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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