Mastering Subcontract Negotiating Strategies - American ...

Mastering Subcontract Negotiating Strategies

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 © 2017 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 and forms are intended to provide information and guidance to individual subcontractors for their use. 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.

Table of Contents Introduction

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Pre-Award Strategies Preservation of Rights

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Preferred Terms Subcontractor Proposal Form Neutral Subcontractor Form Verbal Bids

2 2 3 4

Potential Problems Prime Contractor’s Subcontract Form Mandated Restrictions to Bid Clarifications Pre-Bid Term Negotiations Letters of Intent

4 4 4 5 5

Post-Award Strategies Subcontract Formation Dangers of Doing Nothing Timing of Subcontractor Response

7 7 7 7

Basic Subcontract Considerations Flow-Through Items Interchange with Other Subcontractors Even-Handed Approach Creating Precedents Priorities Clarity

8 8 9 9 9 10 10

Person-to-Person Negotiations Typical Prime Contractor Contentions

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Methods for Modifying Unacceptable Subcontract Terms Subcontract Acknowledgements Subcontract Rider or Addendum Substitution of a Neutral Document Marked-up Subcontract Form

13 14 16 16 17

Conclusion

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Mastering Subcontract Negotiating Strategies Introduction Even a solid knowledge of good and bad subcontract terms cannot help a subcontractor unless the subcontractor can translate that knowledge into equitable subcontract agreements. ASA has numerous educational materials that provide in-depth guidance for dealing with typical language found in subcontracts. This white paper addresses how to negotiate satisfactory subcontract terms using time-tested strategies. The negotiating process is a dynamic one. Different prime contractors have different approaches to subcontract language and subcontract relations. Thus, subcontractors must be flexible enough to use different strategies and techniques to achieve a level playing field of fair subcontract terms for jobs of all sizes and complexities. Certain basic principles apply to the negotiation of equitable subcontracts. Most prime contractors recognize the value of addressing potential problem areas before a job begins. In addition, responsible prime contractors concede that they are only as good as the subcontractors that they use on a project. Thus, if approached in a positive, non-confrontational way, subcontract negotiations can lead to an improvement in customer relations. Enlightened owners—public and private—and prime contractors recognize that equitable subcontracts attract responsible bidders, provide a framework for cooperation and lead to motivated job performance. A subcontractor seeking a clear understanding with a prime contractor is more likely to comply with the letter and spirit of negotiated terms than a subcontractor who is willing to sign unfavorable terms without qualm or question. Owners and prime contractors increasingly realize that a rational allocation of risk produces less costly results and more cooperative projects. A rational allocation of risk means that the party that is best able to evaluate, control, manage and bear a risk be responsible for that risk. This contrasts with the counterproductive, common practice of contractually pushing all responsibility down to subcontractors. Some prime contractors operate on the basis of “ask for it and you’ll get it.” They also may operate on the premise that most subcontractors lack the expertise or have insufficient interest to avoid dangerous provisions in subcontracts. However, a subcontractor that is hesitant to negotiate for equitable terms may suffer slow pay, bad debts, high legal costs, adverse judgments and productivity losses. The negotiating techniques outlined in this white paper are designed both for small, emerging firms and for well-established subcontracting firms. Often, the companies that are the most successful at getting equitable terms are smaller subcontractors in highlycompetitive trades. They are motivated not only by the opportunity for savings, but also

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by the threat of going out of business if adverse terms cause serious problems in the future. The various approaches and techniques outlined in this white paper should be considered in relation to those that are the most important to one’s own operation. Some subcontractors feel more comfortable using written acknowledgements, with a minimal amount of discussion with prime contractors. Others prefer to sit down with customers and iron-out their differences face-to-face. Most subcontractors find it necessary to use a combination of approaches. Subcontractors using this white paper generally will know more about subcontract terms than their counterparts during negotiations with prime contractors. Most prime contractors are busy people, who sometimes lack the time or inclination to discuss subcontract terms in detail every time a new job is awarded. Once favorable terms have been negotiated with a specific prime contractor, it may be easy to apply the same terms to future subcontracts with that prime contractor. This guide will reinforce some basic principles of the subcontract negotiation process.

Pre-Award Strategies Preservation of Rights A subcontractor must be careful to preserve its options to negotiate equitable subcontract language when bidding to a prime contractor. This may be accomplished in most instances as part of the bid submittal process. For example, a subcontractor could accompany its bid with a transmittal, such as the following: “Notwithstanding anything to the contrary, our bid is conditioned upon mutuallyacceptable subcontract terms being negotiated. Further, we do not agree to be bound by the terms of any document not furnished to us.” Even verbal bids should include, at a minimum, either a reference to mutuallyacceptable subcontract language to be negotiated later, or to a specific set of terms preferred by the subcontractor, such as the current ConsensusDocs Form 750, Standard Agreement Between Constructor and Subcontractor.

Preferred Terms Subcontractor Proposal Form Many subcontractors and their attorneys have developed standard bid proposal formats. Some include terms and conditions for payment, indemnity, warranty, excusable delays and required jobsite utilities. Other subcontractors have developed standard language so that recurring items can be inserted on a uniform basis. This flexible system allows subcontractors to add further bid clarifications to address unusual situations on individual jobs.

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Proposal terms and conditions either can be incorporated directly into the bid document, or used as an attachment to the proposal. In any event, the submittal should clearly state that the proposal terms take precedence over any conflicting or inconsistent provisions in other documents. The prime contractor may not agree to the proposal terms during later subcontract negotiations. However, using a proposed set of equitable terms establishes the foundation upon which the subcontractor’s price was based. Use of proposal terms improves a subcontractor’s ability to negotiate acceptable terms if a prime contractor seeks to impose its own subcontract form or attempts to hold a subcontractor responsible for requirements that were not revealed prior to bid. For more information, see the “Subcontractor Bid Proposal” in the ASA Subcontract Documents Suite. Neutral Subcontract Form A subcontractor may want to make its bids subject to a neutral subcontract form, such as the latest edition of the ConsensusDocs Form 750. This standard form for building construction is one of the most balanced and equitable subcontracts in general use. The prime contractor may not agree to all the ConsensusDocs Form 750 provisions. However, even if some changes become necessary due to overriding commercial considerations, the remaining provisions are even-handed. This beats using a typical prime contractor-authored subcontract document having terms unfavorable to subcontractors. The following is an example of wording used when transmitting a bid conditioned on the use of the Form 750: “Our bid proposal is subject to and conditioned upon either usage of the current ConsensusDocs Form 750 or another subcontract form acceptable to us.” Standard subcontract forms cannot address detailed requirements that are unique to a project. Accordingly, any points of clarification relating to scope, schedule, jobsite utilities and services, or other job-specific items should be included in a subcontractor’s bid submission. Occasionally, a prime contractor may offer to use a neutral subcontract by including a marked-up form, such as the ConsensusDocs Form 750, in the bid documents. However, subcontract language that is inserted in the form’s blank spaces or attached to the document will supersede the favorable terms in it. Sometimes selected ConsensusDocs Form 750 terms are deleted, and occasionally, fake forms or forms calculated to appear like the ConsensusDocs forms are used. In such cases, a subcontractor should carefully review such forms to determine how they deviate from the neutral form, and treat the altered forms the same as any other unsatisfactory subcontract document.

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Verbal Bids Bids phoned in to the prime contractor should be made subject to later negotiation of mutually acceptable subcontract terms. To the extent practical, subcontractors should provide their proposal terms to the prime contractor in advance of bidding in a pre-bid letter. The subcontractor can then refer to these specific terms when calling in the dollar amount of its bid. In many instances, a practical alternative to verbal quotes is to send the bid by email, using a format that documents the bid price and terms of the bid. When providing verbal quotes, a subcontractor routinely should include written confirmation of its price, the time frame on which the bid was based and the preferred subcontract terms. If the successful prime contract bidder becomes known immediately, a single confirmation email usually is all that is necessary. The email generally should include congratulations to the prime contractor, an offer of assistance on job-related problems and information about the subcontractor’s qualifications to relate the subcontract terms to other aspects of the prime contractor-subcontractor relationship. If selection of the prime contractor is to be made later, confirmation emails can be sent to all prime contractors supplied with verbal quotes.

Potential Problems Prime Contractor’s Subcontract Form Mandated Occasionally, a prime contractor will include a copy of its standard subcontract form in the bid package. The prime contractor may require that bidders to sign that form if awarded a subcontract. One way a subcontractor can avoid being obligated to sign an unacceptable subcontract form is to clarify its bid by stating the following: “We agree to use the Contractor’s subcontract form as the agreement document, but subject to mutually agreed upon clarifications and changes.” This method preserves the subcontractor’s ability to negotiate satisfactory subcontract language, instead of being bound to unsatisfactory terms simply by submitting its bid. Note that the subcontractor is not necessarily refusing to sign the prime contractor’s basic form. Since any modifications to that form would be by agreement, the prime contractor will find it difficult to disallow the subcontractor’s bid. Restrictions to Bid Clarifications A prime contractor may insert in bid invitations statements that no changes, qualifications or clarifications to the subcontract are allowed, and that any such responses will be disregarded. In these cases, subcontractors may want to start their bid clarifications with language such as:

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“Notwithstanding anything to the contrary, our proposal is conditioned on the following ….” At the very least, this communicates the subcontractor’s bid, and serves as a far better basis for negotiating equitable terms than simply submitting an unconditional bid. As a practical matter, a prime contractor is unlikely to dismiss such a “qualified” subcontract bid merely because it does not strictly conform to the prime contractor’s format, especially if it includes a highly-competitive price. Most public bid instructions state that any qualifications of the bid will cause the bid to be considered non-responsive. However, this principle usually only applies to bids that are submitted at the prime contract level. A subcontractor still should offer clarification when bidding to a prime contractor. However, if a specialty contractor is bidding directly to a public agency, any potential problems should be worked out with the agency in advance of the bid. Pre-Bid Terms Negotiation Generally, a subcontractor is in a better position to negotiate satisfactory terms after being awarded a subcontract, rather than prior to bid. This is particularly true once the subcontract award has been confirmed to the owner and competitors are no longer pursuing the job. However, there are times when a prime contractor will insist upon reaching a firm understanding of the terms as part of the bid process. Conversely, a subcontractor may want to assure itself of equitable terms as a precondition when submitting an especially attractive price. A subcontractor may want to consider including unfavorable subcontract terms as extra cost items when developing the total bid amount. That is, a subcontractor could show particularly costly terms as optional extra items. A prime contractor may elect to withdraw unusual terms to get a more attractive price. When offering a particularly low price on a given job, a subcontractor may want to attach terms to its bid, making the price contingent upon the use of those terms. It does not make good sense to bid extremely low and still be vulnerable to an unacceptable set of subcontract terms. When a subcontractor is a frequent business partner with a prime contractor, it can be mutually advantageous to reach a continuing agreement on standard subcontract terms, which are understood to apply to all bids. Thus, the subcontractor can be confident of obtaining reasonable subcontract terms, while the prime contractor can expect the best pricing from the subcontractor based on it being treated fairly. Letters of Intent A prime contractor often will send a letter of intent, or notice to proceed, to a subcontractor prior to preparing formal subcontract documents. The purpose of this is to encourage the subcontractor to start preparing drawings, ordering material, obtaining permits, lining up workers, etc.

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While such a letter of intent is not the equivalent of a mutually-agreed-upon subcontract, it can have significant legal consequences. Until such notice, the prime contractor most likely is not obligated to award the subcontract to the party submitting the lowest responsible bid—even if the prime contractor used the subcontractor’s price in formulating its own bid. However, once a subcontractor has been reasonably induced to begin work, in reliance upon such a notice, then the subcontractor has a much stronger entitlement to award, even though the subcontract itself has not been finalized and executed. To reasonably induce this reliance by the subcontractor, the letter of intent or other notification should include the following elements:  A signature by an authorized party, confirming that the prime contractor intends to award a subcontract to the subcontractor.  An identification of the work that is consistent with the subcontractor’s proposal.  A stated price that is satisfactory to the subcontractor for the work described.  An authorization for the subcontractor to proceed with the work described.  A confirmation that the subcontractor will be entitled to collect for its demonstrated costs, plus reasonable overhead and profit, if a subcontract does not materialize.  A reference to terms and conditions, if any, that are acceptable to the subcontractor. Frequently, a letter of intent lacks one or more critical elements that require clarification before a subcontractor spends any substantial amount of money. The following is an example of an incomplete letter of intent: “This will confirm our intent to award a subcontract to you in the amount of $1,250,000 covering the furnishing and installing of automatic sprinkler equipment as specified. Please be guided accordingly.” The subcontractor could respond using the following wording to assure a firm understanding: “Our acceptance of your letter of intent, dated November 1, 2017, is conditioned upon the following: 1. The subcontract amount of $1,250,000, includes recognition of exclusions, exceptions and clarifications, as contained in our proposal letter dated October 1, 2017 (copy attached). 2. It is our understanding that you are authorizing us to proceed with shop drawings and the ordering of material for the job. Our agreement to take those actions is with the understanding that you shall pay us for all

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demonstrated costs, plus reasonable overhead and profit if we do not enter into a subcontract. 3. It is contemplated that the subcontract terms and conditions shall be as stated in our October 1, 2017 proposal. Please indicate your agreement with the understanding as stated above by return email. As a rule, a letter of intent is not sufficient for authorizing jobsite work, especially if there is any question about the agreement of terms that are important to both the parties. It is by no means a substitute for a fully-executed subcontract agreement.

Post Award Strategies Subcontract Formation A subcontract is a set of promises under which the parties have legal duties to perform agreed upon work, and the parties have legal remedies for breach of those duties. The process consists of an offer, such as a subcontractor’s bid, with all its various terms, conditions and qualifications. If accepted by the prime contractor, the offer represents a legally-binding subcontract. However, the prime contractor ordinarily makes a counter-offer in the form of a subcontract document containing terms preferred by the prime contractor. In such a case, no subcontract is formed, since no offer has been accepted, and there has been no meeting of the minds concerning the terms of an agreement. At this point, a subcontractor should evaluate the prime contractor’s terms, and either accept them or negotiate alternative terms that are agreeable to both parties. Because most subcontractors require clarification and changes to protect the subcontractor’s interests, this white paper assumes situations in which unsatisfactory subcontracts have been received and need to be acted upon. Danger of Doing Nothing A simple refusal to sign an unsatisfactory subcontract document will not negate its adverse terms and conditions. By starting jobsite work without acting on the subcontract, a subcontractor ordinarily will be considered to have accepted the obligations of the unsigned subcontract. To make matters worse, the prime contractor then may demand a signed document, without any changes, before the prime contractor will make progress payments for work performed. Thus, a subcontractor often faces a no-win situation by failing to react to a prime contractor-supplied agreement form within a reasonable time. At such a late date, a subcontractor’s negotiating leverage usually is minimal. Timing of Subcontractor Response Regardless of how a subcontractor seeks to improve subcontract terms, the preferred time to address unsatisfactory provisions with a prime contractor is after the

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subcontractor has been certified to the owner, and job coordination has started. This usually involves the exchange of schedules, plans and drawings. The subcontractor’s negotiating position is then at its strongest, because the prime contractor has limited opportunity to bring in a competitor. This is particularly true if most of the changes and clarifications sought by the subcontractor parallel the rights contained in the owner-contractor agreement. In other words, a prime contractor will have a hard time convincing an owner that a subcontractor should be disqualified for wanting the same terms that the prime contractor secured in its own contract. Nevertheless, a subcontractor should be cautious about delaying too long in communicating unsatisfactory terms and conditions in the subcontract to the prime contractor. Waiting longer is often counterproductive, since a prime contractor may distrust the subcontractor’s motive for the delay. Also, the subcontractor should allow sufficient time to negotiate acceptable subcontract language before starting work at the jobsite. As indicated earlier, if a subcontractor begins work before finalizing the subcontract, it may be legally bound to adverse terms and conditions. While timing is an enormously valuable tool for a subcontractor in negotiating levelplaying-field terms, it must be used carefully to achieve maximum advantage. The time usually needed to review prime contract documents, confirm credit, obtain copies of missing items, evaluate potential problems and develop a list of needed changes is 30 to 60 days. Thus, the natural time to raise questions and resolve issues coincides with the best time to do so. There are some situations that require earlier negotiation of subcontract issues. For example, a deadline may have been set or the need to start jobsite work may be imminent. However, when circumstances permit, subcontractors should treat the timing factor as one of the most important elements in successful subcontract negotiations.

Basic Subcontract Considerations Flow-Through Items Subcontract terms should be the same as those in the owner-contractor agreement as related to the subcontractor’s work. The ConsensusDocs Form 750 states that subcontractors are entitled to all rights, remedies and redress that are contained in the prime contract documents unless otherwise specifically stated in the subcontract agreement. “3.1 OBLIGATIONS The Parties are mutually bound by the terms of this Agreement. To the extent the terms of the prime agreement apply to the Subcontract Work, then Constructor assumes toward Subcontractor all the

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obligations, rights, duties, and redress that Owner under the prime agreement assumes toward Constructor. In an identical way, Subcontractor hereby assumes toward Constructor all the same obligations, rights, duties, and redress that Constructor assumes toward Owner and Design Professional under the prime contract. In the event of an inconsistency among the documents, the specific terms of this Agreement shall govern.” Prime contractors generally are not reluctant to pass along to the subcontractor the rights that the prime contractor has negotiated with the owner. These rights may include retainage reduction, right to stop work for nonpayment, extension of time for excused delays, and dual notice and adequate correction time prior to termination. No matter which strategy is used to obtain acceptable subcontract terms, a subcontractor should identify favorable terms in the prime contract, and insist on a flow through of these items to the benefit of the subcontractor. There is no valid reason why a prime contractor should not be willing to pass along these rights. Interchange with Other Subcontractors Before finalizing the subcontract clarifications and changes that are needed, a subcontractor may want to explore what success others have had in securing subcontract modifications from the prime contractor. This information can be helpful in wording proposed clarifications and addressing anticipated objections ahead of time. Finding out any problems experienced by other subcontractors also is important. Subcontractors are forbidden by law from acting in concert against a prime contractor in their current or future business practices. However, there is nothing wrong with suitablymonitored exchanges of facts about a prime contractor’s past practices. One source of such information is Business Practices Interchanges operated by some ASA chapters. Even-Handed Approach A subcontractor does not need to seek terms unduly biased toward it just because a prime contractor-supplied form may be strongly biased in the prime contractor’s favor. It is far better to establish credibility through clarifications and changes that are evenhanded. Otherwise, it is hard for a subcontractor to maintain a consistent position or to expect fair play later, when its negotiating leverage may not be as strong. Creating Precedents A subcontractor normally will not find it necessary to repeat the subcontract negotiation process every time a new job is awarded by a repeat customer. At the very least, a pattern of past subcontract clarifications is available to use as precedent on future projects. Basic continuing understanding can be supplemented by addressing such variable items as: 1) Unusual owner requirements. 2) New editions of the prime contractor’s standard subcontract. 3) Changes in the law.

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4) Schedule, scope and other job-specific issues. Priorities A subcontractor must prioritize the changes and clarifications that it intends to seek. These priorities will vary from job to job, and from prime contractor to prime contractor. For example, if a subcontract contains liquidated damages terms and a tight schedule, the ability to get prompt time extensions for unexcused delays may be more important than getting long lead times. Similarly, a higher priority may be justified for clarifications to control backcharge abuses for a prime contractor that has a history of abusing that process. Negotiations consist of give and take by both sides. Priorities are helpful in keeping concessions limited to those items having relatively less value for a project. Many subcontractors include a few low-priority items in their proposed changes to have concessions available, if needed. Clarity It is very important that subcontract language be worded clearly. When problems arise, the intent of the parties is significant. Any ambiguities generally are construed against the party drafting the subcontract language.

Person-to-Person Negotiations Discussions between a subcontractor’s and a prime contractor’s representatives may take many forms. These range from face-to-face negotiation of individual subcontract terms to telephone conversations and emails about points at issue. ASA has many resources that include negotiating tips and arguments to use in support of subcontract modifications being sought on specific issues, such as payment, scope, insurance and more. These are available on ASA’s Web site at www.ASAonline.com. Prior to face-to-face discussions, a subcontractor should anticipate possible prime contractor objections for each item at issue. A subcontractor should be ready with one or more justification points for each anticipated objection. A subcontractor may benefit by referring to proposed modifications as clarifications. The term “clarifications” comes across as far less threatening than the word “changes.” Most subcontractor points do represent clarifications. Even when a change is sought, a subcontractor needs “clarification” to confirm the agreed upon change. Some prime contractors contend that they never make modifications to their documents. In rare instances, there may be such a firm company policy. More often, it is simply a negotiation tactic to preempt any effort to modify the subcontract terms. In any event, the subcontractor should still press for any changes necessary to make the deal acceptable or be ready to walk away. If a subcontractor’s bid is advantageous to the prime contractor, the contractor may consider bending its own rules.

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One good way to overcome this argument is to cite a discrepancy between the subcontract and the specifications or general conditions. This may involve a topic such as jobsite utilities or retainage reduction. Once it is obvious that changes or clarifications can be made, it becomes easier to obtain other modifications. Another effective and disarming way to respond is to say, if true, that a “a friend not only told me that you modified the subcontract, but also complimented your fairness in working out the language.” A subcontractor should be a good listener during person-to-person discussions. Often, a prime contractor has concerns that can be dealt with using specific language, instead of the catch-all wording that so frequently is found in proprietary forms. For example, a prime contractor may try to defend its no-damage-for-delay language by citing concern about claims for brief job delays. The subcontractor might agree not to file a delay claim if its work is delayed by no more than 90 days. The prime contractor may then delete the no-damage-for-delay clause, and, instead, insert language confirming that no claims will be filed for delays of 90 days or less. When a subcontractor decides to concede a point as a part of the give-and-take of negotiating, it has much to gain by making that concession conditional upon the contractor’s agreement to other items under consideration. Casually conceding points and not receiving anything substantive in return just encourages a prime contractor to test the subcontractor’s resolve on other issues. A subcontractor also should use person-to-person discussions as an opportunity to sell its strengths. By pointing out successful projects and specific advice already given on the current job, a subcontractor can enhance its customer relations, and improve its chances for getting equitable terms. Prime contractors usually admit that many of their subcontract terms are designed with marginal subcontractors in mind. A subcontractor should stress that such terms are inappropriate when dealing with a responsible subcontractor. A subcontractor also can use the argument that fair subcontract terms attract a better class of subcontractor, more favorable prices, better cooperation and a less confrontational relationship. Subcontract negotiation is more of an art than a science. A subcontractor will need to develop a comfortable approach for each situation. This approach may vary, depending upon the subcontractor’s rapport with the prime contractor, the magnitude of the problems to be discussed and the negotiating leverage available. A prime contractor will respect a subcontractor who skillfully conducts the negotiation. A subcontractor often can improve customer relations by firmly and cooperatively addressing mutual needs. It usually is best to avoid confrontational, overly-aggressive conduct during subcontract negotiations.

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Typical Prime Contractor Contentions Prime Contractor Contention: Sure, our subcontract is tough, but when problems come up, we do what’s fair, without worrying about what the subcontract says. Subcontractor Response: For a subcontract to be of real value, it needs to say what it means and mean what it says. Big problems wind up with lawyers interpreting the intent of the parties. If you plan to be fair, what’s the harm in having the subcontract say what you expect to do anyway? Both of us are better off with a clear understanding up front, instead of waiting until a problem arises. Prime Contractor Contention: We have a firm policy of making no modifications to our standard subcontract language. That way, we don’t have to worry about what our agreement says with every subcontractor on the job. Subcontractor Response: We bid on the bid documents you gave us. Many points in those documents conflict with your subcontract terms. Both of us benefit by clarifying those items, as well as some language that we think is out-of-step with prevailing industry practice. A fair subcontract is the best way to motivate a subcontractor to be a real team player. Also, it’s not equitable to lump responsible, experienced subcontractors in with marginal subcontractors by insisting that everyone sign the same terms without changes. A lot of those terms seem to presuppose that an irresponsible subcontractor will be signing your form. (If you discover that other subcontractors obtained modifications from the prime contractor, make that point, as well.) Prime Contractor Contention: We included a copy of our subcontract in the bid documents, and instructed that all subcontractors price their work based on use of that form. We expect you to sign our form for the price you quoted. Subcontractor Response: Our bid was clarified to confirm our acceptance of your subcontract terms on mutually-agreed-upon clarifications. We’ve agreed to using your form as the basic subcontract document. Now, we’re here to review our clarifications. We’re sure you’ll find them to be consistent with current industry practice, and fair to both of us. Prime Contractor Contention: You’ve signed this same subcontract form without any changes on past jobs. Did you get hurt on them? Subcontractor Response: We’ve had some serious problems when working under terms like yours. Our new policy is to work out terms that are equitable to both parties, instead of waiting until problems arise. We will gladly negotiate clarifications to future jobs, too, if you’d like to avoid covering the same ground again. Clearer understandings ahead of time are of as much of an advantage to you as to us.” Prime Contractor Contention: Your competitors never raise any questions about my form. Why should you be any different? Subcontractor Response: We can only speak for ourselves, but it’s evident that we take our contractual obligations seriously. As a responsible subcontractor, we believe the best way to give you the results that you want at an attractive price is to have

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equitable subcontract terms. That’s a lot better than signing whatever is laid before us and later wondering why so many misunderstandings occurred. We’re not asking for the moon, and we believe that we add value to the project. (If you are aware that your competitors get subcontract modifications from the prime contract, that point also should be made.) Prime Contractor Contention: What gave you the idea that it would be all right for you to use a subcontract form other than our standard company document? Subcontractor Response: Our bid was made subject to the terms of the current ConsensusDocs Form 750 (or other standard subcontract, the ASA addendum or your own addendum). It tracks closely with your prime contract document, and we’ve provided job specific information. Your printed form varies so much from the prime contract documents that it seems a lot easier to see if anything in the neutral document causes you a problem, rather than plowing through your form to make it conform to the basis of our bid. Prime Contractor Contention: What’s this attachment you have stapled to our subcontract form? I’ve glanced through it, and have a problem with some of your points. Subcontractor Response: The attachment contains the clarifications that we consider necessary to address conflicts, loose ends and inequities in the subcontract. I suggest that we go through the points one at a time. Our aim is a level-playing field subcontract that is consistent with the prime contract document that you have included in our subcontract by reference. We can understand why your form has some tough provisions, since you deal with some marginal outfits from time to time. However, those are not appropriate for a responsible company such as ours. We respect your company, and want to establish a good working relationship both for this job and the future. Prime Contractor Contention: I don’t have time to go through your proposed terms right now, but we’ll react to those when we get around to it. Subcontractor Response: We’ll be proceeding based on our clarifications to the standard terms until we hear from you. If you have questions or problems with any of the points, please call us promptly. We’ll be unable to start jobsite work until we have a signed subcontract with mutually-acceptable terms.

Methods for Modifying Unacceptable Subcontract Terms A subcontractor has many ways to confirm modification to a prime contractor’s subcontract form to make the subcontract terms mutually acceptable. In choosing which method to use, a subcontractor must take into consideration the preferences of both parties. For example, a subcontractor might prefer to use an acknowledgement letter, whereas the prime contractor may insist on issuing a subcontract rider to accomplish any modification. Often, using a jointly-negotiated rider that incorporates most of the points contained in the subcontractor’s acknowledgement may satisfy both parties.

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A subcontractor should be familiar with the various methods for reacting to unacceptable subcontract terms, as well as the advantages and considerations involved in using each method. That way, the subcontractor is prepared to adapt to the needs and desires of the prime contractor in confirming subcontract negotiations. A subcontractor may choose different methods to counter inequitable contract terms:  Subcontract acknowledgement.  Subcontract rider or addendum.  Substitution of a neutral document.  Marked-up subcontract form. Because of the legal implications, a subcontractor may wish to consult occasionally with its attorney about the wording that is used and the methods that are chosen for incorporation as part of the subcontract agreements. Subcontract Acknowledgement An acknowledgement letter or form may be used to confirm subcontract modifications. An acknowledgement letter generally makes specific reference to each unsatisfactory provision in the prime contractor’s document. It also provides appropriate clarification, such as: “In lieu of Article 6, substitute: “The Subcontractor agrees to waive its lien rights applying to materials delivered and work performed only to the extent for which payment has been received applying to such material and work.” The preparation of an acknowledgement letter can be facilitated by having standard wording ready for repetitive responses, such as the above example. Some subcontractors have several variations available for each topic to provide flexibility. A subcontractor may find it practical to address several unacceptable subcontract terms through a single clarification, such as: “Notwithstanding anything to the contrary, and in lieu of the payment terms contained in the subcontract form, Subcontractor shall be entitled to prompt monthly payments for the value of material delivered and work performed. These monthly payments shall be conditioned on Owner payment to Contractor only to the extent moneys withheld by the Owner is due to some deficiency of the Subcontractor’s Work. Retainage shall not exceed the percentage currently being retained by the Owner with respect to the Subcontractor’s material and work. Final payment shall be due upon acceptance of the Subcontractor’s Work.” Other items frequently included in a subcontract acknowledgement form are:  Entitlement to time extensions for delays beyond the subcontractor’s reasonable control.  The right to stop work for nonpayment.

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 A disclaimer of liability for bodily injury or property damage except to the extent of losses caused by the subcontractor.  A disclaimer of all consequential damages. The last item is particularly important because subcontractors can be held liable for consequential damages if the subcontractor does not address this subject and if there is no disclaimer, such as “in no event shall subcontractor be liable for consequential damages.” A subcontractor should exercise certain precautions when using an acknowledgement letters or forms to obtain subcontract modifications. Words such as those shown below should be entered above the subcontractor’s signature on the subcontract form. “Acceptance conditioned on clarifications contained in the attached acknowledgement.” Without this step, the prime contractor might later claim that it was unaware of any subcontract clarifications. Each subcontractor acknowledgement letter or form should contain a space for signature by the prime contractor to confirm its agreement to the subcontract clarifications. In addition, the following wording generally is included on acknowledgement forms or incorporated in the text of acknowledgement letters: “Your agreement herewith shall be evidenced by your signature hereon or by any directive to us to commence work on the project.” If the prime contractor fails to sign and return the acknowledgement document but instructs the subcontractor to begin work, the acknowledgement then becomes binding. The subcontractor should be sure that clarifications and subcontract language modifications contained in an acknowledgement letter or form takes precedence over inconsistent terms in the prime contractor’s subcontract form or other contract documents. This usually is accomplished by including the following wording in the acknowledgement document: “The clarifications and changes contained herein shall supersede any conflicting terms in the subcontract or any other contract documents.” A prime contractor may mark up the acknowledgement document to accept certain items and to reject others. At that point, the subcontractor may elect to: 1) Initiate person-to-person negotiations with the prime contractor about any items at issue. 2) Prepare a revised acknowledgement that considers the objections raised by the prime contractor.

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Subcontract Rider or Addendum Subcontractor-Initiated A subcontractor also may want to use a standard addendum form, such as the one published by ASA as part of its Subcontract Documents Suite. If so, the subcontractor should follow the same steps discussed earlier in this white paper for acknowledgement documents. The following may be inserted in or near the subcontractor’s signature space on the subcontract form. “The addendum dated _________ attached hereto is incorporated into and made a part of this subcontract and together they represent the subcontract agreement. In the event of any conflict between the terms of the addendum and this subcontract, the terms of the addendum shall govern.” The addendum technique also can be used to make the subcontractor’s proposal form an addendum to the subcontract. However, that practice is not recommended unless a subcontractor’s proposal addresses practically every issue of concern to the subcontractor. A better approach is to identify and react to unacceptable subcontract terms individually by using the proposal language to the extent practical. Prime Contractor-Initiated Some large prime contractors require that any subcontract modifications be worded by them and attached as a subcontract rider. Thus, following negotiation of terms, a subcontractor must be vigilant to assure that all agreed-upon modifications, clarifications and amplifications are stated appropriately by the prime contractor in its rider. If not, the subcontractor should resume negotiations for revisions to the rider. Substitution of a Neutral Document A subcontractor may wish to achieve equitable subcontract terms by substitution of an industry standard form, such as the ConsensusDocs Form 750. The current ConsensusDocs Form 750 represents language developed with the goal of being equitable both to prime contractors and subcontractors. A major advantage of this approach is that many prime contractors do not feel threatened by neutral subcontract terms. They may prefer to sign a Form 750 rather than spend a lot of time trying to defend their own subcontract form. A subcontract that wants to use this method may simply transfer project-specific information from the prime contractor’s subcontract to the ConsensusDocs Form 750 by making entries in blank spaces available on the form to identify the parties, describe the scope and schedule information, subcontract sum and similar facts. The subcontractor then signs the form and delivers it to the prime contractor in lieu of the prime contractor’s subcontract document.

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Sometimes a prime contractor may demand certain changes to the ConsensusDocs Form 750 before signing the form. A subcontractor may want to resist such demands because each change tends to defeat the purpose of a document carefully designed to be fair to both parties. However, even if commercial considerations dictate making some limited prime contractor-requested changes, the remaining terms are equitable. This is just the opposite of many unmodified prime contractor-authored terms in which it is nearly impossible to address every potentially adverse provision. Marked-Up Subcontract Form A subcontractor may find it more practical to cross out unacceptable language and insert corrected wording directly on the contractor-supplied subcontract form if only a small number of subcontract modifications are involved. Both parties should initial each change as part of the subcontract execution process. This method is not recommended for a large number of changes. The system is messy and cumbersome, at best. In addition, extra time is needed to get each item initialed by the prime contractor. The revised pages become especially messy if the prime contractor makes further changes to the wording inserted by the subcontractor.

Conclusion Subcontractors have a wide range of options available for overcoming unacceptable language in a prime contractor’s subcontract document. There is no single right way, because individual circumstances vary so much. Thus, it is important for a subcontractor to become adept at using proven techniques to deal most effectively with a prime contractor’s subcontract terms. The material contained in this white paper, when used in conjunction with other information published by ASA, gives a subcontractor the guidance needed to negotiate terms in a professional way. Proficiency comes with practice. A subcontractor can develop a comfort level by building on successes in dealing with prime contractors. Many prime contractors recognize the value of partnering and team building. The laudable goals of these programs are best achieved with equitable subcontract terms and active participation of subcontractors. Everyone benefits in the long run through agreements that foster cooperation instead of confrontation.

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