By Timothy J. Woolford, Woolford Kanfer Law, P.C.
Properly preparing and submitting construction claims is among the most important aspects of managing a construction project. Succeeding in your claim(s) can be the difference between a profitable project and one that loses money. Generally speaking, a claim is the assertion of a right to additional compensation or to extension of time, or both, due to work or delays that were not required or contemplated by the subcontract. This article discusses important tips and steps that subcontractors must take and follow to give them the best chance to succeed on their claims.
- Strictly Follow the Subcontract. It is essential to strictly comply with the subcontract as it relates to notice of claims as well as all other aspects of your claim. When negotiating the subcontract, careful attention should be paid to the timing and process for submitting claims. Many subcontracts prepared by construction managers and general contractors contain traps that are designed to cause subcontractors to inadvertently waive claims. They often have extremely short notice periods, meaning that written notice of the claim must be provided to the customer almost immediately after the subcontractor discovers the condition giving rise to the claim. While standard industry contracts, such as those by the AIA, typically require more reasonable notice periods such as 21 days, subcontracts prepared by many CMs and GCs afford much less time to the subcontractors, such as 3 days (I have even seen 48 hours). If you miss the deadline, it gives the customer an easy basis to deny your claim even though you might otherwise be entitled to the relief you seek.
It is also critical to obtain a copy of the GC or CM’s contract with the owner (the prime contract). The terms and conditions of the prime contract most likely are part of your subcontract through its flow down provisions. It is essential to identify the claim requirements in the prime contract so that they are also strictly followed. You also must ensure that you provide notice of the claim to your customer in time for the customer to provide timely notice of your claim to the owner.
It is also important to understand and follow the subcontract requirements regarding the content of claims. Many subcontracts contain very specific detailed requirements for the information that must accompany your claim notice. If you are claiming delay, for example, and seeking additional time, subcontracts often require you to specify the specific number of days of delay that have been experienced and/or require you to identify the specific critical path activities that were impacted and by how many days. Some requirements may seem impossible to fulfill but do your best to fulfill them anyway. If the number of days cannot be determined at the time of claim submission, state that in your claim notice and follow-up as soon as more information becomes available enabling you to estimate the specific number of days of delay you are claiming and the additional costs of the delay. Follow-up after your initial claim notice with more notices updating the customer with more information as it becomes known. Continue notifying the customer of the effect of the delay on your work. Once the extent of the delay and its impact are known, supplement the claim by identifying the cost. Make sure your claims are supported by detailed backup that substantiates and supports every aspect of the relief you seek. Every dollar sought should be supported by detailed records, such as timesheets, subcontractor or supplier records, accounting information, invoices, rental receipts and the like. Unless the source documents supporting all of your claims are provided, you are inviting the customer (or the owner in the case of a pass-through claim) to deny the claim due to lack of supporting documentation.
- Pass-Through Claims. Many subcontracts condition your right to payment for additional compensation and for additional time on the owner granting the same relief to the customer. Construction lawyers refer to such provision as pass-through liquidating clauses. They peg your recovery to the amount the GC actually recovers on your claim from the owner. If the owner denies your claim, you are entitled to nothing under the subcontract. These clauses are very dangerous, and you should delete them during subcontract negotiations and replace them with the following:
Subcontractor’s entitlement to adjustments in the subcontract time or price for changes in the work shall not be contingent upon or limited to the amount that the Contractor receives from the Owner. Under no circumstances does the Subcontractor waive its right to payment for extra work performed by the Subcontractor pursuant to instructions from the Contractor.
- Avoid Inadvertently Releasing or Waiving Claims. As part of the payment process, subcontractors are typically required to sign waiver and release forms as a condition of receiving progress payments. Do not assume that these forms are boilerplate harmless documents that have no effect on claims, including pending change order proposals. Release forms often state that in exchange for the payment, the subcontractor waives and releases claims or requests for payment that arose during or before the period covered by the payment application. You should conspicuously type or write on the release form specifically identifying claims that you do not intend to release or waive. For example, if there are pending change order proposals or time extension requests, identify them by name and number and state that they are not waived or released.
When reviewing the subcontract in negotiations, ask for a copy of the release or waiver form that you will be required to sign in exchange for payment. If the release or waiver form indicates that claims arising before a certain date are released, ask that the form be revised to include an area where you can identify claims that you do not intend to waive or release. This process is called exempting or reserving claims. Another option is to insist on the following language being included in the subcontract:
Any form of contract language wherein the Subcontractor purports the release the Contractor, Owner or Design Professional is hereby qualified by the following language whether or not the Subcontractor specifically adds the language: “This release shall apply only to work for which payment has been received in full by Subcontractor; shall not apply to retention; shall not apply to unbilled changes which have been asserted in writing or which have not yet become known to Subcontractor, and shall be conditional upon receipt of funds to Subcontractor’s account.”
Please note that the ASA has “model stickers” that can be downloaded from the ASA website and affixed to payment applications, release and waiver forms and other documents to avoid waiving and releasing claims and to reasonably limit the scope of any waiver or release language. We recommend using the stickers or incorporating similar language into your project documents.
As stated at the beginning of this article, project financial success often hinges on obtaining additional compensation or additional time. It is therefore crucial to strictly follow the subcontract and demonstrate your entitlement to the relief you seek. In today’s high-interest loan environment, owners are more aggressive than ever about controlling costs and avoiding incurring additional costs. They are also often very resistant to time extensions which often translates into additional interest payments for the owner. Strictly follow the subcontract and thoroughly document your claims to give you the best chance to overcome that resistance and recover the time, money or both you are due.
About the Author:
Timothy Woolford, Woolford Kanfer Law, P.C., is a construction attorney in Pennsylvania that represents subcontractors and other construction professionals. He has taught construction law to second-and third year law students at Penn State Law School. He is a construction arbitrator with the American Arbitration Association. He can be reached at (717) 290-1190 or twoolford@ woolfordlaw.com.
