Savvy Subs Pump Up Proposals

Proposals are the first chance a subcontractor gets to combat bad contract terms and maximizes its profit goals – after all, no one wants to lose money on a project! 

Most subcontractors focus primarily on identifying their scope in the proposal, which includes diligently reviewing the plans and specifications, doing a comprehensive take-off, and then carefully setting forth what’s included for their scope of work, often adding particular clarifications and exclusions.

Unfortunately, many subcontractors don’t take the opportunity to pump up that proposal with some basic, but important, terms and conditions, leveling out that playing field when it comes time to negotiate the subcontract.

So, what types of terms should you include? There are lots of them but, for now, let’s look at just three (3) very important ones that you should consider when creating the terms for your proposals:

1.    A deadline for progress payments to avoid payment delays when the Owner doesn’t pay.

2.    A deadline for payment for changed or extra work so you don’t get dragged into a long, drawn-out process waiting for the formal change order to be issued before you can bill for it.

3.    Contractor’s or Owner’s termination for convenience must allow payment for costs you’ve incurred, especially for cancelling agreements with suppliers and lower tier subs.

1.    Using a Deadline for Progress Payments

As we all know, most subcontractors include provisions that say that the Subcontractor doesn’t get paid until, or even sometimes “unless” the Contractor gets paid. While California prohibits “pay-if-paid” provisions, some states don’t. And, either way, you don’t want to fight about this during the course of construction.

By including a term in your proposal that has a payment deadline, the Contractor knows that you’re not going to agree to unfair payment terms. A reasonable provision you can add can look like the following:

Payment to Subcontractor shall be made no later than 90 days after Subcontractor submits its proper payment application to Contractor regardless of whether Contractor has received payment for Subcontractor’s work, except to the extent Contractor is not receiving payment due to Subcontractor’s failure to comply with the terms of the agreement between Contractor and Subcontractor.

2.    Ensuring Timely Payment for Changed and Extra Work.

For changed or extra work, the first hurdle is to clarify that you expect to get paid for all changed or extra work that the Contractor directs you to do regardless of how the Owner handles the situation with the Contractor.  The second hurdle is getting around having to wait for a formal change order to be issued so that you can bill for that work.

So, for the first hurdle, you can include language like the following:

Subcontractor shall be paid for all changes and additions/extras to its Work directed by Contractor regardless of whether Contractor receives payment for same.

For the second hurdle, you may want to try a provision like the following:

Contractor shall issue a formal change order for all changed or extra work directed by Contactor no later than 30 days after such work is performed by Subcontractor so that Subcontractor may bill for such work. Otherwise, Subcontractor may bill for such work in its next payment application following the expiration of such 30 days.  

3.    Getting Fair Payment for Cancellations.

An issue that has been much more prevalent since 2020 is the push to get orders placed for materials and equipment as soon as possible to better manage supply chain concerns and long-lead time items.

But what happens if there is a change in the project requirements? Or worse, what happens if the project is cancelled or your scope is reduced?

Who pays for cancelling those orders?

Almost every subcontract these days have terms that allow the Contractor to cancel without a default by Subcontractor and without any other good cause. These terms are generally known as “termination for convenience” provisions.

If you know you will be subject to cancellation charges from your suppliers once you place an order, it’s important that you put the Contractor on notice of this when you submit your proposal. Adding terms like the following can help:

Materials and equipment cancelled after the purchase orders are placed by Subcontractor are subject to cancellation charges. In the event Contractor cancels or terminates Subcontractor’s work or services for its convenience after direction to proceed or execution of the Subcontract, Contractor shall pay Subcontractor for all work performed, plus cancellation and restocking charges assessed by Subcontractor’s material suppliers, rental companies, and sub-tiers, plus a reasonable amount as determined by Subcontractor as compensation for demobilization to safe-off its work.

It makes sense that you provide a proposal believing that you’ll enter into a subcontract that has fair terms. But that is becoming less and less likely as Contractors continue to present increasingly one-sided subcontracts to their subcontractors.

Remember, the main reason you want to add terms and conditions to your proposal is to have a much stronger leg to stand on when you are negotiating the subcontract. By thinking through terms that are important to have in your subcontract, and including those terms in your proposal, you can legitimately argue that your pricing was based on having these or similar terms in the subcontract. And, most importantly, don’t forget to make sure your proposal terms are included in the Subcontract!