By: Jim Sienicki and Christian Fernandez, Snell & Wilmer L.L.P.
An ounce of prevention is worth a pound of cure—a concept subcontractors would be prudent to adopt. Often the best approach a subcontractor can take to prevent or manage claims and disputes on a project is to implement best practices before the dispute arises. This may prevent the dispute from ever arising or best position yourself to prevail in the dispute. In addition, the “ounce of prevention” cost is often significantly less than the “pound of cure” cost, particularly when the pound of cure involves arbitration or litigation. For instance, it often costs significantly less to hire an attorney to review and revise a subcontract before executing it compared to hiring an attorney later to arbitrate or litigate a dispute.
Below are a few of the various “best practices” that subcontractors can implement at the management level and field level to improve a subcontractor’s ability to deal with and manage common claims and disputes. While many of these best practices may seem obvious, you would be surprised how often subcontractors fail to effectively implement such practices, leading to disputes that may otherwise have been avoided.
Management Level
Understand Key Contract Provisions and Applicable Law: General contractors often require that subcontractors agree to the general contractor’s subcontract agreement. Therefore, negotiating and understanding key contract provisions before the subcontract is executed is important. Key subcontract provisions often include those governing payment, change orders, and schedule requirements. In addition, it is imperative for a subcontractor to understand applicable law, which may include mechanics’ lien law and prompt payment law, as well as the steps a subcontractor must take to timely comply with such requirements and law.
Ensure field level personnel are implementing best practices: Field personnel are the boots on the ground and may ultimately dictate a project’s success. Sloppiness in the field may quickly lead to costly disputes and claims, particularly when field personnel fail to comply with the requirements of the subcontract. Management ensures that field personnel are putting in the effort to pay attention to, and execute, the small but necessary details when managing a project to put the company in the best position to prevent, assert, defend, and manage claims when they arise.
Create field level summary sheets and checklists: Create a summary sheet for field
personnel that specifically sets forth key requirements and information from the subcontract and incorporated prime contract. In addition, proper checklists with items that field personnel should be considering on a regular basis (i.e., a modified daily report form) is a relatively cost effective way to ensure that field level personnel are implementing best practices on a regular basis. For instance, a summary sheet may identify key prime contract and subcontract provisions boiled down into an easily digestible format that field personnel can reference throughout the project to ensure compliance with the subcontract terms in the field. In addition, a daily report form can serve as a checklist to remind field personnel of key items to consider on a daily basis, such as:
- Was work outside the original scope requested today? If so, notice should be promptly provided upstream complying with the subcontract notice terms, and a written change order should thereafter be prepared in compliance with the subcontract terms. Did the additional work impact the subcontractor’s planned critical path? If so, the change order should include a request for an extension of the contract performance period in compliance with the subcontract terms.
- Did anything else impact the subcontractor’s critical path and cause a critical path delay to the project? If so, then a subcontract agreement compliant delay notice should be issued.
In turn, the checklist may remind the field personnel to refer to relevant information in the summary sheet to guide the field personnel through the actions that should be performed to comply with the subcontract.
Work with legal counsel early and often: Subcontractors are often reluctant to involve an attorney until a dispute has arisen and is in full swing. Understandably so, as attorneys are often expensive and thus may affect the bottom line. But consider this example: it’s usually a better idea to hire an accountant to assist with complicated tax filings rather than hiring the accountant after the IRS is alleging that additional taxes and penalties are due. Similarly, it often makes far more sense to work with an attorney to advise you or to review and revise a construction contract before executing it than hiring an attorney to litigate or arbitrate a contract dispute. Working with an attorney before a dispute arises, or when a dispute is just beginning to brew on the horizon, to try to avoid a lawsuit or best position you for a lawsuit may often be far more cost efficient than hiring an attorney later to litigate.
Field Level
Read the prime contract and subcontract: A subcontractor’s onsite leadership and management teams (project managers, superintendents, etc.) are the tip of the spear when it comes to best positioning the subcontractor to succeed. The time for such personnel to familiarize themselves with key provisions from the subcontract is not when the project is already going downhill or when a dispute is brewing. The time to do so is before the project starts to ideally avoid the dispute entirely. In a perfect world, key field personnel should be familiar with the entire subcontract and key provisions from the prime contract, but key field personnel should particularly pay attention to the following:
- Change order provisions.
- Notice provisions (i.e., provisions that require a subcontractor timely give notice to the general contractor upon the occurrence of an event, or the subcontractor may potentially waive the ability to assert its rights).
- Provisions governing delays, including under what circumstances a delay may be excused and/or compensable.
- Provisions concerning the subcontractor’s project documentation responsibilities, such as whether the subcontractor is obligated to prepare and maintain daily reports, job cost summaries, progress reports, submittals, schedules, etc.
Follow the subcontract: All too often when the project is underway and the focus is on performing timely and quality work, it is easy to forget to dot the “i’s” and cross the “t’s” of the subcontract requirements, which can later burn a subcontractor. One of the primary purposes of negotiating and signing a subcontract is to establish the parties’ agreed upon course of conduct. The likelihood of a dispute increases dramatically if a subcontractor disregards the terms of the subcontract during the project. For example, subcontracts typically set forth how change orders, delays, notices, and project documentation will be handled. When field personnel fail to comply with these subcontract provisions, disputes arise, and subcontractors may then face an uphill battle.
Document, communicate, document, communicate: Documenting and communicating regular ongoings and key issues throughout a project will often best position a subcontractor to prevent, defend, assert, and/or manage a claim. For instance, should a subcontractor need to defend itself against a general contractor’s claim for delay damages—or should the subcontractor be asserting a claim for delay damages against the general contractor—preparing and maintaining proper documentation, including photos and video, during the project relating to the delays may often be the key to the subcontractor’s success. Whenever possible, a subcontractor should document and communicate with the general contractor through daily reports, photos, videos, meeting minutes, and schedule updates regarding project status, key project milestones, and any issues that may be impacting the subcontractor’s work. Always strive to document in writing. Alarms should sound in the subcontractor’s field personnel’s head when a general contractor tells the subcontractor to not worry about documenting or communicating something in writing because the parties have orally agreed or will handle the details later. Many times, when it becomes time to handle the issue, the parties’ understandings as to what was orally agreed to no longer align and a dispute arises. Often, in this regard, the most important thing about a contract is who you contract with.
There is no silver bullet for preventing all issues, claims, and disputes from arising on a construction project. But implementing best practices before an issue, claim, or dispute arises often puts a subcontractor in a much better position to successfully navigate and prevent or manage the issue, claim, or dispute.
About the authors:
James J. Sienicki is a construction and commercial litigation partner with Snell & Wilmer in Phoenix, Arizona. His robust practice covers a wide range of services such as construction contract preparation, construction law representation and litigation, procurement law and bid protests, general commercial litigation, creditors’ rights and other litigation, alternative dispute resolution (mediator, arbitrator, advocate), and appellate matters. A section of Jim’s practice includes serving as a mediator and arbitrator of construction disputes and he is a panel member of the American Arbitration Association (AAA). He is also a fellow of the Construction Lawyers Society of America, a peer-selected, rigorously vetted organization of the nation’s best construction lawyers. Jim is widely recognized for his work by leading legal publications such as Chambers USA: America’s Leading Lawyers for Business® for Construction (2024), and by The Best Lawyers in America® for Construction Law and Construction Litigation (2003-2024) as well as Commercial Litigation (2014-2024). Jim led the firm’s construction practice group for over 15 years and currently serves as the editor of the group’s Under Construction Newsletter, a publication dedicated to discussing relevant and trending issues facing the construction industry. With decades of experience navigating complex construction and commercial law, Jim Sienicki is a trusted advisor to his clients.
Christian Fernandez is a member of the firm’s commercial litigation practice group. In addition to handling general commercial disputes, Christian’s practice focuses on construction, real estate, and investigations, government enforcement and white collar protection. Christian has experience representing clients throughout the litigation process, including trial. In his construction practice, Christian regularly represents owners, developers, contractors, subcontractors, and suppliers in all aspects of construction disputes, including delay, defect, wrongful termination, change order, mechanic’s liens, and breach of contract disputes.More information on Snell & Wilmer can be found at swlaw.com
