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.

 

EXAMPLES OF (RISK SHIFTING & ACCEPTING) PROVISIONS IN A SUBCONTRACT

imagesIn reading articles posted in this blog, I hope it is impressed upon you to understand the risks you are accepting in your contract and what to do if you encounter a risk, as well as those risks you are flowing down or allocating to your subcontractors.   Construction is inherently risky so you want to know what to do when you encounter certain situations or occurrences, and in certain circumstances, you want to factor the costs associated with certain accepted risks in your contract amount. 

 

When it comes to subcontracts, there are provisions that contractors want to include in their subcontracts that subcontractors need to note:

 

  1. The schedule – the contractor will want to include provisions that any baseline schedule is not written in stone and that it has the discretion to resequence the progress of the work.  This is an understood event since the contractor is responsible for managing the work so subcontractors should account for this contingency.
  2. No damage for delay – the contractor will want to include a no-damage-for-delay provision that provides it is not responsible for any delay-related damages and that the subcontractor’s only recourse for a delay will be an extension of time.  The provision may also state that the contractor’s liability for any delay will be limited by the amount it receives by the owner associated with the delay.
  3. Change orders – There will be a change order issue at some point.  The subcontractor needs to understand the change order procedure so proper notice is given regarding the change order work before proceeding with that work.  And, if the subcontractor is directed to proceed with work (through a change order directive) or there is a dispute as to the amount or time associated with the change, the subcontractor needs to understand that it needs to track and itemize its costs associated with the change.
  4. Claims – If a subcontractor is delayed / impacted or there is an event triggering change order work, as mentioned above, the subcontractor needs to submit timely notice of the event or occurrence.  Otherwise, there may be an argument that this event or occurrence is waived.  The contractor will argue that the notice provision is important so that it can ensure it timely submits notice to the owner pursuant to the prime contract and a subcontractor’s failure to comply with the notice provision prejudiced the contractor.

 

Provided below is an example of contractual provisions that fit within the above four categories.  These provisions may be analogous to provisions in the subcontract you are working under or, if you are a general contractor, may be provisions you want to consider including in your subcontract.  Remember, the objective is to know those risks you are accepting, those risks to flow down or allocate to the subcontractor, and, importantly, what to do if you encounter a risk!!

 

Also, please share any examples of contractual provisions that you have come across that fit within these categories. The more examples the merrier when it comes to understanding the types of risks that are frequently dealt with and allocated between a contractor and subcontractor.

 

Download (PDF, 394KB)

 

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.

 

 

THE VALUE OF A WELL-WRITTEN SUBCONTRACT TO FORECLOSE SUBCONTRACTOR’S INEFFICIENCY / LOST PRODUCTIVITY DAMAGES

 imagesI have previously discussed the challenges a subcontractor has in proving a lost productivity / inefficiency claim.  Besides being difficult to prove, subcontractors generally enter into subcontracts that include onerous provisions that foreclose a subcontractor’s right to pursue lost productivity / inefficiency claims.   General contractors try to account for these types of delay-related claims by including provisions in their subcontracts that require subcontractors to fully bear this risk.  An example of this ocurrence can be found in the opinion entered in Electrical Contractors, Inc. v.  Fidelity & Deposit Co. of Maryland, 2015 WL 1444481 (D. Con. 2015) where the trial court precluded a subcontractor from recovering lost productivity / inefficiency costs based on the language in the subcontract that precluded such claims. Additionally, and importantly, the trial court found that that the subcontractor failed to timely notify the general contractor of its claims under the strict notice provisions of the subcontract.

 

In this case, the general contractor was hired by a state agency to construct a laboratory building and furnished the state a public payment bond.  The prime contract contained a construction schedule (which is not an uncommon exhibit in a prime contract).  The general contractor then entered into subcontracts with trade subcontractors including the electrical subcontractor.  An exhibit to the electrical subcontract was a schedule that simply reproduced dates applicable to the electrical subcontractor’s scope of work that were included in the construction schedule attached to the prime contract.

 

No different than any baseline construction schedule on any construction project, it was not written in stone. This meant there were updates to the schedule that were furnished to the state agency and the state agency unsurprisingly challenged or opposed numerous schedule updates. The general contractor did not keep its electrical subcontractor apprised of the back-and-forth between it and the state agency involving schedule updates (nor was the general contractor under any real obligation to do so).

 

And, as we all know, the schedule of the project is really driven in the field.  So, as the construction progressed, the general contractor’s superintendents directed the electrical subcontractor to perform work in a piecemeal and unsystematic manner. This was due to work areas not being ready for the electrical scope due to delays on the project.  The electrical subcontractor notified the general contractor that it was being impacted and forced to work unproductively. Thereafter, the electrical subcontractor sued the general contractor and the general contractor’s payment bond sureties for damages that included lost productivity / inefficiency damages. 

 

However, the subcontract that the electrical subcontractor signed posed problems with its claims, particularly the following contractual provisions:

 

“Subcontractor agrees to … complete the work in such sequence and order and according to such schedules as Contractor shall establish from time to time … time being of the essence…. If Contractor determines that the Subcontractor is behind schedule or will not be able to maintain the schedule, Subcontractor … shall work overtime, shift work, or work in an altered sequence, if deemed necessary, in the judgment of the Contractor to maintain the progress of the work. Any such … altered sequence work required to maintain progress or to complete the work on a timely basis shall be at Subcontractor’s expense and shall not entitle Subcontractor to … additional compensation.”

***

 

 

“To the fullest extent permitted by applicable law, Contractor shall have the right at any time to delay or suspend the work or any part thereof without incurring liability therefore. An extension of time shall be the sole and exclusive remedy of Subcontractor for any delays or suspensions suffered by Subcontractorand Subcontractor shall have no right to seek or recover from Contractor any damages or losses, whether direct or indirect, arising from or related to any delay or acceleration to overcome delay, and/or any impact or effect of such delays on the Work.”

***

 

 

“In the interest of the overall project, W–T [Contractor] reserves the right to alter the sequencing of activities in order to accommodate project conditions and/or Owner requirements. It is understood that the Subcontractor shall be obligated to complete its activities [timely] … regardless of the actual start date.”

***

 

 

There is no guarantee of continuous work. Subcontractor shall work in all areas as they become available and as directed by Whiting–Turner [Contractor]. Subcontractor shall include the inefficiencies, supervision and manpower necessary to run separate and independent crews as necessary.”

 

Electrical Contractors, Inc., supra, at *6 and *7.

 

Additionally, the electrical subcontractor needed to timely notify the general contractor of its claims:

 

“Article 6(d) requires timely written notice as a precondition for making such claims: [N]otice in writing shall be given to the Contractor no later than seven (7) days following the occurrence on which such claim is based…. Any claim not presented within such time period shall be deemed waived by Subcontractor. The notice must describe the dispute, controversy or claim in detail so as to allow Contractor to review its merits … [and] provide detailed information to substantiate such claim including supporting documentation and calculations.”

 

Electrical Contractors, Inc., supra, at *8 (internal citations omitted).

 

While the 7-day claim notice requirement may seem unfair, the court explained that the electrical contractor was a sophisticated entity that knowingly assumed this notice obligation.

 

Of Significance: 

 

These subcontract provisions recited above are not uncommon provisions.  They are rather commonplace with sophisticated contractors–there is no real shock value when looking at these provisions, right?

 

 

If you are a general contractor that includes such provisions in your subcontracts, this case gives you reassurance as to those contractual provisions that are aimed to insulate you from a subcontractor’s delay-related damage and require the subcontractor to give you timely notification of a claim (so that you are not prejudiced by the late submission of a subcontractor claim).  These are important provisions for a general contractor to include in a subcontract and the provisions referenced above are certainly well-written provisions to model.  It is understood that a schedule is never going to be written in stone and there will be logic and sequence changes in the schedule, so protect yourself by including such provisions (including the no-damage-for-delay provision). As you can see, there is value in doing so.

 

On the other hand, if you are a subcontractor, if you accept these provisions, you need to either account for these risks in your subcontract price and/or bear the risk that these provisions may be appropriately enforced against you as shown in this case.  Alternatively, and as the court alluded to, as a sophisticated party, you have the option of not signing the subcontract or trying to negotiate the best subcontract for you with an understanding as to those onerous provisions and risks that you choose to accept.

 

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.