9 MSA Negotiation Fundamentals for the Owner/General Contractor
Jun 14, 2018
By Craig T. Watrous:
Here is a short list of 9 items for the owner/general contractor to consider when negotiating in its Master Services Agreements (MSAs) with subcontractors:
- Indemnifications. This is often the most heavily negotiated aspect of an MSA. There are a number of items the Owner/Prime should consider. What are the main concerns for this project? What should be covered? Some common items would be:a) requesting an indemnification from the sub for property damage and personal injury to the subcontractor and its personnel;b) indemnification for the subcontractor’s breach of the agreement and intentional misconduct;c) indemnification for intellectual property claims based on the subcontractor’s deliverables; andd) indemnification for environmental claims related to the subcontractor’s work. A duty to defend is a key element of a strong indemnification that puts the obligation in place early with the subcontractor and also helps limit out-of-pocket expenses for the owner/prime. Consider if you even want to offer mutual indemnifications, and if so, why.
- Pass-through provisions to the subcontractor’s subs. If the subcontractor is permitted to sub out its services (which should only occur upon prior written approval), then a specific provision should be created whereby the MSA’s terms with the subcontractor pass through to such sub-subs. You don’t want the third-party subcontractors to be subject to lesser standards than those of your own sub.
- Termination rights. Termination for cause should certainly be included. But with any project, the plans, financing, and permitting can all change at a moment’s notice. Immediate termination and/or suspension rights should be considered. If the project stalls, then the owner/general must retain the ability to immediately suspend/terminate its subs’ work. Work should be paid up to the termination date, and provisions should be included to ensure an orderly wind down of services so valuable work product is not lost upon the termination.
- Payment terms. Specify when normal payment for the sub’s invoices will be made, and make sure the right to dispute invoices is expressly stated. Spell out specific invoicing requirements. If an invoice is improperly submitted, the time period to pay does not begin until it is properly re-submitted. If specific documents are required for reimbursable expenses, then spell out what is included and excluded, as well as the supporting documentation required for payment. Audit rights are always recommendable, and if an audit confirms the sub made overcharges, consider adding a penalty provision with interest on the overcharges that must be paid back.
- Damages. Direct damages are a given, but also consider including the express right to take back the project from the sub, hire out its work to another capable party, and charge the amount back to the defaulting sub. All payments/invoices should be suspended until the new contractor finishes the work.
- Warranties. How long and when does the warranty period start? It should be not upon completion of the work, but upon acceptance of the work. If a warranty is enforced, then the warranty period should start over. The warranty should provide for the repair/replacement of the defective work, but also consider an ability to claw back moneys paid for the defective work. Make sure to include a time period to respond to warranties. If the subs provide any third-party goods, then make sure that all third-party warranties for such goods are assigned to the owner/general.
- Venue and jurisdiction for disputes. Where is a dispute going to take place? Spell out the location and choice of law from the beginning. Generally, the place and choice of law should be the same. It makes no sense to choose Delaware law and Colorado courts. Courts apply the law of their jurisdiction. It is impractical to ask or require a court to enforce laws of another state.
- Confidentiality. If an NDA has not been entered into during the RFP portions, then consider confidentiality provisions for the MSA. Define what is confidential, the time period for confidentiality, and specific rights of enforcement, namely permanent injunctive relief.
- Right to remove the subcontractor’s personnel. Specific designees for the sub should be included so a point of contact is established from the outset. Also, the owner/general should retain the right to request the replacement of any sub personnel who is/are not performing.
These are just a few of the key areas an owner/general should consider when negotiating its master services agreement with its subcontractors. Robust contract negotiation allows the parties to negotiate and make appropriate shifts in risks and exposure. A good MSA should be nuanced, complete, and tailored to meet the specific needs of the owner/general on the project. We hope these general ideas have been useful.
(Mallon Lonnquist Morris & Watrous, LLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado business attorney and partner at MLMW, based in Denver, Colorado. Craig regularly represents clients on both sides of master service agreements. Craig can be reached at firstname.lastname@example.org and (303) 722-2165.)