Small contracting firms with one to five employees often shy away from subcontracting work for fear of stepping into a quagmire. Nevertheless, it remains a lucrative market that, with proper business techniques, can be tapped in ways never thought possible.
As a subcontractor, you've no doubt developed a challenging relationship with the general contractor that will place the profit of a job or even the future of your company in jeopardy. And if you haven't already, you're bound to sooner or later. This article will show you how to position yourself on an even or better playing field with the general contractor and equip you with the basic knowledge to conduct your business in a preemptive mode from the time you decide to bid the job to the day when you collect your last dollar.
Assuming that you check, record, and preserve all of the documents pertaining to marketing the job, such as invitations to bid, bidding documents, minutes of pre-bid meetings, and jobsite visits, we'll begin with the issues of selling and contracting the job.
Selling the job. When you're writing a proposal, avoid using words that can backfire on you, such as the following:
All. This term has no boundary and isn't clear because it means different things to different people. It can include items of work you don't intend to furnish, install, or maintain.
Any. This can mean “one,” “some,” “every,” or “all” without specification. Its usage isn't specific for proposal writing. You should use “any” only to promote and instill confidence. For example, “Permit fees, if any, shall be paid by others.” In this case, the term diminishes the possible outcome and alleviates you the expense. On the other hand, if you write, “we shall remove any violation” or “install any work shown on …” you could be liable for some very expensive surprises.
Complete. “Complete” isn't much different from “all” or “any.” While it's a good selling word, it can cost you plenty.
Work. Used as in “electrical work,” it means all work related to that specific trade. For example, “Install all electrical work as per plans…” could mean to include any electrical apparatus shown on any plans, such as starters, motor drives, or electric hand dryers. In that context, you should substitute work with “electrical wiring” or any other word but “work.”
Contracting the job. Because most electrical firms sign the general contractor's or the owner's subcontract agreement, they can lose a favorable opportunity when the customer chooses to sign their contract. By drawing up their own legal document, contractors can protect themselves on a construction job and look out for their best interests.
One of the most overlooked parts of the proposal is the customer's acceptance clause. It states that the price, specification, and conditions set therein are satisfactory and accepted, which authorizes you to proceed with the work. It should also state that your payment shall be made as outlined and unpaid balances are subject to a 1.5% per month interest rate until paid in full.
You should keep in mind that the opportunity to freely negotiate the terms and conditions of a contract presents itself once, and it occurs before you sign. Negotiating the job, however, goes beyond the legal ramifications of a contract. It involves translating the parties' offer and acceptance into a fair and equitable agreement. The contract should include the method of payment, limitation amounts on changeorders, back charges, completion date, and premium time.
Method of payment. Indicate whether the payment structure is monthly, bimonthly, or weekly. You should also note that final payment is due upon physical completion of the job and that the retainer, if any, will be reduced by one-half, once 50% of the contract is earned.
Changeorders. Most changeorders are written to revise the contract amount up or down. However, some don't affect the price and thereby serve an important role in documenting changes to the scope of work without the aftermath back charge or, most importantly, charges for modifying the work without authorization. To render your changeorder “collectable,” be sure it includes the changeorder number and date submitted, job name and address, and owner's contract number. You should also address your changeorder to your customer's designated person as called for in your contract. Remember to request or write the following clause in your contract: “Changeorders in excess of 10% of the base contract amount shall be treated as supplemental contracts, and shall be quoted and governed independently from the terms and conditions set therein.”
Back charges. Don't accept any back charges from the general contractor or owner without a 10-day notice from the date the event occurs.
Completion date. When possible, force the general contractor or owner to insert a completion date in the contract.
Premium time. Specify that contract work shall be performed during regular working hours.
The letter of intent. A letter of intent is a formal commitment that tells you that based on your proposal and the owner's bidding documents, you have been awarded the job. The purpose of this letter is to move along the construction process through the release of shop drawings and the filing for permit applications and insurance certificates. At times, you may also be able to begin the work while the general contractor prepares the subcontract agreement for you to sign.
In accepting such letters, make sure they include a reference to your proposal, a directive to release material, the contract amount, a directive to pull permits, and any alternates and allowances. The letter should also include a directive to mobilize the job, a copy of notice of commencement, a deadline for the execution of the subcontract agreement, and a signature from the general contractor or owner. Finally, make sure the letter of intent is dated.
The subcontract agreement. The subcontract agreement may never have been a part of the bidding documents, or you may not have been made aware of its existence until after the job was bid and won. When you receive your subcontract agreement, consider the following before you sign on the dotted line:
Offer. Is the offer inclusive of your scope of work and is its list of exceptions in response to the general contractor's or owner's invitation to bid? The offer should include the base price of the project, a list of exceptions, an alternate price, a list of drawings and specs, any allowances, a payment schedule, an addenda, and revisions.
Performance. Pay special attention to each of the following items, because they're notorious for tripping up well-intentioned contractors:
- Scope of work
- Work condition
- Owners' furnished material. Who will receive, unload, store, uncrate, and check it against damages?
- Commencement date
- Progress and performance schedules
- Completion date
- Substantial completion date
- Labor force commitment
- Possession of work prior to completion
Compensation. Getting paid for your work is the essence of any business. No truer statement can apply to subcontracting. Because so much can be lost due to hidden and unexpected costs, the subcontractor can't afford to overlook any amount earned and its timely payment. Another mistake subcontractors can't afford to make is extending credit beyond their projected monthly cash outlay without proper compensation. With that in mind, it's critical that you understand that production acceleration clauses will increase your estimated monthly cash outlay. You must also know how to get the GC or owner to pay you in a timely fashion, once he gets paid.
Consequence. When you fail to deliver on a promise, you pay a consequence. And in construction, that consequence is a double-edged sword. Either party to the contract can be assessed a penalty for failure to perform or even for coming up short on a commitment. For an agreement to be fair and balanced, the penalty has to be proportionate to the damage and equally applicable to those who default. Depending on which side of the fence you stand on, here are some favorable and unfavorable consequences for you to consider:
Right to stop work. Consider using this as a clause in your agreement: “Each requisition submitted by the 25th of the month is due by the 10th of the following month. If any requisition, or part of, remains unpaid 30 days after its due date (insert your company name here) has the right to stop work.”
To induce the acceptance of the clause, you may negotiate the 30-day grace period by starting with a 10-day period and working your way up. Whichever grace period you and the GC or owner agree to will give you an ultimate cutoff date to stop work without consequence.
Liquidated damages. Make sure that all parties understand that no liquidated damages shall be assessed to you without your participation in the decision-making process of revising progress schedules and deadlines that affect the overall completion date of the project.
Acceptance. If a deal is to last, it has to be beneficial for all parties concerned. If you know you've negotiated an agreement grossly in your favor, don't sign it. You may benefit from it now, but it will cost you a relationship with your customer or the GC in the future. However, if you negotiated a smart agreement, make sure to protect it. It would be unfortunate to lose it on an irregularity. The subcontract agreement should include the customer's signature, title, and date. The changes should also be clearly marked on the agreement. Handwritten changes, even in the margins of the document, are as good as typewritten, if not better. Initial every page and every change you make. Retain a complete photocopy. Stamp date your photocopy and note the method of delivery. Allow 10 working days for the original to return.
Once you've agreed on the basics of the agreement, the general contractor or owner should send you two unsigned copies of the subcontract agreement for you to execute. They won't sign your copy until after you've signed it. Go through the agreement thoroughly and verify that it contains what you both agreed upon. Once satisfied, sign it and send both copies back to them for a signature.
When you get your copy back, don't just file it away. To confirm the validity of the agreement, check to make sure that both your signature and their signature are on the same contract, the contracts are originals and aren't photocopied, all revisions are initialed by both parties, and if required, the contract is notarized. You should also check carefully to see whether or not the agreement was altered after you signed it. Tedious as it may seem, it's worth comparing each paragraph to your photocopy set. Also remember to retain a photocopy for office use and file the original away from the office.
By carefully reviewing the subcontract agreement, effectively negotiating the terms of a contract, and understanding the business basics of subcontracting work, you can develop a successful relationship with a GC or owner and pump up your profits. On the other hand, if you don't focus on getting paid for each and every labor hour, you could soon face challenging times ahead.
Sammaritano is a contributing writer in Margate, Fla., and serves as the Webmaster for ContractorsPress.com.