Contractors, especially subcontractors, often lack the opportunity to review the “general conditions” in their contracts until after they’ve priced the work and their bids have been accepted. These terms are by no means standard or consistent from project to project. A contract’s general conditions can radically reduce a contract’s value by imposing additional risks and obligations not taken into account when the work was first priced.
For that reason, taking the time to review and understand your contract’s general conditions is one of the best investments you can make in risk management. With that backdrop in mind, I want to share some (but not all) of the questions I ask when reviewing a contract for directional drilling work.
1. Has the entire bid or proposal been accepted, or just the price?
Bids for HDD work often consist of prices based upon a set of assumptions about the project. For instance, a contractor’s price may assume that the project’s actual subsurface conditions will not deviate significantly from what’s indicated in a geotechnical report. Bids may also include contingencies and qualifications; for example, a daily rate charged to the customer for stand-by time. But these terms are virtually meaningless if they are not expressly stated or incorporated into the signed contract.
2. Does the contract attempt to take away what has been previously given?
I look for clauses that attempt to disclaim the accuracy of any project information— especially geotechnical—previously made available to would-be contractors. Related to this and almost as problematic: contract language demanding that the contractor verify the accuracy of any geotechnical reports. If geotechnical reports are used to obtain bids that would have been higher if the reports did not exist, then disclaimers inserted into the contract amounts to dirty pool. While courts may refuse to enforce these types of clauses, it is better if the parties are on the same page when it comes to allocating the risk of the project’s subsurface conditions.
3. Are there any problem payment terms?
I look for heavy-handed payment provisions. Chief among these is the “pay-if-paid” clause. This type of provision makes a subcontractor’s right to payment for its work conditional: the subcontractor has no right to payment unless the contractor has been paid by the owner first. While these types of provisions are not always enforceable, a valid pay-if-paid clause effectively transfers the risk of an owner’s non-payment from the contractor to the subcontractor, who is generally not in a position to assess the owner’s creditworthiness or to ensure that payment is not held up because of a dispute between the owner and contractor.
4. Is the scope of work clear?
A subcontract should describe the scope of work in clear and plain terms. Any doubts about the boundaries of a contractor’s responsibilities, either express or implied, should be raised and addressed before the contract is signed.
5. What are the indemnity obligations?
Boiled down, an indemnity clause amounts to a promise to pay for the losses incurred by others. Indemnity clauses are often lengthy, legalistic, poorly written, and prone to abuse and over-reaching. It’s a good idea decipher these before the contract is signed and not wait until a dispute arises. Subcontractors should be especially wary of indemnity clauses that require them to pay for losses caused by somebody else’s negligence, or that require the purchase of an insurance policy to cover the subcontractor’s indemnity obligations. Remember, the failure to read or understand a contract is generally no defense (and indemnity clauses are among the most unreadable legal garbage you will ever come across).
6. Is the contract form suitable for horizontal directional drilling?
Many construction contracts are based on forms published by industry groups like the AIA, EJCDC, and AGC. These form contracts may include terms that make sense on more traditional construction projects, but which cause confusion when applied to directional drilling work. One example is the typical requirement that a contractor provide a warranty in connection with the materials used on the project. This makes sense when the contractor supplies its own materials. On an HDD project, however, the same clause may lead to problems, or at least what I regard as the frivolous argument that an HDD contractor must warrant the product being installed, even though this material has been supplied by someone else.
7. Does the subcontractor have a complete set of the contract documents?
Don’t underestimate the importance of this last question because many subcontractors do. Most subcontracts include “flow down” clauses that incorporate the contract between the project’s owner and general contractor. The goal is to avoid any inconsistencies between the subcontractor’s obligations to the general, on one hand, and the general’s obligations to the owner, on the other. From the contractor’s perspective, it’s a no-brainer.
From the subcontractor’s perspective, a flow-down clause brings with it a whole new set of contract terms and obligations to worry about. Still, subcontractors must must MUST insist on receiving copies of anything that governs or bears upon their work. As stated earlier, not having read or even received a document referenced in your contract will not excuse you from complying with it. Also, having a complete set of contract documents allows you to identify and resolve any inconsistencies or contradictions between documents before signing the contract.