John Benjamin Patrick | Gordon & Rees LLP | November 11, 2016
George Orwell wrote “all animals are equal, but some animals are more equal than others.” In construction, this is plainly true. The large, multi-billion dollar prime contractor, for example, is unlikely to negotiate subcontract terms with the 7-figure concrete installer. The public agency is unlikely to negotiate design contract terms with the 10-member architectural firm who is designing a new courthouse. But these general guidelines are just that: general (not universal) guidelines (not rules). A party who fails to recognize situations where the leverage has shifted runs the risk of either killing the deal (by demanding that which it is not entitled to) or failing to get as beneficial a bargain as they are entitled to (by failing to appropriately flex their muscle). A brief review of some common situations where the situational leverage differs substantially from ordinary leverage will illustrate some issues to keep an eye out for.
A. The “Plus Factor” Subcontractor
There are times when a specific subcontractor brings a very specific and rare (or unique) advantage to a project. One example is a subcontractor who holds an SBA, MBE, WBE, DVBE, or LBE designation from the relevant government entity. The prime contractor likely achieves a monetary advantage by contracting with this certified subcontractor, and a smart certified subcontractor will leverage that advantage to bargain for better commercial terms with the prime, whether that takes the form of more money or better subcontract legal terms, or both. Another example is a subcontractor with a special (and rare) material application certification that is necessary for the project, such as a certification to apply an epoxy that is specified in the specifications (and for which a certified installer may also be specified). If the prime contractor adopts its standard, take-it-or-leave-it approach to negotiations with “plus factor” subcontractors, they may quickly find themselves talking to an empty chair. On the flip side of that coin, a “plus factor” subcontractor who accepts an “industry standard” deal is failing to avail itself of the benefits it is commercially entitled to realize.
B. The “Connected” Subcontractor
Leaving aside jokes regarding East Coast garbage hauling contracts, the fact remains that at times, a subcontractor has a special and useful connection with an important player in the project. When the design-builder is looking for a design subconsultant, the designer who has designed dozens of projects for the project owner can probably help speed and smooth the process of getting the DB design approved. The electrical subcontractor who performs direct contracts for the public owner of a project can probably help the prime contractor get submittals and test results approved quickly. These advantages are generally less clear and less well known than “plus factor” subcontractors, who enjoy a built-in, knowable, often quantifiable advantage. As such, subcontractors looking to flex this leverage need to be ready to make a convincing case that they actually HAVE the leverage—they need to sell the prime contractor on the existence of the advantage before they try to use that advantage. But subcontractors who have these sorts of connections will be in demand among every prime contractor seeking the work, and so primes would be well-advised to effectively court subcontractors who have a demonstrated, and useful, connection.
C. The “Competent” Subcontractor in a Busy Market
It seems odd to talk about a subcontractor being competent as though it was a unique advantage. But, as various cities in the U.S. experience construction booms, we can see the repetition of a common cycle. In any up-cycle, the first contractors to become fully utilized (i.e., have all their resources occupied and be unable to take on additional work) are usually the best subcontractors. The last contractors to become fully utilized are usually the newest and/or least experienced. Thus, an owner or prime contractor looking for an excellent contractor or subcontractor to work on a critical aspect of the project may find that the best-qualified candidates are not hungry enough to chase work. These “top tier” contractors will demand favorable commercial terms to work on your project, and in many cases it will be worth it to the owner or prime contractor to accede to a reasonable number of such demands.
Mel Brooks wrote, and Zero Mostel said, “when you got it, flaunt it!” When you find yourself in possession of atypical negotiating power, you are well-advised to strategically, intelligently, and effectively use that power to get a better deal. Similarly, when you find yourself negotiating with such a party, you need to realign your expectations to reflect commercial reality. Failure on either party’s part will result in both of them losing out on a deal that may be beneficial to both parties when strategically negotiated and closed.