedent to recovery – both of which are terms that prompt judges to deal harshly with the specialty contractor’s claim.

Modify Flow-Down Clauses

Most specialty contracts with prime contractors include a flow-down clause that imposes obligations on the specialty contractor that the prime contractor owes to the project owner. Prime contractors are not likely to remove such clauses, but the specialty contractor could make it palatable by certain revisions. The flow-down clause should be limited to provisions of the prime contract that are directly applicable to the specialty contractor’s scope. There should be no expansion of the scope due to a flow- down clause. Also, consider stating that the specialty contract governs over any inconsistent or overlapping provision of the prime contract. And finally, consider making the provision mutual (flow-up), such that the specialty contractor is entitled to all rights that the prime contractor has under the prime contract.

David R. Cook is a partner at the Atlanta-based law firm, Autry, Hanrahan, Hall & Cook, LLP. He practices in the firm’s construction law group, representing specialty contractors in connection with their contract negotiation and drafting, commercial and corporate transactions, and dispute resolution, litigation, and arbitration of construction claims. His profile and contact information are found at www.ahclaw.com.


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