Two tweets touching upon subcontract negotiation dynamics jumped out at me this week. The first was from zlien founder Scott Wolfe, Jr., who linked to his recent blog post about general contractors who demand that their subcontractors sign away their lien rights:
Money quote from the post:
General contractors scream that relationships are important, but really, it’s relationships on their terms. … In reality, however, the subcontractor is likely feeling a bit abused. They accommodate because of the general contractor’s influence and contracting power.
The second tweet was from good friend and Virginia construction attorney Chris Hill, who linked to fellow Virginia attorney Juanita F. Ferguson’s piece discussing (among other things) forum selection clauses in subcontracts between out-of-state prime contractors and local subs:
Money quote from the post: “local contractors must be savvy in negotiating contracts with out-of-state companies.”
Which, in turn, begs the Friday Forum money question:
What factors impact the relative bargaining power of primes and subs when it’s time to make a deal?
The most succinct answer I’ve found to that question comes from Eugene J. Heady, an Atlanta construction attorney and co-editor and co-author of one of my favorite contract negotiation resources, Alternative Clauses to Standard Construction Contracts (Wolters Kluwer 4th ed. 2014). In his chapter covering the AIA’s Standard Form of Agreement Between Contractor and Subcontractor, Eugene identifies seven key factors affecting prime contractor-subcontractor deal making, each of which I briefly elaborate on:
1. The price difference between the subcontractor’s bid and the next competitive bidder. If the prime can turn to a competitor who has offered a similar price, the sub likely has reduced contract negotiation leverage. Much different story should the sub have some way of knowing that its price is substantially better than its competitor(s).
2. The parties’ past experiences and relationship. Subs that do top-notch work reliably and dependably have the best shot at earning repeat business, even when their quote might be higher than a competitor’s. Always performing excellent, timely work not only mitigates quality and schedule risks on the present project, it also makes the next deal with the same prime easier to acquire and negotiate.
3. Experience with the type of work involved. Bargaining power is not only a function of experiences and relationships between the parties, but also of the subcontractor’s own job history and experience. If you’re a painting sub trying to break into the drywall biz, you likely won’t have the same negotiating leverage as a well-established drywall sub. Breaking into a new trade likely means less subcontract negotiation wiggle-room.
4. The subcontractor’s backlog of other profitable work. If it’s easy for an in-demand sub to walk away, then the prime will have to be realistic about how much risk it can flow downstream.
5. The availability of qualified labor. I have a theory that as labor shortages become more acute, subs should enjoy increasing bargaining power, particularly the best-established, most-reliable subs on the largest, most time-sensitive projects.
6. The subcontractor’s reputation in the industry. See number 2 above. As I tell the subs I represent, do great work, and the rest will follow.
7. The willingness of competitors to sign the subcontract form without alteration. For some primes, compliance with their terms and conditions might be a top consideration, even if that means sacrificing on price and/or dependability. Short-sighted? Arguably. But if you’re a sub unwilling to accept a risk allocation that your competitor is willing to embrace, you might not possess as much subcontract bargaining power as you would like, even if your price is low and your track record unimpeachable.
What do you think? Are there other factors that affect contract negotiations between prime contractors and subs? Do you get the sense that the negotiation playing field is any more or less balanced than in recent years? Let your voice be heard. The Friday Forum microphone is all yours!
2 responses to “Subcontract Negotiation Is a Question of Leverage. Leverage Is a Function Of . . .”
Matt. I enjoyed this article, and appreciate your reference to our post. Working with a construction attorney who understands this stuff at the beginning of every project is really important. It’s a real challenge for companies with a high volume of work – especially in relation to Chris’ point about crossing state lines. Nevertheless, that’s a challenge that in-house counsel for these companies should be sweating full-time to meet, working on their own nationwide knowledge and with lawyers in the local jurisdictions.
Thank you for another great blog post; and, your summary of the Alternative Clauses to Standard Construction Contracts is right on the mark. Throughout the recession (and now) it appears to be a general contractors market, and it’s increasingly difficult for subcontractors to have any leverage. We always strive to work to bring the contracts into fairness by negotiating specific provisions which might make-or-break a project.