Tips for the Trade in an Owner's Market
April 29, 2015
It is an owner’s market. Competition continues to keep building costs down. This lowers margins, allowing owners to dictate job conditions and contract terms. It also leads to owners cutting out middle levels for direct contracting with trades. And, there are some issues that need to be kept in mind when dealing with owner contracts.
It seems simple, but identifying job demands is the first step. Materials and expertise are not cheap. Neither is the work to bring those things together. But owner-contracts sometimes try to stretch the bounds of what a trade brings to the job. Consider:
- A request for materials is a supply contract, and it should look that way. Yet often embedded are representations or guarantees of appropriateness for the location and compliance with codes or other prescriptive requirements. A true supply contract can disclaim project specific requirements. If it does not, then look again at what the owner is requesting.
- An assembly contract is a labor agreement, not necessarily a guarantee of system criteria. Site suitability and whether a system can meet the owner’s expectations are not always controlled by an assembler. Accepting the work of others and the ability to disclaim approval of that work will be key considerations. Assembly alone should not be turned into a guarantee of goals beyond a product’s design intent.
- Design-build contracts must establish owner expectations early in the project life and then confirm and document those expectations throughout the project. Meeting the owner’s goals is essential, but so too is meeting the owner’s purpose for the project
Match the scope of work to the contract, but also be sure to get paid. Owners are supposed to control the purse strings so securing payment would seem straightforward when contracting with them. Oftentimes it is not.
- When available, liens for materials can have an impact on owner’s property interests. Many owners will try to limit lien processes or propose alternative workarounds. Watch out for these steps. A state’s lien process is powerful leverage for trades to secure payment. Use it.
- Watch for RFI, claim, and dispute procedures. Sophisticated owners—public and private—often have specific requirements for submittal and payment contests. Failure to meet these conditions can prevent payment or delay it. Determine how these clauses will affect project fulfillment requirements and ensure compliance to help get paid in a timely fashion.
- Approval conditions are also used to delay payment. Tie payments to specific, agreed upon, project life events. Define when the obligation to pay arises and the penalty clock starts running for the failure to do so.
The most important part of being paid is keeping the money. Negotiating protections in owner contracts can be difficult because of leverage positions at the time of contracting. Even so, it can be helpful to watch for items that should be excluded as well.
- Be clear on the owner’s demands for insurance under your policies. Evaluating needed coverages demands a clear understanding of what you are bringing to the project. General Liability might not cover failure in product specification that leads to compliance issues. Understanding a contract’s insurance coverage demands is often as much about protecting yourself as it is the person demanding coverage.
- Demand clarity on indemnity requirements and document that mutual understanding. Avoid situations where the owner can demand indemnity for a suit against another trade. Keep indemnity clauses with owners limited to the work included in the contract.
- Warranty and service obligations can introduce post-completion costs that eat into profitability. These obligations often get limited attention in owner contracts but should be spelled out. Exclude warranty and ongoing service obligations if possible; set contractual deadlines for termination of the obligation as a fallback.
It is an owner’s market, but it is your signature on the contract. Contracting with an owner can offer flexibility and some degree of certainty. While it can be an educational process for an owner, it remains a contractual one. Key to every contract is knowing what is being sold, how to get promptly paid, and protecting those monies.