Contract speak

If only contracting were as simple as Dr. Seuss: "I meant what I said and I said what I meant... ." When we overcomplicate the simple, the effect is lost. So, why then can contracts be so complicated? And, what can you do when reviewing them to better understand the terms?

Let's begin by recognizing two points. First, contracts are usually about allocating responsibility and risk. And these legal concepts are about money: money one company agrees to pay, and money another company agrees to accept as motivation for their service or products. When negotiating contracts the parties are protecting more than just words on a page; they are talking about real money.

Second, most construction contracts are written by and for lawyers. When a company asks a lawyer for a contract, it is asking that lawyer to be its advocate and protect its interests in the contract document. Lawyers tend to be good at identifying risk and negotiating its impact. As a consequence, contracts become huge, with terms covering scenarios that might arise and how the parties will address (read, pay) for them. This, in turn, leads to contracts that are more like instruction manuals than agreements to perform a service.

So, what can you do when reviewing contracts to protect your company? There is no single answer to that question. My self-interested side says, get a lawyer. Good advice, but not every client−or contract−requires formal review. The following points are good to keep in mind, and can help you better understand the obligations your company accepts when contracting.

The document, the whole document

First, ensure you have all the documents. It sounds simple, but there are key clauses in most contracts that can expand your review beyond the four corners of the "contract" you are reading. Called integration or acceptance clauses, these clauses require the signing party to accept the terms and obligations in another contract or set of documents. For example, they can require acceptance of the Owner-Architect-Developer contract(s) or the plans/specifications for work unrelated to the contract itself. From a contractor's review, these items might be skipped over because they are not related to the contract or work to be performed. However, these items can expand the risk and responsibility for a given contract beyond the usual glazing context.

An example will help: A subcontractor bids for installation of doors. A clause in the subcontract requires the installing subcontractor to accept the owner-developer contract, which the subcontractor never sees. Unbeknownst to the subcontractor, the owner wants the developer to engage in mock-up testing of all assemblies before installation. That provision never made it into the scope of work statement provided to the subcontractor. Despite that fact, when the owner halts all work until mock-up testing is complete and bills the developer for the delay, that same amount is back-charged to the subcontractor.

In this scenario, the subcontractor assumed the owner-developer contract would not impact its work. The subcontractor was wrong.

The best way to avoid this type of situation is to review all of the documents incorporated into the proposed contract. If you do not have them, ask. Only then will you know exactly what you are accepting responsibility for on a given project.

What am I looking at?

Now that you have the documents, do you know what you are reading?

For example, the following is a standard phrase in most specification books: "The Owner has a critical need for the Work to commence upon Notice to Proceed and be Substantially Complete by the Date states in the Owner-Contractor Agreement." A careful reader will note the sprinkling of capital letters throughout that sentence. These tend to be the hallmark of a defined term in most legal documents—contracts included. This means the normal meaning of words and phrases like "owner, work, notice to proceed, substantially complete, date, and Owner-Contractor Agreement," have been replaced with definitions within the agreement.

Defined terms can expand the scope beyond that of a straightforward reading. Anytime you see a defined term, you must consider all parts of its definition within the contract context, in addition to analysis of overall costs and potential tail exposure.

Time is money, my friend

There is no mystery to contract review. Accepting obligations in exchange for money is an everyday process at most companies. Problems occur when people don't take the time to ensure that the obligations are known, identified and understood. If a company rushes into a sale and starts work without defining the accompanying risks and responsibilities, it could end up losing money down the road on legal fees. The allocation of risk and responsibility is an essential step in any contractual relations; rushing or skipping steps along the way can lead to deep problems later.

Questions regarding terms and language are unique to each project and best addressed in the confines of a specific transaction. That said, let me know what terms cause your company concern and I might include them in another article. But either way, if you take the time to define the obligations in a contract and another Dr. Seuss-ism might come to light: "And will you succeed? Yes. You will, indeed! (98 and ¾ percent guaranteed.)"