Problems with Subcontractors | What are my options as a General Contractor?

• Missed deadlines
• Deficient work
• Accidents on-site (safety)
• Failure to pay workers or material suppliers downstream
• Payment disputes
  
  

Many well-drawn construction contracts will have concrete milestones spelled out.
Failure to meet those milestones or failure to prove that you can meet those milestones is a material breach of the construction contract.

Missed Deadlines

So, if you are a general contractor or a building contractor that has hired subcontractors downstream, and those subcontractors aren’t meeting milestones or haven’t shown that they can meet milestones, it can be both beneficial and detrimental.

Detrimental because it is a poor reflection on you since the people you hired are not performing adequately.

After all, your customer is the owner and expects timely delivery of its project. But the good news is that if someone downstream from you has failed, you may have grounds to terminate and replace them.

However, the contract determines what rights and options you have.

Scheduling, Milestones, and the Subcontract

For example, some contractors are more sophisticated than others when it comes to scheduling.
Some may use what’s commonly called a simple bar chart method that shows duration and completion dates.

Others, or for more sophisticated projects, may have a critical path method schedule that shows float or task dependencies.

For example, you may have three activities that have to happen concurrently before the fourth activity on the schedule can happen. Like having to build a foundation before you can erect a wall.

The subcontractor isn’t responsible for not building the wall on time if the foundation wasn’t ready.

But for certain things, there may be built-in delay allowances. Because even if you are four days delinquent it won’t delay completion. It may delay a different phase, but the delay in that different phase doesn’t delay completion.

To determine whether a client is behind, we have to dig into the schedule.

We must have a strong understanding of the schedule and analyze any pre-termination notices that may be required.

Some contracts may state that the first remedy for a delay is ordering the delaying party to accelerate by whatever means possible without additional compensation.

A subcontractor may have a right to additional compensation for that acceleration unless there’s a provision in the construction contract that says the subcontractor was responsible for those kinds of contingencies.

A subcontractor may also argue that another party caused the delay, and therefore they are entitled to additional compensation for the acceleration. For example, it could be that there is an issue with the plans and specifications or a lack of clarity on some matters. The subcontractor submits a request for information that goes through its customer, the contractor. The contractor then communicates with the owner and design professionals, which all takes a month to resolve before clarity is sent back.

Delays can be very significant, and some types of construction contracts may have provisions between the owner of the project and the general contractor or building contractor for liquidated damages.

Liquidated Damages – Hotel Example

For example, whether it’s a hotel renovation or a new-build, the hotelier expects to rent out most, but not all, rooms.

Sometimes the contracts will have provisions that specify liquidated damages based on rooms and nights unsold or unusable. This can range into hundreds of thousands of dollars per day.

Liquidated damages for delay are a big issue and always something of which we need to remain mindful.

Though it carries risk, if you don’t terminate your subcontractor, liquidated damages can become an issue for not only you, but also everyone downstream.

On the other hand, if we represent the subcontractor, we look for ways to avoid liquidated damages for delay.

Typical Issues with Subcontractors – Deficient Work

Construction documents lay out specific requirements that all must be met, and if they are not, they are all cause for consequence. Where there are holes in the plans and specifications or construction contract, you are also bound to meet industry-standard on various issues.

Industry standards of all kinds are present, whether electrical, fire protection, drywall finishing, or the thickness of paint applied to an exterior surface.

There are industry standards on many things. Many of them are published, and often experts who issue opinions well after the fact will dictate what those standards are.

Deficient work is a hotbed for delaying or reducing payment. There are legitimate deficient work claims, but more often than not, what we see are immaterial deficiencies or fabricated deficiencies in the work.

They are fabricated upstream because the project owner or the general contractor wants to keep as much money in their pocket as possible.

Every well-drawn construction contract will have a right for someone upstream to back charge someone downstream for their deficient work or to withhold money.

In theory, the more money you withhold, the more concessions you can get from the party from which you are withholding.

But when dealing with a deficient work issue we have to analyze our options. We typically examine all contracts, construction documents, and various records to substantiate our position.

Typical Issues with Subcontractors – Job Safety

Many construction contracts do not have job site safety provisions, which is a significant mistake because safety requirements obligations exist.

OSHA regulates job site safety and job site accidents, and certain types of accidents have to be reported to OSHA. A job site accident may be a reason why you get terminated, a delay claim is placed, or why you have the right to terminate somebody else.

Many thousands of pages of regulations have been published by OSHA. However, there are gaps, and there is room for interpretation.

While OSHA has regulatory authority over you, contract provisions are what give you power over others. For example, a contract might give you a right to terminate or charge safety violation penalties if you have contractual safety provisions. If you are not prepared to force an unsafe party off the job because you need them, a simple slap on the wrist will not be effective. You will need the contractual ability to fine them into safety compliance.

Setting a dollar amount for safety violations gives you the resources you need to enforce proper conduct.

We are told time is money, get the job done, and we’ll get it to you soon as we can. That may be an excellent defense to a material breach claim based upon a job-site accident if safety provisions are absent from the contract.

If you are a contractor responsible for folks downstream and there has been a job site accident, you’ve got to evaluate what consequences fit the situation, and what rights your contract provides.

Contracts are critically important because they will drive many of these issues.

Suppose we’re representing a general contractor, who wants a new superintendent assigned by the subcontractor, and our general contractor doesn’t have that right under its contract.
In that case, we have to invent a new tactical, legal, and strategic basis for coercing the subcontractor into doing that, so our client doesn’t have to fire the subcontractor. Fitting a square peg into a round hole costs more money than designing a square hole from the beginning.

Typical Issues with Subcontractors – Failure to Pay Downstream

Failure of subcontractors to pay their bills is a significant issue as well.

Under Chapter 713 and all the other applicable laws, money received must be paid downstream unless there is a right to withhold payment.

Suppose a subcontractor fails to pay the bills of its sub-subcontractors or its material suppliers. In that case, those material suppliers and laborers have lien rights or bond claim rights, and they will assert them.

It becomes imperative that all parties, at whatever tier in a construction project, track and timely complete payment requests and documents to ensure that money is always correctly flowing.

Protecting Yourself from Liens and Bond Issues

One of the ways you can protect yourself is through lien or bond claim waiver forms.

In the example of a general contractor, you’ve received payment from the project owner. And a portion of that money is for your subcontractor called ABC.

You go to your subcontractor and request a lien waiver, not just from it, but also from everyone it hired downstream. This proves that everyone is being properly paid and protects you.
Documentation is key.

Waiver Types

There are conditional and unconditional waivers.

Unconditional means that they are effectively releasing all lien and bond claims when those waivers are given.

Conditional waivers are the same as unconditional, except it has a sentence stating that the waiver is conditioned and not effective until the releasing party receives payment in X amount.

Many construction parties will refuse to cooperate with the lien waiver process, or will refuse to provide lien waivers in the format they are requested to provide them in. Being between a rock and a hard place, the general contractor will often capitulate, but that is where many clients get into trouble.

You want your contract to address lien waiver requirements because if it doesn’t, often, you won’t get cooperation. At that point you may have to get legal counsel involved to force cooperation.

Typical Issues with Subcontractors – Payment Disputes

In a typical payment dispute one party may threaten to terminate the other or a party may decide to stop work. This situation occurs when someone submits a payment application that the recipient thinks is excessive. Excessive claims to payment come in two varieties, one is on proposed change orders, and the other is a disagreement over percentage of completion and progress billing.

Disputed Change Orders

The big lesson with change orders is that contractors should not wait to submit them. Whether you are the general contractor that wants to submit a change order upstream to the owner or you are a subcontractor or supplier, don’t wait. You also shouldn’t wait to resolve disputed change orders.

The longer you wait, the bigger the problem is. It ends up turning into a bigger fight and agitator the longer you wait to submit it.

There are often contractual provisions, whether apparent or buried, requiring that proposed change orders be submitted in advance of doing the additional or different work. You must comply with those provisions unless certain exceptions apply.

Suppose you are a general contractor, or a building contractor and you’ve received an approved change order request, and you disagree with it. If you ignore or reject the change order, the subcontractor who presented it may end up liening the job and stopping work.
In that case, the owner will probably sue that contractor or subcontractor, who recorded a lien for change order work for what’s called a fraudulent lien because you often cannot lien a job for work that was not included as part of the contract.

If the owner didn’t know about the work or didn’t approve the work, chances are it could be fraudulent.

Similarly, nonpayment claims are commonly met with allegations of deficient or defective work, and lien claims based on change orders are often met with a fraudulent countersuit. There are severe damages and repercussions that the lienor can be held to account for if it records a fraudulent lien.

Percentage of Completion Disputes

Disputes over percentage-of-completion are also widespread. Most projects of any significant nature are billed on an interim basis. Most often, percentage of completion billing is based on the American Institute of Architect’s forms, the G701, and the G702.

Those are the payment application forms with schedule values attached that identify the line items being charged, as well as retainage withheld.

Ultimately, the general contractor rolls up all of the lower-tier pay applications into its own and submits one payment application to the project owner. The project owner may disagree on the percentage of completion of a particular line item. If the contract does not address how percentage is determine and how to resolve disputes, contractors could be in trouble.
Disputes often also arise where a contract includes specific fixed prices for the work and allowances, and the two get blended in the progress billing.

Unfortunately, there’s usually not much thought put into those contract provisions unless construction counsel is involved. The G701, and G702 aren’t designed to deal with allowances very well. You might have a scenario where the project is coming in under the allowance for one category and over allowance for another.

The general contractor may want to apply the credit from one line item to another. The subcontractor may not want to because they have a high percentage of completion on one of the two allowance items and the subcontractor wants more money in his pocket now. This is a common issue we see as well, which will be governed strictly by the construction contract, including plans, specifications, and communications that have occurred relating to the project, along with a multitude of other things.

These disputes can be difficult to resolve, but it is critical that they be efficiently and properly resolved so that you can keep making money, finish your project on time, and keep your reputation intact.

For more information on Issues With A Construction Subcontractor In FL, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (727) 787-3121 today.