Strategies for Obtaining Unconditional Payment for Performance

Strategies for Obtaining Unconditional Payment for Performance

Published by American Subcontractors Association, Inc. Foundation of the American Subcontractors Association, Inc. 1004 Duke Street Alexandria VA 22314-3588 (703) 684-3450 [email protected] www.ASAonline.com

Copyright © 2016 by the American Subcontractors Association, Inc. and the Foundation of the American Subcontractors Association, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the American Subcontractors Association, Inc. Disclaimer: This publication does not contain legal advice. The discussion is intended to provide information and guidance to individual subcontractors. Specific circumstances vary widely, so subcontractors may need to consult their attorneys before acting on the premises described herein. Each subcontractor should decide for itself the contract terms and conditions which it believes will best protect its interests. Subcontractors should not agree among themselves as to the form of contract terms and conditions they will use. Such agreements may violate federal or state antitrust laws and could result in the imposition of civil and/or criminal penalties.

Strategies for Obtaining Unconditional Payment for Performance Introduction In ASA’s most recent member needs assessment, subcontractors reported that egregious subcontract terms remain one of their most serious problems, with predatory payment terms being the most challenging. This white paper is intended to provide ASA members with additional tools to help them develop strategies for obtaining equitable payment terms

Establish Goals A subcontractor developing a program to negotiate improved payment terms should first establish its goals. That is, a subcontractor should identify the payment terms it finds most challenging and give some serious thought to what it considers to be fair treatment and the minimum requirements it is willing to accept. Of course, such a decision may vary with the customer and the type and size of the project. One good method is to compare the language in a prime contractor’s proprietary subcontract with the terms in the ASA Subcontract Documents Suite or the ConsensusDocs Form 750, Standard Agreement Between Constructor and Subcontractor. ASA members report that the payment terms they find the most challenging include:  Final payment  Contingent payment  Slow progress payments  Retainage  Change orders  Inability to stop work for nonpayment ASA has free materials to help you learn about and negotiate improved terms on each of these issues. These include ASA’s Subcontractor Negotiating Tips, frequently asked questions, white papers, podcasts and more. Explore the “Contracts and Project Management” section of ASA’s Web site at www.ASAonline.com.

Contract Review To assure a systematic means of screening subcontract payment terms, a subcontractor should consider developing a check list on each of the issues you decided are of concern. For example, such a check list could indicate whether a subcontract is (1) satisfactory, (2) unsatisfactory, or (3) silent on each issue of concern. This check list can be used to record clarifications obtained through negotiation with contractors and as an aid in invoicing to assure that any favorable payment terms are considered. For more information, see ASA’s white paper The Prime Contractor Factor.

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Strategies A subcontractor should establish an individual strategy based on its trade, method of operating and experience. Still, there are certain techniques that deserve consideration if only because other subcontractors have found success with them. Some of these strategies are discussed below. Avoid Being Precluded at the Time of Bid Just as a bid proposal contains a specified scope of work and rates, it can contain very specific, binding conditions that make a subcontractor’s offer of performance dependent on the prime contractor’s acceptance of the whole package. For example, if a subcontractor uses the “ASA Subcontractor Bid Proposal,” one of the documents in the ASA Subcontract Documents Suite, and commences work at its customer’s direction, its terms and conditions will include ConsensusDocs Form 750 and the conditions spelled out in the ASA bid proposal. The subcontractor would be under no obligation to renegotiate a subcontract for the same scope of work; instead, the customer would be contractually obligated to sign a ConsensusDocs Form 750 incorporating the terms of the subcontractor’s bid proposal by reference. If, on the other hand, the customer responds to the subcontractor’s bid by marking it up or sending a subcontract form with different terms, before allowing it to commence work that will constitute a counteroffer subject to the subcontractor’s approval, modification and counter-offer or rejection. Some prime contractors make it a practice to attach a copy of their standard subcontract form to the bid documents and say that bidders agree to sign that form if awarded a subcontract. These proprietary forms often include unsatisfactory payment language. One way a subcontractor can avoid getting boxed in at the time of bid is to clarify that the subcontract form will be used as the agreement document, but subject to mutually-agreed changes and clarifications. This permits a subcontractor to determine the lay of the land before negotiating payment language. Certainly there is nothing to be gained by being shut out before bid amounts are known. Since the subcontractor is not necessarily saying it will refuse to sign the form, the contractor is unlikely to disallow the subcontractor’s bid, particularly if it is low. Factor in Timing Timing is, perhaps, the single most important element in the strategy of negotiation. It is nearly always best to wait a reasonable time before discussing unsatisfactory terms with a contractor. Yet a subcontractor that has been awarded the contract, been certified to the owner, and has commenced exchange of plans and drawings is in a strong negotiating position to get reasonable payment terms. There is little to be gained, in most cases, by making an issue of payment terms while competitors are still interested in the work and time would permit the contractor to award the work to one of them. Keep an Even-Handed Approach A subcontractor can establish credibility that will serve it well by focusing on provisions that are in neutral subcontract documents. There may be a temptation to take advantage of an especially strong negotiating position to demand terms that go beyond such documents. The short-term advantages of such a stance almost always are 2

outweighed by the long-range disadvantages. It is difficult to expect equitable treatment under adverse circumstances if one has ignored fair play when one has the upper hand. Just because a prime contractor’s form may be biased in its favor does not mean that terms equally-biased toward the subcontractor represent a desirable long-range goal. Rather, a set of terms fair to both parties offers a far more appropriate aim. Set a Precedent for Later Subcontracts Most contractors are busy people who do not have the time or inclination to discuss subcontract terms each time a job is awarded. Accordingly, most are agreeable to arriving at an understanding that applies to future work as well as the subcontract under discussion. On those occasions when a satisfactory agreement has been reached on modifying terms, a subcontractor is well advised to seek extension of the agreement to cover future subcontracts. Conversely, if the negotiations have not gone well, a subcontractor will probably want to clarify that the changes apply only to the one job. Characterize Requests as Clarifications There often is a natural reaction against changes—less so to clarifications. Many times a contractor’s terms are at variance with the general conditions for a job. In other cases, the contractors’ forms are not all that clear. The subcontractor should clarify the meaning. In those cases where the form is clear, but unfavorable, the subcontractor may still needs a “clarification” to confirm the changes needed. Start with the Easiest Points First Many prime contractors contend that they make no changes to their subcontract documents. One of the best ways to overcome this argument is to cite an apparent discrepancy between their subcontract language and that contained in the specification or general conditions. Once it is obvious that changes/clarifications can be made, it is much easier to discuss other items. Prioritize Negotiation consists of give and take. Thus, it is normally a good strategy to decide which points are most important so that concessions can be made on points of relatively less value. For example, even if the primary purpose of a negotiation is to get reasonable payment terms, it may be desirable to discuss other terms as well—both to get better overall conditions and to provide a basis for compromise if that becomes necessary. During discussions of proposed clarifications, it may become necessary to concede a point. In such instance, a good tactic is to make a concession conditional on agreement to other items under consideration. Focus on Benefits that the Contractor Received from the Owner A prime contractor should be willing to pass along rights it has obtained from the owner. For example, a reduction in retainage to the percent retained by the owner is only fair, and any provision to retain more from subcontractors is almost impossible to defend. In some cases, it may be necessary to join the prime contractor in contacting the owner to make sure the contractor has the ability to commit to and deliver on promises of prompt payment. 3

Stress the Need for Understanding Prior to Problems Prime contractors frequently say that they treat their subcontractors fairly in spite of the one-sided wording in their subcontract agreements. Such promises are much easier to deliver when the parties have a written understanding of what fair treatment entails. There should be no objection to reaching a written understanding. Similarly, prime contractors state that their practices on past jobs are more relevant than the terms contained in its subcontract. One answer to this is to point out that this is the same rationale made by those who play Russian Roulette. Tie in with Low Price In those cases in which a particularly low price is being offered on a given job, it offers a good opportunity to state that the price is contingent on equitable payment terms.

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