Contract Savings Clause: Everything You Need to Know
A contract savings clause is a clause that protects the enforceability of the rest of the contract if any clause therein is found to be unenforceable.3 min read
2. An Example of a Shared Savings Clause Helping to Cut Costs
Updated November 11, 2020:
What is a contract savings clause? Also known as a severability clause, it's a clause that protects the validity and enforceability of the rest of the contract if any clause therein is found to be unenforceable. When a contractual clause is determined to be invalid, the parties may then negotiate substitute terms in place of the invalid ones.
About the Savings Clause
Most contracts contain a savings clause, which upholds the enforceability of the agreement. With the exception of the disputed clause, the rest of the contract remains in effect. However, if a contract doesn't have a savings clause, it's possible for the whole contract to be found invalid.
The savings clause states that contractual terms are independent of each other. Even if a court finds one or more provisions invalid, the rest of the contract stands.
In some cases, a savings clause makes it clear that some provisions are so important to the agreement that, if they're found to be invalid, the whole contract will be voided.
Savings clauses usually have two parts:
- Savings language: This preserves the rest of the contract if a court finds one part to be invalid.
- Reformation language: This describes how contractual parties may modify the invalid provisions or delete them altogether.
Usually, the parties can rewrite the problematic provision to fit the original intention of the agreement and to meet court requirements, within reason.
An Example of a Shared Savings Clause Helping to Cut Costs
A construction cost-plus contract may contain a shared saving clause to help owners and construction managers save money. Owners invest time and money into projects with the expectation that they'll get a quality structure that doesn't go over budget and is built to specifications. The contractor wants to make the owner happy without overspending.
With the right agreement in place, both sides may cut costs and split the difference.
Construction contracts come in different types, such as design-build, lump sum, and integrated project delivery. Cost-plus gives both sides the chance to share cost savings, with its shared savings clause and a guaranteed maximum price (GMP).
In the bidding process, contractors present proposals to the owner. Most owners factor the total estimated cost in their decision of which contractor wins the bid. This bid establishes the GMP.
Under a cost-plus contract, owners pay actual costs along with a percentage for profit and overhead. Barring any exceptions, the GMP part means the owner pays no more than that, even if the following apply:
- The contractor makes a miscalculation.
- The price of materials increases.
- The cost of the job increases.
A shared savings clause is designed to motivate the contractor to reduce costs. This clause allows the contractor and owner to split the difference when total expenditures are less than the GMP. Renegotiating subcontracts — or the buyout process — is what usually leads to savings.
There's not much wiggle room on the cost elements of a project or material prices. The area that's most open to change is what the subcontractors charge. When they know they have the job, they're sometimes more willing to cut labor markups to come down on their price. In many cases, contractors start with a higher bid because they know they'll probably have to negotiate down.
Construction companies are required to open their books to the owners for audits that determine final costs. This is part of entering into cost-plus contracts. The contract specifies how construction managers and owners split savings. Usually, it's a 50-50 split.
However, if the owner doesn't give up much, the contractor isn't likely to go through a lot of trouble to get a little more savings. As long as the construction manager is savvy at negotiating and the owner is willing to give a little, a cost-plus agreement with a GMP and shared savings clause is often a win for all parties.
Contracts often contain a number of terms, conditions, and provisions. Including a savings clause can prevent the entire agreement from being invalid, which may cause you to start from square one on a new contract. If you're unsure of the best way to draft a contract, consult with an expert in contract law.
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