Transcript Document

AVOIDING AND MANAGING
CONSTRUCTION SUBCONTRACT
RISKS
© 2005 American Subcontractors Association, Inc.
American
Subcontractors
Association
 ASA – Education and advocacy on
issues that all subs have in common.
 Brian W. Cubbage, Construction Law &
Contracts Counsel, ASA
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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
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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):
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Specifies the AIA’s A401-1997
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.2d 496 (Fla.App.3
2003) “consistent with the purpose and intent of the
Plans and Specifications”; Triad Electric & Controls,
117 F.3d 180 (1997) “Design Control Specification” for
power plant at Houston refinery.
 Disclaimers of designs and reports (build
according to design specs?).
 KiSKA v. WMATA, 321 F.3d 1151 (D.C. Cir. 2003),
“additional wells may be required”; Interstate
Contracting v. City of Dallas, U.S. 5th 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.3d 1084 (8th 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.
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“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
 A401-1997
 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.2d 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.2d 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
 A401-1997 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: A401-1997
– “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:
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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:
 A401-1997 “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.