General contractors have traditionally negotiated individual subcontracts for each new project. This allows for a great deal of flexibility to address project-specific risks and concerns. However, the benefits of this flexibility can sometimes be outweighed by the added time and expense of ongoing contract management. General contractors are increasingly moving to master agreements to reduce the time and expense of the contracting process, to promote the company’s contracting standards internally and externally, and, most importantly, to build collaborative relationships with subcontractors.
Similar to individual subcontracts, master agreements dictate the rights and obligations of each party and address critical issues such as schedule, payment, and dispute resolution. Also like traditional subcontracts, there is no one-size approach that will fit each industry and trade. Since a master agreement will apply to a large number of projects over a long period of time, care should be given to the drafting and negotiation of these agreements.
The following are just a few things general contractors and subcontractors should consider when moving to a master agreement platform.
1. How will the master agreement relate to future engagements?
Master agreements contain the terms and conditions that govern the parties’ future work. However, master agreements do not necessarily include any specific scope of work or apply to any particular project. When the parties do engage for a specific project or scope of work, this may be accomplished in a variety of ways, as outlined in the master agreement.
On one hand, the parties may agree that the terms of the master agreement apply to any work that the subcontractor performs at the direction of the general contractor, even without a subsequently-signed agreement. This may be appropriate for volume-based business, or where immediate and sometimes emergency work is more typical. Under this scenario the master agreement governs the relationship of the parties in the broadest sense, and any future bid, estimate, or proposal, is superseded by the terms of the master agreement. The aim here, is to ensure that the terms of the master agreement apply under all circumstances.
On the other hand, the master agreement may require the parties to execute a work order or some other similar document. The work order incorporates additional contract documents, or project-specific plans and specifications, and can outline project-specific requirements, including price, schedule, and insurance requirements. In either event, or if the master agreement provides some other means for future engagements, the parties must find a balance between the formality of contract formation versus the desire to ensure that the terms of the master agreement apply.
2. What is the appropriate level of detail and contingencies?
Master agreements provide the most value when they avoid revisions and negotiations on a project-by-project basis. However, it is often unrealistic to assume that no flexibility is necessary. This can be achieved in a number of ways while preserving the benefit of the master agreement. For example, the master agreement can provide a series of different payment terms depending on the value or duration of the project. It may be the case where a small project does not warrant retention or a detailed schedule of values. Depending on the industry or trade, the master agreement may utilize a set of exhibits to establish unit pricing or labor costs for future changes. Instead of modifying the agreement when the work order is issued, the master agreement can account for this and other variables, such as insurance requirements, if the parties invest the time up front to consider the most efficient and cost-effective way to do business, while also maintaining all appropriate rights. In any event, the master agreement should account for the basic variables that generally arise between the parties.
3. How will the contract documents relate?
By their nature, master agreements govern future projects that may not even be contemplated when the agreement is signed. The master agreement still must address how the future contract documents will relate to each other. At a minimum this requires a thoughtful order of precedence clause, which again, relates to how the parties want to engage. For some contractors, it is imperative that the prime contract controls in all respects, while others need the certainty of the master agreement. In other cases, where the parties will use an established work order, the work order may govern. Even relatively low-value projects may have a series of “contract documents” that need to be accounted for. Under traditional contracting this is easily accounted for because the universe of the contract documents is largely known at the time of contract. By contrast, the master agreement must anticipate future contract documents and provide appropriate protections in the event of inconsistencies or conflicts between the contract documents, including the master agreement itself.
Master agreements can significantly streamline the contracting process to save time and money. They are most beneficial in terms of both cost savings and effectiveness if the appropriate care and attention is invested upfront to ensure the document is responsive to the particular trade, general value of work, and working relationship of the parties. If done thoughtfully, both the general and subcontractor, and their ability to work efficiently together, will benefit.