An unduly burdensome contract for a roofing contractor on a job going south can put that roofer out of business. After all, it’s the contract that determines which party accepts which risks. It’s through the construction contract that a sophisticated owner or general contractor attempts to shift risks from itself to the roofing contractor. Roofers need to be aware of the risk shifting in each instance.
Among the contract provisions where the risk shifting can potentially put a roofing contractor out of business are the payment terms, the indemnity provision, the insurance requirements, and scheduling.
Also, in today’s market, a contract that puts the risk of material delivery delays or material price escalation on the roofing contractor can ruin that roofing contractor. Help is on the way, however, through suggested revisions to these provisions.
IRE 2022 Seminar Session
Title: Killer Contract Clauses
Speaker: Philip Siegel, Partner, Hendrick, Phillips, Salzman & Siegel
Date: Wednesday, Feb. 2, 9:30 a.m. to 11 a.m.
What to Avoid
With respect to payment terms, roofing contractors would be wise to avoid pay-if-paid provisions, which condition the roofing contractor’s receipt of payment from the general contractor on the general contractor’s receipt of payment from the owner, especially in those situations where the owner is withholding payment for reasons unrelated to the roofing contractor’s work. The roofing contractor should seek to avoid the risk that another trade will hold up its payment.
These provisions can and should be revised to reflect that the general contractor’s receipt of payment from the general contractor is a condition precedent to the roofing contractor’s entitlement to payment, unless the owner is withholding payment due to the general contractor or another trade.
With respect to indemnity provisions, a fair and equitably drafted indemnity clause would hold each side responsible for damages caused by their own negligence. Indeed, the AIA contract documents (equitably drafted, industry accepted contract documents) do limit the liability of the indemnitor to only those personal injury or property damages (other than to the work itself) to the extent caused by the negligence of the indemnitor. The indemnity clause to be on the lookout for is the clause that goes beyond this limit of liability.
For example, an indemnity clause that holds the roofing contractor responsible for all damages arising out of its work, regardless of cause, unless the damages are caused by the sole negligence of the indemnitee, is a typical indemnity provision where almost all of the risk is shifted to the roofing contractor. In all cases, the roofing contractor should seek to limit its liability to only those damages caused by its negligence or the negligence of those persons or entities for whose acts it may be liable. The indemnity provision should also be limited to personal injury and property damage claims, where the roofing contractor has general liability coverage.
With respect to insurance requirements, roofing contractors should look to close what is commonly known as the additional insured loophole. The additional insured loophole involves a situation where the contract contains a favorable indemnity provision, which holds the indemnitees responsible for their own negligence. The insurance requirements, however, are such that the indemnitees look to the indemnitor’s liability policies as an additional insured for coverage for that loss. The additional insured loophole can be closed by making clear within the contract that the additional insured coverage is intended to limit the coverage of the additional insureds to only those claims due to the roofing contractor’s negligence.
The schedule to which the roofing contractor is bound can also be a source of great risk, especially in those instances where the general contractor or owner retains the right to make changes to the schedule, without entitling the roofing contractor to any additional compensation, yet holding the roofing contractor responsible for alleged delays. To avoid this scenario, the roofing contractor should seek to add a clause that identifies a specific, agreed-upon minimum number of work days with conditions suitable for roofing work that the roofing contractor has to achieve substantial completion.
Roofers should also seek to add language that both obligates the general contractor or owner to consult with it before implementing any scheduling changes and compensates the roofing contractor for accelerating its work.
Lastly, with regard to issues involving material delivery delays or material price escalation, roofing contractors need to know that the typical construction project has the roofing contractor accepting the risk. The roofing contractor in today’s market should look to shift this risk back to the owner or general contractor.
While payment terms, indemnity obligations, insurance requirements, and scheduling provisions are not the only contract terms that can ruin a roofing contractor, these are the provisions on the proverbial Mount Rushmore of risk shifting contract provisions that merit special attention during a contract negotiation.