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Contract Unfair? Just Say No

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Some clients have been asking contractors to take on unnecessary risks without providing a significant reward for the risks taken. However, during these economically challenged times, I believe it is in the best interest of the construction industry to stand up for itself and refuse to sign contracts that assign risk without any benefits.

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William C. Siegel
SIEGEL

Life is full of uncertainties, and we readily take on risk every day the for benefits we receive. For example, driving a car is very risky, and every year more than 40,000 people are killed in car accidents—that’s one person every 13 minutes. Nevertheless, we choose to drive.

Similarly, businesses take on risks every day. Companies enter into contracts, hire employees and provide wellperforming products it hopes will meet customer needs. Strategically, firms have to decide what markets to serve, where to allocate capital, how to improve the brand and how to sell the products and services. If properly managed, a firm can meet these goals. But every week, businesses falter or end up bankrupt.

However, again and again, a company willingly must take these risks in order to succeed. In the construction industry, we have the opportunity to work on projects that help drive the country and deliver the highest quality of living in the world.

Despite these satisfactions, pressure is mounting on our industry to accept increased risk without any potential reward. This circumstance is neither reasonable nor fair. The industry should resist these lopsided contracts with all its might.

One good example of unreasonable risk without reward is in the area of contracts and the terms under which parties share risk.

If I have to take extraordinary risk, then I deserve a chance for potential rewards.

Contracts are crucial, but I would guess that fighting over terms is near the bottom of many to-do lists. However, contracts are critical to the success of a business. Standard client contracts—both public and private—very often have language that requires a contractor to provide indemnities for anything that might go wrong on a project, even if the contractor is not at fault in any way! That’s just the start. Unreasonable clauses regarding compensatory damages, warranties, guarantees and insurance are too common.

We must not accept onerous terms; if we do, we must demand potential rewards to compensate the risk we are taking on. When I put up resistence to clients’ demands, they say, “Your competitor firm XYZ has signed this contract.” The implication is that one should be happy just to get the work. First, I don’t believe all my competitors are signing up for bad contracts with onerous terms. Second, if I have to take additional or extraordinary risk, then I deserve a chance for potential rewards.

Many in the industry would say we carry insurance because the clients require it. True, but we also carry insurance to protect the equity of our shareholders, especially in an employee-owned firm. Even though our industry has an exceptional track record, sometimes things go wrong.

Smart Policy

While insurance is a mechanism for mitigating financial risk related to errors we might make, clients should not view our insurance policies as a catch-all mitigation for anything that may go wrong on a project. More and more, we are asked to provide greater and more encompassing insurance that will kick in even if we did nothing wrong. If a client wants a guarantee they are covered against everything, you should direct them to Lloyd’s of London, not offer up your insurance. Accepting these demands is all risk, no reward.

All clients don’t act this way; in fact, the vast majority of clients are reasonable both in their contract terms and in their insurance expectations. Further, every definition of “unreasonable” is not the same. However, the construction industry must not continue to accept bad contract language, unreasonable scopes of work and schedules, or offer up insurance coverage without a commensurate regard for the risk taken. It’s only fair.

Bill Siegel has been CEO of Kleinfelder since April 2009. He can be contacted at bsiegel@kleinfelder.com.

 

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