How (Sub)Contractors Can Ensure They Protect Their Rights to What They Are Owed
By Michael Metz-Topodas, Saul Ewing LLP
Despite construction project’s fundamental premise—contractors should receive payment for work properly performed—too many subcontractors have lived through too many horror stories about projects where that does not happen. Such scarring experiences can lead subcontractors to use “protective” pricing—bidding or offering prices for project work high enough to “cover” any potential losses from underpayment. Such practice hurts not only subcontractors because over-pricing risks losing work, but also all construction industry stakeholders because it raises prices for everyone. For a more efficient, reliable, stable, and predictable business environment, subcontractors should instead ensure they receive payment for all work performed by understanding and enforcing their contract terms, especially those regarding change orders, lien releases, and claims.
Change Orders
Most subcontracts include a process for preparing, submitting, and executing change orders, also known by their more common legal term—written amendments to an agreement. Such amendments typically address work not covered in the original subcontract agreement. Subcontractors need such change orders where project circumstances or a contractor’s direction require them to perform any construction beyond the original scope of work. Otherwise, subcontractors risk performing such work for free, which harms all industry stakeholders.
Some subcontracts permit subcontractors to request change orders if done timely. Those time requirements can range from weeks to a few days, so project managers should familiarize themselves and their teams with such deadlines. In preparing the change order request or reviewing a change order for execution, subcontractors should ensure the document makes a full and accurate description of the work the subcontractor will perform and in a way that makes it clear such work falls outside the original scope of work. In exchange for such extra work, the change order should provide for not only additional compensation, but also a suitable extension of time to any deadlines the subcontractor has to complete its project work. Should the other party reject a change order request, even partially, or demand a subcontractor execute a change order that does not meet these standards, the subcontractor should consider only agreeing to such a change order under certain conditions. Most change order forms have language by which the subcontractor agrees that the change order represents a full and final resolution of the work described in it. To counter this provision, the subcontractor can issue a notice that it executes the change order only to keep the project progressing, but it reserves its right to dispute the work required and obtain additional compensation or time to perform.
Lien Releases
In dealing with lien releases, subcontractors should keep mindful of three issues: (1) whether they are executing an unconditional or conditional release, (2) whether the release pertains to liens or a broader set of claims, and (3) whether the release excludes any pending claims. Unconditional releases take effect immediately upon execution and often before the subcontractor has received a payment. Conditional releases do not take effect until payment to a subcontractor is made or, better yet, until the subcontractor receives payment. Many jurisdictions bar unconditional releases before a contractor receives payment, but some owners require them once payment is submitted. For either type, the language must state expressly that the contractor does not waive any rights to any liens, claims, or other actions unless and until it has received payment. Similarly, subcontractors should understand what they are releasing (all claims or just liens or a combination) and from what point in time does the release take effect (last date of work performed, date of most recent payment application). Due to lien releases’ typically broad scope, subcontractors should ensure before executing a lien release that they identify any pending claims or unexecuted change orders as preserved and exempt from the release’s scope. Failing to do so would likely mean a subcontractor loses all rights to pursue such claims, including in litigation. Should the lien release form not provide for such exceptions and the owner prohibits amending the form to include them, the subcontractor should consult counsel about other available legal measures to take under applicable law.
Claims
In addition to safeguarding claims from inadvertent waiver under a release of liens, subcontractors need to take measures during a project to preserve, prepare, and present such claims. Almost every construction contract has claim notice requirements with precise deadlines, such the AIA A201’s obligation to notify the other party of a claim within 21 days of the situation creating the claim. Although in certain jurisdictions failing to provide notice does not forever bar the claim, proper notice makes a claim easier, and less costly, to pursue.
Preparing claim involves a process that starts the moment the claim arises, not the day or so before it is submitted. Subcontractors making a claim should track all associated costs, both direct (such as labor and materials) and indirect (such as overhead). Subcontractors must ensure they keep records of tracked costs that are contemporaneous, detailed, verifiable, and calculable. Those records can include invoices, T&M sheets, daily work tickets, certified payrolls, time sheets, job cost reports, and daily reports. No matter what, subcontractors should not lose sight of the old adage: if it is not written down, it did not exist.
By following these the measures to preserve and prepare the claim, presenting the claim becomes a more user-friendly process. Typically, contractors prepare a letter or report outlining the events leading to the claim, the contractual basis for the claim, and the calculation of total costs—all supported by volumes of back-up documentation and data. Most construction agreements establish a multi-step claim procedure and dispute resolution process that could include: a meeting among the parties to resolve the claim, a decision on the claim by a project neutral, mediation between the parties, and arbitration or litigation. Competent construction counsel can guide a subcontractor through this process.
Conclusion
While change orders, lien releases, and claims provide valid grounds for concern on any project, understanding the risks they pose to project success can help position subcontractors negotiate such risk and enhance project success.
Michael Metz-Topodas is a partner in the Construction Group at Saul Ewing, LLP. His practice includes construction litigation, day-to-day project and claims counseling, contract review, drafting and negotiations, bid preparation and bid protests, and OSHA compliance and enforcement defense. Mr. Metz-Topodas represents general contractors, subcontractors, owners, designers, and suppliers on private, public, and federal projects. He counsels clients and handles construction disputes involving delay and inefficiency claims, design and construction defects, unforeseen site conditions, project scope disputes, bid protests, and payment claims, including mechanics liens, bond claims, and Miller Act claims. He can be reached at michael.metz-topodas@saul.com.
