Working with the federal government has its pluses and minuses, but one major advantage is the consistency of regulations. Unfortunately for contractors, that's not the case at the state and local levels, especially with policies involving the amount of risk associated with a contract. Here are two of most common risk-related clauses and policies that state and local government contractors need to be prepared for:
Indemnification and "Hold Harmless" Clauses
There has been a sweeping trend in local contracts toward broader and broader indemnity clauses. An indemnity clause guarantees that the contractor will protect, or "hold harmless," the agency from any losses, claims or lawsuits that may arise from the contract performance. This clause will hold firm regardless of the extent of the contractor's fault in any such losses, although all but the most stringent indemnity clauses will usually make an exception for situations in which the claim or loss is 100% due to the actions of the contract owner. In addition to indemnifying the agency from such claims, the clause may also make the contractor completely responsible for the agency's attorney fees and any settlement costs arising from lawsuits. Many commercial and private-sector contracts also include indemnification clauses, but these are much less extreme.
Limited Liability Clauses
On the other end of the spectrum from "hold harmless" clauses, limited liability clauses protect the contractor. A typical limited liability clause puts a cap on the amount of money a contractor can be held responsible for if something should go wrong in the performance of the contract. Limited liability clauses may also put caps on the types of damages that can be claimed against the contractor. A contractor accustomed to working in the private sector may be surprised to find that these protections are often conspicuously absent in a local-level government contract. Even if the contract in question provides for limited liability, proceed with caution! Some state laws prohibit city and county governments from limiting the liability of their contractors, leaving the contractor responsible for whatever financial damages may accumulate – even into hundreds of millions of dollars. For this reason, it's wise to have a lawyer look over the terms of a contract and explain the risk potential to you before you begin writing your RFP response. Knowing the risk before the contract is awarded gives a contractor more opportunity to avoid situations that could result in losses, claims, or lawsuits.