Updated contracts reduce risk

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On-again/off-again tariffs, immigration issues and rumors of supply chain disruptions and a recession make it harder to manage risk and price fluctuations. Consulting with an attorney experienced in the industry can help. The Level sat down with Hamilton Gardiner, a partner with Holmquist + Gardiner PLLC, to flag some issues that warrant your attention. -Margot Lester

What advice do you have for contractors to reduce uncertainty?

You want to make sure that the person you're contracting with is going to have the finances to pay for the job. Do they have the money? Can they make the payments? And if they're using financing, what is that financing and how are you involved with it? The reason is, money is not cheap right now. We’ve come off a 15-year high of cheap money. So payment terms and down payments are much more important than they may have been in the last decade and a half. 

Should contractors be reviewing cost escalation clauses? 

Cost escalation terms are a negotiation point with the customer. There should be a percentage threshold, say 20% or so. And something that often gets slipped up on is that if you're going to ask for an escalation, you have to show your receipts. You need to have supportive evidence, and that includes an invoice from said supplier that shows that your original cost was, let’s say, for lumber $100 and that the same lumber is now $150.  

Are we entering force majeure territory with all this upheaval?

I don’t think so. But this is a good time to review your force majeure clause. If you're going to make a change, I think it's appropriate to add in pandemics, fires and other things to make sure it encompasses the types of events that are now more of a reality, along with where and how you're doing business. You should really review your entire contract. When was the last time you looked at it? Does it match your business practices? You don't necessarily need to talk to an attorney about it. You could do it yourself—that doesn't cost you any money, just some time and effort. 

What’s a legal mistake contractors should avoid?

I understand why a lot of contractors like time-and-materials contracts. They take less effort on the front end but can lead to disputes on the back end. If you do a bad job of estimating your project, you did yourself a disservice and you're potentially looking to get sued on the back end for misrepresentation on the front end. If you're going to use time-and-materials contracts, make sure that you've done your homework, that you've done what you can to get good bids and that the customer understands what they're walking into. Make sure you can defend it. 

Why should firms work with a lawyer specializing in construction?

The construction industry involves a lot of moving parts. Not only is it a contract between the contractor and the project owner, the contractor has several different contracts with subcontractors and tradespeople. There also may be contracts with vendors and suppliers. And then there are governmental agencies which involve permitting and inspections. And one other component is the financing piece. So if an attorney doesn't have at least an understanding of all the different moving parts and involved parties, it's going to be really hard for them to properly advise their clients and give a true outlook. Understanding contracts is great, but you also have to have an understanding of the ramifications of decisions made in the contract and how those are implemented in your actual business operations as a construction contractor.

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The Level is written by Margot Lester and edited by Bianca Prieto.