The art of contract negotiation is often overlooked when associations are contemplating hiring a contractor to provide a particular service or perform certain work.  At the beginning of the relationship, everyone is on their best behavior and thinking that all will go according to plan.  Often, boards fear insulting a contractor by pushing for a contract that protects the association and will just sign the pre-printed contract presented by the contractor.  However, pre-printed contracts prepared by contractors, and even standard industry contracts such as AIA contracts, are often drafted largely in favor of the contractor and are missing key provisions for the protection of the association.

When presented with a pre-printed or form contract from a contractor, the following are some of the top provisions to watch for and to ensure they are contained in the contract:

  • Clear provision on the type of compensation structure, such as cost plus, time and material, cost plus with guaranteed maximum price or lump sum.  Each type of compensation may have benefits to either side, and the type of compensation is often dependent on the type of work being contracted for.
  • Clear payment schedule, which includes the right of the association to withhold payments if the work is not being performed in a timely or workmanlike manner or if mechanics liens are threatened or filed.  A payment withholding provision can give an association leverage if the contractor has not paid its subcontractors and the association is facing possible mechanics liens.  It is also a handy to threaten to withhold payment to the contractor to force the contractor to get back on track with the schedule or quality of the work.
  • Termination provision that at least allows the association to terminate for cause, with a clear process to be followed in order to terminate.  Often, termination provisions are non-existent or only allow the contractor to terminate for non-payment.  The ideal termination provision would allow the association to terminate the contract with or without cause.  That is often a tough sell, in which case the termination provision should at least allow the association to terminate the contract if the contractor is failing to perform, after being given a short window of time to cure the breach.
  • Insurance provision requiring the contractor to carry general liability and workers compensation insurance.  It is important to ensure the contractor has adequate insurance in the case of damage or injury.  Otherwise, the association may be faced with a judgment proof defendant.
  • Indemnification provision that requires the contractor to indemnify the association in the event a third party is injured as a result of a negligent, willful or wanton act of the contractor.  The indemnification provision should also require the contractor to indemnify the association in the event the association has to pay a subcontractor or material supplier to avoid or release a mechanics lien.
  • Lien waiver provision that requires the contractor to provide signed lien waivers from subcontractors and suppliers prior to payment being due from the association to the contractor.
  • Attorney fee provision that entitles the prevailing party in a lawsuit over the contract to recoup its attorney fees from the losing party.  We often see associations which have good cases for breach of contract against a contractor, but the cost of bringing a lawsuit to enforce the contract is more than what the association would recover in such a lawsuit.  In such cases, if there is an attorney fee provision, the association may be more likely to pursue such claims if there is a good chance of recovering its attorney fees in the end.

As the above discussion highlights, taking the time to carefully review and negotiate pre-printed or form contracts can go a long way to protecting an association in the event the relationship with the contractor goes south.  An even more proactive approach is for the association to have a standard contract prepared in advance, which it then requires all contractors to use rather than using the contractor’s form of contract.  Either way, an ounce of prevention . . .

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