July 2018
by Joseph L. Katz, Esq., Huddles Jones Sorteberg & Dachille, P.C.
Just as the three most important factors in real estate are location, location, location, successful construction has its own recipe for success: document, document, document! A good rule of thumb is the more documentation the better, both for timely and quality delivery, for capturing all compensable costs and change order opportunities, and for prosecuting (or defending) claims in litigation. Of course, pushing paper alone will not build the project, and many subcontractors feel that documentation gets in the way and detracts from their “real” work at the project.
This article will highlight which documents are the most critical at the various lifecycles of a construction project. Think of this as the “minimum best practices” of construction documentation.
The Three Stages of a Project: Bid, Contract/Change Order, and Performance
The Bidding Stage
Believe it or not, good documentation practices begin well before a contract is signed. A strong estimating sheet, accurately showing how the subcontract price was calculated, is crucial. First, it ensures against a bid-bust later in the project. Second, if time delays or other unexpected circumstances arise which drive costs up, the subcontractor must demonstrate that its original estimate was accurate, and that it was the fault of others that raised the costs to complete.
Pre-contract bid documents should include all necessary take-offs, unit prices as may be appropriate, including both labor and equipment rates (with burden), subcontractor and supplier bids, and calculations showing overhead and profit mark-ups. Unless your subcontract is a cost-plus agreement, these documents are confidential and proprietary, for internal use only, seeing the light of day only if a claim for additional costs is presented.
The Contract/Change Order Stage
Subcontract
The subcontract is perhaps the single most important document in a construction project, and it should be given the care and attention it deserves. A common myth I encounter from subcontractors is that the general contractor’s boiler-plate subcontract form cannot be changed or modified—after all, the cover letter clearly stated no changes will be accepted! Well, I regularly modify subcontract language—and have it countersigned by the GC—despite that “no changes will be accepted” line. I don’t always get everything I ask for, but I make it a practice to ask for more than I (and my client) really need, so at the end of the day, everyone has given up something, and the playing field is more level then it was before.
For example, broadening an attorney fee provision to apply to the prevailing party, and not just the general contractor, dramatically shifts the home-court advantage previously in favor of the contractor. Coupled with a few other modifications and other insertions, such as the ability to stop work if invoices are not paid within 45 to 60 days even if payment is otherwise pay-if or when-paid, tort liability limited to the extent of negligence only, and no ability to force work in the absence of a mutually agreed price for change orders, a somewhat fair balance is ordinarily achievable.
If you have tried, and have not successfully scored, a few key changes to the boilerplate language on your own, hire an experienced construction lawyer in your area to negotiate more favorable terms. ASA has an Attorneys’ Council and can likely make several referrals to lawyers in your state that specialize in representing subcontractors. Consider that “an ounce of prevention is worth more than a pound of cure.”
Change Orders
Change orders are, at their core, addenda or modifications to the subcontract, and should also be handled with extreme care. Many general contractors use form change order sheets designed to work to the advantage of the GC and the detriment of the subcontractor. While providing additional funds on the one hand, a change order will often cut off all prior avenues to additional funds by certifying that other than the cost increase provided by this change order and any other previously signed change order, no additional costs are due, and/or are waived. This effectively forever releases the contractor from any then-pending claims or requests for change orders, and from any claim for delay even if a formal delay claim has not yet been raised. Because delay claims are usually realized in hindsight, it is important not to unintentionally waive recovery for delays prospectively.
While I’ve written it in these pages before, it cannot be overstated that the “do it later” approach does not work for change orders. Stopping to get written approval for every change during the construction process is sometimes seen by the subcontractor as potentially detrimental to his or her relationship with the customer, or otherwise perceived as not being a team player. Often, the mentality is to “just get the work done and we will negotiate the price and terms in good faith later,” or “we just don’t have the time to do it now.”
However, this “do it later” approach often leads to a huge amount of time (and lost profitability) spent on the back end of a job trying to resolve disputes that could have been avoided if changes were dealt with in writing before the work was done. Even more harmful, crucial notice or signature provisions of the subcontract will be missed, meaning you are no longer contractually entitled to payment for such extra work. As discussed more below, monthly “partial” lien releases will often not simply release lien rights for the current funds being paid, but will release all rights to lien for all work performed through the date of payment, which will include both unbilled and unapproved change orders. If your subcontract says no change order work is to be done unless a signed change order is in place, insist on this—simply do not do the work until a signed change order is in place!
I’ve seen too many subcontractors get burned by relying on verbal assurances from GC project managers and superintendents that the extra work they are performing will be paid as a change order. Once the work is done, however, the story changes. Abide by the simple rule of thumb that unless something is in writing, it does not exist.
Performance Stage
Well-documenting the subcontract performance is both good offense and defense. This category of documentation will include such items as daily tickets or reports, job cost reports, employee logs and payroll records, schedules, notices of delay, requests for information, notice of changed conditions leading to increased cost and/or time, applications for payment, and partial lien releases. Email has become the top method of communication, and I can guarantee you that email will play a role in any construction litigation or arbitration today. Learn to use email often and well, being careful not to write anything you wouldn’t want read in front of a judge and jury (and your spouse or significant other!).
Daily Reports
At minimum, daily reports should track the weather, names of subcontractor employees on-site, hours worked and a brief description of the work performed and equipment utilized. However, the savvy subcontractor will also make it a habit to record in the daily report any hindrances, obstacles, delays or other obstructions to either the time or quality of his trade’s work that day. A play-by-play of the job, or a journal of sorts, written from the perspective favorable to the subcontractor can be a vital resource to both prosecuting claims for extra work or delay damages, and for defending against backcharges or a wrongful termination. The daily report or work ticket is a particularly golden opportunity to record and memorialize oral instructions, directions and even off-the-cuff comments by the general contractor’s superintendent, PM or other owner, A/E or contractor official that can prove invaluable down the road. It may take time to develop a feel for what should be included, but many would never even think or consider including oral comments within a daily report. Once you are tuned into the strategic use of daily reporting to your advantage, you will find such opportunities everywhere. Consider the daily report as an outlet to tell the story of this job through your company’s vantage point.
Cost Codes
Job cost reports, and cost codes, is another important methodology for tracking costs and catching cost overruns. Once a changed or differing condition is realized, all costs associated with the change should be tracked by a particular code, and segregated in real time. Courts do not award speculative damages, and absent a contemporaneous record of actual cost overruns, judges can be reluctant to use more imaginative cost accounting methods to establish the actual monetary loss.
Email is your friend—use it often. Get in the habit of sending short emails confirming oral conversations or verbal assurances and direction given to you during the day. And now that everyone has email right on their phone, there is no need to let it wait until the end of the day, when you’ve forgotten the details or forgotten altogether—email right after an oral conversation, succinctly summarizing what was discussed. Email can also be used to document and memorialize daily delays, obstructions, hindrances, and virtually any other project or personnel situation for prosperity.
Notice
As addressed at length elsewhere within this edition of The Contractor’s Compass, many subcontracts contain notice provisions for proposed change orders—use email for that, too. Get into the habit of documenting everything in real time, and your email will be a paper trail credibly demonstrating the project timeline and milestone events. Courts around the country are concurring that an electronic signature, i.e., your name at the bottom of an email, constitutes a legally binding signature (disclaimer: email is not recognized as binding in Texas). Depending on your jurisdiction, contractual notices and even change orders can be established simply through your email. Do not waste this golden opportunity.
Lien Releases
These days, partial lien releases are anything but. Often they will release the GC and owner from payment for all work performed on the project through the date of the payment application, or even worse, through the date the lien release is signed. And, yes, this can readily become a legal obstacle to receipt of future payment for unpaid change work already performed but not yet billed, and/or accepted. Many “partial lien releases” don’t even contain an exception for retainage, and by executing the “partial release” you have just signed away your legal entitlement to your retention, as well as any pending or unbilled/unapproved changes or delay damages.
It is best to modify the language of any payment release—be it for lien claims or any claims—to indicate the release is being provided “only to the extent of payment received” for the work performed. Better yet, ASA has a great sticker titled “Lien Waiver Reservation of Rights,” which you can easily slap on to every “partial” lien release. (The reservation of rights stickers are available to ASA members under “Contracts & Project Management” by logging into the ASA Web site, www.asaonline.com, at “LogIn/Access Member Resources.”) The sticker specifically carves out retention, unbilled changes and claims which are unknown or not yet asserted in writing. It also clarifies that the release is effective only through the date of the subcontractor’s last pay application. I have recently commissioned a rubber stamp I give my clients to stamp onto every release, making sure that the partial release is not a final release.
Learn to use the documentation process at each stage of a project to your advantage, and enjoy the success that savvy subcontractors know well.
Joseph L. Katz, Esq., is a senior associate at the construction litigation firm Huddles Jones Sorteberg & Dachille, P.C. in Columbia, Md. Katz regularly represents subcontractors and suppliers on federal, state and municipal construction projects and has specialized expertise in guiding his clients through the various regulatory requirements unique to government contracting. He also frequently represents clients involved in private sector construction, including housing, commercial, retail and industrial projects. He is experienced in all facets of construction litigation, including mechanic’s liens, Miller Act payment bond claims, arbitration, and civil actions in both state and federal court. He can be reached at (410) 720-0072 or katz@constructionlaw.com.
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