August 6, 2009

Watch out for those post-contract agreements

Henry

It was a clear, crisp fall morning almost 20 years ago. As a young project manager on the jobsite while our superintendent was on vacation, I was relieved to finally have asphalt trucks lined up and steaming away on the project's access road. Bad weather had delayed paving to a point where it had become critical, and I needed to have it done — and soon.

As I watched a roller being unloaded from a flatbed, the subcontractor's foreman walked up, handed me a pre-printed form and said, “Sign this.”

The form said “Subgrade Release” in bold capital letters on the top. It also said that by signing it I accepted responsibility for anything wrong with the subgrade over which the paving was to be placed. My relief evaporated as I realized that signing the form would effectively make my company responsible for specific risks I had painstakingly tried to shift off to a group of subcontractors who were doing the sitework, utilities, landscaping, curb and gutter, and of course, asphalt paving.

“I'm not signing this,” I told the foreman, trying to sound authoritative.

“OK,” he shrugged. He then turned to his crew and hollered, “Load ‘em up, we're outta here!”

My excited protests about the requirements of the subcontract were met with a dismissive wave of a hand. My ever-escalating tone and threats elicited a likewise disinterested response.

“Look,” he said very calmly, “if you want us to pave, my boss says you gotta sign the form.”

The whole point of construction contracting — whether between the project owner and general contractor or between the general and its subs — is for one party to accept a share of the risk in return for a share of the potential reward. However, just like my experience with the paver, a contractor's “buy out” of its project does not cast all of a project's allocated risk in stone. Every day, oftentimes without the project's management realizing it, contractors enter into supplemental agreements that can and do fundamentally change the allocation of the project's risk.

Some supplemental agreements are accepted as a matter of course. The agreements presented for operated equipment rentals, such as mobile cranes and concrete pumps, often get signed without any review of their terms and conditions. And, does anyone read all the fine print on the back of the form agreement presented when a Bobcat or scissor lift is delivered to the jobsite? Yet in many cases, their contents conflict with the terms included in the purchase order by which they were ordered and delivered.

Field personnel regularly receive direction in meetings, via e-mail and verbally, which changes — sometimes in significant ways — the deal under which the contractor assumed it is working. And worse, because the Mike M. Johnson decision now makes it a requirement to strictly comply with contract notice and claims procedures in Washington, supplemental direction may start the time ticking by which a contractor must reserve its right to claim for additional time or costs — without anybody realizing it.

In tough times like this, competition is high, fees are falling and contractors' risks are increasing. Therefore, it is only natural for a contractor to reassess its risk as a project progresses, and to make whatever efforts it can to lower it, just as our paving subcontractor did in 1989.

Contractors today report a jump in the kinds of risk-confirming and risk-shedding writings contractors and subcontractors often demand as a job progresses. Whether titled a “release,” “assignment,” “hold harmless,” “waiver” or “clarification,” all such writings are designed to “hold the line” on the risk assumed in the original contract, if not to shed more of it.

Contractors must educate all project personnel to recognize instances that may impact risk, and then to know what to do about it. Just as a flow chart of claims procedures and deadlines should now be part of every contractor's pre-mobilization preparation, so too should a lesson on the recognition of new or added risks for all field management personnel, together with establishing a project-specific procedure of what to do once the situation is known.

When faced with my dilemma, I knew that finding a new paver would cost my company time and money it didn't have to spare, and my doing so was no guarantee that I wouldn't see another similar release from the new paver. So, with a shaky hand, I signed the release, and started hoping for the best. And though I got lucky on that project, hoping for the best is not a good, planned approach to construction risk management.

A successful project includes superior planning and preparation, making execution of the work easier and more predictable. The same kind of preparation and planning allows a contractor to best manage its risk, keeping precious profit intact. In a tough economic climate, proactively planning for the times somebody wants to increase your risk is a must. A few hours spent on the front end of a project will pay dividends when somebody walks up to you and says, “Sign this.”

Todd Henry is a former contractor, now a lawyer and partner with Oles Morrison Rinker & Baker LLP, focusing his practice in construction law.

Previous columns:

• $50M bio-energy plant nearly ready, 07-30-2009
• Snohomish company shrugs off the bad economy, 07-23-2009
• 10 insurance tips for contractors and developers, 07-16-2009
• Underwater forests: The final logging frontier?, 07-09-2009
• Budget balancing puts state's trails in peril, 07-02-2009
• State construction deaths drop significantly, 06-25-2009
• This viaduct job is proceeding as planned, 06-18-2009
• Will low-income housing clash with wine tourism in Prosser?, 06-11-2009