AVOIDING AND MANAGING CONSTRUCTION SUBCONTRACT RISKS 2005

American Subcontractors Association § ASA – Education and advocacy on issues that all subs have in common. § Brian W. Cubbage, Construction Law & Contracts Counsel, ASA § Task Force on Risk Transfer § Task Force for the SLDF § Task Force on Model Contract Documents § Attorneys Council

Summary § Bids § Rules of Offer and Acceptance § Contract Terms § Design Changes and Differing Conditions § Project Management Issues § Payment Terms § Indemnity and Insurance Requirements § Warranty Terms

Estimates Include Cost Assumptions § Every contract term is a job cost. § Your cost assumptions must become contract terms. § “Contractor” (not “Builder”)

Condition Your Bids § It is legally necessary to state your terms in your bid. § Contract = Offer + Acceptance § Bid = Offer: Bid recipient has power to accept. § Sub bids “per plans and specs” § Specs include GC’s worst subcontract form § GC says “I accept” – CONTRACT FORMED.

Condition Your Bids § If your bid is subject to certain conditions, then the GC’s form subcontract is a “counter-offer, ” not an acceptance! § Uniform Commercial Code (UCC) rules are a little different from the common law “mirror-image” rule: § Bids should say “acceptance is expressly limited to the terms of this offer” to prevent other terms from creeping in: § Acceptance specifying different terms than P. O. – different terms rejected if they “materially alter” the deal. § Failure to respond to a P. O. (10 day rule) confirming a verbal order is an acceptance. § Bottom Line: Condition Your Bids! § (exception for primes on public works)

Condition Your Bids § ASA Subcontractor Bid Proposal (2005): § Specifies the AIA’s A 401 -1997 § Attach your insurance certificate § Attach your schedule of values § Complete wrap-ups section § ASA Subcontract Addendum (2005) § When the GC counter-offers § Or, condition your bid on the addendum where bid docs specify a subcontract you’ve read

Condition Your Bids § “Do you have authority to change anything in this agreement? Who does? ” § Don’t underestimate your leverage. § “You’ll never work for us again [until you’re low]. ” § You’re in the business for profits, not for work.

Design Changes and Differing Site Conditions § Payment for “extras”: (1) substance and (2) procedure. § (1) Substance: your scope of work. § The all-encompassing performance spec. § Sunhouse Construction 841 So. 2 d 496 (Fla. App. 3 2003) “consistent with the purpose and intent of the Plans and Specifications”; Triad Electric & Controls, 117 F. 3 d 180 (1997) “Design Control Specification” for power plant at Houston refinery. § Disclaimers of designs and reports (build according to design specs? ). § Ki. SKA v. WMATA, 321 F. 3 d 1151 (D. C. Cir. 2003), “additional wells may be required”; Interstate Contracting v. City of Dallas, U. S. 5 th Cir (disclaimers of fill specified for construction of a levee) § Pre-bid site visit requirements. § Code compliance.

Design Changes and Differing Site Conditions § Procedure: claims. § Proposed change order is not a claim. § MCI Constructors, 62 Va. Cir. 375 (2003); Cameo Homes, 394 F. 3 d 1084 (8 th Cir. 2005) § Field directives aren’t change directives. § Get it in writing (written claim when all else fails, before doing work). § Watch what you sign (waivers) and beware “final payment. ”

Project Management or Passing the Buck? § General Contractor Obligations Often Unwritten § Implied duty of good faith and fair dealing. § Can’t interfere with other party’s efforts to perform

Project Management or Passing the Buck? “[S]ubcontractors sometimes neglect their rights with regard to the project schedule and react to events, rather than attempting to control them. *** “Subcontractors should periodically provide updated performance information, advise the prime contractor of other trades’ work that has an adverse impact on their work, and otherwise make known their continually changing appraisal of the progress schedule. Only by taking such action can subcontractors preserve their rights and require the prime contractor to fulfill schedule obligations. ” Wickwire, Construction Scheduling: Preparation, Liability and Claims, Second Edition (Aspen Publishers 2003) § 2. 02.

Project Management or Passing the Buck? § No-damage-for-delay/disruption clauses. § Request Time Extensions, and Keep Requesting Them! § Failure to act on a time extension request: acceleration; waiver of no-damage-for-delay? § Protect yourself from liquidated or other delay damages. § Make your requests promptly, and in writing. The technicalities matter!

Another Scheduling Dilemma: Price Volatility § § § How long is your price good? “Force Majeure” clause Price Adjustment clause

Project Management or Passing the Buck? § Temporary facilities, utilities, hoisting services, storage, etc. Never assume! § GC’s obligations are often not spelled-out in the subcontract – only the sub’s obligations are written down.

Payment Terms: Act Like a Creditor! § § § Late Payment Interest Attorney Fees Security: Lien and Bond Waivers

Payment Terms: Retainage § Some retainage costs are the same as the costs for any extension of credit: (1) opportunity cost, (2) inflation, (3) total or partial nonpayment. § Till v. SCS Credit (2004), http: //laws. findlaw. com/us/000/021016. html § Example: Add prime (7%) (opp cost + inflation) + risk factor: 25%? = 32% per year, or about 50% for 18 months? 50% of 10% retainage would be a 5% cost factor for every single bid item. § Retainage punishes everyone. § Legal limits, esp. federal and highway

Payment Terms: Retainage § 48 C. F. R. § 32. 103 (the FAR): “Retainage should not be used as a substitute for good contract management, and the contracting officer should not withhold funds without cause. ” § How might retainage “substitute for good contract management”?

Payment Terms: Backcharges § Notice and Opportunity to Cure § A 401 -1997 § Prompt Billing

Payment Terms: Pay-if-Paid § Terminology: § Pay-if-paid = Conditional payment. If owner never pays, the general never pays. § Pay-when-paid = Timing clause. This clause shifts risks of late payment, but not of nonpayment. If owner never pays, the general must still pay within a reasonable amount of time. § Pay-if-paid clauses aren’t enforceable by judicial decision in NY & CA, by statute in a few other places.

Payment Terms: Pay-if-Paid § Manganaro Corporation v. HITT Contracting, 193 F. Supp. 2 d 88 (D. D. C. 2002): The President of the subcontractor insisted on adding this to the contract: “Notwithstanding the above, it is understood The Contractor has the ultimate obligation to pay the Subcontractor within a reasonable time regardless of payment status from the Owner. ” § Manganaro suspended work for nonpayment, HITT sued for default, HITT lost and Manganaro got paid!

Payment Terms: Suspending Work § The same judge wrote § “[A]uthorities uniformly state that a subcontractor who is unreasonably denied payment as he progresses towards completion is justified in suspending performance until he is paid [Manganaro v. HITT Contracting, 193 F. Supp. 2 d 88 (2002)]. ” Subcontractors are “justified in suspending” because “one reason for providing for installment payments as construction proceeds is to supply the funds necessary for the agreed performance…. ” § What about demobilization costs, delay costs, remobilization costs? § What about PAY-IF-PAID?

Payment Terms: Suspending Work § A 401 -1997 pay-when-paid § For nonpayment ”through no fault of Subcontractor, ” sub may suspend on 7 days notice, and collect costs of de-mob, delay and re-mob. § AGC 650 pay-when-paid § For nonpayment after Contractor receives payment, or if Contractor “has failed to pay … within a reasonable time, ” then sub may suspend on 7 days notice, and collect “shut-down, delay and start-up” costs. § AGC 655 PAY-IF-PAID § For nonpayment after Contractor receives payment ONLY!!! Subs must rely on Contractor to stop work!

Payment Terms: Project Financing Disclosures § “Where reasonable grounds arise to believe that the obligor will commit a breach … the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. ” Restatement (Second) of Contracts § 251(1). § “I haven’t been paid, or seen a signed change order for the last bit of extra work I did…. ” Demand owner financing info?

Three-Headed Hydra § hold harmless clause § “additional insured” requirement § Waiver of subrogation on workers comp, general liability § All 3 are mechanisms for making sure your insurance pays, or else you do, for “third-party” claims, construction defect claims.

Three-Headed Hydra § Broad Form Hold Harmless: “all claims … arising out of the work under this subcontract. ” § Your employee is injured, that “arises out of your work. ” Fault does not matter. Mikula v. Miller Brewing case, reversing the trial court. See Case Studies for more! § Stealth Warranty: Centex v. Dale Tile § Comparative Form Hold Harmless: A 401 -1997 – “but only to the extent caused by the negligent acts or omissions of the Subcontractor…. ”

Three-Headed Hydra § CG 20 10 11 85 covers claims for “bodily injury” and “property damage” § “with respect to liability arising out of ‘your work’ for that insured by or for you. ” § Same language, same result as broad form hold harmless. Again, the Mikula case. Again, see Case Studies for more! § Even worse than hold harmless, because there are no legal restrictions. See the chart. § Others – see ISO excerpts

Three-Headed Hydra § “It’s always the sub’s fault”? § Sequencing § Subcontractor Selection § Inspections § safety hazards § work quality § Where does the buck stop? Isn’t the GC always, at least partly, responsible?

Three-Headed Hydra § The “Moral Hazard Problem” § The “moral hazard problem of insurance” is the problem that insurance makes the insured event more likely to occur. § Why spend a penny on safety or quality when someone else will have to pay (or suffer) for the safety and quality problems? § “RACE TO THE BOTTOM” § Future premium increases – “monitoring”

Wrap-Ups: Death by a Thousand Cuts § “Project Savings” or Upstream Transfer? § “There’s no such thing as a free lunch. ” § Owner or contractor buys from single source … but now subs buy from multiple sources § lost volume discounts (transferred upstream) § coverage review and gap-filling endorsements (transferred downstream and multiplied).

Wrap-Ups: Death by a Thousand Cuts § Lost control over “back to work” programs § “light duty” decisions become a conflict of interest § New claims procedures, forms, payroll reports, i. e. , more overhead. § The subs have no “agent, ” i. e. , no representation, and therefore, even more overhead: § § § coverage review/gap-filling; fixing EMR errors; chasing claims money; extensive retainage delays; “Just sign here … and I’ll tell you what it costs afterwards!” – bilateral monopoly.

Warranty § Excluding defects inherent in the design: § A 401 -1997 “free from defects not inherent in the quality required or permitted…. ” § Disclaimer of implied warranty of fitness for a particular purpose. § Code compliance issues.

Warranty § Time limit: § Disclaimer (or limitation) of implied warranties § Longer warranty available with maintenance program

Warranty § Right to cure: § There isn’t one – unless it’s in the contract! § Bilateral monopoly problem – no alternative to dealing with each other. It effects the cost, right to cure is protection: § Waiver of warranty claims absent notice and opportunity to cure

Summary § Condition Your Bids § Design, Payment, Indemnity, Insurance, Warranty § Communicate in Writing § Scheduling and Claims § Join ASA: Keep your knowledge fresh and current.