SMACNA contractors make decisions every day about risk in their personal and business lives. Risk — in simple terms — is looking at the possibility that something bad can happen on a commercial HVAC job. And potential risks can run the gamut from contract issues to jobsite accidents.
With risk, suffering a bad outcome can even mean the difference between staying in business or not.
This is why looking at risks in a more proactive way is better than reacting to situations as they occur, according to Guy Gast, retired Past President of The Waldinger Corp. — Iowa Division, a premier Midwestern MEP and truck-based service provider.
Gast shared his risk prevention strategies with SMACNA contractors at the 2023 SMACNA Annual Convention in Phoenix, Arizona.
UNDERSTANDING TYPES OF RISK
There are two types of risk: controllable and uncontrollable, Gast explains.
Predictable and controllable risks that are actively managed by processes and procedures include things like workers’ compensation, automobile accidents, rework and payments.
Unpredictable and uncontrollable risks are those that must be managed by risk transfer. Some examples include the negligence of others, consequential damages and catastrophic loss.
You typically have the following actions to take when faced with risk:
- You can accept risks for things you can control.
- You can reject risks for things you can’t control.
- You can transfer the risk.
Your goal is to balance risk and reward, Gast advises, pointing out the two most important questions to ask yourself when faced with risk:
- What is the worst thing that could happen?
- Can we accept the consequence?
BIG CONTRACT RISKS AND HOW TO MANAGE THEM
Gast reviewed some examples of risks commercial HVAC contractors face, offering solutions to help prevent them.
PAYMENT CLAUSES
These include contractor terms, such as “Pay when,” which says a general contractor can delay payment until he or she has received payment from the owner. This does not excuse the general contractor from paying a SMACNA contractor.A “Pay if” clause is when a general contractor can delay payment until he has received payment from the owner. This, unfortunately, does excuse the general contractor from paying a SMACNA contractor, Gast says, adding that language used is typically “condition precedent” or something similar.
HOW TO CONTROL THIS RISK:
- Avoid clauses that restrict ultimate rights of payment, regardless of nature. Both “if” and “when” clauses tie ultimate payment to that of another party.
- Negotiate a clause that requires payment after a reasonable period; avoid language that allows for delay tactics.
- An owner should be responsible for determining if unfair payment terms are acceptable. Never accept a “Pay if” clause.
AIA and AGC Payment Terms
In these contract terms, language will look similar to the following:
- AIA A401 (subcontract): “….or the Contractor does not receive payment for any cause which is not the fault of the Subcontractor, the Contractor shall pay the Subcontractor, on demand, a progress payment….”
- ACG ConcensusDocs 750 (subcontract): “If payment from the Owner for such Subcontract Work is not received by the Contractor, through no fault of the Subcontractor, the Contractor will make payment to the Subcontractor within a reasonable time…..”
HOW TO CONTROL THIS RISK:
- If you receive a contract with unacceptable payment terms, consider adding the following language at the end of the payment clause or contract: “Except for deficiencies in performance by Subcontractor, payment shall be made promptly, regardless of whether the Purchaser has been paid by its lender or others.”
INDEMNIFICATION CLAUSES
Indemnification clauses should be in every contract in the construction industry. An indemnification clause is a legally binding agreement between two parties specifying that one party (the indemnifying party) will compensate the other party (the indemnified party) for any losses or damages that may arise from a particular event or circumstance.
There are three types of indemnification clauses: broad form, intermediate form, and limited/narrow form.
HOW TO CONTROL THIS RISK:
With indemnity, you’re looking for:
- Fair risk for the reward.
- Responsibility for our own mistakes.
- Controllable risks.
- No more than intermediate indemnity clauses.
What you don’t want:
- Consequential damages.
- Sole negligence of others.
- To become a property/casualty insurer.
- Responsibility for design errors/omissions.
- Broad form indemnity clauses.
MISMANAGING CONTRACTS CAN BRING BIG RISKS
When it comes to contracts, Gast says there are numerous risks that can crop up. The goal: “Avoid surprises,” he says. “Call the other party and ask questions about the contract terms. The worst that can happen is you don’t get an answer.”
Stick to some best practices, he suggests. Start by reaching out to discuss the contract terms. Then after talking through it, put it in writing and explain the whys. “Remember to walk in their shoes as you’re reviewing contract terms to ensure you’re being fair,” Gast advises.
The biggest mistakes that happen with negotiating contracts include:
- Failure to act in a timely manner.
- Lack of a plan for navigating the negotiation.
- Inability to explain why you want a change in terms.
- Failure to consider the customer’s interests.
- Failure to be patient.
- Failure to identify the risks/qualify the bid during the bidding process.
- Failure to accept fair risk.
- Failure to obtain and review all the documents.
- Failure to identify coverage for your work.
- Failure to restrict exposure to consequential damages.
- Not asking yourself: What’s the worst that can happen? Can we accept the consequences?
OTHER FREQUENT RISKS
In addition to contract issues, the most frequent risks Gast says SMACNA contractors should watch for on commercial HVAC jobs include:
- Estimating errors or judgments.
- Failure to succeed on change orders.
- Rework.
- Schedule-related damages.
- Labor overruns and mismanagement.
