20 tips for better contracts in structural fabrication

How can surprises be avoided down the construction value chain? More thorough contracts. Getty Images

Structural fabricators work toward the same goal as everyone else in metal fabrication, from precision sheet metal to heavy industrial fab: to achieve flow. Steel should arrive, flow through beam processers and copers and welding stations, then off to the job site for erection. But unlike metal fabricators serving OEMs, structural fabricators serve a complex web of suppliers, contractors, and subcontractors that make up the steel construction business.

Even with high velocity between the receiving and loading dock, all made possible by the latest and greatest automation, a fab shop won’t have stellar cash flow if customers don’t pay or subcontractors don’t fulfill their promises. When that happens, Angela Richie often gets a call.

A Louisville, Ky.-based partner at Gordon Rees Scully Mansukhani, Richie co-chairs the firm’s construction practice group and is a frequent presenter at industry conferences, including those hosted by the American Institute of Steel Construction (AISC), regional steel fabricator association meetings such as the Southern Association of Steel Fabricators (SASF) and the Virginia Carolina Association of Steel Fabricators (VCSSFA).

During a 2019 presentation at AISC’s NASCC: The Steel Conference, held in St. Louis, Mo., Richie made an odd statement for a lawyer: “If you end up having to call your lawyer, that costs you money, right?” So how does a fab shop eliminate or at least minimize the need to call lawyers? “You eliminate the argument,” she said.

OK, so how do fabricators do this? They pay attention to the links that can either foster or destroy smooth workflow among different parties involved in structural steel construction. They pay attention to contracts, both upstream (such as the agreement to the general contractor) and downstream (detailers, connection engineers, subcontracted fabricators, painters, erectors).

“If you are using a single-page purchase order for your subcontracts, we need to fix that,” Richie said. “It’s for your own protection.”

A structural fabricator need not reinvent the wheel with every new business relationship. The same or at least similar elements can be used for every contract with a detailer, connection engineer, painter, erector, or anyone else downstream in the contract chain.

To that end, Richie described 20 elements that make up the foundation of a solid contract between a structural fabricator and its downstream vendors. It’s not an exhaustive list, of course, and individual circumstances can vary. Regardless, good contracts minimize disputes and, ideally, those costly calls to lawyers.

1. Subcontracts should mirror a fabricator’s obligations to the owner or general contractor. When it comes to the actual steel members and connections, when detailers, connection engineers, fabricators, and erectors are all on the same page, the work flows seamlessly from one party to the next. Similarly, when contracts among all the parties have obligations that mirror each other, the flow of work continues without disagreements.

Richie calls these “flow down terms,” which can include things like schedules, change orders, delays and damages, insurance, inspection requirements, dispute resolution, and retainage (that is, money held back until the construction job is complete).

Angela Richie is a partner and co-chair of Gordon Rees Scully Mansukhani LLP’s construction practice. She is a frequent speaker at construction industry events, including those hosted by regional structural steel fabricator association groups nationwide.

In fact, retainage is a classic “flow down” example that Richie uses: The amount and release date of retainages should be the same from the prime contractor through the structural fabricator and subcontractor. That amount can change depending on the state; certain state laws require retainage to be reduced by a certain amount as a construction job progresses. Regardless, the contract terms should flow down to all parties involved.

“Your subcontractor agreements need to mirror what is in your steel fabricator agreement,” she said, adding that lower-dollar-value subcontracts could simply use an “incorporation by reference,” which incorporates a second document into the contract (in this case, the structural fabricator’s upstream contract with the GC or owner) by simply mentioning it.

“But for a higher-dollar-value contract is—say, it’s a $50 million or a $100 million agreement—you may need to take some more time with your contracts to make sure you’re flowing down the appropriate terms,” Richie said.

She mentioned a recent case in which a subcontracted fabricator demanded more money for work it performed because of certain inspection requirements, a year after the work was complete. “We had to argue that the contract incorporated [through “incorporated by reference”] certain inspection requirements, therefore you are bound by those,” Richie said. “Any time you have to hire a lawyer to argue over those things, it costs you money. We need to make it clear, whatever you’re bound by, your subfabricator is going to be bound by.”

If the contract had spelled out the inspection requirements clearly, not just incorporated by reference, the dispute wouldn’t have escalated and lawyers probably wouldn’t have gotten involved.

2. Never include a vendor’s proposal. Richie mentioned that fabricators should not include the subcontractor’s proposal in the downstream contract. “The subcontractor might include a lot of contract terms that could conflict with your standard contract. You can copy and paste [into your contract] the scope of work and exclusion sections, if you agree with them. But don’t just add their [entire proposal]. Otherwise you create conflict, and whenever you create conflict, you create money for lawyers.”

The contract between a structural fabricator and its vendors should clearly state that it constitutes the entire agreement between the two parties. “Any additional provisions contained in proposals or other communications go out the window,” Richie said. “They’re meaningless.”

3. A job begun is a contract signed. Richie described several instances in which erectors didn’t sign a contract, started the job, then halfway through claimed they weren’t bound by a schedule because they never signed the contract. Lawyers got involved and costs mounted.

“Your contract needs to say that, in the event your subcontractor [like an erector] is given notice to proceed, and they proceed to do the work, they are bound by the terms of the contract,” Richie said. “But here’s the key: You must make sure you get your agreement to your downstream vendor before they start the work. Such agreements should be a standard part of your RFP [request for proposal] packages.”

4. Subcontractors must be bound to your schedule. As Richie put it, “If your subfabricator does not get the steel to the job site on time, what’s the builder or construction manager going to be yelling to you about? He’ll be yelling, ‘Where’s my steel?’”

5. Include the AISC Code of Standard Practice for Buildings and Bridges in the contract. “And don’t forget to check which edition is specified,” Richie said. “If none is specified, please issue an RFI [request for information]. And do it in the beginning. If no one tells you, specify the current edition.”

6. Define the scope of work specifically. Fabricators can use standard scope-of-work verbiage for all contracts of a specific type of service (one for detailers, another for connection engineering, another for erectors), but the verbiage still needs to be specific. For instance, a detailer might receive a contract from a fabricator that spells out the scope of work in “detailing structural steel,” “detailing miscellaneous metals,” “stair and handrail calculations,” and “complete stair and handrail design.” The verbiage is standard yet specific. It doesn’t just say “detailing services.”

Such specificity applies to upstream contracts too. If, say, a fabricator offers in-house connection design services, “you want to make sure your contract states ‘connection design,’” Richie said. “The same goes for stair and handrail design. Make sure you don’t just use the generic word ‘design.’”

7. Change orders: The subcontractor is bound as the fabricator is bound. Construction is awash with change orders. Richie recalled one structural fabricator that dealt with more than 1,700 of them for a single construction project. Structural fabricators agree in their contract with the GC to be compensated for change orders fairly for the additional effort. This can include both an adjusted price and delivery date.

The specifics of that agreement should then be included in (as Richie put it, “flow down” to) the subcontractor agreements. This might not apply in every instance, such as when a structural fabricator’s mistake requires it to issue a change order to the subcontractor. But in most cases, change orders should compensate everyone in the contract chain in an identical fashion.

Here again, specifics can eliminate later disputes. For instance, Richie described contract language that states, “This change order includes compensation to the subcontractor for all work arising out of this change order, including any and all effects, delays, impacts, inefficiencies, or similar demands associated with this project, and the subcontractor recognizes that there is no basis for any such claim in the future.”

Richie described instances in which erectors or subcontract fabricators claim, well after the job is completed, that the change-order compensation they previously received accounted only for direct costs, not indirect costs or other impacts. Including such specifics in the initial contract ensures everyone is on the same page during the job and, as Richie put it, “nips these kinds of disputes in the bud.” She added that such language in the contract spurs everyone to “wrap up and resolve all claims at the time of the job.”

8. Include a duty to proceed with disputed work. A fabricator’s upstream contracts likely include this, and so should a fabricator’s subcontracts. Though, if possible, the contract should separate “disputed work” from “undisputed work,” and state that even though some work might be disputed, the fabricator still owes the subcontractor compensation for the undisputed work.

9. Only pay if paid. In a perfect world where every company paid its bills predictably and reliably, a structural fabricator wouldn’t need to pay its subcontractor until the fabricator receives payment from the GC or other prime contractor. (To translate into legalese, the payment to the subcontractor shall be a “condition precedent” for payment to the steel fabricator.)

Of course, the world isn’t perfect. Richie conceded that some subcontractors won’t agree to the pay-if-paid provision. But many times, structural fabricators must agree to such a provision in upstream agreements; that is, the GC doesn’t pay the fabricator until the owner pays the GC. In these cases, it’s always ideal to flow down that pay-if-paid provision to subcontractor agreements.

“If you don’t,” Richie said, “you need to be prepared to finance the job.” That is, the structural fabricator must be able to pay its subcontractor even if it hasn’t received payment from the GC.

10. Watch for the right to stop work. “We need our vendors to keep working pending resolution of claims,” Richie said, adding that contracts should have language that makes this requirement crystal clear.

11. Include “time is of the essence.” This phrase has become even more important as the labor shortage has plagued the construction supply chain, including erectors. As Richie explained, “If you don’t include those words, a court might look at a case and say that [subcontractors] should be allowed to perform work ‘within a reasonable period of time,’ whether you gave them a schedule or not.

“We need to make sure we tie our erector to a schedule and that they’re going to meet it,” Richie continued, adding that often specifics like crew sizes and resourcing strategies are added to the contract language. Having these details in the contract upfront helps catch issues early, including erector defaults. “These erector defaults are so expensive. One of our clients had an erector that simply walked off the job site.”

Scrambling to find another erector cost the job an extra $400,000 than what was in the original contract. “Luckily, my client required its downstream erector to provide a performance bond. That saved us,” Richie said. “If an erector is bondable, that means a surety has come in to ensure the firm is financially viable. If you take a risk with an erector that offers a very low bid, you need to make sure you have the ability to recover.”

12. Damages: Aim to be made whole. Parties to a contract should be able to collect damages to be made whole, not to penalize poor performance. This applies to liquidated damages, a term used in contracts when actual damages are difficult to ascertain. “Subcontractors need to be responsible for the portion [of damages] that they caused,” Richie said. “That’s what’s fair.”

So what about damages for delays? This can get a bit complicated. Many contracts between GCs and structural fabricators state that fabricators aren’t entitled to damages related to delays. This can be fine to accept, Richie said, but ideally, the fabricator should add a sentence that allows the recovery of costs associated with acceleration.

“To the extent that you are accelerated, you are entitled to your acceleration costs,” Richie said. “If your shop schedule is delayed and you’re given an appropriate extension, you’re fine most of the time. You can mitigate those costs. But if you have a six-month fabrication window and now they’ve given you three, that’s what hurts, and that’s what costs money. That’s acceleration. So if you see this clause, modify it to add this acceleration component. And if they’re smart, your downstream vendors will add it to their contract too.”

13. Make your contracts searchable and watch for indemnity agreements. Contracts ideally should be in the form of searchable PDFs or similar files. “When they are,” Richie said, “you can search for ‘indemni.’” That should find words like “indemnity” and “indemnify.”

“Look at your upstream contracts to see what indemnification they have put on you,” she said, “and you always need to make sure you limit it to the extent of your negligence. Downstream, if you include indemnification language, it’s OK to limit that to the extent of your negligence as well.”

14. Watch for the levels of insurance required. When requiring insurance, get copies of the policies or certificates of coverage. Richie has stories to share about subcontractors lacking sufficient coverage to cover property damage. “Check your upstream agreement and look at the levels of insurance required,” Richie said. “Are your downstream vendors required to have certain dollar values in them? If so, make sure you flow that down.”

In typical cases, the subcontractor’s insurance should match the steel fabricator’s required level of insurance—typically $1 million. “However, if you take on a high-risk job, do not leave your insurance levels at $1 million. You need to increase your levels.”

15. Watch your warranties. This can include anything from fireproofing to paint suppliers. “Make sure in your downstream agreements, you are not limited to manufacturer warranties,” Richie said, “especially for paint, fireproofing, and other products you apply to your steel.”

16. Watch for terminate-for-convenience clauses. These days, some contracts are stating that if a GC terminates a fabricator for convenience, “they will only pay your actual costs,” Richie said. “No profit, and no overhead. You must modify that. They might pay you for time and materials, and if they do, you need to track that for the job.”

For downstream contracts, Richie advised that if terminated for convenience, subcontractors should be paid for the work they already performed, including their profit and overhead, along with standard demobilization costs—but no more.

She added, however, that fabricators should not terminate subcontractors for convenience “just to alleviate a fight, and then sue them later for all the damages they caused. In certain states and jurisdictions, terminating a subcontractor for convenience, you have waived all breach-of-contract claims against them.” For this reason, Richie suggested adding a “non-waiver of claims” clause that states a termination for convenience doesn’t relieve subcontractors from correcting defective or otherwise nonconforming work.

17. Agree to mediate, then arbitrate. If a contract doesn’t specify an agreement to mediate and (if necessary) arbitrate, then if a dispute arises, you need to litigate—which, of course, is far costlier and time-consuming.

18. Who owns what work? Structural fabricators’ upstream contracts to GCs usually include work-for-hire language, meaning that the GC owns any work the fab shop performs for the job. This same language should flow down to subcontracts, especially detailing and connection engineering. As Richie explained, “If the detailer’s contract doesn’t have a work-for-hire clause and the detailer completes the work, guess who owns it? The detailer.

“Just because you have a contract with someone for engineering services doesn’t mean you own what’s produced. The only way you get to own their work is if you have a work-for-hire clause in the agreement. Moreover, you can’t transfer the ownership upstream in your agreements with the GC. That puts you in breach of contract.”

19. Don’t forget about immigration law. “ICE raids do happen,” Richie said. “One of my clients had half their operation taken. You need to check your I-9 compliance, not only in your fab shops but also at your downstream vendors, especially your erector.”

She added that subcontracts should specify what compliance is needed, including specific documents workers need to carry. Not all green cards are the same. “Read the contract carefully, and make sure you have the right paperwork.”

20. Pay attention to lien waivers. Richie never advises signing advanced lien waivers, which waive structural fabricators’ right to file a lien against the property in the event they don’t receive payment. But if they do sign an advanced lien waiver, “they need to flow that down,” she said. That is, subcontractors should also agree to lien waivers.

Lien waivers downstream to subcontractors ideally should waive all claims, including pending change-order claims through a specific date. The only exclusions would be any unpaid contract balance the structural fabricator owes the subcontractor, as well as the retainage. Subcontractor lien waivers that Richie uses actually list the open amounts for specific change orders and other items.

“I’m trying to be fair,” Richie said, “but also, do you want to be surprised at the end of a job with $1 million in claims? Your time to resolve claims is during the job. You don’t want to be surprised after the fact.”

Avoiding surprises after the fact pretty much sums up the purpose of having thorough, fair contracts that collectively facilitate smooth flow of work and payments up and down the construction value chain. When a poor contract hinders that flow, even the busiest fab shop can fall on hard financial times.

This article is for general informational purposes only. It does not, and is not intended to, constitute legal advice.