Top 5 Risky Contract Clauses Every Contractor Must Know – with Eliot Wagonheim

Rishi Srivastava (00:00)
Welcome to the finance at the job site podcast. I’m your host Rishi Sivastava from Being Human. Today our guest is Elliot Wagenheim from First Rule Contract Manager. Elliot, welcome.

Eliot Wagonheim (00:14)
Thank you. Thank you for having me.

Rishi Srivastava (00:16)
I’ll let the first section we have is on your background and career journey. What first pulled you toward contract law and construction and how has that path evolved into first rule contract manager?

Eliot Wagonheim (00:32)
So it goes back to the beginning of my career, and I’ve been an attorney for 38 years, so it goes back quite a ways. But I joined a firm and they had one construction client. But it was a small firm and they didn’t know anything about construction. So they sent me out as this young 24-year-old who knew nothing about construction to visit with the owner of the construction company.

Rishi Srivastava (00:52)
Mm-hmm.

Eliot Wagonheim (00:55)
I came back and the owner of the construction company called the senior partner and said, look, Elliot doesn’t know anything about construction. But I like him. So I’ll let him work on all of the stuff. I’ll teach him everything he needs to know about construction, except when you send the bills, I’m only going to pay for the time that I think an experienced construction attorney would take.

Rishi Srivastava (01:02)
Mm-hmm.

Hmm.

Eliot Wagonheim (01:16)
Senior

part of my firm said okay because it was a big client and the client would have walked unless they did that so in the years since then I’ll give you one example we had a large case where I represented that general contractor and You know how the money flows obviously you’ve got the owner to the general contractor and to all the subcontractors So I represented the general and there were 144 unpaid subcontractors and so there were 144 mechanics liens all

Rishi Srivastava (01:30)
Mm-hmm.

Mm-hmm.

Eliot Wagonheim (01:46)
Solidated into that one case so Because I was counsel for the general contractor I got to know all of those contractors and you know after that case was over some of them called me and said can I represent them and it kind of builds and that’s that’s really how I became construction focused because of that one client and I got to know the construction community and began work

with construction contractors of all sizes all trades and so the second part of your question how I got involved in first rule one of the things I noticed in being a construction lawyer

Rishi Srivastava (02:22)
Mm-hmm.

Eliot Wagonheim (02:22)
is that lawyers tend to be a lot like flowers at a funeral. They always arrive a little bit too late to do any good, you know? And I didn’t like that. I didn’t like the fact that so many of my clients called me after they had already gotten themselves into trouble. And I didn’t like the fact that I would be sitting there in a conference room thinking to myself as we prepared for arbitration or litigation. Gee.

Here’s what I wish my clients would have done before they needed to call me.

Rishi Srivastava (02:50)
Thank you.

Eliot Wagonheim (02:51)
So I started doing contract training, training in revising, reviewing contracts, training in negotiation, training in project communication. And that kind of grew. named it Wagenheim University, and that grew into First World Contract Training. And then I got involved with Crow, a company that was actually using its own proprietary AI, and they wanted to come out with a

product

to do risk analysis on construction contracts. So their team asked me to come in and teach their AI construction law.

Rishi Srivastava (03:24)
Mm-hmm.

Eliot Wagonheim (03:25)
So

I did that and then we spun that out of Crow. So we have their contract manager became first rule contract manager and it is a cutting edge AI tool to do risk analysis for contractors on all manner of construction contracts. We combine that with the contract training and that became first rule contract manager corporation.

Rishi Srivastava (03:45)
Yeah, I like the idea of not being reactionary, know being proactive law in my view most of the time is reactive right things have already happened You know, some people are in trouble. There’s a conflict and you guys are coming and resolving it in some ways

Eliot Wagonheim (03:56)
Yeah.

It is.

It’s very reactive. a lot of the time, you’re trained, the way you’re trained as a litigator is to play the cards you’re dealt, which means that your client already signed the contract, your client already sent these emails, your client already set off a number of landmines. And now you have to play those cards as a litigator and try to get the best result for the client. But the better way to do it is to show them a map of the mine.

Rishi Srivastava (04:10)
Mm-hmm.

Eliot Wagonheim (04:27)
field so that they can avoid the mines in the first place. And they don’t have to pay you hundreds and hundreds of dollars an hour to get them out of trouble because there was no trouble to get into. So that’s really, I like that so much better because you’re rowing in the same direction as your clients. When I was a young litigator, one time a judge told me that he knows that he did a really good job if both sides are upset.

Rishi Srivastava (04:35)
Meow.

Mm-hmm.

Eliot Wagonheim (04:51)
you know, because he kind of did something in the middle. And that’s true if you’re a judge or what you can expect from litigation. But it’s just mentally exhausting and somewhat demoralizing to know that the best you can do for your client in litigation anyway is to make sure that they’re upset less than the other guy.

Rishi Srivastava (05:01)
Mm-hmm.

Eliot Wagonheim (05:11)
You know, it’s so much better if they’re just happy with what happens. That means you help build their business and avoid problems. So that’s why I like First Rule.

Rishi Srivastava (05:11)
Thank

right. Next thing I have for you is you’ve trained in improv and taught public speaking. I’ll have those skills shaped the way you negotiate and litigate.

Eliot Wagonheim (05:30)
So the improv, I really thought would be fun and I was scared to try it and my wife was tired of hearing me wonder what it would be like and chicken out all the time so she actually sent in the application for me and then I began training and performing an improv and I didn’t think that had anything to do with my career. I just thought it was kind of a side hobby the way some people do woodworking or whatever. But I realized it had like everything to do with it.

Because to give you an example, one of the first rules of improv comedy is to accept. It’s yes and accept what the other side is saying and then build on that. To give you an example, let’s say that you have in a typical improv, you’ve got an empty stage, no props. You got two people on the stage. And one of them, they’re just standing there side by side. And one of them says, look out, the volcano is about to explode.

Rishi Srivastava (05:56)
Mm-hmm.

Yes.

Eliot Wagonheim (06:20)
Now, if the other one says, don’t see a volcano, the scene dies. You know, because it’s like yes, no, and the scene dies. But if the other one says, yeah, and the lava’s gonna inundate that puppy orphanage at the bottom of the hill, because I guess in my world, puppies live in orphanages or something, it doesn’t matter, but the scene lives.

Rishi Srivastava (06:40)
Thank

Eliot Wagonheim (06:42)
And when you apply that to negotiation, if you say, for example, you really want liquidated damages, you want to be able to charge liquidated damages against my company if we’re late in delivering the project, and I don’t want them, or I want to negotiate something about making it less likely that you’ll assess them. If I just say to you, Rishi, I don’t want this. Take it out.

Rishi Srivastava (07:05)
Thank

Eliot Wagonheim (07:06)
Well then we’re at that yes-no stage. You know, you might say, look, I have it in my contract for a reason I’m not taking it out.

But the more fruitful conversation is to use that rule of improv, the yes and, to say, look, Rishi, I get that you have to hold me accountable. I agree with that. You have a deadline. Your client has a deadline. You’ve got to, I don’t know, have the kids in the classrooms by Labor Day, or you’ve got to have the patients in the new hospital, or whatever you have to do. So I get you have to hold me accountable. But here’s my issue. I don’t want to have these liquidated damages

Rishi Srivastava (07:20)
Bye.

Eliot Wagonheim (07:39)
against me if the delay isn’t something I could control, if the delay isn’t my fault. And see, just in that kind of conversation, it’ll lead to something more productive. It generally does because the first thing that I did was accept what you were saying, accept the reason that you had these liquidated damages in there for a reason, and the best way for me to make sure that you hear me and my concerns is to first show

you that I hear you and I understand your concerns. And that’s really a rule that I learned in negotiation but it was brought into very sharp contrast in improv comedy. Public speaking is very much the same way in that if I get up on stage and I just start talking about

where I went to college and what my life goals are and all that stuff. You probably won’t really care all that much. know, what makes you care, what makes you as a person or an audience care is if…

I talk about you, if I understand your needs, if I structure what I’m saying to address what’s important to you. And then you start to sit up and you say, okay, well he understands it, I’m going to get something out of it because you’re giving me the most important gift of the most scarce resource you have, which is time.

So in order to be worthy of that, in order to make you not regret giving me your time, I really have to honor you and think about what would be important to you, what would be of value to you. And that’s what I learned most strongly from improv comedy and also from my public speaking coaching and training background.

Rishi Srivastava (09:20)
Very interesting combining improv and public speaking with law. Next thing I have for you is after decades of working with billions of dollars in contracts, what perspective do you have now that you wish you had early you had had early in your career?

Eliot Wagonheim (09:37)
I like that question. You know what you learn? I think it’s not just as a construction lawyer but as somebody that deals with contracts a lot, know there are risk managers or CFOs out there that deal with contracts a lot. I think you get a sense of what you can absolutely reject. What’s the deal breaker? Then what don’t you like but you can accept if you massage it a little bit.

what don’t you like but you can accept and what do you want and here’s what i mean by that the couple things that you have to figure out number one is what would make me so regret entering this contract and i would do just about anything to get out of it or what would make my clients so regretted

You have to have experience to understand that. What gets them in trouble? And with experience you learn, oh, these kind of things, these narrow, tight windows on the project schedule, or these unreasonable requirements for change orders, or whatever it happens to be. That gets people in trouble. The other thing that you have to really pay attention to is what

What would make this project something I’d look back on as one of the best decisions I ever made to get involved in it? Which means that I have to have a real handle on what I do well. You know, where I excel. Because look, I’ve had clients and I’ve worked with contractors, they can build pretty much anything. But building a cathedral,

Rishi Srivastava (10:53)
Mm-hmm.

Eliot Wagonheim (10:56)
with its soaring ceilings and stained glass and towers and ornate inside isn’t the same as building a big box store like a Sam’s Club or a Costco or something like that.

Knowing what you’re good at, knowing what you can deliver exceedingly well is something that I think comes with experience. And so I learned that. And I guess the other thing I learned is so many people come to me and say, look, I know you can find fault with all of these things. Every provision in the contract pretty much raises my risk. Tell me what the deal killers are. Tell me what I really should, ⁓ if this isn’t changed, I should just look at and walk away.

Rishi Srivastava (11:26)
Okay.

Mm-hmm.

Eliot Wagonheim (11:35)
And so experience tells you that. And the last thing that I’ll say that I’ve learned and kind of crystallized is that, look, there is no construction project without risk. But in this world, there are five and only five things you can do with risk. You can increase it. You can accept it. You can eliminate it. You can reduce it. And you can transfer it. Nobody wants to increase their risk.

Rishi Srivastava (11:45)
Mm-hmm.

Mm-hmm.

Mm-hmm.

Eliot Wagonheim (11:58)
You can’t

eliminate the risk because there’s no construction project without risk. You don’t really want to accept the risk if you can do one of the other two things. Reduce it by changing the contract or revising the contract. Or transfer it, which means, hey, if I get tagged, you get tagged. And that’s flow down or that’s refusing to accept the risk and transferring it back, hitting the ball back over the net.

And you learn that. You learn, okay, which of these options are possible for me or for my client? And I think that’s a growth process.

Rishi Srivastava (12:27)
Very insightful. Really thinking or deeply about those five points. So who most influenced your philosophy on balancing legal precision with practical business outcomes?

Eliot Wagonheim (12:40)
⁓ I guess I don’t know that there’s any one person. I will tell you that there were a couple judges along the way who guided me, who after certain trials or hearings, whatever, I would ask them their opinion. Once all the…

arguing and everything was done, I’d want to know how do I get better? After every jury trial I did, I asked the judge if once the jury was finished, once the trial was over, could you ask them if they could take five minutes so I could go in and talk to them about what resonated, what didn’t resonate. And every time, not everyone stayed, but most of them stayed because they wanted to talk about it. And I got to see the world through other people’s eyes. But the other thing is that I…

have always been entrepreneurial. I love business. I had my first business when I was in high school and I paid my college with a business that I started on campus. when there’s a different perspective when you’re responsible for payroll.

when you know that decisions you make not only influence you, ⁓ geez, don’t get to take as much home, but there are people out there that are depending on you, depending upon you to make good decisions so they can pay their mortgage or go on vacation with their family or just get a car that they need. And there’s a level of responsibility that I bet each of your

Rishi Srivastava (14:00)
.

Eliot Wagonheim (14:01)
listeners understands, the ones that are responsible for that business.

I know I could get in trouble for saying this, but I really think that if you haven’t had to sweat payroll, if you haven’t been worried about that financial responsibility for other people, then you don’t take these decisions as personally. And so the experience of being responsible, being entrepreneurial but being responsible for other people, knowing how deeply it hurts if you have to lay off people or let them go because of financial

reasons.

Well, that really prepares you to make responsible decisions and at least it guides me. And I know that people that work with First World, for example, our clients, our licensees, they know we’re coming from that world where we understand the bottom line importance of those decisions that we’re helping them to make. So I think that’s really what influences me more than one person. The only other thing I will tell you is that when I was in first year of law school, my father was in

Rishi Srivastava (14:58)
Okay.

Eliot Wagonheim (14:59)
second year of law school and my father was in and my sister was in third year of law school in the same law school from which my father graduated. So I have a whole family of lawyers to bounce all this stuff off of but it’s influenced me as well.

Rishi Srivastava (15:06)
Okay.

Mm-hmm.

Yeah, yeah, a strong law family. Next section is on construction contracts and risk. What are the five most dangerous construction contract terms you see repeatedly? And what can companies do today to protect themselves?

Eliot Wagonheim (15:20)
Mm-hmm.

So the most dangerous terms really differ depending upon whether you’re a subcontractor or whether you’re a general contractor. For a subcontractor, one of the most dangerous terms is flow down.

Because what Flowdown does is generally, I won’t say for all contracts, but for most subcontracts, the prime contract between the owner and the general is incorporated by reference into that subcontract agreement, right? It’s one of the contract documents. Which means that I as a subcontractor have to comply not only with the subcontract that somebody in my organization is signing, but also with the terms of that prime contract that I may never have seen before.

Rishi Srivastava (15:56)
You’re not.

Eliot Wagonheim (16:11)
Let alone, I never signed, I was never in those negotiations. So one of the ways that I see people get in trouble is, subcontractors get in trouble, is that they actually sign on to subcontracts when they don’t even have all of the contract documents. They haven’t reviewed them. So that for example, in the subcontract it may say that my warranty will run for one year from the date of completion of my work.

Rishi Srivastava (16:11)
Okay.

Eliot Wagonheim (16:35)
contract may say that the contractor’s warranty runs for one year from the date of completion of the entire project. And the flow down and conflict provisions in the subcontract may say, look, if there’s a conflict between the subcontract and the prime, prime controls. Which means that I may have signed the subcontract agreement not even knowing how long my warranty runs.

Rishi Srivastava (16:42)
Hmm.

Eliot Wagonheim (16:57)
Right? You don’t know. So flow down is one. Indemnification, everybody’s favorite provision, is always dangerous because indemnification, which means I will become your insurance company if, right? It means that I’ll protect you from certain risks. Indemnification is pretty much in every contract, general contract or subcontract. And that’s okay. You know, as we said, there’s no…

Eliot Wagonheim (17:22)
construction project without risk. So that’s okay. But all indemnification provisions are not created equal. What I mean by that is I’m okay with being responsible for protecting you from the results of my own negligence. I’m not okay with protecting you from the results of somebody else that I can’t control. You know? So if…

Rishi Srivastava (17:37)
Do it.

Eliot Wagonheim (17:47)
If I do my work, let’s say I’m an HVAC subcontractor and part of my work involves installing inter-residential multi-unit housing, washers and dryers and tubs and sinks and toilets and all that stuff.

And I have to install all of that. I have to install this equipment and it has to be new and it has to be free of dents and free of scratches and all that stuff. That’s fine. If I install dented or old or broken equipment, that’s on me and I can indemnify you from any claims arising out of that. Bye.

If I finish my work and all of this stuff is sparkling and brand spanking new without a dent or a scratch, but then the painters come in with their steel-toed boots and they got to get to the high places, so what do they do? They step on my washers and dryers and tubs and sinks and toilets and whatever to do their work. So they leave, and now all of a sudden this brand spanking new stuff that I installed, it’s all scratched and dented. Well…

I don’t want to have to indemnify you from that. That was your failure as the owner or as the GC to secure the site.

I’ve left. I have no power to secure that cider to protect that equipment. So I don’t want to have to indemnify you from losses associated with somebody else’s wrongdoing. So indemnification is one and you have to figure out how you’re best going to protect yourself from that. When you take a look at

Warranty for example, there’s always going to be a warranty. Well, not always, but most of the time there’s going be a warranty. But what are you warranting? When does it start? End of the project? End of your work?

Rishi Srivastava (19:19)
Okay.

Eliot Wagonheim (19:23)
are you if if the owner decides to make modifications your warranty should stop if the owner uses the equipment or their site improperly you’re not working against ordinary wear and tear you know those sorts of things so you really want to guard against an over expanded warranty

But one of the real difficulties, one of the real dangerous provisions has to do with tariffs and by chain. Because let’s say that I’ve agreed to do this project for you for $10 million, whatever it is, random number.

Rishi Srivastava (19:46)
Good.

Eliot Wagonheim (19:55)
But as part of my work, have to bring materials in, I have to install equipment, et cetera. And that equipment comes from overseas. Well, my bid may be based upon real quotes that I got from various vendors. But we are in a very, from an economic point of view, a pretty volatile time. It’s pretty uncertain. If I place an order for drywall or for steel or for aluminum or for lumber,

coming from Canada or China or wherever it’s coming from. I don’t know which tariffs are going to be in effect. I’m not trying to get political. I really don’t want to get political. But I think regardless of where your politics are, you recognize that sometimes tariffs are in effect, sometimes they’re taken away, sometimes they’re announced and there’s a holding pattern. So you don’t know. And I want to make sure because I don’t underwrite the world’s economy. So yes, I

Rishi Srivastava (20:26)
Okay.

Eliot Wagonheim (20:52)
you that bid for 10 million dollars but I want to make sure that my contract allows me to pass through any kind of price hikes overcharges etc that I can’t control because I can’t control tariffs and I want to make sure that I’m not penalized for interruptions in the supply chain that cause delays. Now the other side in negotiating this well may say well wait a minute I’m not going to give you a blank check to just buy it

Rishi Srivastava (21:17)
you

Eliot Wagonheim (21:18)
anything and I’m going to write regardless of what the

increase is. And so you’d have this middle ground. You say, I can pass through these increases provided.

I order the equipment on time or early, you know, I haven’t delayed in ordering the equipment. I’ve kept in touch with the vendors to make sure I’m on top of this and they’re on top of this. When I found out there might be a price increase, I’ve diligently looked for a substitute or ways to reduce that. You know, I’ve done all of those things and a price increase was still unavoidable through no fault of my own. Then I should be able to pass that through.

Rishi Srivastava (21:34)
Okay. Okay.

Okay.

Eliot Wagonheim (21:54)
If I haven’t done it, if I waited until beyond the last minute to order it, or if I didn’t look for substitutes, or if I didn’t keep in touch with my vendor and they kind of misplaced the order or whatever, those things could be on me and I don’t get to pass those through. So the supply chain and the price escalation are other provisions that are really difficult. And I’ll give you the fifth one, which is a typical one.

changes in the work, change orders. And the reason that it’s dangerous, of course you have it and that’s great, you can have it. But there are a couple problems with it that you really have to work through and understand how the contract says it works. The first one is most change order provisions say that you can’t do any extra work over and above the base contract and expect to be paid unless you have a fully executed change order. Both sides have signed it.

Rishi Srivastava (22:19)
Yeah.

Eliot Wagonheim (22:45)
And if you do this extra work without a fully executed change order, you waive your right to payment. A lot of the contracts say that. You’d be working for free. But that’s what’s written in the contract. Then you get to what happens in the field.

Well, in the field, you’ve got a project schedule, you’ve got deadlines, you get a call from the general contractor or the owner, depending upon where it is, that says, look, here’s what I want you to do. And I know it’s over and above your base contract. We’ll have a change order. We agree we’re going to have a change order. But we’re really under the gun for schedule. So why don’t you guys start working and the paperwork will catch up.

And when I speak to audiences across the country and I ask them about that scenario, have any of you ever started work without a fully executed change or everybody nods? Of course they have. Because they want to hit the project schedule, they don’t want liquidated damages, they don’t want delayed damages, and they want to preserve the relationship with their own clients. So yeah, want to But now you’ve got this contract provision that says I may be working for free.

Rishi Srivastava (23:41)
Mm-hmm.

Eliot Wagonheim (23:46)
So you want to revise that going in, that you want to address that going in. The second part of it is the change order provision might say, okay, if you perceive the need for a change order, meaning with an unforeseen site condition, you have to provide us with the change order proposal, the change order request, and all supporting documentation within three business days of noticing the problem.

maybe I can’t get quotes within three business days. Maybe I can’t meet that deadline. And again, the penalty, if you fail to do that, you risk not being able to get a change order and waiving your right to payment. Well, I don’t want to work for free. But that change order provision in the contract could be unrealistic based on my industry and what has to happen in the field in this type of project. So that’s dangerous. So I guess what I’m saying in answer to your question is,

It’s not always just the liquidated damages provision that says you’ll owe me a billion dollars a day for every day you’re late. Sometimes the standard things that the flow down, the conflict, the price escalation, the tariff clauses, the changes in the work, that’s really where the risk lies. So that’s why we like AI review, AI contract.

Rishi Srivastava (24:43)
You

Nice.

Very insightful. The next question is in your view, what’s the most misunderstood clause in modern construction contracts?

Eliot Wagonheim (25:10)
Well, I think there are two for different reasons. One is indemnification, because people’s eyes glaze over when they see indemnification. It’s a long paragraph. It’s got legalese all through it. It’s got like these 19 comma sentences. It has sentences that begin with phrases like, notwithstanding anything set forth, you’re into the contrary. I mean, who talks like that? Nobody talks like that. So.

Rishi Srivastava (25:22)
Mm-hmm.

You

Eliot Wagonheim (25:33)
People generally, their eyes glaze over, they don’t even review indemnification, so they don’t understand it. So that’s one. The second that is, I think, often misunderstood is a broad category in its definitions.

Rishi Srivastava (25:47)
B

Eliot Wagonheim (25:47)
So

if I define the words contract documents so that they’re capitalized, capital C, capital D, contract documents, that means it’s a defined term. When it’s capitalized, it’s a defined term. And people don’t, a lot of people don’t understand that. So when I have capital C, capital D, contract documents, I’ve defined that as all the contracts to which you are liable once you sign this. People don’t understand that. If I have the word damages, capital D, or losses, capital L,

Well, that could be defined as any and all damages including direct cost, consequential damages, economic damages, loss of profit, opportunity cost, attorney’s fees, all of these things where some of them you might say, yeah, that’s fair. Those are damages I have to pay. But some of them you may not. You’re like, I’m not paying you lost profit. I’m not paying you opportunity costs or anything. That could be millions if not more.

So it’s the definitions that a lot of times people don’t understand. And so they don’t know what they’re reading. Definitions are the language in which contracts are written. And if you don’t understand what you’re looking at, it might as well be in Norwegian.

Rishi Srivastava (26:45)
BLEH

Also the contractors approach change orders to make sure they actually get paid each time.

Eliot Wagonheim (27:02)
So it depends where you are in the process. you’re negotiating a contract, the first thing you want to do is protect your ability to request a change order, to get paid for a change order.

And there are a couple of provisions that affect that. One is assumption of risk, and one is due diligence. You see, there are generally speaking, there are two major reasons that a change order is justified. If it’s an unforeseen site condition, or if it’s an owner change. And sometimes if material is unavailable and you need a change order for this. But the big ones are unforeseen site condition and owner change.

You’ve got the assumption of risk provisions and the due diligence provisions are in there to say, you know, from the owner to the general or from the general to the sub, by signing this contract, you’ve agreed that you’ve walked the site, you’ve conducted all of your inspections, you are thoroughly familiar with this project. And the reason those provisions are there is because the other side wants to eliminate your ability to, to,

pursue a change order for an unforeseen sight condition. You’re like, hey, you looked over the sight. How could it be unforeseen? So you want to say, you want to pare that down, say, look, I’ve looked at it, yes, but I’m only charged with the responsibility of seeing things readily visible. I can’t see underground. I can’t see behind those walls or whatever.

Rishi Srivastava (28:10)
Thank

Eliot Wagonheim (28:26)
So that’s the due diligence and the assumption of risk will often say you as a contractor assume any and all risks inherent in the performance of your work. And it sounds logical. But then you think, do I? Do I really? mean, let’s say that the owner has given me a survey or the owner’s given me a geotech report.

I’m allowed to rely on those things. I’m not assuming the risk that they’re wrong. I’m allowed to rely and if they’re wrong I get a change order. So I want to adjust that assumption of risk provision. And in the changes in the work provision I want to make sure I have enough time and enough leeway to create a change order that doesn’t carry with it the risk that I’m working for free that I’ve waived my right to payment.

And I want to make sure that if the other side gets paid for my work, I get paid. So there are things you can do in the contract to revise that changes in the work provision. Now, afterwards.

Afterwards, you’re a project manager or your company has signed the contract and you’ve got this change order and you know it’s a valid change order, meaning a lot of times there are disputes. The guy higher on the food chain, the owner or the general, they think that this work is within your base scope of work.

And you think, no, it’s not. It’s outside, so I’m entitled to a change order. Which means one thing you have to do in the contract formation stage is make sure everybody is crystal clear and aligned on what your scope of work is. So there’s no disagreement about what lies outside of it. But let’s assume that you have a change order for something that lies outside of your scope of work. And you submit it. And your contract says you can’t begin this work until you have a fully executed change order.

You submit it, but know, Susan’s on vacation and Lisa doesn’t get to it and Bobby has bigger fish to fry and people just don’t get back to you. You know, it’s not like people get back to you all the time, you know, immediately. And you’re watching the calendar pages turn. So you’re worried about, I’ve got liquidated damages. I’ve got time is of the essence. I’ve got all of these things coming down on me. You have to be proactive.

You have to, you just can’t watch the calendar pages turn and go, well I turned in a change order request, what else am I supposed to do? Here’s what else you do. You have to send in the emails, you have to build a record, and you have to send in an email that says, this is to confirm that on September 7th at 9 a.m. I will be performing X work.

We’ve agreed that this work is over and above the base scope of work, so I’m entitled to a change order and we’ll work out the paperwork. But I’m going to begin with the understanding that we will negotiate a change order. If you disagree, if I have misunderstood, then contact me no later than September 6, 2005.

If I do not hear from you, will assume that you agree and I will proceed as stated in this email. Now, is that as good as a fully executed change order? No. But it’s the next best thing because, and I’ve been in trial for this, where the judge looks at this and turns to the other side and says, did you respond? No. Well, he said right there he was going ahead with it. That’s on you.

So there are certain things you can do in project communication that your project manager has to have in his or her quiver, certain arrows that he or she should be able to employ in order to protect yourself and make sure the burden is on the other side to approve the change order or to risk a delay in the project. So it’s transferring risk.

Rishi Srivastava (32:00)
Yeah.

When is it worth walking away from a contract negotiation and how do you counsel clients to make that decision?

Eliot Wagonheim (32:09)
I really don’t like telling clients that I think they should walk away. I am a big believer in finding a way where everybody’s interests coincide, where we align. Because after all, you want, let’s say it’s a building and you’re the owner. You want your building built.

I want the job. I want to build that building for you. And so that’s a huge amount of common ground. we really want, we both are incentivized to find a way to move forward.

So I really look for those ways. But I had a situation recently where I was working with a subcontractor. And the price escalation clause came up that we were talking about. And what the owner said on this very large project is said, we will not accept a change order arising out of the increased costs or unavailability of certain products.

The bid is the bid is the bid, the price is the price is the price. And I said to my client, well, wait a minute. You’ve got a lot of materials and a lot of equipment that are coming from overseas. We’re looking at tariffs. And they couldn’t preorder enough, and there were all these issues. So we went back. We had three phone calls with different people on the other side for the general contractor, kind of bumping it up the ladder. And they said, look.

Rishi Srivastava (33:22)
It’s

Eliot Wagonheim (33:25)
I get what you’re saying. You say you can’t underwrite the global economy and I get it, but we will not accept a change order for this. And you have to absorb those costs if those costs increase. And you have to absorb those liquidated damages if there’s a supply chain issue and there’s a delay in shipping.

At the end of the day, is a business decision. It’s not for the lawyer to make, it’s for the owner of the company to make. You know, we talked about being responsible for payrolls and all that stuff. You you’ve got to watch your cash and watch your cash flow. But I did say that, look, given the scope of work and all the equipment and all the materials, you could really be hurt.

Rishi Srivastava (33:49)
Mm-hmm.

Mm-hmm.

Eliot Wagonheim (34:00)
So I think there’s a good reason to walk away, but you’re the one that gauges your own risk. And they did. They walked away. But it’s rare. In my experience, the vast majority of difficulties with contracts can be overcome by a reasoned solution and a good faith conversation.

Rishi Srivastava (34:07)
Mm, that’s

Yeah.

So the next section is on technology, AI, and legal innovation. Where do you see AI tools making a real difference in contract review today? And where are they still falling short?

Eliot Wagonheim (34:30)
So.

Let’s set the stage first of all. And this is not universal, but in my experience, construction contracts are normally reviewed and negotiated by non-lawyers. Even if your company is big enough to have in-house counsel, the fact of the matter is that that lawyer won’t have the bandwidth to look at every opportunity and negotiate every contract.

And even if they do, they might have the experience that I do, which is sometimes ⁓ a company will send me a contract and they’ll ask me for all my comments. I send all my comments. I send it over and I said, look, if you want me to hop on the phone with the other side and help you negotiate this, I’m happy to do that. And a lot of times what my client will say is, I don’t want to do that because if I say to the other side that my lawyer is going to be there, then they have to get a lawyer and…

It becomes a thing and nobody wants it to be a thing. So the non-lawyers have to negotiate. And that means that the non-lawyers have to understand it. Not just understand what I said, but really understand why I said it and where the risks are. So that’s the stage. You have a lot of non-lawyers, even in large, very successful companies, doing the negotiation. So then let’s talk about AI.

AI is extremely useful, but it is also subject to hallucinations and groupthink. It is not creative. is not, it looks for patterns and context, but it doesn’t bring the human element to it. And I’ll give you what maybe seemed like a stupid example. There was an experiment done, a trial done, where

They imagined if AI had existed in the 1500s.

Rishi Srivastava (36:07)
Mm-hmm.

Eliot Wagonheim (36:07)
1500 was where Copernicus was first postulating that the Earth revolved around the sun, and the sun didn’t revolve around the Earth. The Earth and the other planets revolved around the sun. And this was heresy. This was a hugely controversial topic. Now, if you imagine that AI had existed in the 1500s when Copernicus was doing his work, and it had access to all of the materials that were available in the 1500s.

And this was the experiment that was done. And the prompt to the AI was, does the Earth revolve around the sun or does the sun revolve around the Earth? AI would come back and say, the sun definitely revolves around the Earth. Why? Because that’s where all the materials are. That’s what all the materials said.

And so if you set out to use ChatGPT or Copilot or one of these for these questions, no matter how good, and some of these tools are just amazing what they can come up with and how they use the technology, not just as an advanced word search, but really to come up with strategies and prompts and recommendations. It’s still drawing on their base of knowledge. And so…

If you, I’ll give you one other example. Not long ago, I wanted to try this, so I used my ChatGPT and I said, draw an image for me of a clock, analog clock, so with hands, not digital, analog clock at three minutes after 12. And what came back was an image of a clock at 10 minutes after 10.

And the reason was that 10 minutes after 10 puts the hands in a V shape. And that’s the most pleasing shape for an analog image on the internet. It’s the most popular shape for an analog image on the internet. And so I went back to ChatGPT and I said, no, no, no, no, no. I want three minutes after 12. And it returned basically the same thing. So I said, OK, let’s try it again. Give me an image of a left-handed artist.

Rishi Srivastava (37:40)
Hmm.

Eliot Wagonheim (38:05)
and it created, it sent back an image of a right hand drawing. Why? Because right handed people are more common. The images of a right handed artist are more common. And I went back to ChatGPT and I said, no, you made a mistake. This is a right handed artist. I want a left handed artist. And then the prompt came back. ChatGPT said to me, you’re absolutely right. I’m very sorry. And it

it generated another image and that image was of a right hand sketching a right hand. It doubled down on the right hand. Why? Because that’s the most common image, it’s right handed. Now, so the danger is, I think AI is wonderful, but the danger is not understanding its limitations. I spent three years, going on three years now,

training REI. REI for first rule is not only the latest generation, but it’s trained and vetted. I had to train it in construction law. I had to train it into the context of what general contractors and subcontractors do. I had to vet it so that we put hundreds and hundreds and hundreds of contracts through it and see what did it come back with. What are the risks that it assigned to things? What are the suggestions that came back?

Rishi Srivastava (38:56)
you you

Eliot Wagonheim (39:15)
And I had to make sure that it wasn’t

just drawing on the conventional wrong wisdom of the time or what’s most popular. That it was drawing from a base of knowledge. And that’s one of the big things about going into AI. I think AI is an incredible tool. I think it can be an incredible tool helping contractors. I think it can be an incredible tool to help contractors in contract review.

Rishi Srivastava (39:21)
Okay. Okay.

Eliot Wagonheim (39:40)
if it’s the right AI, if it’s trained, if it’s vetted. And I will tell you this, I hear people raise the fear, AI is going to replace me. I don’t believe AI is going to replace people, but I do believe that people who use AI correctly are going to replace those who don’t. So I think there is a huge role, just like there’s a choose any tool in construction.

If you wield that tool correctly, it could be a game changer. It could increase the level of your skill. It could increase the quality of your projects. could do wonders for your reputation. But a hammer is never going to screw in a screw. So if you use that tool incorrectly, then run a lot of risks. And it’s double with AI because…

Rishi Srivastava (40:19)
Yep.

Yeah.

Eliot Wagonheim (40:27)
What you’re putting in AI’s hands are these construction contracts that have a lot of zeros and could carry a lot of liability if something goes south. So you have to understand not only how to use AI, but understand the AI you’re using.

Rishi Srivastava (40:41)
Makes sense. So what should take on balancing AI speed with the nuance that a skilled attorney brings?

Eliot Wagonheim (40:49)
I think that the first thing that you have to realize is that most construction companies should listen more to their own people than necessary, even before they go to an attorney. Do you know how much I know about

whether this particular project should cost a million dollars or two million dollars or how much i know about the best equipment and materials and scheduling and phasing of this particular scope of work nothing i know nothing about that yes i’m a lawyer i know the contract but your own people as a construction company know

Rishi Srivastava (41:17)
Okay.

Eliot Wagonheim (41:23)
when projects get into trouble, when they’ve had near misses, what things to avoid. So the first thing, before you even get to the attorney, the first thing as a best practice for contractors is to make sure that they create an environment where everyone, from the CEO to the assistant superintendent on site.

has an opportunity to contribute his or her knowledge to what we do well, what we don’t do well, what gets us in trouble, what doesn’t get us in trouble. Then after that…

going to an attorney who understands construction and using AI that understands construction to show, I understand that there are risks. I understand I can’t eliminate risk as we’ve talked about. How can I reduce it? How can I make sure that I’m responsible for my own actions but I’m not responsible for the negligence or inaction or inattention of somebody else?

Rishi Srivastava (41:53)
you you

Eliot Wagonheim (42:16)
You answer those questions, you’re good to go.

Rishi Srivastava (42:18)
Yeah. How do you see technology reshaping the relationship among contractors, attorneys and project managers?

Eliot Wagonheim (42:30)
I think that technology used correctly provides an open line of communication. A lot of problems arise within teams between client and customer, among contractors working shoulder to shoulder in various trades to finish up a project. A lot of problems arise because of miscommunication. I thought you were doing this. I thought you were doing this or what have you. But what technology offers

is the ability to create institutional knowledge so that my mistake in a project two years ago is something that people won’t make again because I’ve preserved that knowledge. The contract has changed as a result of it. There’s the people have a climate in which they can actually communicate about the issues that have arisen. And so the more each entity has institutional knowledge, has an understanding

Rishi Srivastava (43:10)
Hello.

Eliot Wagonheim (43:25)
of what needs to be communicated and that all of that is helped by technology, then they can communicate and actually collaborate much more successfully.

I think that’s really how technology takes a lot of the repetition, a lot of the things that we know over and over again and do over and over again. And it makes them more convenient so that people who understand their industry, know what they’re doing, take pride in their work, they actually have a chance now to step back and think to themselves to strategize, to think what would work best in this situation.

And I think that a lot of times that’s lost. If you’re running around and your hair’s on fire and you’re just, you put this out and put that out and you’re just going from emergency to emergency to emergency, you lose the ability to step back and take a breath. And I think that technology employed correctly can allow you to do that.

Rishi Srivastava (44:05)
Yeah, yeah.

Yeah, when the tedious goes away, you can be more creative. So the next section is on training, communications, and operations. What works and what doesn’t when it comes to training non-attorneys to understand and work with contracts.

Eliot Wagonheim (44:22)
Yeah, exactly.

It’s a great question to ask and it’s an easy question to answer. What works is consistency. What doesn’t work is inconsistency. If you think to yourself, I’m going to get in shape. I’m going to go to the gym. I’m going to work out. If you do 30 minutes in the gym three times a week, but you do it consistently,

That’s a heck of a lot better than doing nothing, nothing, nothing and then saying, know what? I’m gonna spend eight hours in the gym one Tuesday.

Rishi Srivastava (45:01)
All right.

Eliot Wagonheim (45:03)
All you’re going to do is get sore and possibly injure yourself. But that’s what lot

of education is like. They say, look, we don’t do anything. And then, ⁓ well, you do have that one all-day workshop in November, so we’ll send you to that. And then you don’t do anything in training until next June when maybe there’s a lunch and learn. That kind of inconsistency, people can learn. They can.

But it’s not really the best practice. The best practice is to create an educational program so that people have courses they go through or every month there, we’re going to get together, we’re going to have a contract talk, or we’re going to analyze a project and see what went right and what went wrong. If you build learning into your organization, you will excel at a rate unheard of by the vast majority of your peers.

Rishi Srivastava (45:47)
As

a non-attorney, know, I personally hate reading these law languages. It is so hard to understand. nobody talks like that. like, you being empathetic to those non-attorneys, what are your words to them?

Eliot Wagonheim (46:00)
use their own turf. In other words, do you know one sentence that really puts every attorney, just about every attorney on the defensive? There’s one sentence. It’s actually one phrase. The phrase is this. Here’s what happens in the field.

Rishi Srivastava (46:10)
What is that?

Eliot Wagonheim (46:13)
See, you say that, all of a sudden, I’m an attorney, I’m looking at the contract, I’m like, know, Rishi, in clause 5.2.4, it says this, whatever, whatever. You can hear me out, and then you can just look at me and you can say, But here’s what happens in the field. Because that’s your turf, that’s where your expertise is, and after all, what happens in the field is the mark of success.

Rishi Srivastava (46:35)
Mm-hmm.

Eliot Wagonheim (46:36)
It’s not whether this is a beautiful contract worth framing. It has to be a beautiful project. I encourage non-attorneys to understand, of course, the contracts and make an effort to understand the legalese.

Rishi Srivastava (46:44)
Mm-hmm.

Eliot Wagonheim (46:51)
But don’t shortchange your own experience about your industry, your trade, what happens in the field. Put it on that turf and that’s where you win, even in a conversation with an attorney. Don’t get intimidated. You know more than that person does.

Rishi Srivastava (47:03)
Yeah,

thank you for saying that. So can you share a real world example where poor contract communication led to costly misunderstandings?

Eliot Wagonheim (47:15)
where contract miscommunication led to mis- Okay, there was this painting subcontractor and the project was on a ⁓ high voltage power line. Or I’m sorry, it was a power station. So the painting contractor sent in a bid and said, we’ll do all the painting on the project except we don’t paint high voltage power lines. We’ll do everything else, but we don’t paint high voltage power lines.

Well, the project came to a close and the subcontractor said to the general, done, ready for my inspection. And the general said, you haven’t painted the high voltage power lines. And the subcontractor said, ⁓ no, if you take a look at our bid, you’ll see that we excluded that. And the general said, I see the problem. If you take a look at the contract, your scope of work is defined as all painting on the project. That’s what you bought.

Rishi Srivastava (48:03)
you

Eliot Wagonheim (48:04)
The miscommunication is that the subcontractor thought that its bid meant something. But if it’s not incorporated as a contract document, its bid doesn’t mean anything. It’s the contract. The contract is the contract is the contract. And so in that situation, the subcontractor had to go out and employ another contractor who did high voltage power lines and had to come out of pocket $250,000 because they misread the contract.

Rishi Srivastava (48:04)
⁓

yeah, that’s definitely.

eye-opening. So what’s the right amount of contract knowledge a CFO or PM should have versus relying on console?

Eliot Wagonheim (48:42)
Well, know, as much as possible. I know that’s a trite answer, but I think that you have to assume that you’re going to be on a call and you’re going to have to understand what works for your company, what doesn’t work for your company. So it’s hard to say the right amount. I would say that the best thing to do

is to make sure that you are consistently educating yourself and more than that, not only educating yourself, but also that you are spreading that knowledge. know, so that you are making sure that if you’re on vacation, if you’re…

You know, in the hospital, if you’re indisposed for some reason, you’re not the sole person responsible for institutional knowledge. That you actually have done your job in making sure that there are other people, other places to access the knowledge so that it’s just not all in your head. And that’s one of the most sacred, most important duties of a CFO or a risk manager.

Rishi Srivastava (49:42)
Yeah. Yeah, institutional knowledge. So the last section we have is on people negotiation and the future.

What’s the biggest myth about construction attorneys and what’s the truth?

Eliot Wagonheim (49:54)
And you think the biggest myth about construction, about attorneys in general, is that their best use is to be, you know, this vicious attack dog. And you can in litigation certainly, but I think the best…

The truth is that the best attorneys look to find a way to achieve the greater good particularly when it comes to contract negotiation. I want my clients to get work. You know, I don’t want to scare them into never taking on another project again. So I’ve got to be practical. I think that the myth is that well, geez, you know, the attorney is going to point out every comma, every period, everything that should be taken out.

An attorney is going to tell you, just delete the indemnification provision and send it back. That’s not going to work. The other side is not going to say yes. They’re going to think you’re crazy and they’re not going give you the contract. So I think that the myth is, I’m hoping it’s a myth. Certainly the myth is that

attorneys will be unreasonable and that they’ll get in the way of deals. The best attorneys who know what they’re doing are there to help grease the runway, help make sure that the deals will actually go through and that everybody is working in the same direction and engaging in a really profitable and beneficial project.

Rishi Srivastava (51:09)
Yeah, and then the day there is a business that don’t need that representing. So the next question is looking ahead. Will world class negotiation be more about technology, legal frameworks or people skills?

Eliot Wagonheim (51:24)
think people, ten times out of ten, a hundred times out of a hundred. There’s always a person on the other side.

And so I think that as we talked about right at the beginning of our conversation, the importance of making that person feel heard, the importance of making that person feel seen, and more than that, it’s not only, it’s not pulling the wool over their eyes making them feel heard, but actually understanding where they’re coming from. You know, and the personal connection. I was reading the other day, there was a psychological study out of Yale University that babies as young as 10 months start to

develop empathy. They start to

Rishi Srivastava (51:59)
Eww.

Eliot Wagonheim (52:00)
actually be drawn to certain characters and repulsed by certain characters. Even before they have the language to express it. You can see what they play with after a scene is put in front of them. And what that says is that we as a species are hardwired for certain emotional responses. And emotional, that’s a word that sometimes has a bad connotation, but I don’t mean hysterical, I just mean

Rishi Srivastava (52:20)
Okay. Okay.

Eliot Wagonheim (52:23)
There’s an emotional response. How often do we make an emotional decision to buy a car and only then look for reasons why we were right in buying the car? But you

react to it and you really love this car and you then convince yourself, oh, but it’s very practical and there are great reasons and I got a great deal in this and that.

We are always in successful negotiations going to have to deal with the person and not just the numbers and not just the data and not just the mechanics of it. So it is as much an exercise in law as it is in psychology. And so the technology can help you identify the things that have to be discussed. But.

to establish the relationship where you and I trust each other enough to have an honest conversation and collaborate on a solution that benefits both of us, that’s not technology. That’s the hope that you and I can go out for a beer sometime. That’s the personal relationship.

Rishi Srivastava (53:17)
Mm-hmm. Yeah, relationships and people.

The last question for you, Elliot, today is, if you could leave construction CFOs, leaders and others with one contract lesson they should never forget, what would it be?

Eliot Wagonheim (53:33)
read the documents. I’ll just tell you that. Read the documents and benefit from your own people’s experience. And the reason I say that is I was in front of a group of subcontractors and I said…

Rishi Srivastava (53:35)
Read the duck.

Eliot Wagonheim (53:45)
Is it an accurate statement that the prime contract between the owner and the general is normally incorporated into one of your contract documents? And then I’m like, yeah. So now, is there anybody here who doesn’t routinely get a copy of the prime contract from the GC before signing your own? And one guy, I always give him credit, raises his hand. He’s in the front row. And I said, can I ask you why? You don’t, I mean, you’re bound to this. Why don’t you get a copy? And he said, because.

If they sent me a copy, I’d have to read it. So, yes, that’s true. But you see, if you don’t read it, if you don’t know, if you don’t put hands and eyes on all contract documents, the way that term is defined as contract documents, capital C, capital D, you don’t know what you’re agreeing to. So read the documents.

Rishi Srivastava (54:14)
Okay.

Yeah.

That was very insightful. And I’m glad that you gave this best lesson right at the end. Elliot, thank you very much for your time. And we really appreciate you educating our listeners and viewers.

Eliot Wagonheim (54:42)
Absolutely. Thank you so much for having me. It’s been a pleasure.