By John A. Greenhall and Lane F. Kelman
The internal business practices you maintain play a significant role in providing ammunition for defending or prosecuting a legal claim. A protocol should be in place that requires contract review and integration of contract terms into your everyday practices on a project-by-project basis. Each project potentially presents its own unique legal, contractual and statutory requirements that, in turn, require communication among all team members in order to preserve or protect your bottom line.
The establishment of good business practices should apply to all contracts, not just those of a certain value. Too many contractors use basic purchase orders for contracts under a certain value or limited scope. The contract value, however, does not lessen your exposure. A $10,000 contract can easily become a $100,000 liability. Regardless of the type or form of the contract, make sure to include important terms. Enforceable limitation of liability clauses, payment terms, insurance requirements and termination rights, and damage provisions are critical. When you receive an award, what process do you have in place for the contract issuance and review?
Add your own proposal
The contract often contains an integration clause, which voids any proposals or oral agreements. As such, it is important that you include your proposal as an attachment in the contract. The proposal may contain contradictory terms to the contract itself. The contract itself should contemplate the inclusion of a proposal and address the possibility of contradictory terms and provisions. In a recent dispute, the terms that comprised an erection subcontract valued at $8,000 were at issue. After precast panels were erected at a residential project, a problem was discovered that required the removal and reinstallation of all panels, and a significant delay ensued. The body of the subcontract contained language that obligated the erection subcontractor to reimburse the general contractor for all costs and damages – just under a million dollars.
A dispute arose because the subcontractor’s proposal was included as a contract document, which included a limitation of liability clause that, according to the subcontractor, capped damages at the value of the subcontract. Clearly, the general contractor failed to identify and address the conflicting terms and limitation of liability clause prior to entry of the contract. As a result, the subcontractor successfully argued that its proposal controlled.
Familiarity with and command of key terms is of paramount importance. Having the right team in place when reviewing and issuing contracts is crucial. Be mindful that the clauses you negotiate may vary depending upon whether you are issuing the contract or serving as the downstream contractor. The potential for a difference between payment terms in the prime contract and those in a subcontract or lower agreements is significant and such differences must be recognized and remedied through the contract drafting.
The relationship between the payment terms needs to be addressed when reviewing subcontracts. If the fabricator has a contract with the prime contractor that contains a conditional payment clause, payment terms for the fabricator’s erection subcontractor should contain the same conditions. Otherwise, if a dispute arises between the prime contractor and fabricator that results in non-payment, the fabricator may still have payment obligations with the erection subcontractor that must be met. The relationship between the upstream and downstream contract clauses must be reviewed on a project-by-project basis.
In many cases, in order to receive a progress payment, you must submit a partial lien waiver and release. Increasingly, the partial lien waiver and release contains language that releases much more than lien rights and instead expands to all claims. Change orders often contain similarly broad waiver and release language. Are you unknowingly waiving your rights?
In addition to preventing exposure, steps need to be in place that preserve claims. Communication between your accounting department and field personnel is important. Too often, a disconnect exists between departments, and, while the left hand is in the midst of a developing claim, the right hand is signing monthly releases that waive the claim. A system needs to be in place where important dates for each contract are noted and monitored by the appropriate departments and personnel. For example, every jurisdiction has different statutory requirements in order to file a lien claim. Likewise, each bond has distinct requirements for making a payment bond claim. These requirements mandate that certain steps be taken by a deadline or the claim may be forever barred as untimely. An understanding by your team of the various requirements and the importance of proper review and communication is paramount to claim preservation.
A recent project gone awry in Virginia also carries an important lesson. Halfway through construction, the developer ran out of money and the project was suspended. Two months after suspension, the general contractor’s contract and, in turn, the subcontractors’ contracts were terminated for convenience. The project was not bonded. Therefore, the only means of recovery were via lien or through the general contractor. In Virginia, you can only lien for work done in the last 150 days. The precaster filed a lien but it was not for the full amount owed due to the time limitation. However, the precast subcontractor realized it could also pursue the general contractor.
While the standard form contract issued by the general contractor contained a payment clause where payment was contingent upon the general contractor being paid (also known as a “pay if paid” provision), the precast subcontractor was the only subcontractor to modify the boilerplate language. Because of that pre-emptive and protectionist action, it removed a significant legal hurdle to its recovery. Therefore, while other subcontractors received only cents on the dollar through the lien process, the precaster received a very favorable settlement. The general contractor had direct exposure, and resolution was reached.
Public projects are equally problematic and informative. A recent county prison project in Maryland highlights the need to properly document and preserve claims. The project was bid in a haphazard, piecemeal fashion as portions of the contract documents became complete, including the precast package. The construction manager failed to make sure that earlier bid packages were consistent with later ones. More than 100 major drawing changes were made during construction. Because of the lack of proper scheduling by the construction manager and its lack of coordination, the project was delayed for more than seven months.
Ultimately, the construction manager issued a revised schedule that varied significantly from the schedule in the bid documents. The owner and construction manager requested that the precast contractor sign-off and thus approve and adopt the revised schedule. In response, the precast contractor sent a notice letter that explained how the bid schedule showed a floor-by-floor construction, but the revised schedule changed to a pod-by-pod sequence. The letter also informed the owner that much more manpower would be needed to meet the revised schedule and requested a change order as a result of the change in sequence. Predictably, the owner refused to issue a change order, and a formal claim was pursued.
Because of proper documentation, the precast contractor demonstrated that it rejected the revised schedule, that the construction manager was responsible for the lack of coordination and scheduling, and that its failure to do so resulted in impacts and damages to the precast contractor. The paper trail created by the precast contractor enabled it to not only preserve its claim, but prevail.
Both of these projects serve as good examples of proactive protocols put in place by the respective precast contractors. With no up-front review and negotiation, the precast contractor on the Virgina project would have been confronted with a “pay if paid” defense by the general contractor. In addition, the termination of the contract was likely timed to jeopardize lien rights, yet the contractor was aware of the statutory deadline and prepared to proceed with its lien. On the prison project, claim documentation and notice were key. Rather than explicitly or tacitly accepting the revised schedule, it was rejected by written notice. Detailed documentation as the claim developed ensued, including the written proof of increased manpower costs and delay notification.
The bottom line is excellent on-site coordination that leads to the successful completion of a project must be duplicated at the home office as well. Establishing good, standard practices for your team, such as contract review and written notices, protects the profit margin. From estimating through close-out, communication, coordination, and awareness of your rights and obligations are the keys to a truly successful project.
John A. Greenhall and Lane F. Kelman are Partners at Cohen Seglias Pallas Greenhall & Furman PC. Both practice in the Construction and Green Building Sustainability Practice Groups. They can be reached at (215) 564-1700, [email protected] or [email protected]