CLAIMS GUIDELINES FOR CONTRACTORS

Transcription

1 CLAIMS GUIDELINES FOR CONTRACTORS A Handbook by The Construction & Design Practice Group of DORSEY & WHITNEY LLP

2 DORSEY & WHITNEY S CONSTRUCTION & DESIGN PRACTICE GROUP Helping our clients build a better tomorrow To build a successful project, you must first build a successful project team. When participants work together to minimize disputes and accomplish common goals, projects succeed. From conceptualization through project closeout, Dorsey helps clients establish and maintain the working relationship necessary to successfully complete projects. And when disputes arise, our accomplished trial lawyers prove why they ve earned a track record of successful results in trial and arbitration. You can count on Dorsey & Whitney to assist you through all phases of a construction project. Dorsey lawyers have a long history of serving the construction industry and have a solid understanding of complex issues and direct construction and design project experience to provide clients with proactive solutions.

3 The risks that confront Contractors continue to expand as construction techniques become more complex, costs escalate, and other participants in the construction process attempt to transfer liability for losses. Today s Contractor must be able to recognize and effectively deal with events that give rise to claims. Early detection and proper administration of claim events are essential to project profitability. I. BE EVENT-ORIENTED The Contractor s project management personnel must be eventoriented. They must understand the rights and duties of the Contractor under the various construction contracts to which the Contractor is a party. In addition, they must astutely manage construction to avoid claims by others and to preserve the Contractor s claims. Finally, they must keep records that fully and accurately document the construction process and demonstrate the Contractor s entitlement to a time extension and/or additional compensation. Being event-oriented also means knowing when to consult competent construction counsel. A Contractor s construction attorneys play an important role in the claims prevention and claims resolution processes. The legal standards and requirements that apply to construction projects are becoming increasingly complex and fact-specific. The Contractor should not jeopardize important rights by waiting too long before getting construction counsel involved when claim events arise. The old adage that an ounce of prevention is worth a pound of cure is particularly true in the construction industry, where failure to preserve claims and to guard against claims by others can have a devastating effect on a Contractor s business. Claims Guidelines for Contractors 1 dorsey.com

4 II. KNOW AND UNDERSTAND YOUR CONTRACT The construction contract is the primary source of a Contractor s rights and responsibilities. The general conditions of the contract are as important to the Contractor as the plans and specifications. Before commencing construction, the Contractor should make a checklist summary in plain English so all management personnel will be able to understand it of all important contract requirements, including: All notice requirements; All change order requirements; Any limitations of authority, including dollar limitations, of employees and other authorized representatives of the Owner; and All scheduling deadlines. The summary checklist should be distributed to all project management personnel, including foremen. It should also be kept in all job trailers for easy reference. Standard Forms. Standard form subcontracts and purchase orders developed by or in conjunction with a Contractor s construction attorneys generally should be used for all subcontractors and suppliers. These agreements should incorporate by reference all terms and conditions of the contract with the Owner that are necessary to pass along to the appropriate subcontractors and suppliers all responsibilities and risks relating to their work. The agreements also should limit the Contractor s liability to subcontractors and suppliers for Owner-caused delays, changes, and other claim events to the amount that the Contractor actually recovers from the Owner on their behalf. Pay-When-Paid Clauses. A Contractor generally does not want to guarantee the project Owner s ability to pay for work performed by subcontractors or for materials or equipment provided by suppliers. Subcontract and purchase order forms should therefore contain pay- 1 Condition precedent, a contract law term, is a specified event that must occur before a contracting party will be required to perform a conditional obligation. 2

5 when-paid clauses. Such clauses provide that receipt of payment from the Owner is a condition precedent 1 to the subcontractor s or supplier s right to receive payment from the Contractor. Because of the harsh consequences that can result from pay-when-paid clauses nonpayment of subcontractors and suppliers they are strictly construed by the courts. The clause should, therefore, explicitly state that payment by the Owner to the Contractor is a condition precedent to the subcontractor s/supplier s right to receive payment from the Contractor and that the subcontractor/supplier will not be entitled to receive payment if the Contractor is not paid by the Owner. In the absence of an enforceable pay-when-paid clause, a Contractor generally will have to pay subcontractors and suppliers even though the Contractor has not been paid by the Owner. III. KEEP GOOD RECORDS It is essential for a Contractor to maintain a good recordkeeping system. The protection of a well-drafted contract or subcontract can be lost if the Contractor does not systematically prepare and maintain documentation that will enable the Contractor to prove and defend against claims. A Contractor s recordkeeping system should document all important events, when they occur. Special care should be taken to record (a) the progress of construction and (b) problems that are encountered. The recordkeeping system should include the following: The pre-contract/bid estimate; Plans and specifications, including all revisions; All shop drawings (whether or not submitted and whether approved, rejected, or not acted upon), together with shop drawing logs; All contracts, subcontracts, purchase orders, and other agreements; Change orders (both proposed and approved change orders, with supporting cost records and other documentation), together with a change order log; Claims Guidelines for Contractors 3 dorsey.com

6 Inspection reports; Quality control reports; Daily labor reports; Daily equipment reports; Correspondence with others; Internal correspondence; Memoranda to the file and telephone notes (which should be used to memorialize all important events that are not otherwise recorded in writing); A Daily Log for the project (which should be kept diligently by the Contractor s management representative with overall jobsite authority usually the Project Superintendent); Journals made by project management and other personnel (controls should be established to govern who maintains journals, what information is recorded, and how that information is stated); Minutes of weekly meetings with the Owner and its representatives; Minutes of weekly meetings with subcontractors; Photographs and video tape (a visual record should be made whenever a problem arises and also periodically to show the progress of construction); All reports, memoranda, correspondence, and other input from or relating to consultants; All schedules (whether official or unofficial and whether approved or unapproved), revised schedules, and other documentation relating to scheduling (including input from scheduling consultants); All analyses of labor productivity or efficiency (including any impacts caused by events such as differing site conditions, delays, acceleration, and adverse weather conditions); 4

7 Progress payment applications, together with all supporting documentation; Daily time cards and other payroll records (which should be coded to indicate the area(s) in which each employee worked and the specific work that was performed; extreme care should be taken to record time spent on extra work); and All cost records, including jobsite overhead records and the job cost ledger for the project. All important information and events should be reduced to writing, and all documents that are prepared should be dated and identify the author(s). Controls should be put in place that govern the use of electronic mail correspondence. messages should not be written carelessly or out of frustration. messages are frequently used to undermine Contractor claims. IV. CLOSELY MONITOR SCHEDULING AND PROGRESS A. Scheduling. Scheduling and coordination are the keystones to timely project completion. During the pre-bid or negotiation phase of a project, the Contractor should determine whether the construction contract contains specific scheduling requirements and whether required schedules are to be prepared by the Contractor or the Owner. Contractor-Prepared Schedule. If the Contractor is required to prepare the schedule, the Contractor should: Determine whether the contract requires a specific scheduling method and/or form; Determine what, if any, responsibilities the Owner has for the preparation of the schedule; If either the method or form of scheduling is unclear, request clarification; Claims Guidelines for Contractors 5 dorsey.com

8 Determine whether the Contractor will be able to provide all of the scheduling information and detail within required time limits; If the Contractor is not satisfied with the scheduling requirements specified in the contract, determine whether the Owner will agree to another scheduling method/form or will allow the specified method/form to be revised; If, despite protest, the Contractor is required to follow the specified scheduling method, the Contractor should provide the Owner with written notice of (1) the perceived deficiencies of the specified scheduling method/form and (2) the potential consequences that may result from being required to use the specified scheduling method/form. Owner-Prepared Schedule. If the contract provides that the Owner will prepare the schedule, the Contractor should: Determine what responsibility the contract places upon the Contractor for reviewing the schedule and analyzing or verifying its feasibility; Determine whether the contract requires the Contractor s approval of the schedule; Determine what responsibility, if any, the Contractor has for updating or revising the Owner-prepared schedule; If the Contractor concludes that either the required schedule is not feasible or that scheduling alternatives are available that are better-suited to the project, the Contractor should ask the Owner to approve an alternate scheduling method; If the Contractor s request for an alternate scheduling method is denied, the Contractor should provide written notice to the Owner of (1) the perceived deficiencies of the Owner s schedule and (2) the potential consequences of using that schedule. 6

9 Matters to be Addressed Regardless of Who Prepares the Schedule. The contract should be reviewed to ascertain the following information without regard to who prepares the schedule: Evaluate whether the performance period specified in the contract is adequate for completion of the project; Determine the circumstances under which time extensions will be granted; Determine whether the Contractor or the Owner gets the benefit of float time; Determine whether the contract requires allowances for holidays, possible strikes, inclement weather, and so forth; Determine whether progress payments are required to be based upon the schedule and whether frontend loading is permitted; and Determine whether interim schedules are required. The Schedule s Effect Upon Subcontractors. Regardless of who prepares it, the schedule affects the work of subcontractors. If the contract requires the schedule to be distributed to subcontractors, the Contractor should take appropriate precautions to protect against subcontractor claims that the schedule constituted the Contractor s guaranty or warranty that work would be performed as depicted in the schedule. Whether or not the schedule is to be used by the Contractor to implement the work, the subcontract should expressly state: (1) that the schedule is to be used only as a guide; (2) that the Contractor does not guarantee or warrant either start or finish dates or the duration of time for the various items of work set forth in the schedule; (3) that the dates set forth in the schedule are subject to revision for any reason, at the discretion of the Contractor, and therefore should not be relied upon as establishing specific or even approximate dates when the subcontractor will have access to specific areas of the project or be able to commence or continue contemplated work; and (4) that the subcontractor is required to follow whatever scheduling or coordination directions are issued by the Contractor, notwithstanding anything depicted in the schedule. Claims Guidelines for Contractors 7 dorsey.com

10 B. Job Progress. The Contractor should be proactive in implementing the project schedule(s). The Contractor must aggressively, yet positively and fairly, coordinate (sometimes, in fact, referee) the work of various subcontractors. The Contractor must be unyielding in demanding that subcontractors perform their work when specified in the schedule, as revised to reflect current conditions. The Contractor cannot afford to have a passive attitude which allows subcontractors to focus their resources on someone else s project. By entering into their subcontracts, the subcontractors have promised certain levels-of performance. Ask for nothing more, and accept nothing less. The Contractor should normally do the following on all projects: Maintain a continuous, but separate, dialogue with both the Owner and subcontractors with respect to scheduling matters. Regardless of whether required by the contract, conduct weekly meetings with both the Owner and its agents (including the design professionals and construction manager, if applicable) and subcontractors. The subcontractors meeting is especially important. Allow subcontractors to raise, and assist them in resolving, coordination problems. Address all delays, extra work, and other scheduling impacts with the responsible party when they arise. When events occur that entitle the Contractor to an extension of the time for performance, always provide notice to the Owner, in accordance with the requirements of the contract. Forward to the Owner copies of all subcontractor claims and notices involving the Owner or the Owner s agents. Request written confirmation of all verbal directives. If the Owner fails to reduce its directives to writing, always send the Owner a letter confirming the directives. 8

11 V. TAKE PROMPT ACTION TO PRESERVE CLAIMS The Contractor should preserve all rights to time extensions and additional compensation by timely complying with all contract change order and claims requirements. Most construction contracts now contain provisions requiring written notice of claims for time extensions and/or additional compensation to be made within a specified period of time after the occurrence of the event giving rise to the claim. These time periods are often quite short. Unless the Owner issues a change order providing for appropriate extensions of time and/or compensation (or a written directive if change order terms cannot be agreed upon) prior to the time that the work is performed, the Contractor should not: Perform extra work that is, work not required by the contract documents (specifically, the plans and specifications); Perform work in a manner, method, or sequence different from what the Contractor planned based upon the requirements contained in the contract documents. (If the Owner demands work to be performed in a manner that is more time consuming or costly than that required by a reasonable reading of the contract documents, the Contractor is entitled to a time extension and/or its increased costs.); Perform work pursuant to plans and/or specifications that are incomplete, insufficiently detailed, or inaccurate and therefore require the Contractor to perform architectural, engineering, or other services that are the responsibility of the Owner s design professionals; 2 2 When deficient plans and/or specifications are discovered, the Contractor should promptly notify the Owner of the problem. If appropriate, the Owner should be advised that any delay caused by the deficient plans and/or specifications may necessitate an extension of the completion date. The Owner should be informed that such an extension could result in increased direct and indirect costs to the Contractor and subcontractors for which a formal claim will be submitted when the impacts caused by the delay are able to be quantified. Claims Guidelines for Contractors 9 dorsey.com

12 Perform work in unreasonably congested work areas; Accept Owner-furnished equipment that is delivered late or is damaged or otherwise not in proper condition unless an appropriate time extension is granted; Accelerate performance in any way (e.g., use extra personnel, provide additional materials, perform overtime work, or utilize additional shifts) to attempt to make up delays for which the Contractor is not responsible; Compress the performance of work (i.e., perform a greater amount of work in a shorter period of time than reasonably anticipated); Comply with any scheduling requirements by the Owner that differ from the approved project schedule; or Assuming that coordination of work is the responsibility of the Owner or one of its designated representatives (such as a construction manager), relocate work crews because of lack of proper coordination. The Contractor should not execute change orders or other contract amendments or modifications which award direct costs but do not provide for a time extension or indirect costs. The impact of changed work on unchanged work is often not able to be ascertained when a change order is executed. The Contractor may later discover that disruption costs, extended overhead, wage rate and material price escalations, and other impact costs substantially exceed the direct labor and material costs for the changed work. The Contractor should therefore consider using reservation-of-rights language in change order proposals and change orders such as the following: This change order includes only the direct costs of performing the changed work. The changed work may cause [Contractor] to incur increased costs in performing work which has not been changed. The amount of any such increased costs cannot be determined at this time. [Contractor] reserves the right to receive payment for all such increased costs. A claim for those costs will be submitted to [Owner] when they become available. 10

13 As a practical matter, many Owners will be reluctant to sign a change order containing such open-ended language. Prudent owners understandably want all change orders to constitute a guaranteed maximum price for both the changed work and its impact on unchanged work. The Contractor therefore may have to negotiate an appropriate alternative with the Owner. Sometimes a Contractor has no realistic choice but to sign a change order in the form required by the Owner. The Contractor should be careful to not relinquish rights to receive time extensions and compensation for impacted, unchanged work, however. VI. SECURE PAYMENT OF CLAIMS WHEN POSSIBLE Federal and state laws provide contractors, subcontractors, and suppliers with the means to obtain security for payment of certain claims. Security may also be available pursuant to provisions contained in the construction contracts to which the Contractor is a party. Security is important to the Contractor for two reasons: (1) it provides a fund from which to obtain payment if the Owner is financially unable to make payment, and (2) it often provides the Contractor with leverage to obtain payment more quickly than might otherwise be the case. Private Projects. State statutes allow contractors to record construction liens when payment is not received for work performed. Construction liens encumber the project real property. The encumbrance may constitute an event of default under the Owner s construction loan agreement or make the property more difficult to sell. In either case, the Owner may be presented with an incentive to pay the Contractor in order to remove the encumbrance. If the Contractor is unable to receive payment from the Owner voluntarily, the Contractor can commence a foreclosure proceeding and ultimately cause the property to be sold to satisfy the claim. It should be emphasized that construction liens do not provide any protection for contractors if prior encumbrances on the project property exceed the price for which the property may be sold, however. Claims Guidelines for Contractors 11 dorsey.com

14 State and Local Government Projects. State public works statutes require contractors to provide performance and labor and materials payment bonds for public construction projects. These statutes frequently also allow the public Owner to retain a specified percentage of payments to further secure payment to subcontractors and suppliers. Since it is not possible to record liens on government property, the bonds and retainage serve as lien substitutes. Unpaid subcontractors and suppliers are able to make claims against the payment bond and retainage to secure payment of their claims. Federal Government Projects. The Miller Act requires general contractors to provide performance and payment bonds for most federal construction projects. The payment bond provides a source of payment for certain tiers of unpaid subcontractors and suppliers. Bonds Required by Contract. Contractors and subcontractors are frequently required to provide performance and payment bonds for construction projects as a condition of contracting, without regard to whether the project is private or public. As with bonds required by statute for public projects, the purpose of the bonds is to secure the performance of the Contractor or subcontractor and to secure payment of subcontractors and suppliers. Bonds Required by the State as a Condition of Doing Business. Various states require contractors and subcontractors to register with a designated state agency as a condition of doing business. Registration statutes generally require contractors and subcontractors to post bonds with the state to satisfy unpaid claims by owners, other contractors, subcontractors, suppliers, and others. Notice, Time, and Other Requirements. Applicable statutes and bonds may contain requirements, such as the following, which must be followed in order to perfect lien and bond claims: Pre-lien or pre-claim notice requirements; Requirements that liens be recorded or claims be made within a certain time period after some specified event, such as when the Contractor completes its work on the project or total project completion or acceptance; 12

15 Requirements that liens and bond claims be recorded or filed with specific public officials or in specific places; Requirements that certain persons receive notice of the lien or bond claim; and Requirements that litigation with respect to liens and bond claims be commenced within a specified time and in a specific court. Failing to comply with the requirements that apply to a particular lien or bond claim may result in the lien or bond claim being found to be invalid. VII. CONCLUSION Claims protection is largely a function of prudent project management. A Contractor s principal rights and duties are contained in the construction contracts to which the Contractor is a party those with the Owner, subcontractors, suppliers, and others. Timely compliance with contract requirements is crucial. The Contractor must be organized. Lines of authority should be defined and followed. Meaningful meetings with the Owner and subcontractors are essential to ensure proper coordination of work and to resolve problems. A recordkeeping system that records all important events is necessary to show the Contractor s compliance with the contract requirements or another party s failure to comply with contract requirements. The Contractor should respond promptly to all questions, complaints, and other potential claim events. The response should either be in writing or be confirmed in writing. The Contractor must be fair, yet firm in requiring all parties to meet their contractual obligations. Following the suggestions in this Handbook will not eliminate all claims. It should minimize the number of claim events that occur, however, and it should place the Contractor in a better position to protect its interests when claim events do arise. Claims Guidelines for Contractors 13 dorsey.com

16 CONSTRUCTION & DESIGN PRACTICE LEADERS Steve Champlin Partner & Co-Chair, Construction & Design Practice Group Dorsey & Whitney LLP Jocelyn Knoll Partner & Co-Chair, Construction & Design Practice Group Dorsey & Whitney LLP Dorsey & Whitney LLP This handbook contains general guidelines for Contractors to follow in implementing and maintaining a claims-control program. The contents are not intended to address specific legal standards in any particular jurisdiction and should not be construed as legal advice or a legal opinion on specific facts and circumstances. The standards that govern construction industry claims are numerous and complex. The resolution of an issue often depends on the specific factual context, as well as the particular jurisdiction (state/federal), in which it arose. The scope of this Handbook does not permit all claim events that conceivably may arise on a construction project to be addressed. Nor does it allow a comprehensive treatment of the claim events that have been discussed. When specific problems arise, the Contractor is well-advised to contact experienced construction attorneys. Failure to consult competent construction counsel may result in the loss of important rights and substantial sums of money. 14