by Nicholas W. Schwandner, Esq., Harrison Law Group
Back in my high school football days, one particular coach loved to walk into the weight room and yell the old adage that, “proper preparation prevents poor performance.” There was an extra word in the phrase, but you know what I mean. After hearing the phrase yelled so many times, it has been burned into my brain. The adage certainly applied to football, but since then it has proven true in virtually all aspects of life including negotiations.
Proper preparation is critical in subcontract negotiations because the starting point is typically the general contractor’s standard subcontract, which was written to favor the general contractor. General contractors also have the benefit of being familiar with their own subcontract. Subcontractors, on the other hand, may need to evaluate and comply with different subcontracts on each project.
Identify the Risks
The first step in negotiation preparation is reviewing the proposed subcontract terms and comparing them to the specific project to identify which risks are present and which risks are not. For example, if the subcontract’s progress payment terms require lien waiver/release forms to be submitted with each requisition, but form is not attached, it becomes a significant risk.
General contractors will occasionally require a previously undisclosed waiver/release form that is unconditional (i.e., it may be enforceable even if payment is not received) or that imposes new obligations on the subcontractor that were not included in the subcontract (such as adding an indemnity obligation). Identifying these risks prior to executing the subcontract provides an opportunity to negotiate a fair waiver/release form before the general contractor has the leverage of withholding payment.
Another common risk is dispute provisions that require litigation to be brought in the general contractor’s home state, which may be far from the subcontractor’s headquarters. Litigating in a court that is a hundred miles away—or more—can put the subcontractor at a disadvantage for enforcing payment obligations. Identifying an unfair forum-selection clause prior to executing the subcontract allows the subcontractor to negotiate a revision so that litigation will be where the project is located, which puts the subcontractor on equal footing.
Pick Your Battles
Picking your battles wisely is a combination of choosing to negotiate provisions that actually are negotiable and that are worth negotiating. If a mechanic’s lien or payment bond claim will available on the project, the risk of nonpayment presented by a pay-if-paid clause may be reduced and the juice may not be worth the squeeze to conduct a difficult negotiation to strike the pay-if-paid clause from the subcontract. On the other hand, if payment bonds will not be available and the subcontract contains an advance waiver of lien rights that the governing jurisdiction will enforce, the general contractor may be the only entity the subcontractor can look to for payment making a negotiation to remove the pay-if-paid clause worthwhile.
A subcontractor is more likely to be successful in negotiating its subcontract if it considers the terms, project at issue, past and future business relationship with the general contractor, and then limits its requested revisions to key issues. This stage is also when the subcontractor should identify what leverage it has to demand subcontract modifications.
First a Phone Call, Then in Writing
Phone calls are a great start to negotiations. Use an opening phone call to determine if requested revisions will be agreed to or, if not, why the general contractor is resistant to a revision. A phone call is an efficient way to learn the specific basis for refusal so that it can be addressed. After the phone call, a written follow up by letter or email is advisable. Letters and emails allow the subcontractor’s arguments to be easily and accurately circulated amongst the higher-tier decision making team as well as forwarded to the project’s owner if necessary.
Written communications also facilitate setting forth the subcontractor’s reasoning instead of bare requests for revisions. It should not be assumed that the general contractor will automatically understand why a revision to the subcontract is requested. To avoid having a request cursorily denied, an explanation of the reasoning increases the chances of success because most people can be persuaded when presented with practical and legitimate reasoning.
Use Project-Specific Arguments When Available
Develop project-specific arguments for why your requested changes are appropriate. Arguing that your company should not be required to provide a bond because the project characteristics make it likely to experience significant delays, such as government projects, and that the bond will tie up a significant portion of your bonding capacity is more persuasive than an unexplained request to omit bonding.
Negotiating Tone and Style
Negotiating tone and style is largely dependent on the individual negotiator’s personality. Most effective negotiations, however, maintain a businesslike and evenhanded tone. An aggressive or heavy-handed style may occasionally work and in limited instances possibly be called for. But more often than not it causes the opposing negotiator to dig in his or her heels. No one wants to feel bullied, so a heavy-handed style risks the opposing negotiator rejecting a request, that they otherwise would have agreed to, simply to avoid the appearance of being pushed around. Tone and style has to fit the individual, but maintaining a professional posture is frequently the greatest chance of negotiation success.
Frequently Successful Arguments
There are many types of arguments that can be made in subcontract negotiations. The following, in no particular order, are arguments that tend to fit the construction industry well:
Prohibited by Law. A subcontractor can argue that certain requirements are prohibited by law. For example, in certain jurisdictions government construction projects are subject to a statutory prohibition against sole source requirements. If the specifications require that a product be used that is only available from one supplier, i.e. a sole source, the requirement may be contrary to law and the subcontractor is entitled to substitute the specified product with an equal product available from multiple sources. This argument can make competitively priced materials available.
Value Engineering. Similarly, value engineering arguments that the same quality end-product can be achieved by an alternative lower cost method are compelling.
Mutual Benefit. A subcontractor can argue that its requested revision will benefit both the subcontractor and the general contractor. For example, revising the subcontract’s scope of work addendum may clarify what services will be provided if the project’s specifications are ambiguous.
Past Success. Providing an example of a previous project where the requested revision was made and had a successful result is persuasive. This argument lessens the risk perceived by the general contractor that it will be the first to try something and the result is uncertain.
Anchoring. Anchoring, which is intentionally asking for considerably more in the opening offer than the ultimate goal, plays on the mental effect the strategy causes. A subsequent lower offer appears more reasonable by comparison to the intentionally high opening offer.
Uniformity. A subcontractor can also take the position that it’s request is reasonable because the requested change brings the subcontractor’s rights in line with the general contractor’s own rights. For example, in a negotiation to remove a lien prohibition from a subcontract, the subcontractor may argue that the general contractor’s prime contract does not include a lien prohibition, so the subcontractor is merely asking to enjoy the same protections for its business that the general contractor has.
Horse Trading. If there are multiple points of contention in a negotiation, horse trading may be effective. Agreeing to concede on one issue if the general contractor will concede on another is commonplace and a good way for both parties to walk away satisfied—or at least equally unsatisfied.
Framing. Framing is strategically describing the issue. A subcontractor can strategically describe the requested revision not as changing an unfair contract provision but rather as the need to protect its business, which is a sentiment all construction companies can identify with.
Inappropriate for a Particular Trade. Finally, a great argument is that a particular subcontract provision does not fit your particular trade. It is difficult to dispute that the site work subcontractor should not be subject to a boilerplate retainage provision that does not release retainage until the entire project is completed. A subcontract provision that in practice has one effect on the painter may appear quite unreasonable when negotiated by the site work subcontractor who will complete its work months or years before the project is completed.
These are only a few of virtually unlimited negotiation arguments. With the proper preparation of identifying risks, picking the right subcontract terms to negotiate, and then pursing the negotiation with sensible arguments, subcontracts can effectively be negotiated despite the tendency to view them as take it or leave it.
Nick Schwandner is a construction litigator at Harrison Law Group and practices in Maryland and Ohio. He represents subcontractors and contractors on public and private construction projects with a particular focus on payment-related and defective work disputes. He can be reached at (513) 284-7893 or email@example.com.