by James T. Yand, Miller Nash Graham & Dunn, LLP
One of the keys to getting paid for equitable adjustments to the contract price is avoiding surprises. The general contractor has to get your change order funded by the owner, and this becomes increasingly hard to do when the budget is set, the contracts have been signed, funding is limited, and the project is nearing completion. Timing is crucial to making this process work. It starts with getting information out early once the adjustment is known, followed up with the necessary documentation that will support why the adjustment is necessary. Most contracts anticipate change orders so long as they fall into expected categories. Once an adjustment is foreseen, send out a placeholder letter or email saying that a change order is expected and the backup documentation will follow as soon as the details are known. In states that strictly enforce clauses regarding timely notice of claims, this early notice will avoid potential forfeitures. For example, in Mike M. Johnson, Inc. v. County of Spokane, 150 Wn.2d 375, 78 P.3d 161 (2003), the Washington State Supreme Court held that actual notice of the claim by the owner is not an exception to compliance with mandatory contractual protest and claim provisions. See also Paige Spratt, Strict Compliance With Construction Contract Notice Provisions: Detrimental to Contractors and Taxpayers, 40 Pub. Cont. L.J. 911 (2011).
Partnering with the general contractor consistent with the terms of the contract will help expedite the payment process rather than delaying notification and deferring resolution of claims for extra work. Unlike wine, payment disputes rarely get better with age.
Tell Your Story
We all know that a picture is worth a thousand words. Claim documentation should include photos and graphics whenever possible to illustrate both the need for the adjustment and the cost associated with the change. In this day and age, photos should also include video from drones that may be used in the construction process to track the progress of the project. Arrange for access to these photos and videos well before starting work. If there are discussions about a change in the field, this needs to be followed up in writing as quickly as possible. This documentation should be readily available to add to the change order when the time comes.
Remember, if it is a problem worth complaining about, it is worth documenting properly. The superintendent and project manager in the field must be the front line of correctly documenting changes and directives given on the jobsite as well as providing the narrative as to why a change order is justified. This information should be included in daily and weekly job logs. Use e‑mail when necessary, but text messages are typically too informal. Yet getting the general contractor to acknowledge and confirm the content of the message is very important to supporting a claim later. If you cannot agree on what happened, it is even more unlikely that there will be agreement on what extra should be paid.
Battle of the Best Books
Winning a claim is both an offensive and defensive process. If you receive a letter, e‑mail or change order that sets out certain events that do not accurately reflect the truth of events on the job, you need to respond promptly with a corrected version of what happened. This is called “protecting the record,” which is often the basis for getting paid, either during construction or after the dispute goes into litigation. Contractors have to think like lawyers when it comes to claims and disputes. The single most important factor in driving the successful outcome in a case is documentation of the facts. If your books and records are not complete, not properly organized, and not telling your side of the story, you are already at a big disadvantage and the value of your claim is significantly reduced for settlement purposes and unlikely to be persuasive before the fact-finder.
Use Tools That Document Impacts
One of the major components to equitable claims is impact to labor caused by delay or disruption of the work. A number of published studies (MCAA and NECA) assist in this process. One of the more recent is from the drywall industry: “Impacts to Labor Productivity in Steel Framing and the Installation and Finishing of Gypsum Wallboard,” published by the Northwest Wall & Ceiling Bureau. See http://www.nwcb.org/labor-productivity-study.html. These studies help evaluate impacts to labor productivity by establishing a connection between acts (trauma) and effects (productivity impacts and cost increases). Labor productivity is the single greatest variable affecting the construction contractor’s cost of production and profitability. External impacts to labor productivity have been the subject of numerous books and studies—and litigation—over the years. The key to any of these studies, however, is to provide the necessary documentation to support the damage claims that are developed. The causes of labor overruns include excessive overtime, changes to scope, material crowding, trade-stacking, weather, and site access.
Leading indicators of a job going sideways include schedule revisions, labor-control deviations, multitude of RFIs, and accusations by the general contractor of setting up for a claim.
The key documents that will be developed to prove up claims start with the contract but also include the schedule, daily log, correspondence, manpower loading graph, labor control (measured mile), RFIs, ASIs, CCDs, along with project records.
The accuracy of the submitted claim does not need to be proved with absolute certainty or mathematical exactitude. It is sufficient to furnish a claim that provides a reasonable basis for computation, even though the result is only approximate. It is enough to establish a rough order of magnitude for the negotiation process. If that does not work, it can be handed off to a claims expert to support the more precise damage amount.
Claim avoidance is always the preferred outcome. But that is not the real world of construction. Owners and general contractors know this to be true and should not hold it against the subcontractor if the process is handled correctly. After all, the contract requires you to give notice and provides for the claims process. Moreover, why should others be able to control your ability to perform the work in a timely manner? As soon as it becomes apparent that you may suffer additional cost as a result of impacts to the work, notify the general contractor of the potential impact, describe the impact, and provide a detailed accounting of the projected costs. It is often important to set up a separate cost code to track changes or delays once they are identified. A convincing argument/narrative for the projected costs may result in an approved change order rather than a claim for equitable compensation, after the fact. If you are unsuccessful early on, the correspondence submitted before the event will increase your chances for recovery if the disputed costs go to claim/arbitration.
General contractors love to say that they “didn’t know.” To anticipate this excuse, attach to the schedule of values or billings an accurate accounting (similar to specific damages analysis method) that clearly indicates the original contract amount, change order log, amount paid to date, outstanding amount owed, and revised contract amount. Request at least monthly meetings with the general contractor to review the change order log, and keep the added costs in the contractor’s face at every opportunity. Getting paid sometimes requires being a persistent pest, so don’t be afraid to be the squeaky wheel that gets paid.
Beware of the typical approaches from general contractors to avoid making any payment. Examples: “We’ll work with you,” so no need to file a formal claim or lien; “I don’t want to see any letter,” with the implied threat that you will be dropped from the approved subcontractor list for making a claim; “We’ve got this great job coming up and we’d like to use you, but …”; and “We have set aside _____ money that we may be able to send your way.” Finally, “I’m sorry; the owner just won’t go for it.” The common thread in all these approaches is the attempt to get the subcontractor to hold off making a claim in the misguided belief that the problem will just go away. Typically, the general contractor is not waiting around, hoping to be paid by the owner, and is diligent in pursuing its own claims for additional compensation. It should expect nothing different from a subcontractor.
When to Get Help
If it appears, at any time, that your request for equitable adjustment or claim will have to go through the claims-disputes portion of the contract, you should start seeking legal/professional counsel. A good indicator that trouble is brewing is the general contractor’s refusal to consider reasonable compensation or refusal to advance your request for payment to the owner. You may also discover that proper documentation is lacking in your project file to support the claim being made. Having read this article, you now understand the importance of documentation and what is necessary to achieve a successful outcome. Re‑creating the wheel is costly and, more often than not, futile. Your attorney should be available for a quick consultation in these circumstances and be part of the construction team. The consultation does not need to necessarily lead to a paid retention until the time is ripe. These early discussions with your trusted legal adviser are critical to not jumping the gun, but also not waiting too long to bring in the big guns you need to get paid.
James Yand is a partner with Miller Nash Graham & Dunn, LLP, Seattle, Wash. He has more than 20 years of experience resolving disputes for business owners and individuals in construction law, products liability, e-discovery, franchise and commercial law. He can be reached at (206) 622-8484 or james.yand@millernash.com.
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