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PCCA Journal|1
st
Quarter 2010
23
T
he pre-bid stage of a con-
struction project involves
many forms of inquiry, fact
gathering, and analysis,
all designed to determine
the digits to the left of the
decimal point in the lower right-
hand corner of the last page of the
bid form. Contractors may conduct
site investigations, review technical
specifications for the work, evalu-
ate the financial results of previous,
similar work, and solicit quotes
from subcontractors and suppliers.
But one often-overlooked aspect of
determining the appropriate price for
construction work is a review of the
terms of the construction contract.
The terms and conditions in the
contract can have a profound impact
on the costs of construction and the
payment therefor.
While a review of the proposed
contract by the contractor’s con-
struction lawyer is always advisable,
often the size of the contract may
not justify the expenditure associ-
ated with a comprehensive legal
analysis of the risks. There are,
however, certain general contract
provisions that substantially increase
a contractor’s risk and therefore
deserve special attention when
determining the appropriate price for
the work. If the job is a significant
one for the contractor, the contractor
should send the proposed contract
to its construction lawyer for review
and ultimate negotiation with the
owner.
Even in the rare case where the
owner may refuse to negotiate its
contract terms, a legal review will
alert the contractor to risks that it is
undertaking on the project so that
the price can be adjusted accord-
ingly. Those of you who have heard
me speak or have read papers I have
authored on the “art” of contract
negotiation know that I consider it a
form of risk brokering. In a perfect
world, risks would be assumed
based on who controlled the likeli-
hood of their materializing and who
could, therefore, best protect against
the risk. In other words, the finan-
cial consequences of a risk con-
trolled by an entity should be borne
by that entity and no other, and the
risk no one controls should be in-
sured against. Risks involving more
than one parties’ conduct should be
shared according to fault.
But in reality, what generally hap-
pens in contract negotiation is that
the owner attempts to shift as much
risk as possible on the contractor,
and the contractor in turn tries to
pass as much of that risk to sub-
contractors and suppliers as it can.
Consequently, savvy contractors will
review the contract terms and object
to unacceptable terms before sub-
mitting a bid. If the owner refuses to
negotiate (or is a governmental en-
tity that cannot negotiate) and if the
project’s contract terms pose greater
risk to the contractor, the contrac-
tor should expect a greater reward,
and therefore the contractor’s price
should be adjusted upward. For
example, if the contract contains
a differing site conditions clause,
the contractor may lower its price
because the contractor knows that,
should subsurface conditions differ
from those anticipated, the contrac-
tor may demand that the owner pay
the ensuing extra costs. (More about
that later in this article.) The key
here is: read the contract terms. You
cannot make intelligent decisions
without “intelligence,” which in this
case means reading the contract you
are being asked to sign.
What follows is a short list of the
more important terms and condi-
tions found in many construction
contracts and subcontracts—and
some that are implied by the courts
regardless of the language of the
contracts—to which the contractor
should at least pay attention in the
pre-bid stage of construction con-
tracting.
Flow Down Clauses
The project owner can exert its influ-
ence on contract terms between the
contractor and its subcontractors
by including a contract provision
requiring the contractor to bind its
Contract Review:
An Important but Often
Overlooked Aspect of Bidding
By Gregory T. Spalj
Legal Watch
Continued on page 24