LUMP SUM SUBCONTRACT? PERHAPS NOT.

Lump sum subcontract?   Perhaps not due to a recent ruling where the trial court said No!” based on the language in the subcontract and contract documents generally incorporated into the subcontract.

 

This is a ruling on an interpretation of a subcontract and contract documents incorporated into the subcontract that I do not agree with and struggle to fully comprehend.  The issue was whether the subcontract amount was a lump sum or subject to an audit, adjustment, and definitization based on actual costs incurred.  Of course, the subcontractor (or any person in any business) is not just interested in recouping actual costs, but there needs to be a margin to cover profit and home office overhead that does not get factored into field general conditions.  

 

In United States v. Travelers Casualty and Surety Company, 2018 WL 6571234 (M.D.Fla. 2018), a prime contractor was hired to perform work on a federal project.  During the work, the Government issued the prime contractor a Modification that had a not-to-exceed value and required the prime contractor to track its costs for this Modification separate from other contract costs.  In other words, based on this Modification, the prime contractor was paid its costs up to a maximum amount and the prime contractor would separately cost-code and track the costs for this work differently than other work it was performing under the prime contract.   

 

The prime contractor hired a subcontractor to perform a scope of fireproofing work relative to the Modification.  The subcontract amount was $646,886 and the subcontractor claimed it was due and owing $376,609 upon completing the work and filed a lawsuit against the prime contractor’s Miller Act payment bond.  

 

The prime contractor argued that the subcontract amount was not lump sum and was subject to definitization, auditing, adjustment, and change, although it certainly is not uncommon by any means that a prime contractor working under a cost-plus scenario to enter lump sum subcontracts.   The subcontract contained the following language:

 

  • The Contractor agreed to pay the Subcontractor for the complete performance of the Subcontract the sum of $646,886, subject to additions and deductions for changes agreed upon in writing…and Contractor further agreed to make all partial and final payments in accordance with the terms and provisions of the Subcontract Documents.
  • The Subcontractor had to submit a complete and accurate schedule of various parts of the Subcontractor’s work aggregating the total sum of the Subcontract, itemized and detailed as required by the Contractor and supported by such evidence as to its correctness as the Contractor may direct.
  • Each partial payment and final payment would be subject to final audit and adjustment and Subcontractor agreed to reimburse the Contractor for overpayment.
  • The Contractor was entitled to make changes in the work that could cause an increase or decrease in the work.
  • The Contract Documents including certain Federal Acquisition Regulation (FAR) clauses were incorporated into the Subcontract.

 

The subcontractor argued that this was not a unit cost contract, but a lump sum contract, and it did not agree to any such changes (such as those that would have removed a scope of its work).  Thus, the subcontractor completed its work and should be entitled to the subcontract amount.

 

The trial court did not agree with the subcontractor: “The Court finds that the Subcontract contains unambiguous language which shows the Subcontract amount was subject to definitization, adjustment, and audit, rather than being a fixed-price amount.”  United States, supra, at *6. 

 

Huh!!??!!

 

The language in the subcontract was relatively standard subcontract language included in most subcontracts.   The changes clause is standard that allows the contractor to increase or decrease the work and the subcontractor is required to proceed with any changes.  The schedule of values language is standard, which is nothing more than an administrative vehicle for purposes of allocating payment based on percentages of work performed.   The overpayment clause is relatively standard.  As the subcontractor argued, the subcontract amount was not based on specific unit costs measured against a specific unit of measurement.  The subcontract did not unequivocally state that the subcontractor would be paid a cost of the work plus a specific markup for profit and overhead.   Nothing of the sort and nothing identifying what should be construed a permissible cost of work versus an impermissible cost of work so that the subcontractor could specifically track its costs of work.  There was nothing that identified the subcontract amount would be reconciled based on the subcontractor’s actual costs of the fireproofing work.  If it did, then the argument that it was not a lump sum amount makes sense.  But, what is there to audit?  The subcontractor’s actual costs should be less than the fixed amount in light of a profit and overhead margin.  The subcontract did not identify what this margin should even be.  If it were a unit cost contract, that margin would be built into the unit costs.  If it were a cost of the work subcontract, as mentioned, it would clearly specify what the agreed markup was and the permissible costs of work to be tracked.  Also, nothing in the subcontract mentioned the subcontractor would only be paid its time and materials based on a specific labor rate where the profit and overhead would be built into the labor rate.

 

As it pertains to the FAR clauses, the trial court held that, “Incorporation by general reference only incorporates the quality and manner of the subcontractor’s work from the prime contract, not the rights and remedies he may have against the prime contractor.”  United States, supra, at *8.   This makes sense and, for this reason, the trial court held that the general incorporation by reference language only incorporated the FAR clause or the Modification at-issue only if they refer to the quality and manner of the subcontractors’ work.  Based on this, the trial court explained that language in the Modification requiring the prime contractor to track its costs was incorporated  into the subcontract because it related to the manner in which the work was to be completed.  This does not make sense as the prime contractor is tracking the fireproofing costs by buying out that scope at a fixed amount.  

 

The trial court’s interpretation based on rather common and standard subcontract language could ultimately turn every fixed price subcontract that requires an audit as a requirement of the subcontractor to track actual costs without any true understanding as to how actual costs are determined, reconciled, or what the appropriate markup should even be.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

GENERAL CONTRACTOR’S ABILITY TO SUPPLEMENT SUBCONTRACTOR PER SUBCONTRACT

shutterstock_142349770As a subcontractor, you need to appreciate that the subcontract you (more than likely) sign is going to have you bear risk associated with furnishing manpower to maintain the prime contractor’s schedule and progress.   A subcontractor can factor some of this risk into the lump sum amount it agrees to in the subcontract.  But, from the general/prime contractor’s perspective, it is very important that this risk is borne by the subcontractor because there is no such thing as a schedule written in stone.  The baseline schedule, whether attached to the subcontract or not, will change.  Activities will be re-sequenced.  Activities will be added.  Activities will overlap.  Activity start dates and finish dates will change.  It is the nature of construction.  As a subcontractor, you know all of this because it is the same no matter the project. Schedules are never written in stone — they change on a regular basis.

 

The subcontract will include a number of provisions that address the schedule, the prime contractor’s discretion to adjust the schedule and supplement the work, and the subcontractor’s requirement to maintain progress.  These are provisions that shift risk to the subcontractor including:

 

  • The subcontractor will furnish all manpower to complete its scope of work;
  • Time is of the essence with respect to the subcontractor’s performance of its work;
  • The prime contractor has the right to decide the time and order of various portions of the subcontractor’s work;
  • The subcontractor must prosecute its work in a prompt and diligent manner and at such times as the prime contractor directs;
  • The subcontractor must keep itself thoroughly informed as to the overall progress of the project;
  • The subcontractor must not delay, hinder, or interfere with the progress of the project;
  • The subcontractor must notify the prime contractor within “X” days after the occurrence of the circumstances giving rise to a change (or delay) or else waive such claim for additional time or compensation;
  • If the subcontractor fails to furnish sufficient manpower or prosecute the work with promptness and diligence, which is not corrected after “X” days after receiving notice, the prime contractor can declare the subcontractor in default, supplement the subcontractor, terminate the subcontract in whole or in part, and/or complete the subcontract work at the expense of the subcontractor;
  • The prime contractor can withhold payments if the subcontractor is unable to comply with subcontractual obligations, perform its work, or is delaying or is in reasonable danger of delaying the work; and
  • The subcontractor is required to indemnify the prime contractor for damages resulting from its breaches of the subcontract (which may be an indemnification provision separate from an indemnification for personal injury or property damage claims).

 

These types of provisions are crafted a number of different ways, are perhaps more onerously drafted, but the intent is the same relating to the subcontractor assuming risk and ensuring the prime contractor has recourse against the subcontractor associated with that risk.   (An example of such risk-shifting provisions in a subcontract can be found here.)  Again, these are important provisions for prime contractors to include in subcontracts.  They are also important provisions for subcontractors to factor in the risk associated with the subcontract amount.

 

In a recent bench trial, MWH Constructors, Inc. v. Brown and Brown Electric, Inc., 2018 WL 2087687 (S.D.Fla. 2018), a prime contractor sued its electrical subcontractor for breach of subcontract and contractual indemnification associated with the subcontractor’s inability to maintain progress during the construction of a water treatment project.  The subcontractor counter-sued for its contract balance.  The subcontract at-issue contained all of the provisions discussed above.

 

During the subcontractor’s scope of work, its president and qualifier died.  Thereafter, it began to fall behind schedule and was not furnishing sufficient manpower. There were numerous discussions between the prime contractor and subcontractor regarding the subcontractor’s inability to timely complete its work.  It was discussed that the subcontractor needed additional manpower and needed to work on Saturdays to recover lost time.   The subcontractor, however, was unable to abide by its commitments.  Further meetings were held and notifications were sent to the subcontractor. The public owner notified the prime contractor the job was delayed, the electrical subcontractor was behind schedule, and was threatening to assess liquidated damages.  Finally, after the subcontractor was unable to improve its progress, the prime contractor declared the subcontractor in default and supplemented its work with another electrical subcontractor and back-charged the subcontractor for such costs.

 

Due to the supplementation, the prime contractor paid the supplemental electrical subcontractor in excess of the defaulted subcontractor’s contract balance.  The prime contractor also had to pay the defaulted subcontractor’s lower tiered subcontractors and suppliers because the defaulted subcontractor did not pay them (likely because it did not have the cash flow due to the prime contractor withholding contract balance). 

 

The trial court entered judgment in favor of the prime contractor against the subcontractor finding that the prime contractor was justified supplementing the subcontractor in accordance with the numerous contractual provisions.  The prime contractor put on evidence at trial supporting the justification in conjunction with its rights under the prime contract. 

 

Of importance, the trial court was not going to rewrite the subcontract or the risks the subcontractor assumed in the subcontract:

 

Contracts are voluntary undertakings, and contracting parties are free to bargain for-and specify-the terms and conditions of their agreement.  That freedom is a constitutionally protected right.

***

Thus, [i]t is not the function of the courts to rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain.

***

Rather, the court’s task is to apply the parties’ contract as-written, not rewrite it under the guise of judicial construction.

 

MWH Constructors, Inc., 2018 WL at *6 (internal citations and quotations omitted).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

EXCULPATORY PROVISIONS IN BUSINESS CONTRACTS

shutterstock_734837968-644x316An exculpatory provision in a contract is a provision that relieves one party from liability for damages.  It shifts the risk of an issue entirely to the other party.   Such a provision is generally drafted by the party preparing the contract that is looking to eliminate or disclaim liability associated with a particular risk, oftentimes a risk within their control.  These provisions are also known as limitation of liability provisions because they do exactly that — limit liability as to a risk.   For this reason, they can be useful provisions based on the context of certain risks, and are provisions that are included in business contracts (such as construction contracts).

 

While such clauses are disfavored, they are enforceable if they are drafted clearly, unambiguously, and unequivocally.  If they are unclear, ambiguous, or equivocal, they will construed against enforcement.  See Obsessions In Time, Inc. v. Jewelry Exchange Venture, LLP, 43 Fla.L.Weekly D1033a (Fla. 3d DCA 2018) (finding exculpatory clause in lease ambiguous and, therefore, unenforceable as to lessor looking to benefit from the exculpatory clause).   

 

Exculpatory clauses are enforceable only where and to the extent that the intention to be relieved from liability is made clear and unequivocal. The wording must be so clear and understandable that an ordinary and knowledgeable person will know what he is contracting away. A phrase in a contract is ambiguous when it is of uncertain meaning, and thus may be fairly understood in more ways than one.

Peterson v. Flare Fittings, Inc., 177 So.3d 651, 654 (Fla. 5th DCA 2015) quoting Tatman v. Space Coast Kennel Club, Inc., 27 So.3d 108, 110 (Fla. 5th DCA 2009). 

 

 

Because such clauses are disfavored and will be narrowly construed against the party who benefits from the clause, there are certainly public policy considerations that may come into play. See, e.g., Loewe v. Seagate Homes, Inc., 987 So.2d 758 (Fla. 5th DCA 2008) (exculpatory provision in agreement for purchase and construction of new home unenforceable to the extent it relieved homebuilder for an intentional tort and homebuilder could not contract around complying with building code). 

 

When negotiating a contract with an exculpatory provision in a contract, make sure you appreciate the risk associated with the clause.  The risk could be significant and outside of your control.  Make sure the provision is drafted in a clear, unequivocal. and unambiguous manner.  If you are dealing with such a provision after-the-fact, consult with counsel to best analyze arguments pertaining to the enforceability of that provision.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

ACCOUNT FOR THE IMPOSITION OF MATERIAL TARIFFS IN YOUR CONSTRUCTION CONTRACT

shutterstock_138974732After Hurricane Irma, I wrote an article that contractors should revisit the force majeure provisions in their construction contracts.  Not later.  But Now. The force majeure provision is an important provision in a construction contract to account for certain uncertainties that you have NO control over. 

 

Recently, another reason has given rise to contractors needing to revisit their force majeure provisions, as well as any provisions dealing with material escalations. Not later.  But now.  The imposition of raw steel and aluminum tariffs (tax on imported goods) and the back-and-forth regarding a potential trade war leads to the kind of uncertainty that should be assessed as a risk.  A risk in both time and cost from material escalations.

 

Contractors want to revisit their force majeure provisions, as well as any material escalation language, for these two reasons. 

 

First, you want to ensure any delay, to the extent there is any, associated with the tariffs or potential trade war provides for a time extension.    Any impact a contractor has with the delivery or fabrication of raw steel due to the imposition of tariffs should result in an extension of time.

 

 

Second, and probably the bigger concern, is associated with price.  Higher raw steel and aluminum costs could mean you based your price on inaccurate supplier and/or subcontractor pricing (pricing that did not factor in tariffs), particularly if the raw steel has not been pre-ordered or pre-delivered. Escalating material pricing is a concern.

 

 

Moving forward, I suggest including language in the force majeure provision that accounts for the imposition of tariffs and the concern of a trade war just to be safe.  Clarity in a contract is always better.  But, adding this language will account for time, but not the escalation of steel and aluminum pricing due to the tariffs.

 

If you are entering a lump sum contract, consider factoring this issue into your pricing.  Or, alternatively, identify an allowance associated with these materials so that you are not penalized based on actual pricing that accounts for the tariff   Another thing you can do is include a contingency in your lump sum contract with language that allows you to use the contingency for this purpose.  The difference between the allowance and contingency is there is still contractor-risk with the contingency if the costs exceed the contingency agreed upon in the contract.  Finally, you can include a carefully crafted material escalations provision that does not require you to bear the risk of certain material escalations.  

 

If you are entering into a Guaranteed Maximum Price (GMP) contract, you want to factor this escalating material pricing into the GMP cap.  Most GMP contracts have (and, if not, they should have) a line item for contingency.  The contingency amount should be increased (or there should be a separate contingency) to account for this issue with language that allows the contractor to use the contingency for escalating material pricing.  Alternatively, you can identify that due to the uncertainty associated with steel or aluminum pricing (or perhaps any other pricing) the GMP includes certain allowance items which will increase the contract through change order if the cost of the item exceeds the allowance. Finally, you can include a carefully crafted material escalations provision so that you are not bearing the risk of this uncertainty, i.e., material escalations entitle you to a change order. 

 

The politics behind the tariffs are irrelevant.  What is relevant, however, is the uncertainty behind the impact and pricing associated with the imposition of tariffs and the risk assessment that needs to be factored in to deal with this uncertainty.   This uncertainty affects the costs and potential time associated with obtaining raw materials to fabricate and incorporate into an owner’s construction project.

 

If this issue is currently impacting an on-going project, be proactive and consult an attorney that can review the language in your existing contract(s) and help, as need be, craft a change order request or claim based upon what has already been agreed to.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.