AVOIDING AND MANAGING CONSTRUCTION SUBCONTRACT RISKS © 2005 American Subcontractors Association, Inc

AVOIDING AND MANAGING AVOIDING AND MANAGING CONSTRUCTION SUBCONTRACT CONSTRUCTION SUBCONTRACT RISKSRISKS

© 2005 American Subcontractors Association, Inc.© 2005 American Subcontractors Association, Inc.

ASA – ASA – EducationEducation and and advocacyadvocacy on on issues that all subs have in common.issues that all subs have in common.

Brian W. Cubbage, Construction Law & Brian W. Cubbage, Construction Law & Contracts Counsel, ASAContracts Counsel, ASA Task Force on Risk Transfer Task Force on Risk Transfer Task Force for the SLDF Task Force for the SLDF Task Force on Model Contract DocumentsTask Force on Model Contract Documents Attorneys CouncilAttorneys Council

American American Subcontractors Subcontractors Association Association

SummarySummary

BidsBids Rules of Offer and AcceptanceRules of Offer and Acceptance

Contract TermsContract Terms Design Changes and Differing ConditionsDesign Changes and Differing Conditions Project Management IssuesProject Management Issues Payment TermsPayment Terms Indemnity and Insurance RequirementsIndemnity and Insurance Requirements Warranty TermsWarranty Terms

Estimates Include Cost Estimates Include Cost AssumptionsAssumptions

EveryEvery contract term is a job cost. contract term is a job cost. Your cost assumptions must Your cost assumptions must

become contract terms.become contract terms. ““Contractor” (not “Builder”)Contractor” (not “Builder”)

Condition Your BidsCondition Your Bids

It is legally necessary to state your terms It is legally necessary to state your terms in your bid.in your bid. Contract = Offer + AcceptanceContract = Offer + Acceptance Bid = Offer: Bid recipient has power to Bid = Offer: Bid recipient has power to

accept.accept. Sub bids “per plans and specs”Sub bids “per plans and specs” Specs include GC’s worst subcontract formSpecs include GC’s worst subcontract form GC says “I accept” – CONTRACT FORMED. GC says “I accept” – CONTRACT FORMED.

Condition Your BidsCondition Your Bids If your bid is subject to certain conditions, then If your bid is subject to certain conditions, then

the GC’s form subcontract is a “counter-offer,” the GC’s form subcontract is a “counter-offer,” notnot an acceptance! an acceptance! Uniform Commercial Code (UCC) rules are a little Uniform Commercial Code (UCC) rules are a little

different from the common law “mirror-image” rule:different from the common law “mirror-image” rule: Bids should say “acceptance is expressly limited to the Bids should say “acceptance is expressly limited to the

terms of this offer” to prevent other terms from creeping in:terms of this offer” to prevent other terms from creeping in: Acceptance specifying different terms than P.O. – different Acceptance specifying different terms than P.O. – different

terms rejected if they “materially alter” the deal.terms rejected if they “materially alter” the deal. Failure to respond to a P.O. (10 day rule) confirming a verbal Failure to respond to a P.O. (10 day rule) confirming a verbal

order is an acceptance.order is an acceptance.

Bottom Line: Condition Your Bids!Bottom Line: Condition Your Bids! (exception for primes on public works)(exception for primes on public works)

Condition Your BidsCondition Your Bids ASA Subcontractor Bid Proposal (2005):ASA Subcontractor Bid Proposal (2005):

Specifies the AIA’s A401-1997Specifies the AIA’s A401-1997 Attach your insurance certificateAttach your insurance certificate Attach your schedule of valuesAttach your schedule of values Complete wrap-ups sectionComplete wrap-ups section

ASA Subcontract Addendum (2005)ASA Subcontract Addendum (2005) When the GC counter-offersWhen the GC counter-offers Or, condition your bid on the addendum Or, condition your bid on the addendum

where bid docs specify a subcontract you’ve where bid docs specify a subcontract you’ve readread

Condition Your BidsCondition Your Bids ““Do you have authority to change Do you have authority to change

anything in this agreement? Who does?”anything in this agreement? Who does?” Don’t underestimate your leverage.Don’t underestimate your leverage. ““You’ll never work for us again [until You’ll never work for us again [until

you’re low].”you’re low].” You’re in the business for profits, not for You’re in the business for profits, not for

work.work.

Design Changes and Design Changes and Differing Site ConditionsDiffering Site Conditions

Payment for “extras”: (1) substance and (2) procedure.Payment for “extras”: (1) substance and (2) procedure. (1) Substance: your scope of work.(1) Substance: your scope of work.

The all-encompassing performance spec.The all-encompassing performance spec. Sunhouse Construction 841 So.2d 496 (Fla.App.3 Sunhouse Construction 841 So.2d 496 (Fla.App.3

2003) “consistent with the purpose and intent of the 2003) “consistent with the purpose and intent of the Plans and Specifications”; Triad Electric & Controls, Plans and Specifications”; Triad Electric & Controls, 117 F.3d 180 (1997) “Design Control Specification” for 117 F.3d 180 (1997) “Design Control Specification” for power plant at Houston refinery.power plant at Houston refinery.

Disclaimers of designs and reports (build Disclaimers of designs and reports (build according to design specs?).according to design specs?).

KiSKA v. WMATA, 321 F.3d 1151 (D.C. Cir. 2003), KiSKA v. WMATA, 321 F.3d 1151 (D.C. Cir. 2003), “additional wells may be required”; Interstate “additional wells may be required”; Interstate Contracting v. City of Dallas, U.S. 5Contracting v. City of Dallas, U.S. 5thth Cir (disclaimers of Cir (disclaimers of fill specified for construction of a levee)fill specified for construction of a levee)

Pre-bid site visit requirements.Pre-bid site visit requirements. Code compliance.Code compliance.

Design Changes and Design Changes and Differing Site ConditionsDiffering Site Conditions

Procedure: claims.Procedure: claims. Proposed change order is not a claim.Proposed change order is not a claim.

MCI Constructors, 62 Va.Cir. 375 (2003); Cameo MCI Constructors, 62 Va.Cir. 375 (2003); Cameo Homes, 394 F.3d 1084 (8Homes, 394 F.3d 1084 (8thth Cir. 2005) Cir. 2005)

Field directives aren’t change directives.Field directives aren’t change directives. Get it in writing (written claim when all else Get it in writing (written claim when all else

fails, fails, beforebefore doing work). doing work). Watch what you sign (waivers) and beware Watch what you sign (waivers) and beware

“final payment.”“final payment.”

Project Management or Project Management or Passing the Buck? Passing the Buck?

General Contractor Obligations Often General Contractor Obligations Often UnwrittenUnwritten

ImpliedImplied duty of good faith and fair dealing. duty of good faith and fair dealing. Can’t interfere with other party’s efforts to Can’t interfere with other party’s efforts to

perform perform

Project Management or Project Management or Passing the Buck?Passing the Buck?““[S]ubcontractors sometimes neglect their rights with [S]ubcontractors sometimes neglect their rights with

regard to the project schedule and react to events, regard to the project schedule and react to events, rather than attempting to control them.rather than attempting to control them.

******““Subcontractors should periodically provide updated Subcontractors should periodically provide updated

performance information, advise the prime performance information, advise the prime contractor of other trades’ work that has an adverse contractor of other trades’ work that has an adverse impact on their work, and otherwise make known impact on their work, and otherwise make known their continually changing appraisal of the progress their continually changing appraisal of the progress schedule. Only by taking such action can schedule. Only by taking such action can subcontractors preserve their rights and require the subcontractors preserve their rights and require the prime contractor to fulfill schedule obligations.”prime contractor to fulfill schedule obligations.”

Wickwire, Construction Scheduling: Preparation, Liability and Claims, Wickwire, Construction Scheduling: Preparation, Liability and Claims, Second Edition (Aspen Publishers 2003) Second Edition (Aspen Publishers 2003) § 2.02.§ 2.02.

Project Management or Project Management or Passing the Buck?Passing the Buck?

No-damage-for-delay/disruption clauses.No-damage-for-delay/disruption clauses. Request Time Extensions, and Keep Request Time Extensions, and Keep

Requesting Them! Requesting Them! Failure to act on a time extension request: Failure to act on a time extension request:

acceleration; waiver of no-damage-for-delay? acceleration; waiver of no-damage-for-delay? Protect yourself from liquidated or other delay Protect yourself from liquidated or other delay

damages.damages.

Make your requests promptly, and in writing. Make your requests promptly, and in writing. The technicalities matter!The technicalities matter!

Another Scheduling Another Scheduling Dilemma: Price VolatilityDilemma: Price Volatility

How long is your price good?How long is your price good? ““Force Majeure” clauseForce Majeure” clause Price Adjustment clausePrice Adjustment clause

Project Management or Project Management or Passing the Buck?Passing the Buck?

Temporary facilities, utilities, hoisting Temporary facilities, utilities, hoisting services, storage, etc. Never assume!services, storage, etc. Never assume! GC’s obligations are often not spelled-out in the GC’s obligations are often not spelled-out in the

subcontract – only the sub’s obligations are subcontract – only the sub’s obligations are written down.written down.

Payment Terms: Act Like Payment Terms: Act Like a Creditor!a Creditor!

Late Payment InterestLate Payment Interest Attorney FeesAttorney Fees Security: Lien and Bond WaiversSecurity: Lien and Bond Waivers

Payment Terms:Payment Terms: Retainage Retainage Some retainage costs are the same as the Some retainage costs are the same as the

costs for any extension of credit: (1) opportunity costs for any extension of credit: (1) opportunity cost, (2) inflation, (3) total or partial cost, (2) inflation, (3) total or partial nonpayment.nonpayment. Till v. SCS Credit (2004), http://laws.findlaw.com/us/000/02-Till v. SCS Credit (2004), http://laws.findlaw.com/us/000/02-

1016.html1016.html Example: Add prime (7%) (opp cost + inflation) Example: Add prime (7%) (opp cost + inflation)

+ risk factor: 25%? = 32% per year, or about + risk factor: 25%? = 32% per year, or about 50% for 18 months? 50% of 10% retainage 50% for 18 months? 50% of 10% retainage would be a 5% cost factor for every single bid would be a 5% cost factor for every single bid item.item.

Retainage punishes everyone.Retainage punishes everyone. Legal limits, esp. federal and highwayLegal limits, esp. federal and highway

Payment Terms:Payment Terms: Retainage Retainage

48 C.F.R. § 32.103 (the FAR): 48 C.F.R. § 32.103 (the FAR): “Retainage should not be used as a “Retainage should not be used as a substitute for good contract substitute for good contract management, and the contracting officer management, and the contracting officer should not withhold funds without cause.”should not withhold funds without cause.” How might retainage “substitute for good How might retainage “substitute for good

contract management”?contract management”?

Payment Terms:Payment Terms: Backcharges Backcharges

Notice and Opportunity to CureNotice and Opportunity to Cure A401-1997A401-1997

Prompt BillingPrompt Billing

Payment Terms:Payment Terms: Pay-if-Paid Pay-if-Paid

Terminology: Terminology: Pay-if-paid = Conditional payment. If owner Pay-if-paid = Conditional payment. If owner

never pays, the general never pays.never pays, the general never pays. Pay-when-paid = Timing clause. This clause Pay-when-paid = Timing clause. This clause

shifts risks of late payment, but not of non-shifts risks of late payment, but not of non-payment. If owner never pays, the general payment. If owner never pays, the general must still pay within a reasonable amount of must still pay within a reasonable amount of time. time.

Pay-if-paid clauses aren’t enforceable by Pay-if-paid clauses aren’t enforceable by judicial decision in NY & CA, by statute in judicial decision in NY & CA, by statute in a few other places.a few other places.

Payment Terms:Payment Terms: Pay-if-Paid Pay-if-Paid

Manganaro Corporation v. HITT Contracting, Manganaro Corporation v. HITT Contracting, 193 F.Supp.2d 88 (D.D.C. 2002): The President 193 F.Supp.2d 88 (D.D.C. 2002): The President of the subcontractor insisted on adding this to of the subcontractor insisted on adding this to the contract: “Notwithstanding the above, it is the contract: “Notwithstanding the above, it is understood The Contractor has the ultimate understood The Contractor has the ultimate obligation to pay the Subcontractor within a obligation to pay the Subcontractor within a reasonable time regardless of payment status reasonable time regardless of payment status from the Owner.”from the Owner.”

Manganaro suspended work for nonpayment, Manganaro suspended work for nonpayment, HITT sued for default, HITT lost and HITT sued for default, HITT lost and Manganaro got paid!Manganaro got paid!

Payment Terms:Payment Terms: Suspending Suspending WorkWork The same judge wroteThe same judge wrote

“ “[A]uthorities uniformly state that a subcontractor who is [A]uthorities uniformly state that a subcontractor who is unreasonably denied payment as he progresses towards unreasonably denied payment as he progresses towards completion is justified in suspending performance until completion is justified in suspending performance until he is paid [Manganaro v. HITT Contracting, 193 he is paid [Manganaro v. HITT Contracting, 193 F.Supp.2d 88 (2002)].” Subcontractors are “justified in F.Supp.2d 88 (2002)].” Subcontractors are “justified in suspending” because “one reason for providing for suspending” because “one reason for providing for installment payments as construction proceeds is to installment payments as construction proceeds is to supply the funds necessary for the agreed supply the funds necessary for the agreed performance….” performance….”

What about demobilization costs, delay costs, What about demobilization costs, delay costs, remobilization costs?remobilization costs?

What about PAY-IF-PAID?What about PAY-IF-PAID?

Payment Terms:Payment Terms: Suspending Suspending WorkWork A401-1997 pay-when-paidA401-1997 pay-when-paid

For nonpayment ”through no fault of Subcontractor,” For nonpayment ”through no fault of Subcontractor,” sub may suspend on 7 days notice, and collect costs sub may suspend on 7 days notice, and collect costs of de-mob, delay and re-mob.of de-mob, delay and re-mob.

AGC 650 pay-when-paidAGC 650 pay-when-paid For nonpayment after Contractor receives payment, For nonpayment after Contractor receives payment,

or if Contractor “has failed to pay … within a or if Contractor “has failed to pay … within a reasonable time,” then sub may suspend on 7 days reasonable time,” then sub may suspend on 7 days notice, and collect “shut-down, delay and start-up” notice, and collect “shut-down, delay and start-up” costs.costs.

AGC 655 PAY-IF-PAIDAGC 655 PAY-IF-PAID For nonpayment after Contractor receives payment For nonpayment after Contractor receives payment

ONLY!!! Subs must rely on Contractor to stop work!ONLY!!! Subs must rely on Contractor to stop work!

Payment Terms: Project Payment Terms: Project Financing DisclosuresFinancing Disclosures

““Where reasonable grounds arise to believe Where reasonable grounds arise to believe that the obligor will commit a breach … the that the obligor will commit a breach … the obligee may demand adequate assurance of obligee may demand adequate assurance of due performance and may, due performance and may, if reasonable, if reasonable, suspendsuspend any performance for which he has not any performance for which he has not already received the agreed exchange until he already received the agreed exchange until he receives such assurance.” Restatement receives such assurance.” Restatement (Second) of Contracts § 251(1). (Second) of Contracts § 251(1).

““I haven’t been paid, or seen a signed change I haven’t been paid, or seen a signed change order for the last bit of extra work I did….” order for the last bit of extra work I did….” Demand owner financing info?Demand owner financing info?

Three-Headed HydraThree-Headed Hydra

hold harmless clausehold harmless clause ““additional insured” requirementadditional insured” requirement Waiver of subrogation on Waiver of subrogation on

workers comp, general liabilityworkers comp, general liability All 3 are mechanisms for making All 3 are mechanisms for making

sure your insurance pays, or else sure your insurance pays, or else you do, for “third-party” claims, you do, for “third-party” claims, construction defect claims.construction defect claims.


Broad Form Hold Harmless: “all claims … Broad Form Hold Harmless: “all claims … arising out of the work under this subcontract.”arising out of the work under this subcontract.” Your employee is injured, that “arises out of your Your employee is injured, that “arises out of your

work.” Fault does not matter. Mikula v. Miller work.” Fault does not matter. Mikula v. Miller Brewing case, reversing the trial court. See Case Brewing case, reversing the trial court. See Case Studies for more!Studies for more!

Stealth Warranty: Centex v. Dale TileStealth Warranty: Centex v. Dale Tile Comparative Form Hold Harmless: A401-1997 Comparative Form Hold Harmless: A401-1997

– “but only to the extent caused by the – “but only to the extent caused by the negligent acts or omissions of the negligent acts or omissions of the Subcontractor….”Subcontractor….”


CG 20 10 11 85 covers claims for “bodily CG 20 10 11 85 covers claims for “bodily injury” and “property damage”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 excerptsOthers – see ISO excerpts


““It’s always the sub’s fault”? It’s always the sub’s fault”? SequencingSequencing Subcontractor SelectionSubcontractor Selection InspectionsInspections

safety hazardssafety hazards work qualitywork quality

Where does the buck stop? Isn’t the GC Where does the buck stop? Isn’t the GC alwaysalways, at least partly, responsible?, at least partly, responsible?


The “Moral Hazard Problem”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 Why spend a penny on safety or quality when when someone elsesomeone else will have to pay (or will have to pay (or suffer) for the safety and quality problems?suffer) for the safety and quality problems? ““RACE TO THE BOTTOM”RACE TO THE BOTTOM”

Future premium increases – “monitoring”

Wrap-Ups: Death by a Wrap-Ups: Death by a Thousand CutsThousand Cuts

““Project Savings” or Upstream Transfer?Project Savings” or Upstream Transfer? ““There’s no such thing as a free lunch.”There’s no such thing as a free lunch.” Owner or contractor buys from single source Owner or contractor buys from single source

… but now subs buy from multiple sources… but now subs buy from multiple sources lost volume discounts (transferred upstream)lost volume discounts (transferred upstream) coverage review and gap-filling endorsements coverage review and gap-filling endorsements

(transferred downstream and multiplied).(transferred downstream and multiplied).

Wrap-Ups: Death by a Wrap-Ups: Death by a Thousand CutsThousand Cuts

Lost control over “back to work” programsLost control over “back to work” programs ““light duty” decisions become a conflict of interestlight duty” decisions become a conflict of interest

New claims procedures, forms, payroll reports, New claims procedures, forms, payroll reports, i.e., more overhead.i.e., more overhead.

The subs have no “agent,” i.e., no The subs have no “agent,” i.e., no representation, and therefore, even more representation, and therefore, even more overhead:overhead:

coverage review/gap-filling;coverage review/gap-filling; fixing EMR errors;fixing EMR errors; chasing claims money;chasing claims money; extensive retainage delays;extensive retainage delays; ““Just sign here … and I’ll tell you what it costs afterwards!” Just sign here … and I’ll tell you what it costs afterwards!”

– bilateral monopoly. – bilateral monopoly.

WarrantyWarranty Excluding defects inherent in the design:Excluding defects inherent in the design:

A401-1997 “free from defects not inherent in A401-1997 “free from defects not inherent in the quality required or permitted….”the quality required or permitted….”

Disclaimer of implied warranty of fitness for Disclaimer of implied warranty of fitness for a particular purpose.a particular purpose.

Code compliance issues.Code compliance issues.

WarrantyWarranty

Time limit:Time limit: Disclaimer (or limitation) of implied Disclaimer (or limitation) of implied

warrantieswarranties Longer warranty available with maintenance Longer warranty available with maintenance

programprogram

WarrantyWarranty Right to cure:Right to cure:

There isn’t one – unless it’s in the contract!There isn’t one – unless it’s in the contract! Bilateral monopoly problem – no alternative Bilateral monopoly problem – no alternative

to dealing with each other. It effects the cost, to dealing with each other. It effects the cost, right to cure is protection:right to cure is protection: Waiver of warranty claims absent notice and Waiver of warranty claims absent notice and

opportunity to cureopportunity to cure

SummarySummary

Condition Your BidsCondition Your Bids Design, Payment, Indemnity, Insurance, Design, Payment, Indemnity, Insurance,

WarrantyWarranty

Communicate in WritingCommunicate in Writing Scheduling and ClaimsScheduling and Claims

Join ASA: Keep your knowledge fresh Join ASA: Keep your knowledge fresh and current.and current.