THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION
Calculating Delay Change Order/ Claim Costs
by Anwar Hafeez, SDC & Associates, Inc.
Calculating Inefficiency (Disruption) Change Order/Claim Costs by Anwar Hafeez, SDC & Associates, Inc.
Use Mechanic’s Lien and Payment Bond Claims to Get Paid
by Timothy Woolford, Woolford Law, PC
Preserving Subcontractor Claims for Delay, Disruption, and Cumulative Impacts
by Jim Sienicki and Chris Colyer, Snell & Wilmer L.L.P.
Claims—Make Them Count by Julianne C. Wheeler, Jennings Haug Cunningham
Understanding Your Workers’ Compensation Experience Modification Factor
by Fran Lusardi and Bill Bilinkas, Scirocco Group
Handling the Problem Project by David R. Cook, Autry, Hanrahan, Hall & Cook, LLP
Solving the Healthcare Problem for Subcontractors
by David Slepak, Redirect Health
LegallySpeaking: How the
Difference Between ‘Extra Work’ and ‘Additional Work’ Can Impact Claims for Payment
by Stephen Moore, Galloway Johnson Tompkins Burr & Smith
SAVE THE DATE! February 28 â€“ March 3, 2018
TEMPE MISSION PALMS HOTEL & CONFERENCE CENTER | TEMPE, AZ
EDITORIAL PURPOSE The Contractor’s Compass is the monthly educational journal of the Foundation of the American Subcontractors Association, Inc. (FASA) and part of FASA’s Contractors’ Knowledge Network. The journal is designed to equip construction subcontractors with the ideas, tools and tactics they need to thrive.
Features Calculating Delay Change Order/Claim Costs.................................... 8 by Anwar Hafeez, SDC & Associates, Inc.
Calculating Inefficiency (Disruption) Change Order/Claim Costs.........10
The views expressed by contributors to The Contractor’s Compass do not necessarily represent the opinions of FASA or the American Subcontractors Association, Inc. (ASA).
by Anwar Hafeez, SDC & Associates, Inc.
EDITORIAL STAFF Editor-in-Chief, Marc Ramsey
by Timothy Woolford, Woolford Law, PC
MISSION FASA was established in 1987 as a 501(c)(3) taxexempt entity to support research, education and public awareness. Through its Contractors’ Knowledge Network, FASA is committed to forging and exploring the critical issues shaping subcontractors and specialty trade contractors in the construction industry. FASA provides subcontractors and specialty trade contractors with the tools, techniques, practices, attitude and confidence they need to thrive and excel in the construction industry. FASA BOARD OF DIRECTORS Richard Wanner, President Letitia Haley Barker, Secretary-Treasurer Brian Johnson Robert Abney Anne Bigane Wilson, PE, CPC SUBSCRIPTIONS The Contractor’s Compass is a free monthly publication for ASA members and nonmembers. Subscribe online at www.contractorsknowledgedepot.com. ADVERTISING Interested in advertising? Contact Richard Bright at (703) 684-3450 or rbright@ASA-hq.com or advertising@ASA-hq.com. EDITORIAL SUBMISSIONS Contributing authors are encouraged to submit a brief abstract of their article idea before providing a fulllength feature article. Feature articles should be no longer than 1,500 words and comply with The Associated Press style guidelines. Article submissions become the property of ASA and FASA. The editor reserves the right to edit all accepted editorial submissions for length, style, clarity, spelling and punctuation. Send abstracts and submissions for The Contractor’s Compass to communications@ASA-hq.com. ABOUT ASA ASA is a nonprofit trade association of union and non-union subcontractors and suppliers. Through a nationwide network of local and state ASA associations, members receive information and education on relevant business issues and work together to protect their rights as an integral part of the construction team. For more information about becoming an ASA member, contact ASA at 1004 Duke St., Alexandria, VA 22314-3588, (703) 684-3450, membership@ASA-hq.com, or visit the ASA Web site, www.asaonline.com. LAYOUT Angela M Roe firstname.lastname@example.org © 2017 Foundation of the American Subcontractors Association, Inc.
Use Mechanic’s Lien and Payment Bond Claims to Get Paid............... 13 Preserving Subcontractor Claims for Delay, Disruption,.....................15 and Cumulative Impacts by Jim Sienicki and Chris Colyer, Snell & Wilmer L.L.P.
Claims—Make Them Count...................................................................17 by Julianne C. Wheeler, Jennings Haug Cunningham
Understanding Your Workers’ Compensation Experience.................... 20 Modification Factor by Fran Lusardi and Bill Bilinkas, Scirocco Group
Handling the Problem Project.............................................................. 22 by David R. Cook, Autry, Hanrahan, Hall & Cook, LLP
Solving the Healthcare Problem for Subcontractors........................... 25 by David Slepak, Redirect Health
Departments CONTRACTOR COMMUNITY................................................................................... 4 LEGALLY SPEAKING.................................................................................................26 How the Difference Between ‘Extra Work’ and ‘Additional Work’ Can Impact Claims for Payment by Stephen Moore, Galloway Johnson Tompkins Burr & Smith
Quick Reference ASA/FASA CALENDAR.............................................................................................28 COMING UP.................................................................................................................. 28
CONTRACTOR COMMUNITY Beware of ‘Killer Contract Clauses’ That Are Out to Get You! Register for ASA’s June 13 Webinar You are negotiating a new construction subcontract. There are always some clauses you question. Some look innocent. Others you believe are non-negotiable. Others are just horrible—killer contract clauses—and they are out to get you! “Seldom is a general contractor’s contract form a fair and balanced contract. Why would it be?” says Russell O’Rourke, Esq., Meyers, Roman, Friedberg & Lewis, Cleveland, Ohio, who will present the June 13 ASA webinar, “Killer Contract Clauses.” “It was written by his or her lawyer to protect the contractor, not you. It has every bad clause in it the lawyer could think of to protect the contractor, but with the purpose of being negotiable.” In this webinar, O’Rourke will examine some of the worst clauses you’re bound to encounter, what they mean to you, and how to negotiate them away so you have a reasonable contract. O’Rourke’s discussion of contract clauses will cover pay-if-paid; retainage; change orders; no liens; dispute resolution with venue and choice of law; indemnification; flowdown; expanding scope of work; no damages for delay; waiver of claims by accepting final payment; non-compete agreements (even with your existing customers); personal liability for corporate default; and uncompensated schedule/sequencing changes. This live, 90-minute webinar will begin at 12:00 p.m. Eastern time/9:00 a.m. Pacific time. Registration is $99 for members and $179 for nonmembers. Register online.
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ASA Joins in Call for White House Conference on Small Business On Feb. 13, ASA joined more than 50 other associations in calling on President Donald Trump to host a White House Conference on Small Business. The last conference was held more than 20 years ago. The coalition of associations whose members are composed primarily of small businesses said “that is far too long to go without giving voice a forum to America’s small businesses which account for 99 percent of U.S. private sector employers and a 64 percent of net new private sector jobs.” ASA and its members were active in the first three conferences, driving issues such as prompt payment and regulatory reform. The conferences held in 1980, 1986 and 1995 shared similar organization formats and activities. Each of the three conferences issued 60 policy recommendations for Congress and the Administration to consider. In addition, the 1995 Conference delegates elected regional implementation teams that worked closely with Small Business Administration officials to monitor congressional and executive branch on the 1995 Conference’s recommendations after the Conference had ended.
House Small Business Committee Requests Federal Change Order Data In a March 3 letter to the Government Accountability Office, bipartisan leaders of the House Small Business Committee ordered a review of change order policies and practices on federal construction projects. The four representatives wrote, “The Small Business Committee is concerned about the impact the process for issuing and addressing change
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orders on construction contracts may be having on the ability of small businesses to maintain viability while fully and efficiently performing these modified contracts.” Rep. Steve Chabot (R-Ohio), chair of the House Small Business Committee; Rep. Nydia Velazquez (D-N.Y.), ranking member of the committee; Rep. Steve Knight (R-Calif.), chair of the Subcommittee on Contracting and Workforce; and Rep. Stephanie Murphy (D-Fla.) asked GAO to address five questions: 1. What is the statutory and regulatory framework that applies to the use of construction contract change orders on the prime and subcontractor level? 2. What, if any, time frames apply to the issuance and settlement of change orders on the prime and subcontract levels? How long does it take, and should it take, for agencies to determine the cost impact of change orders and compensate contractors? 3. What guidelines do agencies have for issuing and paying for change orders on the prime and subcontract levels? 4. What evidence exists of change order bundling, i.e., that agencies may be aggregating change orders and delaying payments due to the contractors until completion of the contracts or later? What is the purpose of agencies engaging in these actions? What safeguards, if any, exist to prevent improper bundling of change orders? How does change order bundling affect the ability to obtain surety bonds? 5. Is there evidence that agencies otherwise may be acting in bad faith in delaying the settlement of change order requests for equitable adjustment?
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The Small Business Committee will use the data collected by GAO to inform the development of legislation on federal change orders.
ASA and AGC Officers Discuss Top Industry and Public Policy Issues During an April 14 meeting in New York City, national officers of the Associated General Contractors of America and ASA discussed top industry and public policy issues, including workforce shortages, immigration reform, prequalification of subcontractors, wrap-up insurance, and other risk allocation challenges. The ASA and AGC officers meet each year to discuss issues and explore new ways in which the associations can work together. ASA’s representatives were 2016-17 ASA President Robert Abney, F.L. Crane & Sons, Inc., Southaven, Miss.; 2016-17 Vice President and President-elect Jeff Banker, Banker Insulation, Chandler, Ariz.; 2016-17 Treasurer Courtney Little, ACE Glass Construction Corporation.; 2016-17 Secretary Anthony Brooks, Platinum Drywall, Maumelle, Ark.; and ASA Chief Advocacy Officer E. Colette Nelson. The meeting of ASA and AGC officers took place the day after the annual Engineering News-Record Awards of Excellence luncheon and dinner.
ASA White Paper Provides Tips on Project Financing Construction project insolvency is a major concern of construction subcontractors who provide a large amount of labor and materials to the prime contractor on credit. A 2015 ASA survey revealed that slow final payment, slow progress payment and pay-if-paid subcontract clauses are among the top concerns of ASA members. All three of these concerns
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can be traced back to the adequacy of project financing, at least absent predatory behavior by those controlling the cash flow. ASA’s White Paper on Project Financing is intended to help ASA members understand the importance of the creditworthiness of their potential customers. The white paper addresses industry policies and practices, including a review of relevant clauses in contract documents published by ConsensusDocs. ASA’s Subcontract Addendum, which is one of the documents in the ASA Subcontract Documents Suite, includes a provision that clarifies the contractor’s obligation to provide disclosures to the subcontractor as a condition precedent to the subcontractor’s performance. The white paper also provides tips on protecting your business, including arguments to make to the prime contractor and how to get information on project financing. The ASA White Paper on Project Financing is available to ASA members free on the ASA Web site at www.asaonline.com.
Trump Revokes OSHA Recordkeeping Expansion Rule On April 3, President Trump took the final step to revoke a rule that if allowed to stand would have subjected American businesses to citations for paperwork violations. The rule, issued by the Occupational Safety and Health Administration on Dec. 19, 2016, extended to five years the explicit six-month statute of limitations on recordkeeping violations in the OSH Act of 1970. In comments submitted to OSHA in 2014, ASA had argued that the rule was an overreach of OSHA’s authority and a clear misinterpretation of the law. As part of the Coalition for Workplace Safety, ASA called on Congress to revoke the OSHA rule using the Congressional
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Review Act. CWS told Congress, “This regulation simultaneously represents a usurpation of Congress’ power to write the laws, and a rejection of the judicial branch’s authority to rein in an agency when it has exceeded its authority to interpret the law.” Both the House and Senate had approved H.J.Res. 83, which invalidates the rule under the Congressional Review Act. The CRA allows Congress to roll back recently-adopted regulations by a simple majority vote. Once the CRA is invoked, an agency cannot promulgate a similar measure without Congressional authorization.
Federal ‘Sick and Safe’ Regulation Rolled Back On March 27, President Donald Trump took the final step in rolling back a rule that required federal contractors and subcontractors to disclose and correct serious workforce law violations. The “Fair Pay/Safe Workplace” rule, issued by the Federal Acquisition Regulatory Council in August 2016, was intended to ensure that the federal government does business only with companies that comply with laws that protect workers’ safety, wages and civil rights. Both the House and Senate had approved H.J.Res. 37, which invalidates the rule under the Congressional Review Act. The CRA allows Congress to roll back recently-adopted regulations by a simple majority vote. Once the CRA is invoked, an agency cannot promulgate a similar measure without Congressional authorization.
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Help ASA Fund PrecedentSetting Briefs Have you ever wondered what you can do to improve the business environment for construction subcontractors? One answer is to support ASA’s work to protect payment and other subcontractor rights in federal and state courts. ASA’s Subcontractors Legal Defense Fund has been financing “friend of the court” briefs for 20 years. The SLDF allows ASA to intervene in court cases where it can have a meaningful impact on cases involving subcontractor rights, such as the enforceability of pay-if-paid clauses, mechanic’s lien and payment rights, bid shopping, no damage for delay, the applicability of the duty to defend, insurance coverage for construction defects, and more. Right now, ASA is involved in a lawsuit to block OSHA’s implementation of its new rule on crystalline silica and another case that concerning contingent payment and unjust enrichment. ASA can’t continue its work in support of subcontractors unless it has the funds to pay for participation in the court cases that matter most to subcontractors. With the help of ASA members, ASA can marshal the financial resources needed to invest in precedent-setting litigation to establish subcontractor rights. You can make your contribution through the ASA online store. For more information, visit the ASA SLDF Web site at www.sldf.net.
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Protecting Your Lien Rights A lien is a hold or claim on property or security for some debt or charge. The basic principle behind a lien is that, because it generally is not practical for a subcontractor or supplier to reclaim its material or product of its labor once it is incorporated into the real property, subcontractors and suppliers should have a security interest in the property being improved. In the case of construction subcontractors and suppliers, a lien serves as a legal means to secure payment for the value of work performed and materials furnished in a construction project. Liens afford maximum protection when funds are flowing into a project from lenders who are insistent upon no encumbrances to the property title prior to their release of funds. Conversely, liens offer less help in those situations in which an owner is providing its own financing and simply arranges to bond off any liens placed on its property. Lien laws vary from state to state, both in terms of the protections provided to subcontractors and suppliers and the procedures to be followed. This variety is further complicated by the fact that lien statutes tend to require that all “t’s be crossed” for the lien to be upheld. Subcontractors and suppliers should familiarize themselves with the provisions of the lien laws in the states in which they operate, paying particular attention to the time limits for asserting liens. One tool that can help is the Foundation of ASA’s manual, Lien and Bond Claims in the 50 States. Many prime contractors require subcontractors to waive their lien rights with the submission of each application for payment. A subcontractor should take care not to waive its lien rights until payment
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is received. Most lien waivers can be modified simply by adding the words: This release becomes effective upon full payment to the Subcontractor of the amount stated in this payment request. A subcontractor also should be careful to waive its lien rights only to the extent of the work performed and paid to date. That is, be careful not to waive lien rights in advance for any future work. Prime contractors frequently require subcontractors to submit lien waivers from their subcontractors and suppliers. These waivers should be in the same format as the subcontractor’s. It’s important to note that if a subcontractor waives its lien rights and subsequently fails to get similar waivers from its subcontractors and suppliers, it may have to remove, at its own expense, any liens that may be placed against the property as a result of their work. Most lien filings require the precise legal description of the property to be liened. The ConsensusDocs Form 750, Standard Agreement Between Constructor and Subcontractor, makes clear that the subcontractor is entitled to obtain the information it needs to give notice of or enforce mechanic’s lien rights and, where applicable, stop notices (§ 4.4). The subcontractor should request property description data as early as possible on the job.
Guideline Helps You Balance Reward and Risk in the Digital Age Would your company be insured if an employee accidentally sawed through a beam that wasn’t on the plans and specs for a project, causing structural damage and thousands of dollars’ worth of damage? How
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about if the beam was on the original plans, but it was deleted because of a computer glitch or an incompatibility between the version of the rendering program your company uses and the server used by the plan room you downloaded the file from? What if the prime contractor could prove that the original file had the “correct” plans and specs on it? It’s not hard to see how these kinds of problems could land specialty trade contractors, prime contractors and construction owners in expensive and lengthy disputes. To help all members of the construction team communicate more accurately and promote efficient projects with fewer disputes, ASA, the Associated General Contractors of America and the Associated Specialty Contractors published the “Guideline on Exchanging Documents and Data in Electronic Form.” The guideline is one of the “Guidelines for a Successful Construction Project” as part of the Guidelines for a Successful Construction Project. One of the suggestions in the guideline is that contractors establish a protocol for exchanging data electronically that details, among other things, “[t]he applicable insurance requirements, if any.” Establish a written protocol with the prime contractor for data exchange and, where necessary, any supplemental or specific insurance requirements that are needed to cover potential liabilities. Assessing the potential liabilities of data exchange means discussing the risks, and the alternatives for minimizing risk, with an attorney and an insurance agent. The guideline points out that:
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In many instances where design professionals do forward documents in electronic form to contractors, such documents often are accompanied by statements disclaiming accuracy and completeness or limiting the design professional’s liability. Such language requires a conscious decision on the part of contractors and specialty contractors to decide whether they are willing to accept such documents in electronic form, thereby increasing their potential liability, or if they would be better served by waiting for the “hard copies.” With the standard use of electronic data exchange in the construction industry, it’s time to broach the topic with your professional advisors. The “Guideline on Exchanging Documents and Data in Electronic Form” includes several other recommended best practices, including: • Assign the responsibilities of compliance with any data exchange protocol to one person in your company. • Define which documents may be accepted in electronic format. • Define document security requirements.
Are Your Company’s Expectations of Professionalism Clear? Have you ever had an employee conduct business in a way that is so unethical that you wonder if he or she missed the “professionalism boat” altogether? Professionalism is very important in the workplace and ASA provides tools to help specialty trade contractors make their expectations of behavior clear. One
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of these tools is the ASA Professional Standards of Practice for Construction Subcontractors, a document that includes general principles encouraging responsible conduct. For example, the document suggests that a subcontractor “avoid divulging its price to a competitor or seeking information on a competitor’s price directly or through a general contractor” and “submit bids promptly with the terms of its offer clearly defined, including any obligations of others that are not made clear in the bid documents.” Make your expectations of professionalism clear to your employees.
Save the Dates! SUBExcel 2018 Will Take Place Feb. 28-March 3, 2018, in Tempe, Ariz. Mark your calendars! SUBExcel 2018 will take place Feb. 28-March 3, 2018, at the Tempe Mission Palms Hotel & Conference Center, 60 E. 5th Street, Tempe, AZ 85281. Located in the heart of downtown Tempe in the Mill Avenue District, the Tempe Mission Palms is known for the serenity of its surrounding desert landscape and rose-colored vistas and is just steps away from more than 100 shops, restaurants and galleries. “From the smell of the citrus in our courtyard, to the soothing sound of the fountain, you will be surrounded with a sense of relaxation at our hotel in downtown Tempe, AZ that will immerse you in our beautiful desert destination,” the hotel’s Web site proclaims.
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Feature Calculating Delay Change Order/Claims Costs by Anwar Hafeez, SDC & Associates, Inc. Most general provisions in contracts have language that grants time extensions due to excusable delays. Some contracts (especially private) have provisions that state, “No Damages for Delays” —do not sign without consulting a professional. The first thing that subcontractors and suppliers need to do is insert the following provisions into their contract agreements with the general contractor:
• Mutually agreed upon CPM Schedule. • GC to provide electronic copies of the Approved Baseline and all the Monthly Updated CPM Schedules.
SDC Note: Electronic copies of the CPM Schedules are normally required by the owners from the GC to prevent it from manipulating the CPM Schedules by using comparison of schedules software called “Claim Digger.” Subcontractors and suppliers can do the same and see all your float time in the schedule. Understand that the CPM Schedule becomes part of your contract even though it may have been prepared after the contract was signed. The only other document that changes the contract is change orders.
Subcontractor Delay Change Orders or Claims • Delay must be to subcontractor’s
critical path—they do not necessarily have to be on the GC’s Critical Path.
• Subcontractor change orders/claims
must provide an analysis of delays to GC: o vs. delays by owner. o vs. delays by other factors.
Types of Delays Non-Excusable—They are NonCompensable—Caused by the GC or the subcontractor or supplier. Nonexcusable examples of these are stated at the top of the next collumn.
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If it prevents project completion:
Contractor Performance Problems
May be a material breach of the contract
May lead to Liquidated Damages
Excusable – They are Compensable or Non-compensable—Four Types: 1. Acts of God, Force de Majeure— Generally non-compensable since they are beyond the control of the owner and the GC. Both the owner/ GC/subcontractor/supplier agree upfront that if this type of delay occurs, the owner will grant time extensions* and will not charge for liquidated damages and GC/ subcontractor/supplier agree that they will not charge for delay costs. Some of these are due to: o Inclement Weather—Rain, snow, sleet, high winds, mud slides, earthquakes, hurricanes. *Some contracts state that in excess of the specified number of work days in each month, the owner will grant time extension for inclement weather. o Force de Majeure—Strikes, war, epidemic, riots, factory burned down in the middle of the night that was fabricating your materials, materials look longer to get out of customs than normal, shortage of materials/ labor/equipment, switchgear got hit by a train on the way to the jobsite, etc. 2. Concurrent—Could be noncompensable or could be partially compensable. Example of this is as shown below: Owner caused delay of 20 work days on critical path
Answer No. 1: GC/subcontractor/ supplier will get 20 Work Days of time extension out of which 15 Work Days are not compensable as they are concurrent and five Work Days are compensable as they are not concurrent, since 15 Work Days were on the critical path of the CPM Schedule. Answer No. 2: GC/subcontractor/ supplier will get 20 Work Days of time extension all compensable if their delays are not on the critical path of the CPM Schedule. Offsetting Concurrent Delay: Description Owner Caused Delays on Critical Path
GC/ Subcontractor/ Supplier Caused Delays on Critical Path
Answer No. 3: GC will get 90 Work Days of time extension out of which 30 Work Days are not compensable as they are concurrent and 60 Work Days are compensable as they are not concurrent, since 30 Work Days were on the critical path of the CPM Schedule and are treated as the concurrent scenario in Answers 1 and 2. 3. Consequential—Compensable, Example as shown below: Planned Duration Start Date 5/1
End Date 9/30
Owner Did Not Get the Permit Until 9/30 10/15-11/30 Torrential Rain
GC/Subcontractor/Supplier caused delay of 15 work days on critical path
O PM AP SA SS S T HT EH EC OC NO TN RT AR CA TC OT RO ’ RS ’ SC OC M
Actual Start Date 10/1 Sub incurred $221,500.00 in rain cleanup damage and wants to get paid. The Construction Manager states that it is an “Act of God” Delay and thus it is non-compensable. CM is not correct, as this is a Consequential Delay and is compensable because the owner caused delay in not getting the permit prior to 5/1, he caused the subcontractor to perform work in time frames that he was never supposed to be at and anything that occurs in this time frame that the subcontractor was not responsible becomes compensable. The owner’s attorney told its CM to pay the subcontractor. 4. Excusable and Compensable—These types of delays are due to, but not limited to, the following:
• Timing for time impact analysis submission—best practice. o Assert it every month. o Absolutely PRIOR to final payment.
Elements of delay—Includes:
• Excusability • Compensability • Criticality • Concurrency
Consider all four elements when sorting out liability for delay. Consider these “hurdles to be cleared.”
In calculating delay costs, the subcontractor is entitled to the following: 1. Extended Field Overhead Costs
Force de majeure
Poor Contract Administration
Conflicts & Omissions
Shortages of labor, material, equipment
Owner Mis-Coordination of Multi-Prime Contractors
Owner late material delivery
Change in Character
Owner’s Risks in Delay • Project costs are not offset until they generate revenues.
• Owner may encounter a market collapse.
• Owner may lose revenues. o loss of rents, tenants, sales.
• Owner may incur additional costs
replacing the use of the completed project. o interim trailers to house employees.
• Pay the CM/Architect/Inspectors/Staff for the longer duration.
• Pay the contractor for delay costs. • Extended storage of owner bought items.
Contractor Requirements in Delays • Duty to diligently proceed. • Contractually required notice for owner or GC caused delays.
• Potential exposure to liquidated damages.
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2. Extended Home Office Overhead Costs 3. Escalation of Labor, Material and Equipment Costs 4. Escalation of Liability or Workman’s Compensation Insurance Costs 5. Interest on Late Retention Release SDC Note: These costs incurred and recoverable if there is a delay on the project.
Extended Field Overhead Costs Under the following categories of costs you can include, but not limited to the following: Project Office & Field Supervision— Project manager, project engineer, safety engineer, general foreman, foreman (if you are running your project with a foreman, allocate for example 50 percent supervision), contractor’s quality control engineer, clerical—based on actual payroll data. Project Labor—Extended labor for attending tool box meetings, clean-up, maintain temporary electrical and/or heat and/or dewatering system, safety, temporary fence, SWPP, street signs, clean streets. This cost can be estimated
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if you do not cost records to support this. Project Equipment—List all the equipment on the jobsite that was delayed—equipment rates as specified in the contract. Project Support—Cost of office trailer (everything inside the trailer such as chairs, table, fax and copy machine, laptop computers, printers, blueprint machine, temporary fence rental, safety supplies, phones, utilities, portable toilets, internet access—based on actual invoice data. SDC Note: Don’t create shock to GC/ owner by submitting a big amount— break costs in small increments—See above.
Escalation of Labor, Material and Equipment Costs Labor Escalation—Must be based on actual cost records. Material Escalation—Must be based on actual cost records. Equipment Escalation—Based on actual rental rates invoices or specified rental equipment guide during the contract and delay time frames.
Escalation of Liability or Workman’s Compensation Insurance Costs Insurance Escalation—Must be based on actual cost data.
Interest on Late Retention Release Subcontractor may be entitled to other delay costs, such as:
• Loss of benefit for purchasing larger quantities.
• Storage costs. • Additional material handling costs. If you would like help preparing and/ or negotiating delay cost change orders using these techniques, contact Hafeez at email@example.com. Anwar Hafeez is president of SDC & Associates, Inc., San Diego, Calif., a construction claims consulting firm that prepares and negotiates change orders/ claims with 99.999 percent success rate; CPM scheduling; and teaching seminars on project management and change orders/claims, (www.sdcassociates. com). He can be reached at (800) 7323996 or firstname.lastname@example.org. J U N E
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Feature Calculating Inefficiency (Disruption) Change Order/Claim Costs by Anwar Hafeez, SDC & Associates, Inc. Inefficiency costs are very difficult to get paid for from the owner or the general contractor. Why are owners or GC unwilling to pay for inefficiency costs easily?
• Because the subcontractor did not
prove how the inefficiency occurred.
• To the owner or GC you have to
prove that while they directed you to do change order work, your contract work became inefficient and why it
is their fault? You have to answer these two questions before calculating inefficiency costs. In labor productivity, there are two major types of costs for subcontractors: fixed and variable.
• Inherently lower in risk. • Costs are fixed throughout the project.
• Risks do exist, e.g. subcontractor and supplier.
• Bankruptcy, default, defective work, faulty work.
Variable Costs • Equipment o Generally low on risk—tends to be proportional to labor. o Maybe high risk on utility, heavy and highway construction.
• Job overhead is low on risk unless delays occur. • Labor—biggest risk, some subcontractors watch costs on a daily basis, most watch it on a weekly basis.
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What Costs Can You Recover?
LABOR COSTS (HOURS)
UNITS OF WORK Expressed in man-hours per unit of work. For subcontractors it is a major issue and they tend to view in narrowly defined units.
Greater productivity • Achieving more units for the same man-hours spent.
• Spending fewer man-hours for same units achieved.
Loss of productivity: • Achieving fewer units for the same man-hours spent.
• Spending more man-hours for same
Labor Productivity Formula:
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units achieved. To measure productivity on a jobsite use Cost Codes for tracking costs.
Bid Unit Price Bid Productivity Bid Cost/Day
= $3.53/CY = 500 CY/Day = $3.53 x 500
If labor cost is $400/day, to break even or make money, what size crew do you need? Answer: Four or fewer.
Measured Mile Method Excavate Week 1–3 No rock encountered (Non-impacted)
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Direct costs for rock removal and disposal. Code all costs to New Cost Code 18001 (change order cost code)— All labor, materials and equipment is coded and charged to this cost code by the superintendent/foreman. Credit for not excavating the volume of the rock excavated. The credit computed at $2.23 per CY based on actual productivity. Not at the bid price which at best was a based on experience or calculated guess. Delay costs (see other SDC article)
Plan Crew Sizes Using Cost Codes
Excavate Week 4–10 Rock encountered (Impacted)
1. Direct costs for rock removal and disposal 2. Credit for not excavating volume of rock excavated 3. Delay costs (see other SDC article) 4. Inefficiency costs because in Weeks 4-10 you cannot excavate in the same way as in Weeks 1-3
Inefficiency costs because in Weeks 4-10 you cannot excavate in the same way as in Weeks 1-3—Use the measured mile method to compute costs
• You need to compare the costs
from Week 1-3 (no problems encountered, therefore, no inefficiency) to Week 4-10 (rock was encountered—inefficiently) • Week 1-3 (Non-Impacted Period)— On this project, with this crew, with these soil conditions, with this superintendent/foreman, with this inspector, encountering a mix of learning curve, equipment breakdown, bad weather, subcontractor actually proved that he did excavate the soil at $2.23/ CY. This is his historical cost data.
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ABC CONSTRUCTORS, INC. INEFFICIENCY CAUSED COST CODES AIRPORT BUILDING PROJECT
• Week 4-10 (Impacted Period)—On
this project, since subcontractor encountered rock, it could not excavate the same way as in Week 1-3 (soil was excavated inefficiently having to work around the rock removal), subcontractor’s costs for excavation of soil increased. Week 10 Cost Coding Report is shown at the right Week 10 Cost Coding Soils Report shows the cost of excavation to be $3.68/CY. Should we use $3.68/ CY? Answer: No, because the spectacular performance in Week 1-3 lowered the average. $3.68/CY is an average cost—actual cost computes to $4.03/CY. WEEKS
1 to 3
4 to 10
It costs more to excavate in Wk 4–10
Costs due to inefficiencty = 10,000 $1.80 $18,000
In the Weeks 4-10, the soil was excavated at $1.80/CY greater than in Weeks 1-3. Areas of potential owner/GC defense:
• Does benchmark represent actual unit prices?
• Is the data for a long enough period? • Not isolated instances that (unrepresentative).
• Similar conditions to impacted period.
• Not “ideal” conditions. •Are sub’s records accurate? Owner/GC does not have much of a defense against a Measured Mile Method analysis of calculating inefficiency costs—it is almost a slam dunk. By far it is the best method to compute inefficiency costs. There are many other types of inefficiency costs that subcontractors encounter. SDC has found through its
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10150 CURB AND SIDEWALK 4 SUBS
ACTUAL TO DATE
Bid Unit Quantity Actual Cost Price To Date To Date
229,856.00 0.00 148,900.00 305,483.00
3.53 0.00 4.27 3.06
161,545.00 0.00 161,545.00
10221 MASS EXCAVATION & DEMOLITION 1 PAYROLL 16,054 3 EQUIPMENT CY 16,054 4 SUBS 5 MATERIAL 7 OTHER CY 7,812 39,920
10210 STRUCTURAL EXCAVATION 1 PAYROLL CY 4 SUBS 7 OTHER CY
10220 STRUCTURAL BACKFILL 1 PAYROLL CY 5 MATERIAL
10222 MASS BACKFILL 1 PAYROLL 3 RENT EQP 5 MATERIAL 7 OTHER SUN
TOTAL FOR PROJECT
Unit Price PROFIT / LOSS To Date -
6.96 0.00 6.96
28,957.00 100,000.00 0.00 0.00 68,005.00 88,072.00
1.80 6.23 0.00 0.00 8.71 2.21
2.01 3.21 6.72
(3,312.16) 48,438.43 15,522.17 60,648.45
5.21 0.00 0.00 0.00 5.21
(15,215.68) 0.00 0.00 0.00 (15,215.68)
experience that federal government studies work every time on federal projects—Target your audience. Various inefficiency are stated below: 1. Acceleration a. Overtime b. Shift Work c. Overmanning d. Trade Stacking 2. Excessive Change Orders 3. Contract Work pushed into Hot or Cold Weather 4. NECA Job Factors 5. MCCA Study 6. Total Cost & Modified Total Cost Method 7. Out-of-Sequence 8. Learning Curve 9. Added Demobilization & Remobilization – usually caused 10. Owner Early Occupancy The following is methodology and/or calculations for the above mentioned inefficiency costs: 1. Acceleration a. Overtime • Dept. of Labor Bulletin #917— Preferred over U.S. Army Corps of Engineers • The Business Roundtable Study Limitations of Study: Only OT for 50- and 60-hour weeks Using this methodology, SDC calculated the overtime inefficiency cost for
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(9,398.71) (16,282.14) (25,680.85)
a subcontractor whose overtime differential cost was $235,000—their inefficiency cost was $306,000. Subcontractors are also due Spot Overtime (working less than a 40-hour week but on individual WD working overtime). • Working a prolonged OT schedule can cause LESS OUTPUT/week than normal schedule of 40 hours/week, This is the “point of no return” Business Roundtable states that this happens: a. Working 50 hours/week – “Point” in 6-8 weeks b. Working 60 hours/week – “Point” in 8-10 weeks • NECA Study • Masonry Institute Study • Adrian and Haverton Studies • U.S. Army Corps of Engineers b. Shift Work—Study available for mechanical and sheet metal subs c. Overmanning Studies • Mechanical Sub • Electrical Sub • Civil/Architectural Sub – Corps of Engineers Study d. Trade Stacking • Study available for electrical subs 2. Excessive Change Orders a. Leonard Study/Revay Formula b. For Electrical / Mechanical Contractor
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3. Contract Work pushed into Hot & Cold Weather • NECA Study • Masonry Institute Study • U.S. Army Cold Region Research & Engineering Laboratory • Enno Koehn & Gerald Brown, Climatic Effects on Construction 4. NECA Job Factors – Applies to individual change orders and not cumulative 5. MCCA Study – Please read the disclaimer 6. Total Cost & Modified Total Cost Method a. Total Cost Method is taking the total actual costs – bid costs – change order costs = claim amount
Works if you have a Cardinal Change – otherwise you face four legal challenges and if you can’t meet them you get 10 to 15 cents on the dollar b. Modified Total Cost Method is taking the total actual costs - bid costs - subcontractor caused delay and inefficiency costs - bid error costs - change order costs = claim amount 7. Out-of-Sequence—SDC has to understand the nature of the problem and come up with a customized solution to quantify this type of costs. 8. Learning Curve—Occurs when Sub is accelerated and adds workers or is forced to demobilize and hire new workers when remobilized. 9. Added Demobilization & Remobilization—Usually caused by out-of-sequence work.
10. Owner Early Occupancy—Study available for electrical subs. For more on inefficiency calculations, you may wish to attend SDC’s Inefficiency Claims seminar. If you need help calculating Inefficiency (Disruption) change orders using these techniques and more, contact Hafeez at ah@ sdcassociates.com. Anwar Hafeez is president of SDC & Associates, Inc., San Diego, Calif., a construction claims consulting firm that prepares and negotiates change orders/ claims with 99.999 percent success rate; CPM scheduling; and teaching seminars on project management and change orders/claims, (www.sdcassociates. com). He can be reached at (800) 7323996 or email@example.com.
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Feature Use Mechanic’s Lien and Payment Bond Claims to Get Paid by Timothy Woolford, Woolford Law, PC
Subcontractors must be aware of every possible legal tool to enforce payment rights. Among the most important in the subcontractor’s arsenal are mechanic’s liens and payment bond claims. Subcontractors must acquaint themselves with the mechanic’s lien and payment bond rights available to them in their particular state. Mechanic’s lien laws differ widely between states. On federal government projects, a law called the “Miller Act” sets forth all the requirements for making bond claims. Most states also have their own unique laws governing claims on payment bonds. These state laws are often referred to as “Little Miller Acts” since they are often similar to the federal Miller Act. Mechanic’s lien and payment bond claims can be very powerful and properly asserting such a claim can be the difference between getting paid or not. But if you don’t carefully follow the proper law, you risk losing these rights.
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A subcontractor with a valid mechanic’s lien has the right to force a judicial sale of the property on which their work was performed and to be paid out of the proceeds of that sale. The ability to compel a sale of property is a powerful weapon, so subcontractors must understand exactly what needs to be done in order to establish a valid mechanic’s lien. While requirements differ in each jurisdiction, there are some common features that should be kept in mind. Lien laws typically require claimants to give notice of their lien claim within a certain number of days or months following completion of their work. Fourand six-month limitation periods are common, but some states have even shorter periods. These deadlines arrive quickly and are frequently missed by subcontractors. Therefore, if the customer owes you money after you finish your work, be sure to file your lien claim and provide all required notices within the required time frame. C O M P A S S
Some states require subcontractors to some form of preliminary or advance notice of their intent to file a mechanic’s lien claim to the owner of the property a certain number of days before the actual mechanic’s lien claim is filed. Failing to provide the required notice can invalidate the lien. If the law of your state requires a preliminary or advance notice of some kind, it means you need to get started with the mechanic’s lien process even earlier to avoid losing lien rights. This is all the more reason to carefully track receivables and exercise your lien rights quickly. The contents of the lien claim (and preliminary notice if required) vary from state to state and again, making a mistake can invalidate the lien. There are often numerous other requirements to file a mechanic’s lien, such as the existence of a written contract and completing the work under that contract. It is highly recommended that you confer with experienced
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construction counsel to make sure nothing is missed and that all requirements are followed and deadlines are met. When a mechanic’s lien is filed or notice of a potential claim given, many owners often immediately contact the general contractor and pressure it to pay the lien claim so that the lien (or the threat of the lien) is removed. Thus, simply filing the lien may result in payment to you without having to actually go through the entire process to force the judicial sale of the property. Some states’ mechanic’s lien laws provide that subcontractors can waive their mechanic’s lien rights in advance of starting work on the project. These are often referred to as up-front lien waivers. Subcontractors who agree to waive their lien rights before starting work are taking an enormous risk and giving up one of the greatest sources of security they have to enforce their payment rights. If the general contractor has provided a payment bond, waiving mechanic’s lien rights is not as perilous because the payment bond provides an alternative source of security. A payment bond claim, however, does not encumber the owner’s property. Therefore, the owner is not likely to be involved in a claim upon the payment bond and not likely to pressure the GC to pay the claim as it often does when a lien is filed on its property. A mechanic’s lien is often the most powerful weapon that a subcontractor possesses to enforce its payment rights, so waiving that right before receiving payment should be avoided. With that said, partial lien waivers given during the course of the project in exchange for payments actually received are usually acceptable, but check the language of the partial waiver form to make sure you are not inadvertently waiving lien rights for work for which you have not been paid (such as pending change orders or other claims). On public projects, contractors and subcontractors normally can’t file mechanic’s liens. This is because, as previously stated, a lien ultimately entitles the lienholder to sell the property in question. Since the government will not allow its property to be sold, public projects normally require all prime
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contractors to post payment bonds. The payment bond is a guarantee that if the contractor (referred to as a “principal” under the payment bond) does not fulfill its payment obligations to subcontractors, the bonding company (or “surety”) will. As with mechanic’s liens, there are detailed requirements that subcontractors must follow in order to make a valid claim on the payment bond. Subcontractors usually must provide written notice to the surety within 90 days of completion of their work. If the notice does not result in payment, the subcontractor usually must file a lawsuit against the surety on the payment bond within one year of completing the work. Missing these deadlines will cause the bond claim to be dismissed. Many subcontractors miss the 90-day deadline for notice to the surety since it arrives so quickly. Their payment bond rights are forever lost as a result. There are two sources of requirements setting forth the contents of the notice to the surety and the suit on the bond. The first is the written payment bond itself. If the project is a public project, the state’s bond law, or “Little Miller Act,” will apply and will contain requirements that must be followed. Again, if it is a federal project, the Miller Act applies and its requirements must be followed. It is imperative to make sure you strictly comply with all requirements in the payment bond itself and any bond law that applies. Often, both the bond itself and the state’s Little Miller Act will require the amount claimed, the name of the customer, the last day of work or delivery of materials, and certain other information be included. Subcontractors should insist on receiving copies of payment bonds before signing the subcontract. It is critical for subcontractors to know whether security to guarantee the customer’s payment obligations exists in the form of a payment bond. Don’t wait until a dispute develops to request the bond because your customer is not likely to respond to a request for a copy of the payment bond when there is a payment dispute. They may not even be responding to your emails or returning phone
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calls at that point. Tell the customer during contract negotiations that as a condition of signing the subcontract, they must provide you with a copy of the payment bond. It’s a red flag if they refuse this reasonable request. On public projects, state and federal laws allow you to obtain a copy of the payment bond from the owner. Requirements for these requests vary from state to state. However, even on public projects, though, it is strongly recommended that you obtain a copy of the payment bond before signing the subcontract. You don’t want to be at the mercy of a government bureaucrat providing you with a copy of the payment bond while the clock is running. If you wait until there is a payment dispute to request the bond, it might be too late to file the claim once you receive it. The payment bond is not a guarantee that you will be paid no matter what. The surety providing a payment bond is entitled to assert any defenses that the principal on the bond has available under the subcontract. Thus, if your customer has legitimate grounds to withhold payment based on the subcontract terms, the surety can refuse to pay you on those grounds as well. Still, when a surety receives notice of a bond claim from a subcontractor, the surety often applies pressure on the GC to resolve the claim (pay the subcontractor or otherwise resolve the claim), so the surety is off the hook. This may be the leverage you need to get paid. It is imperative to understand your mechanic’s lien and payment bond rights. ASA has attorneys throughout the country that can assist you in navigating the complex requirements for liens and bond claims. Consult one of them, or someone else you trust, to make sure that your rights are protected. Doing so could make all the difference. Timothy Woolford of Woolford Law, PC, is a construction attorney in Pennsylvania that represents subcontractors and other construction professionals. He is also an Adjunct Professor of Law at the Penn State Law School where he teaches Construction Law to second- and third-year law students.
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Feature Preserving Subcontractor Claims for Delay, Disruption, and Cumulative Impacts by Jim Sienicki and Chris Colyer, Snell & Wilmer L.L.P. It is often challenging for subcontractors to seek damages for delay, disruption, or cumulative impacts due to onerous subcontract claim provisions. Ideally, a subcontract and prime contract would provide fair, direct, and easy to understand requirements for seeking recourse from an owner and/or general contractor. In practice, however, subcontracts—and often prime contracts— contain onerous terms and provisions that attempt to restrict or eliminate a subcontractor’s right to seek payment for delay, disruption, or cumulative impacts. Nevertheless, a subcontractor can take steps in at three different stages to help overcome these onerous subcontract and prime contract provisions and preserve its claims: (1) prior to contract execution; (2) during a project; and (3) once the claim arises.
Preservation of Subcontractor Claims Prior to Contract Execution A subcontractor often is best suited to protect itself from delay, disruption, or cumulative impacts by understanding exactly what is in its subcontract prior to its execution. By understanding the provisions and requirements set forth in its subcontract (and the prime contract which almost always is incorporated into the subcontract by reference), a subcontractor may be able to negotiate away, or at the very least minimize, problematic or adverse provisions. In particular, a good subcontractor will examine the proposed subcontract to determine the impact of any clauses that apply to claims for delay, disruption, or cumulative impacts or to passthrough claims through the general contractor to the owner. For example, a common problematic pass-through provision provides that the general contractor’s only obligation is to pass-through
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the subcontractor claims to the owner, with the general contractor’s obligation to pay any portion of the claim to the subcontractor expressly contingent upon the general contractor’s receipt of payment from the owner for the subcontractor’s pass-through claim. While this provision provides a mechanism to pass-through subcontractor claims to the owner, the subcontractor may not be entitled to damages if the general contractor or another subcontractor caused the delay, disruption, or cumulative impacts, and as a result, the owner does not make any payment to the general contractor. An experienced subcontractor often will attempt to negotiate away this clause as well as any pay-if-paid, no damages for delay, no damages for disruption or cumulative impacts, or any other problematic claim or change order provisions. ASA maintains a database of subcontractorfriendly contract provisions in its online Member Resources section at www. asaonline.com. Even if the subcontract includes provisions hindering a subcontractor’s right to payment for delay, disruption, or cumulative impacts, it is possible that state law may render such provisions void. For example, pay-if paid clauses— which dictate that a general contractor is only required to pay a subcontractor for completed work if and only if the general contractor is paid by the project owner—are void in California. Similarly, Arizona’s Prompt Pay Act may obligate an owner and/or general contractor to provide payment, notwithstanding any contrary contractual provisions, if the owner and/or general contractor fail to timely comply with the Arizona Prompt Pay Act. Additionally, prior to contract execution, an experienced subcontractor will
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already have prepared and will thereafter maintain its records showing how it bid or calculated its subcontract price as well as the schedule it used to develop its bid or price. By doing so, the subcontractor has a baseline that can be used in the future, if necessary, to show damages incurred due to delay, disruption, or cumulative impacts.
During Project, Consider Claim Notification Requirements Subcontractors also can take steps to protect themselves following execution of the subcontract. At the outset of a project, experienced subcontractors will ensure that their project managers, superintendents, and other crucial personnel are aware of—and understand the implications of—the subcontract’s key provisions. In particular, a good subcontractor will be cognizant of and comply with any notice deadlines and any other deadlines for providing details regarding the subcontractor’s claims. Similarly, a good subcontractor can help the general contractor comply with the prime contract’s claim provisions and understand how they tie into the subcontract’s notice and passthrough provisions. Above all, experienced subcontractors are aware of both (1) when notice and other claim information is required to be provided to the general contractor under the subcontract, and (2) when the general contractor must provide notice and other claim information for any pass-through claim to the owner under the prime contract, so that the subcontractor and general contractor comply with these provisions. In addition, even if one does not timely comply with the notice, all may not be lost. Some states do not require
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strict compliance with a subcontract’s notice provisions if the adverse party otherwise had knowledge of a claim and was not prejudiced. For example, the Arizona Supreme Court held in New Pueblo Constructors, Inc. v. State, 144 Ariz. 95, 101 (1985), that strict application of a contractual notice requirement was not required when (1) the party to be notified was aware of the changed conditions and of the claim for compensation, and (2) there was no prejudice shown by the lack of formal notice. A subcontractor may also be able to argue that a general contractor’s prior material breach excused the subcontractor’s subsequent noncompliance with the terms of the subcontract, including the notice provisions, or that the changes to the subcontract were so drastic and unanticipated that they constituted a cardinal change, which is itself a material breach of contract. Subcontractors Often Can Avoid Negatively Affecting Their Claims by Timely Submitting Change Orders and Objecting to Overly-Broad Pay Applications, Change Orders, and Lien Waivers Subcontractors unknowingly can negatively affect claims by failing to properly and timely submit change orders or change order requests. Experienced subcontractors will strictly comply with a subcontract’s change order provisions for any changes in scope. In particular, a common best practice is to execute a change order prior to undertaking any additional work. (At a minimum, a subcontractor can send the general contractor an email confirming that the subcontractor has been directed to perform the additional work and that the subcontractor will be paid X dollars and will be given a Y day time extension for doing so). Similarly, a good subcontractor will avoid executing change orders that do not set forth the full compensation and the appropriate time extension in the change order for the additional work performed. Alternatively, the change order will reserve the subcontractor’s rights to later claim additional time and/or dollars. Likewise, subcontractors must be careful reviewing and executing lien
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waivers because often the lien waiver arguably waives all of their claims through a certain date, except for retention or pending modifications. At minimum, a good subcontractor will submit any change order requests prior to signing lien waivers to increase the likelihood that the change order request will be considered a pending modification for purposes of any lien waivers, or even better, will explicitly reserve its claims that have not yet been resolved in its lien waivers. Additionally, a subcontractor may also be able to avoid the harsh impacts of an executed lien waiver if the lien waiver is not in accordance with the requirements of the applicable statute. A frequent trap for subcontractors is executing overly broad pay applications or change orders. It is common for pay applications to include language effectively stating that the pay application sets forth all amounts due and owing through the date of the pay application. By executing such pay application, a subcontractor may be admitting it has no claims for additional amounts arising out of any delay, disruption, or cumulative impacts. Likewise, a change order often will include overly broad language stating that it constitutes “full payment for all amounts owed, including amounts for delay, disruption, and/or cumulative impacts,” and that “the subcontractor waives any claims for delay, disruption and/or cumulative impacts.” A good subcontractor will modify such change order to avoid waiving pending or future claims, and will ensure that the change order also identifies and addresses any time extensions to which the subcontractor is entitled. Once a Claim Arises, There May Be Multiple Options to Take Action Against General Contractor and/or Owner Once a claim arises, a subcontractor often must comply with both the subcontract’s and prime contract’s notice and pass-through requirements. If the general contractor fails to comply by timely submitting the subcontractor’s pass-through claim to the owner, the subcontractor may have a strong breach of contract claim against the general contractor. Additionally, a subcontractor
also may have claims for breach of the general contractor’s implied duties. Under most state laws, all contracts include several implied obligations, such as the duty of good faith and fair dealing, the duty not to hinder or delay, and the duty of cooperation. The general contractor’s hindrance, failure to cooperate, or failure to act in good faith regarding the subcontractor’s pass through claim may be sufficient for an actionable claim, notwithstanding protections provided by the express terms of the subcontract that benefit the general contractor. If the general contractor complies with its pass-through obligations, but the owner still fails to provide payment for its owner-caused delay, disruption, or cumulative impacts, a subcontractor may have rights directly against the owner. For example, a subcontractor may possess a valid unjust enrichment claim against the owner. Moreover, a subcontractor may be able to pursue its rights directly against the owner through a liquidating agreement with the general contractor. An experienced attorney can assist with navigating these state law issues and identify additional strategies to protect a subcontractor’s rights and prosecute any disputes arising from any delay, disruption, or cumulative impacts caused by the owner or general contractor. Jim Sienicki and Chris Colyer are attorneys at Snell & Wilmer L.L.P. in Arizona. They can be reached at firstname.lastname@example.org, (602) 382-6351, or email@example.com, (602) 382-6000.
O TN RT AR CA TC OT RO ’RS ’ SC OC M O P M AP SA SS S T HT EH EC OC N
Feature Claims—Make Them Count
by Julianne C. Wheeler, Jennings Haug Cunningham Ironically, the terms of the contract are often overlooked by claimants. Yet, those terms often serve as the virtual roadmap of the claims process that the parties are to follow once a claim is identified. Project Management and administrative staff should be familiar with that process when the project kicks off because, unfortunately, claims are often far from bashful and have a tendency to arise when Project Management has little time to deal with them. The claims provisions of the subcontract define what a claim is. AIA Document A201-2017, just recently released, includes changes to Article 15 governing claims and disputes. Under the new general conditions that are incorporated into the AIA A401-2017 by Article 1.3: 1) “a change in the Contract Time” is now clearly a claim governed by the Article 15.1.1; and 2) the owner is not required to file a claim to impose liquidated damages under the contract. Because of the “flow down clause” in a typical subcontract, the general contractor will not need to file such a claim against the subcontractor, either.
Are There Claim Deadlines? Most subcontracts include aggressive notice provisions that are intended to batten down the hatches on extra work
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claims and delay claims. For example: All claims by Subcontractor relating to Subcontractor’s Work, including without limitation, any claimed adjustment to the subcontract Price and any claimed delay in prosecution of Subcontractor’s Work … shall be submitted to Contractor in writing within 72 hours after the occurrence of the event giving rise to the Claim or, if earlier, in advance of the time required for submitting any such Claim under the Prime Contract Document. Any claim not timely submitted shall be deemed waived by Subcontractor … While it is true that, in the absence of “prejudice” to the general contractor, many courts refuse to strictly enforce abbreviated notice deadlines, claims are difficult enough to win without having to get over the “untimely claim” hurdle. It just makes sense to find a simple way to jot them down for the right person to read.
Who Should Get Notice of Claim and How? Barring a contract restriction, a written claim can be an email to the person designated by the prime contract for receipt of notice, or even a text. If you plan to rely on texts, they need to be routinely captured and stored where they can be retrieved. Emails are
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easier to send and usually simple to find, once sent. For short claim periods like that quoted above, the idea is to put the general contractor on notice of the fact(s) that triggered the claim. The details of the claim (whether it be for additional time and/or additional compensation) can be provided later. However, the subcontract may require certain types of information within the notice of claim. For example, the A201-2017, at Article 15.1.6, requires that “an estimate of cost and of probable effect of delay on progress of the Work” be included within the claim notice.
Don’t Waive Claim! Those payment applications and the lien waivers/releases that are sent with them each month often function to waive a claim, sometimes even before it is made. Some jurisdictions limit the general contractor’s ability to exploit unintended claim waivers but many do not. If the form of lien waiver or release includes language stating that the subcontractor has been paid in full through a specific date, claims that have yet to be quantified and presented need to be carved out of the scope of the lien waiver. If for example, the subcontractor is required to perform extra work in the absence of a signed change order and has yet to bill for the change order
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work, the lien waiver should include a corresponding exclusion. Subcontractors often get caught in the lien waiver trap, particularly when lien waivers are required to be electronically escrowed with a third-party service. Anxious to receive the payment and accustomed to the ease of electronic signatures, the full impact of the lien waiver is easily overlooked. The best practice is to flag the payment applications on all projects with extra work claims and make certain that they are singled out for additional review and approval.
Know Your Limits Subcontracts often include language intended to limit the damages that the subcontractor may recover under various circumstances. “No damage for delay” clauses are far from rare and seek to limit the subcontractor’s recovery to additional performance time. Similarly, termination clauses, both for convenience and for suspension, often limit the subcontractor to payment only for the work performed prior to the termination. The subcontractor’s lost profits for the work that it was prohibited from performing are often excluded. Make sure you have the claim before you go to the trouble to present it.
Set Up a Job Cost Code As soon as a claim is suspected, the costs and labor to be captured in the claim should be separately coded. The codes should be explained to project personnel and accounting staff so that everyone understands what items are to be pulled into the new code and why. It may make sense, depending on the nature of the claim, to set up more than one code. Of course, it always makes sense to describe the additional work in daily reports and other project documentation. Claims are often defeated because they cannot be proven with sufficient certainty. If, for example, the subcontractor contributes to the additional labor costs by installing the wrong materials, the labor costs associated with the subcontractor’s error need to be tracked with a separate cost code. Remember that a solid claim is not based upon the assumption that any cost above the bid estimate is extra
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work. Instead, the claimant needs to be able to convince the general contractor that specific costs were incurred as a result of the event(s) triggering the claim, and for no other reason.
Continue to Communicate with GC About Claim It is a good idea to maintain professional and consistent communications with the ceneral contractor as the claim is developing. The more known about the claim and shared about possible ways to limit the fallout, the better. Open communication may also lead to amicable settlement discussions that avoid expensive claims preparation and ghastly legal fees down the road.
Know GC’s Claim Procedure Subcontractors must understand both the claims procedures in their subcontractors and those in the prime contract. Many jurisdictions allow prime contractors to submit “pass-through” or “sponsored” claims on public projects but only if it can be shown that the general contractor is liable to the subcontractor for the claim. If the claim is one that the general contractor can “pass-through” to the owner, it must be submitted in strict compliance with the owner’s claim requirements. On public projects, the subcontractor can expect elaborate claims procedures with graduating levels of review to loom in the future. On private projects, the subcontract often obligates the subcontractor to be bound by all decisions, findings or determinations made by the project decision-maker, administrative agency, court or arbitration panel, even if the subcontractor is not a party to that proceeding. Even if the claim does not appear to be the owner’s responsibility, the general contractor may insist on presenting it as a proposed change order or some other type of claim. Whether a public agency or the project architect, a review by the initial decision-maker and, thereafter, officials higher up the chain, may be required before the subcontractor can move forward. Moving forward may involve an administrative appeal procedure, a mandatory mediation requirement or an arbitration demand. The A401-2017,
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at Article 6.1.1, states that mediation is a “condition precedent” to “binding dispute resolution.” At the option of the parties, binding dispute resolution may be arbitration, litigation or something else. If the parties do not select an option, the subcontract defaults to litigation (Article 6.2). If arbitration is the designated option, the demand for arbitration cannot be filed before the request for mediation. (Article 6.3.2). If a public agency is the project owner, state laws may require that certain public officials receive notice of the claim within a certain number of days after the claim is discovered. If the general contractor posted a payment bond, the bond and applicable law must be reviewed to make certain that the claim is properly “perfected” with the notices required by the law and/or the payment bond.
Preserve Claim by Anticipating Process Like other aspects of the subcontractor’s work, the claims process is best anticipated early in the project. When project management is aware of the applicable claims provisions and prepared to deal with them, the risk of waiving valid claims is minimized. And, when the costs are tracked from the time that the claim is identified and the additional work or delay carefully documented, the claim can be efficiently and effectively presented for payment. Julianne C. Wheeler is a partner at Jennings Haug Cunningham and has, since 1988, been a commercial litigator whose practice focuses primarily on commercial disputes, from dispute avoidance to dispute management, as well as commercial litigation, with an emphasis on constructionrelated issues, including bid protests, and extending to surety and fidelity. From administrative licensing matters to complex litigation arising out of disputes over technical specifications, Wheeler has litigated in state and federal courts and represented national and Arizona contracting firms and a variety of other commercial enterprises ranging from national restaurant chains to local childcare facilities. She can be reached at (602) 234-7826 or jcw@ jhclaw.com.
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Learn How to Avoid Risk of Non-Payment and How to Spot Unfair Lien Waiver Tactics in Two On-Demand Videos from FASA The American Subcontractors Association More than 200 years ago, Thomas Jefferson invented the mechanic’s lien right and therein established the right of construction subcontractors and suppliers to get paid as a bedrock principle of the nation. “Ever since then, there has been tension between the top and bottom of the chain about payment timing, rights, and abuses,” said Scott Wolfe Jr., zlien, New Orleans, La. “GCs and owners fear subcontractor default and double-payment. Subcontractors and suppliers fear non-payment and payment abuses.” Wolfe discusses the risks of non-payment and payment abuses and how to spot unfair lien waiver tactics in two videoson-demand available from the Foundation of ASA: “The Payment Dance in the Construction Industry” and “The Subcontractor’s Guide to A Fair Lien Waiver Process.” In “The Payment Dance in the Construction Industry” (Item #8087), Wolfe discusses: • Public policy reasons and the background behind lien and bond claims laws. • Rights that can be leveraged to mitigate the risk of nonpayment or payment abuses.
• Tools and rights available to mitigate subcontractor default and lien exposure. • How industry predators abuse payment processes to unfairly leverage against other participants. • How to get positive results with fair and ethical practices. In “The Subcontractor’s Guide to A Fair Lien Waiver Process” (Item #8081), Wolfe examines when lien waiver tactics are unfair and when subcontractors should be concerned about executing a lien waiver. He also explains lien waiver rules across the nation and explores markers of a fair and unfair lien waiver process. Wolfe is a licensed attorney in six states with extensive experience in corporate credit management and collections law, including the use of mechanic’s liens, UCC filings, and other security instruments to protect and manage receivables. zlien is a platform that reduces credit risk and default receivables for contractors and suppliers by giving them control over mechanic’s lien and bond claim compliance.
New On-demand Video from FASA When it comes to managing your business, the Foundation of ASA is your partner in education. View and listen to FASA’s on-demand videos at an individual workstation or in a conference room for group training. Your order includes access to the on‑demand video any time, and as many times as you’d like! This is just one of the on-demand videos available through the FASA Contractors’ Knowledge Depot to meet your business management training needs.
“Cost Coding Made Simple” (Item # 8100) Construction cost codes are used to help monitor and evaluate a contractor’s costs during the course of a construction project. Construction cost codes help keep track of actual costs in comparison to estimates. In this video-on-demand, Anwar Hafeez, SDC & Associates, discusses fixed and variable costs and explains how subcontractors can economically set up a cost coding system and how cost coding can make your company money.
$65 for ASA members $95 for nonmembers.
ORDER ONLINE AT www.contractorsknowledgedepot.com
Feature Understanding Your Workers’ Compensation Experience Modification Factor by Fran Lusardi and Bill Bilinkas, Scirocco Group
Understanding your company’s mod and the data used to obtain it helps you identify ways to minimize your workers’ compensation premium. A key to understanding your workers’ compensation premium is the experience modification factor, also known as your mod. Understanding your company’s mod and the data used to obtain it helps you identify ways to minimize your workers’ compensation premium.
Who Calculates Mod Factor? Most states use the National Council on Compensation Insurance to collect data and calculate the experience modification factor. NCCI is a private corporation funded by member insurance companies. However, the following states have their own independent rating bureaus that are separate from the NCCI: California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania and Wisconsin. Texas is in the process of transferring from an independent bureau to the NCCI system.
How Is a Mod Calculated? The process of calculating the experience modification factor is complex, but the underlying theory and purpose of the formula is straightforward. Your company’s actual losses are compared to its expected losses by industry type. The formula incorporates factors that account for company size, unexpected large losses and the incidence of loss frequency and loss severity to achieve a balance between fairness and accountability.
How Does My Mod Affect My Premiums? The mod factor represents either a credit or debit that is applied to your workers’ compensation premium. A
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mod factor greater than 1.0 is a debit mod, which means that your losses are worse than expected and a surcharge will be added to your premium. A mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium.
What Is Experience Rating Period? The mod is calculated using loss and payroll data for an experience rating period. The experience rating period typically includes data for three policy years, excluding the most recently completed year. For example, if your anniversary rating date is Jan. 1, 2015, the experience period is 2010 to 2013, and 2014 would be excluded. Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of any exceptionally bad or good year for losses. Both actual and expected losses are divided into a primary and an excess portion in what is called a split rating method. Primary losses are designed to be an indicator of loss frequency (the number of losses) and are used at their full value in the mod formula. Excess losses are an indicator of loss severity (the amount of each loss) and are weighted in the formula so that they are less important. The emphasis of loss frequency over loss severity in the formula reflects the fact that loss frequency is a more actuarially significant indicator of risk and can be improved through proactive loss control programs. The primary amount of each actual loss is the first x dollars of each claim, where x is determined by the split
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point that applies to the state and effective date. Excess losses—the amount of each loss that’s more than x—measure severity. Very large losses are also capped at levels that vary by state. This minimizes the impact that any single claim can have on your premium. In approved states, medical-only claims figures are reduced by 70 percent. In most NCCI and some independent states, the split point is currently undergoing a multi-year transition to better correlate with claim inflation. The process of transitioning to the new split point began in 2013, with an increase in the split point from $5,000 to $10,000 in most states. In 2014, the split point increased to $13,500 in most states. In 2015, the split point increased to $15,500 plus an adjustment for claim inflation, and is set to increase to $16,000 in 2016. The split point will continue to increase with claim inflation in 2017 and beyond. Expected losses are calculated using your payroll data by state and class code and applying the Expected Loss Rate. The ELR is provided by each state’s rating bureau. These figures are also broken down into expected primary losses and expected excess losses.
How Do Your Losses Compare? The final mod calculation compares your actual primary and excess loss figures to those expected for a company of the same size and industry type. To understand how workers’ compensation losses to your business compare to state industry averages, contact Scirocco Group to review your experience modification worksheet.
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Warning Signs of Fraud by Fran Lusardi and Bill Bilinkas, Scirocco Group The workers’ compensation insurance system is a no-fault method of paying workers for medical expenses and wage losses due to on-the-job injuries. While the majority of WC claims are truthful, the National Insurance Crime Bureau reports that billions of dollars of false claims are submitted each year. To help you detect possible WC fraud, experience shows a claim may be fraudulent if two or more of the following factors are present: 1. Monday Morning: The alleged injury occurs either “first thing Monday morning,” or late on a Friday afternoon but not reported until Monday. 2. Employment Change: The reported accident occurs immediately before or after a strike, a layoff, the end of a big project or at the conclusion of seasonal work. 3. Job Termination: If an employee files a post-termination claim: • Was the alleged injury reported by the employee prior to termination? • Did the employee exhaust his/her unemployment benefits prior to claiming workers’ compensation benefits? 4. History of Changes: The claimant has a history of frequently changing physicians, addresses and places of employment.
5. Medical History: The employee has a pre-existing medical condition that is similar to the alleged work injury. 6. No Witnesses: The accident has no witnesses, and the employee’s own description does not logically support the cause of injury. 7. Conflicting Descriptions: The employee’s description of the accident conflicts with the medical history or First Report of Injury. 8. History of Claims: The claimant has a history of numerous suspicious or litigated claims. 9. Treatment Is Refused: The claimant refuses a diagnostic procedure to confirm the nature or extent of an injury. 10. Late Reporting: The employee delays reporting the claim without a reasonable explanation.
11. Hard to Reach: You have difficulty contacting a claimant at home, when he/she is allegedly disabled. 12. Moonlighting: Does the employee have another paying job or do volunteer work? 13. Unusual Coincidence: There is an unusual coincidence between the employee’s alleged date of injury and his/her need for personal time off. 14. Financial Problems: The employee has tried to borrow money from co-workers or the company, or requested pay advances. 15. Hobbies: The employee has a hobby that could cause an injury similar to the alleged work injury.
How Can You Control Your Mod?
• An effective self-inspection and accident investigation program are critical to managing claim frequency. • Implement an active claims management program to manage outstanding reserves and focus on efficiently resolving open claims. • Report all claims to your carrier immediately. • Take an aggressive approach to providing light duty to all injured employees upon their release from treatment. • Set safety performance goals for supervisory roles. Success in achieving safety goals should be used as one measure during performance appraisals. • Train employees on their responsibilities for safety, and enforce violations.
• Frequently communicate with employees on a formal and informal basis regarding the importance of safety. Establishing a proactive safety program is an effective way to reduce losses, positively impacting your mod and workers’ compensation premium. Scirocco Group is a best-practices insurance agency specializing in risk management for contractors. Scirocco Group has the loss control experience to help subcontractors promote safety and control their workers’ compensation premium. For more information, contact Fran Lusardi at firstname.lastname@example.org or Bill Bilinkas at email@example.com or (201) 727-0070.
Your mod factor has a direct impact on your workers’ compensation premium. The key to controlling your insurance costs is accident prevention. • The mod is calculated based on data reported to the rating bureau by past insurers. Incorrect or incomplete data can cause incorrect mod factors. Review loss and payroll data to ensure the calculation is complete and accurate. • Losses remain in the experience rating formula for three years. The experience modification factor is influenced more by small, frequent losses than by large, infrequent ones. • Develop a sound safety program, return to work program and appropriate prevention procedures to reduce loss frequency.
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Feature Handling the Problem Project
by David R. Cook, Autry, Hanrahan, Hall & Cook, LLP Most subcontractors have experienced the “problem project.” These projects are rife with delays, defective work, design errors, major changes, excessive RFIs and broken handshake deals. They drag on long past the completion date, require additional overtime and temporary labor, and always bust the cost budget. Losses from problem projects can offset net income from multiple other projects and may even result in extensive litigation. When such projects are encountered, subcontractors are either reactive or proactive. Reactive subcontractors ignore the problem and allow it to continue, accumulate their losses, and hope for eventual recovery one day. They are at the mercy of the upstream contractor’s honesty in evaluating the cause of the problem and willingness to compensate the affected subcontractors. On the other hand, proactive subcontractors know how to spot the problems early. They can identify the red flags before a project jumps off track and address them directly or in cooperation with the upstream contractor. They also assert their rights early and often. By identifying problems and notifying the upstream contractor, proactive subcontractors facilitate in finding a solution, limit the ability of others to improperly shift blame, and in the process, satisfy contractual requirements to recover any resulting losses.
Defining the Problem Project The telltale characteristics of a problem project are busted labor, material, and time budgets. Putting aside the possibility of a bad estimate, a bust in the labor budget can result from being on the job longer, possibly due to delays, defective design or construction, or project shutdowns and suspensions. Or it could result from employing existing employees more hours than expected, which may result in expensive overtime pay. It can also result from bringing additional employees to the jobsite,
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or even the use of higher-cost temporary labor. These circumstances usually occur when the work is accelerated to compensate for prior delays or an owner’s request for early completion, or when coordination failures result in inefficient work, trade stacking, and crowded work areas. Whatever the cause, the result is the same— higher labor costs and a budgeted labor budget. A bust in the materials budget can result from uncompensated changes in the work and the correction of defective work, whether incorrect materials or defective installation. Another red flag of a problem project is noncompliance with the schedule, or a busted time budget. A busted time budget can be costly because time usually drives the increase in several job costs. Busts in the time budget can result from the failure to start a job on time, slow progression of the work, inefficient progression, and other forms of delays.
Typical Causes of Problem Projects It is not enough for subcontractors to merely identify problem projects, they also must know what causes them. There are many potential causes of problem projects, but some appear more frequently than others. Common causes include inferior schedules, lack of progress or inefficient progress, lack of coordination and supervision, design errors, and defective work.
Inferior Schedules An inferior schedule can wreak havoc on a job. Subcontractors use the schedule to plan their labor and materials, delivery of equipment, and storage availability. So when an owner or contractor fails to properly schedule a job, subcontractors’ plans fall through and additional costs rack up. Inferior schedules result from insufficient activities,
improper logic or lack of logic, lack of input from subcontractors, razor-thin float, and failure to consider scheduling constraints such as weather or ownerimposed constraints. Even if the contractor develops a good initial schedule, it must be updated frequently. Failure to account for subsequent events on the ground can render a good schedule useless. Spotting inferior schedules is not always easy. While some logical errors may be apparent from the schedule printout, normally scheduling problems are embedded in the metadata, which is not usually distributed to subcontractors. But subcontractors will know if they have not been approached for input on a schedule. They also will know if schedule updates are not frequently distributed.
Lack of Progress or Inefficient Progress Even with a good schedule, a project can go off the rails when other trades fail to complete their work on time. Signs of inadequate progress include typical delays, frequent startstops, hopscotching, and trade stacking. Scheduling logic is based on the idea that work flows in a typical pattern, and delays in predecessor activities can impact successor activities. These impacts include delays, inefficiencies, and additional rental costs. As a result, subcontractors should keep a close eye on the activities that precede their work and watch for signs of inadequate progress. As an example, many of the interior trades cannot start their inside work until “building close-in.” They may have rented equipment expecting to start work on time. But if the steel subcontractor does not get the decking in place on time, then “building close-in” will not occur on time. This inevitably will delay the interior trades’ work. They will need to put their labor to work on
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other jobs (if any are available). Some trades have a hard enough time attracting labor, so any downtime may result in loss of skilled labor. In addition, the interior trade may incur additional costs for the rental equipment that will be needed at another time. Subcontractors can spot progress issues by comparing the project schedule with the progression of work. If trades are not starting and stopping near the scheduled start or stop times, or if their work is not performed in a typical flow, delays could result. Other signs include haphazard work days (i.e., trades showing up for work infrequently) and frequent transitions among various areas of job (i.e., trades hopscotching around the job site looking for available work).
Lack of Coordination and Supervision Another factor of a problem project is lack of coordination and supervision by the contractor or construction manager. Coordination and supervision are essential to the efficient flow of work and compliance with the schedule. When these tasks are not performed properly, the job and especially subcontractors suffer. Many court cases recognize the tremendous impact that lack of coordination and supervision has on subcontractors. Fortunately, subcontractors can spot lack of coordination and supervision. They know whether the contractor or construction manager is frequently and proactively seeking their input, requesting submittals, or pressing them to perform faster. They can easily assess how frequently meetings are held, including jobsite meetings, progress meetings, coordination meetings, and pre-coverup meetings. When these basic functions are not performed, the project may be headed for trouble.
Design Errors An overlooked but often important cause of problem projects is design errors. Design errors can include, for example, lack of specificity; inadequate coordination among drawing divisions; and failure to incorporate codes,
applicable standards, or the owner’s true wishes. Each of these problems can negatively impact the schedule, the cost of work, and ultimately a subcontractor’s job success. Design errors can be spotted by inspecting the drawings and seeking input from interconnected trades. A common sign of design problems is a high number of requests for information. As other trades begin to assess their scope of the drawings, they issue RFIs to seek clarification and resolve conflicts. When these RFIs exceed the typical number of RFIs for the type of work, it is a potential warning sign.
Defective Work Another red flag is defective work. It affects not only the work performed defectively but can affect surrounding work or work that must be removed to perform remedial work. It is difficult to predict when defective work will occur. For this reason, it is important to assess the experience and attentiveness of the contractor’s or construction manager’s superintendent and supervisory staff. It is also helpful to assess the other trades and their propensity for defective work.
Avoiding and Responding to Problem Project Red Flags The best kind of problem project is the one avoided. So the first line of defense is to assess the contractor or construction manager, other trades, designer and specialty engineers, and the owner. If the project participants are known for problems, it may be best to avoid them, especially if other work is readily available. After accepting a job, subcontractors should be on guard for the red flags discussed above. The subcontractor’s foreman, superintendent, and project manager should receive training on the red flags and what happens if they are ignored. They should also know how to respond when they observe red flags. Upon encountering a problem project, the first response is to be proactive in bringing the project back on track. There is no substitute for developing a good relationship with the contractor’s or construction manager’s superintendent, and subcontractors should make
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a habit of frequently consulting with them. Because the superintendent cannot remedy problems of which they are unaware, subcontractors should quickly notify the superintendent of red flags and emphasize the impact on the job as a whole. If the superintendent does not or cannot resolve the problem, consider going up the contractor’s or construction manager’s corporate ladder until proactive measures are taken. It is also advisable to negotiate a contract that anticipates potential problems. Many subcontracts are written to push the financial burden of project problems down to subcontractors. Avoid those subcontracts and consider the following: • Eliminate no-damages-for-delay clauses. These clauses eliminate the incentive for upstream contractors to keep the project on schedule. Permit recovery of delay damages when caused by the owner, upstream contractor, or other trades. • Increase the number of days required to provide notice of potential claims. • Eliminate or minimize claim waivers. • Expressly require the contractor or construction manager to coordinate and supervise the work as necessary to promote efficient and timely work. Of course, some negative subcontract provisions cannot be avoided. So the subcontractor must review each subcontract, identify the requirements to assert claims, and set up a system to ensure compliance. David R. Cook is a partner at the Atlanta-based law firm, Autry, Hanrahan, Hall & Cook, LLP. He practices in the firm’s construction law group, representing specialty contractors in connection with their contract negotiation and drafting, commercial and corporate transactions, and dispute resolution, litigation, and arbitration of construction claims. His profile and contact information are available at www.ahclaw.com.
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Feature Solving the Healthcare Problem for Subcontractors by David Slepak, Redirect Health The healthcare crisis is getting worse by the day. The issue is taking center stage in Washington, D.C., but a real solution is not yet within reach. Meanwhile, insurance companies ratchet up their rates every year— often for fewer benefits—placing a huge financial burden on individuals and businesses nationwide. The construction and building industry has been hit especially hard. Contractors and subcontractors want to provide their employees with competitive health benefits, but the high price of traditional health insurance cuts dangerously into company profits. Moreover, in an industry with a high percentage of support-level and seasonal workers, most employees can’t afford their share of costs for high-deductible health plans or coinsurance. Business owners are forced to make a difficult choice: pay exorbitant prices that cut deeply into their bottom line, offset premium increases by cutting coverage, pass more costs on to their staff, or trim their workforce. It seems there are no good options. But a solution is emerging, and it’s a game-changer—especially for construction companies with a fluctuating or support-level workforce. A self-funded plan may be the right strategy for curbing costs while still offering competitive benefits.
The Big Picture Few people understand the actual costs of services performed by providers and hospitals. Despite all of the banter about cost transparency, healthcare pricing is still shrouded in mystery. Insurance premiums rise every year, and with no real information about cost drivers, people begin to panic. Companies and legislators attempt to develop solutions focusing on healthcare insurance, but their premise is faulty, so the solutions fail.
A Real Solution The self-insurance model came about when employers’ frustrations over healthcare costs reached a tipping point. Every year, premiums go up— even when companies’ utilization goes down. This is because businesses are all lumped together in risk pools, so employers’ efforts to manage their own healthcare claims are just a drop in the risk pool bucket. Businesses also began to recognize the high price of insurers’ profit margins. They no longer wanted to pay the markup for healthcare services. The wanted simple, straightforward, transparent healthcare.
What Is Self-Funding? Self-insurance is almost universal among large employers, but it is a growing trend among businesses of all types and sizes—particularly in industries like construction. Companies that self-fund their healthcare assume the claims risks of their employees. The business pays workers’ health claims directly or through a third-party administrator, and costs vary month-tomonth depending on employees’ use of services. Self-insurance benefits can include medical, chiropractic, dental, vision, prescription medications and workers’ compensation. For employees, the health plan may look and operate exactly the same. From the company’s standpoint, costs are better controlled and administration is streamlined.
Who Can Self-Fund? Self-funded plans are almost universal among large employers. In fact, the Kaiser Family Foundation reports that 82 percent of covered workers in large firms are enrolled in plans that are either partially or completely selffunded. Today, the model is growing in popularity among companies of all sizes, especially with construction and building companies that employ a large
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number of support-level workers who typically haven’t received comprehensive health benefits in the past.
Advantages to Self-Funding 1. Customization: Companies that have fund can customize benefits packages to meet the needs of staff. For example, construction companies may want more coverage for injury and chiropractic care, while a company with a young workforce may choose to offer family-planning benefits. Major medical plans aren’t as flexible. 2. Workers’ Compensation: Many support-level workers can’t afford traditional insurance and use workers’ comp for basic injuries requiring only first aid. In other cases, employees submit claims for injuries sustained outside of the workplace, most often because they simply don’t have other healthcare options. As a result, workers’ comp costs can easily spiral out of control, and eMod scores drop, too. It creates a terrible domino effect for subcontractors, as poor eMod scores can prevent them from winning contracts. Selfinsurance solves this problem by providing an affordable, simple route for low-income workers to access the right healthcare. 3. Transparency: Unlike traditional insurance, self-funded plans give employers complete transparency in healthcare spending. They have access to every claim, from prescriptions and primary care visits to ER usage and specialists. This allows them to address red flags and determine how best to manage benefits and control costs. 4. Plan reserves: Employers who selffund retain the health plan reserves, giving them the option to invest the money and earn interest on the reserves. With a fully insured plan, those dollars simply line the pockets of the insurer.
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How the Difference Between ‘Extra Work’ and ‘Additional Work’ Can Impact Claims for Payment by Stephen Moore, Galloway Johnson Tompkins Burr & Smith Most of us are passionate about the work we do. Nevertheless, we typically like to get paid for it. And usually we prefer to get paid without a fight, and certainly without having to file a lawsuit against one of our customers. Disputes over payment can take many forms and spring from many sources, but one that merits special attention, because of a nuance in a way that only lawyers could cook up, is a dispute over the difference between “extra work” and “additional work.” Understanding the difference can ensure that you get paid without having to pay your lawyer. To understand why the distinction between extra work and additional work matters, it is important to understand the concept of quantum meruit, a Latin phrase meaning “as much as is deserved.” The law does not allow one to benefit unfairly from another’s labor without paying. While it is certainly preferable to have everything clearly agreed upon in black and white, that is not always possible or practical. The good news is that a contract, written or otherwise, is not always required to get paid for work you have performed. The doctrine of quantum meruit is available to a contractor who has performed work that has unfairly benefitted another. To recover in quantum meruit, which is to say, in the absence of an oral or written contract, the contractor must show that the general contractor or owner voluntarily accepted a benefit that would be unfair to retain without payment. The law will imply a promise to pay for services if the contractor can demonstrate a reasonable expectation that the party who benefited from those services would pay for them. On the other hand, courts will not look
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favorably at any claim for payment where the owner or GC was unaware the services were being performed and therefore could not have agreed to pay. For an easy example of quantum meruit, suppose you bid a job to perform landscaping work for Business A. Due to a miscommunication, your crew shows up at Business B, next door, advises Business B it is there to do the work and then performs several days of work, cutting grass, pruning trees and installing a sprinkler system, all under the watchful and appreciative gaze of Business B’s owner. Although you never had a contract with Business B, the law will not allow Business B to take the benefit of that work without paying its reasonable value. To do so would be unfair, since owner watched the work as it was performed and knew you expected to be paid for it. On the other hand, if your crew showed up and performed the same work on a Saturday, while the business was closed, you would not get the benefit of a claim in quantum meruit. The test is whether the benefitting party agreed to or acquiesced to the work. Of course, real life is rarely that clear cut. On many projects, the plans and specifications tell us only so much. Unforeseen circumstances can alter the scope of a job in significant ways. Site conditions may turn out to require additional, unanticipated work. A job to renovate a kitchen may unexpectedly require installation of a new subfloor before contracted-for tile work can proceed. Or, the owner could ask you to retile an adjoining bathroom when you are finished with the kitchen. The first example is additional work, and the second example is extra work.
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Additional work is work necessarily required in the performance of the contract and for which no additional compensation is owed absent an agreed change order. In fact, failing to perform additional work results in a breach of contract. Extra work, on the other hand, is work not governed by the contract because it is not part of the work contemplated by the contract, either by the known circumstance, the general description of the scope of work or the express language of the contract excluding such work from the scope. Many contracts provide a mechanism for paying for additional work— commonly a change order. Contractors who find that additional work is necessary to complete the work contemplated by the contract are well-advised to seek and insist on a change order before proceeding forward, or else be prepared to swallow the cost of the additional work. Extra work, however, is not contemplated by the contract. If a contractor performs that work to the owner’s benefit with the reasonable expectation of getting paid, and with the owner’s knowledge and acquiescence, the contractor may have a valid claim in quantum meruit, even in the absence of any change order. In the abstract, the difference between additional work and extra work is easy. In practice, however, the difference can be “tenuous in the extreme,” as one New York appellate court described it in the case of Buckley & Company vs. City of New York. In that case, the contractor agreed with the city to build a pumping station but found unexpected subsurface conditions that delayed work and required remedial measures. The court pointed out that the contract in
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that case defined “extra work” as “work other than that required by the contract at the time of its execution,” which the court properly noted “would seem to be inclusive of “additional work.” This kind of circular definition of these terms can make one’s head spin. In the Missouri case of Wisch & Vaughn Const. Co. v. Melrose Properties Corporation, a contractor brought a claim against the property owner for 12 items of extra work, and the court entered judgment in the contractor’s favor. Under its contract with owner, the contractor was obligated to construct a motel in accordance with the architect’s drawings without additional compensation so long as the architect’s specifications were within “the general scope” of work. Wisch & Vaughan argued that the 12 items for which it was awarded damages by the trial court were outside the general scope of the contract and were thus “extra work.” Among the items of extra work were requirements for steel reinforcing rods in the concrete parking lot and a slotted drain for storm drainage, both of which were items added after the contract was signed. Although each of these items were part of the overall construction of the motel, they were not completely
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5. Cash flow: With self-insurance, employers don’t pre-pay for coverage. Cash flow is improved because businesses only pay when claims are incurred. Moreover, businesses aren’t on the hook for insurance companies’ marketing costs or profit margins. The Self Insurance Educational Foundation estimates these cost savings at 10 percent to 25 percent in non-claims expenses. 6. Tax exemption: Self-insured plans are regulated under federal law (ERISA), so employers are not subject to state-specific health insurance regulations and benefit mandates. As a result, companies have more flexibility in designing their benefits. Additionally, self-funded plans are exempt from state health insurance premium taxes. This translates to a savings of up to three percent of the total premium dollar value of a traditional plan.
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independent from the project but were “extras” that were not part of the originally contracted scope of work. Thus, the contractor was able to recover in quantum meruit. In another Missouri case, Husar Industries, Inc. v. A.L. Huber & Son, Inc., Huber contracted with Husar to construct a building. While performing site work, Huber discovered buried debris consisting of old building foundations and other material that had to be removed and replaced with compactable soil. Husar, the property owner, was frequently on site while this work was performed, and Huber notified Husar then that the work would be considered extra, over and above the contract price. Husar, of course, later declined to pay for the extra work, and Huber brought a quantum meruit claim. Husar argued that the contract had a very restrictive change order requirement for any extra work and that no change order had ever been approved. Nonetheless, the court found that the contract expressly excluded the debris removal work from the scope of the contract so there was little question that Huber’s extra work, done under Husar’s watchful eye, was a benefit unfairly conferred on him. The jaded lawyer in me knows that nothing is ever simple, and these sorts
of disputes will continue to arise. To be certain you will get paid for work not contained within your scope of work, it is best to document and make clear all communications with the owner/ contractor and as much of the work performed as possible—including photographing and keeping a detailed log of the work. Forget the distinction between additional work and extra work, and secure a change order, or a contract modification, before proceeding with work you never anticipated nor agreed to. Trust and a good working relationship often lead to less recordkeeping and documentation. To twist Ronald Reagan’s wise words a bit, I recommend instead that you “Trust … but document.” Otherwise, you may have to fight to get paid. Stephen Moore is the director of Galloway Johnson Tompkins Burr & Smith’s office in St. Louis, Mo. For over 20 years, Moore has practiced in state and federal courts representing businesses, professionals and insurers in property and casualty litigation, including commercial auto, professional malpractice, construction defect, fraud, coverage, first party property litigation and workers’ compensation. He can be reached at (314) 725-0525 or SMoore@ gallowaylawfirm.com.
Solving the Healthcare Problem for Subcontractors by David Slepak, Redirect Health
Mitigating Risk 1. Stop loss: Companies that selfinsure often purchase a stop-loss insurance policy for catastrophic illnesses and accidents. With this coverage, the business pays employees’ health claims up to a certain dollar amount. Stop-loss insurance allows employers to modulate their risk and protects them from unexpected financial loss. 2. Streamlined Care Delivery: Companies may choose to hire a third-party partner to help employees navigate the healthcare system. In fact, working with a partner organization is essential to realizing the full benefit of a self-insurance model. The partner provides a concierge-level of service to ensure employees get the care they need at the most appropriate site of service. For
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businesses, this means lower costs. For workers, it’s a simple, convenient and satisfying experience—a 180-degree difference from most people’s experience of healthcare. America’s healthcare outlook may seem bleak, but construction and building companies are no longer at the mercy of traditional insurance carriers or under threat of escalating workers’ comp and poor eMod scores that threaten the bottom line. They can take issues into their own hands through self-funding, and provide their employees with the care they really need while remaining competitive and controlling costs. David Slepak is director of Business Development for Redirect Health, which helps small and midsized companies build healthcare plans using a selfinsurance model. Learn more at www. redirecthealth.com/asa.
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ASA/FASA Calendar November 2017
13 — Webinar: Killer Contract Clauses presented by Russell O’Rourke, Esq., Meyers, Roman, Friedberg & Lewis
14 — “Employment Law Mistakes Most Commonly Made by Subcontractors” presented by Philip J. Siegel, Hendrick, Phillips, Salzman & Flatt
27 — Chapter Leadership Webinar: Developing Your Future Board Leadership Team (Complimentary) presented by Walter Bazan Jr., Bazan Painting Co. July 2017 11 – Webinar: “School of Risk Control Excellence: Employment Practices Liability” (Complimentary) presented by Laura Lapidus, Esq., CNA 24 – Webinar: “ASA Briefing on Federal and State Advocacy Activities” (Complimentary) presented by E. Colette Nelson, ASA August 2017 8 — “The Devil’s Triangle: Understanding the Overlap Between the FMLA, ADA and Workers’ Compensation Laws” presented by Philip J. Siegel, Hendrick, Phillips, Salzman & Flatt 22 — “Self-Funded Healthcare for Subcontractors” presented by Andrea Aker, Redirect Health September 2017 12 — “Lean Construction” presented by Ashley Colburn, Hoar Construction 26 — “How to Have a Multi-Million Dollar Impact by Asking ‘One More Question’” presented by Eric Anderton, Professional Leadership Coach and Trainer October 2017 10 — “Technology and Transparency— Part 2” presented by Stephane McShane, Maxim Consulting Group 20–21 — ASA Legal & Advocacy Meetings, Santa Ana Pueblo, N.M.
in the July 2017 Issue of ASA’s THE
December 2017 12 — “Ownership Succession Planning” presented by Stephen Bonebrake, Maxim Consulting Group January 2018
THEME: Cash Management
9 — “Indemnity and Hold Harmless” presented by Lee B. Brumitt, Dysart Taylor Cotter McMonigle & Montemore, P.C.
23 — “How the Difference Between Extra Work and Additional Work Can Impact Claims for Payment” presented by Stephen Moore and James Morris, Galloway Johnson Tompkins Burr & Smith
February 2018 13 — “Getting Better Subcontracts” presented by Eric Travers, Kegler, Brown, Hill and Ritter 28–March 3 — SUBExcel 2018, Tempe Mission Palms Hotel, Tempe, Ariz. April 2018 10 — “Lien & Bond Claims” presented by Timothy Woolford, Woolford Law, P.C. May 2018 8 — “Change Orders” presented by Joe Katz, Huddles Jones Sorteberg & Dachille, P.C. June 2018 12 — “Cash Management” presented by James L. Salmon, Benjamin, Yocum & Heather, LLC
Is Still King
of Cash Flow
• Cash • Retaining
and Motivating Employees
of a Successful Self-Funded Healthcare
Speaking: Subcontractor Exposure When Backing Out of Bids
Look for your issue in July. PAST ISSUES: Access online at www.contractors knowledgedepot.com
24 — “Using Drones: What Subcontractors Need to Know” presented by Brian Esler and Seth Row, Miller Nash Graham & Dunn LLP
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JUNE 5TH , 11:08 A .M .
A STAGGERING STATISTIC INSPIRES A LIFE-SAVING RULE IN AN INS TANT,
C A LV IN B ERGER SAW THE VA LU E O F IN - C A B B EH AV I O R TR A ININ G FRO M CN A
When a recent safety webinar revealed that 280,000 drivers are involved in serious accidents every year, Calvin Berger of Calberg Contracting took CNA’s recommendation to heart, and posted placards restricting cell phone use in each of his company’s vehicles. Now Calberg Contracting is filing fewer claims, and Calvin’s enjoying a handsome bonus for worker safety and performance.
When you’re looking for risk control programs that keep workers dialed in to relevant industry trends … ® we can show you more.
To learn more about CNA’s coverages and programs for building contractors, contact your independent agent or visit www.cna.com/construction. The examples provided in this material are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice. “CNA” is a service mark registered by CNA Financial Corporation with the United States Patent and Trademark Office. Certain CNA Financial Corporation subsidiaries use the “CNA” service mark in connection with insurance underwriting and claims activities. Copyright © 2017 CNA. All rights reserved.