The news is everywhere that construction spending is down. Contractors face the liability issues inherent in having to cut prices while construction material costs either increase or stay the same. However, opportunities exist for a construction contractor to turn a profit, even in these seemingly dire times. In order to do so, a contractor must plan ahead, run a project smoothly and professionally, assure that its contracts contain terms that protect it from liability as best is possible in an uncertain world, and assure prompt action to collect should those terms be breached (whether with a lawsuit, mechanic’s lien, or, possibly a Miller Act claim).
One key way to avoid having to pursue this last course of action is to make sure that you, as a general contractor, subcontractor or supplier, run your portion of the construction job smoothly. Good relationships with those both up and down stream can go a long way toward heading off problems before they blossom into legal action. The construction guidelines published by a coalition of the AGC, the ASA and the ASC are a good starting point for advice on this topic.
Another way to both avoid problems and protect yourself as a construction professional is through the use of escalation clauses in your construction documents. These clauses allow a subcontractor to pass on an increase in materials cost to a general contractor (or a GC to an Owner) under certain circumstances. As my good friend Scott Wolfe, Jr. of the Wolfe Law Group (@scottwolfejr on Twitter) points out at the Construction Law Monitor, absent such a clause in your contract, you (as the down stream construction company) will likely have to eat any increased costs under a fixed price, lump sum contract. Of course, an escalation clause is just one protection that you can build in to your contracts and a knowledgeable construction attorney can help you incorporate others.
Finally, make sure that all of the details are hammered out up front in the contract documents. In Virginia, the contract is king and (absent some clearly illegal provision) the contract will be enforced as written. Many problems will be avoided by clear contract drafting that assures that all parties know the deal before the project starts. Surprises cause litigation much more often than clear contracts, even in claims situations.
Taking these relatively simple steps should help you concentrate on completing the work and making money doing it.
I encourage all contractors and attorneys that read this blog to comment below with their experiences and tips.
As always, I welcome and encourage your comments below, please share your thoughts. Also, please subscribe to keep up with the latest Construction Law Musings.
There are plenty of folks over the years who wish they included material escalation clauses, that is a good piece of advice for sure.
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Thanks for your continued comments and readership Tim. I’ve run into escalation issues on more than one occasion myself!
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I am not being an American citizen, however, I would have thought that an escalation clause, a percentage of wastage, or material cost increase, be an inclusion to all building contracts. This is particularly relevant if the job goes over the agreed time. Furthermore, if the job exceeds the agreed time of completion then does the escalation clause become void or percentage thereof? Does a registered building contractor need to arrange with an insurance provider for home warranty insurance and would this be inclusive of the delay clause?
Interesting comments. The issue will be the balance between the damages caused by any delay and by whom. If the delay is due to the owner, then the contractor will be able to take advantage of the escalation. If it’s due to the Contractor, then any damage to the owner will be deducted from any escalation.
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We operate a small residential/commercial wood only framing turnkey company in Virginia. Our experience has been that the “big” builders here do not issue contracts for an entire project and although there are such escalation clauses in the contracts, if we try to request more money to account for price increases we are met with “…then we will have to put it our for rebid” or just keep going. I love reading these legal blogs just to keep informed, especially the lien laws, so keep typing away!
Thanks for checking in Kathy. As one who represents a fair number of subcontractors (large and small) I understand that you have more or less leverage to get some of the things discussed in this post depending on the job.
Totally agree with you Chris, that contractors must run their jobs as smoothly as possible, and that the importance of good relationships can never be overemphasized.