The Contractor's Compass July 2015

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THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

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Why Subcontractors Should Adopt a Lean ERM Process

JULY 2015

Risk Management

Feeling Pressure on Your Balance Sheet? How to Help Avoid Default Protect Your Business in 2015 with Contractors Errors & Omissions Coverage Subcontractor’s Guide to Decreasing Financial Risks Legally Speaking: The Ten Commandments of Construction Risk Management

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July 2015

Features

EDITORIAL PURPOSE The Contractor’s Compass is the monthly educational journal of the Foundation of the American Subcontractors Association, Inc. (FASA) and part of FASA’s Contractors’ Knowledge Network. The journal is designed to equip construction subcontractors with the ideas, tools and tactics they need to thrive.

Why Subcontractors Should Adopt a Lean ERM Process............................................................................... 8

by Scott Rasor

Feeling Pressure on Your Balance Sheet?

How to Help Avoid Default ........................................................... 10

The views expressed by contributors to The Contractor’s Compass do not necessarily represent the opinions of FASA or the American Subcontractors Association, Inc. (ASA).

by John Watras

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey

Protect Your Business in 2015 with Contractors Errors & Omissions Coverage ...................................................... 12

MISSION FASA was established in 1987 as a 501(c)(3) taxexempt entity to support research, education and public awareness. Through its Contractors’ Knowledge Network, FASA is committed to forging and exploring the critical issues shaping subcontractors and specialty trade contractors in the construction industry. FASA provides subcontractors and specialty trade contractors with the tools, techniques, practices, attitude and confidence they need to thrive and excel in the construction industry.

FASA BOARD OF DIRECTORS Richard Wanner, President Letitia Haley Barker, Secretary-Treasurer Brian Johnson Robert Abney Anne Bigane Wilson, PE, CPC

by Michael Ahern

Subcontractor’s Guide to Decreasing Financial Risks............ 14

by Scott Wolfe Jr.

Departments

SUBSCRIPTIONS The Contractor’s Compass is a free monthly publication for ASA members and nonmembers. Subscribe online at www.contractorsknowledgedepot.com.

CONTRACTOR COMMUNITY............................................................ 4 LEGALLY SPEAKING.......................................................................... 19

ADVERTISING Interested in advertising? Contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com.

EDITORIAL SUBMISSIONS Contributing authors are encouraged to submit a brief abstract of their article idea before providing a fulllength feature article. Feature articles should be no longer than 1,500 words and comply with The Associated Press style guidelines. Article submissions become the property of ASA and FASA. The editor reserves the right to edit all accepted editorial submissions for length, style, clarity, spelling and punctuation. Send abstracts and submissions for The Contractor’s Compass to communications@asa-hq.com.

The Ten Commandments of Construction Risk Management

by Eric Travers, Esq

Quick Reference

ABOUT ASA ASA is a nonprofit trade association of union and non-union subcontractors and suppliers. Through a nationwide network of local and state ASA associations, members receive information and education on relevant business issues and work together to protect their rights as an integral part of the construction team. For more information about becoming an ASA member, contact ASA at 1004 Duke St., Alexandria, VA 22314-3588, (703) 684-3450, membership@asa-hq.com, or visit the ASA Web site, www.asaonline.com.

ASA/FASA CALENDAR..................................................................... 22 COMING UP....................................................................................... 22

LAYOUT Angela M Roe angelamroe@gmail.com © 2015 Foundation of the American Subcontractors Association, Inc.

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Contractor Community U.S. Appeals Court Ruling in Alabama CGL Case a ‘Big Win’ for Subcontractors After ASA told a U.S. appeals court that construction insureds ought to be able to rely on their liability insurance to protect themselves from property damage arising out of inadvertent and alleged construction defects, the appeals court agreed and reversed a district court ruling that threatened the coverage for which subcontractors pay substantial premiums.

“This case is another big win for ASA, subcontractors, and the construction industry,” said Eric Travers, Kegler, Brown, Hill & Ritter, Columbus, Ohio, general counsel for ASA. “By affirming that unexpected and unintended property damage is an ‘occurrence,’ this common sense decision puts [the U.S. Court of Appeals for] the 11th Circuit solidly in the growing majority of states who are increasingly rejecting insurance companies’ attempts to use narrow policy exclusions to deny basic coverage for the very claims and damages that subs are told and expect will be insured when they buy that insurance.”

In their amici curiae brief to the U.S. appeals court in July 2014 in the case of Pennsylvania National Mutual Casualty Insurance Company v. St. Catherine of Siena Parish, ASA, the Associated General Contractors of America, and the Alabama AGC noted: “Only a few months ago, the Alabama Supreme Court issued its opinion in Owners Ins. v. Jim Carr, a case that confirmed coverage for construction defects under Alabama law. The district court’s application of the Contractual Liability Exclusion supports a back door circumvention of that coverage through an unwarranted over-extension of the Contractual Liability Exclusion. Taken

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to its logical end, that over-extension will result in the elimination of the coverage preserved in Jim Carr.

Therefore, Amici Curiae request the court reverse the district court and render judgment in favor of St. Catherine’s ...”

In the underlying case, the dispute involved a project by the parish to replace the roof on two of its buildings with a 40-year roof shingle. The parish contracted with Kiker Corporation for the work, and Kiker obtained a commercial general liability policy through carrier Penn National. The policy provided coverage to claims for property damage caused by an “occurrence” and defined an occurrence as “an accident.” The policy also contained the standard “your work” and “contractual liability” exclusions.

Kiker subcontracted the roofing portion of the work and work was completed in March 2004 on one building and in February 2005 on the second building. The second building almost immediately began leaking and two years later the first building also began to leak, causing extensive damage to the gypsum substrate of the roof as well as the interior and ceiling of the buildings. Despite repair efforts, the problems were not fixed and the parish hired a roof inspector, who investigated and claimed the leaks were caused by installation errors, construction defects, and other breaches by Kiker. The parish sued and, though Penn National defended Kiker, it did so under a reservation of rights, claiming there would be no coverage under the policy for damages caused by a breach of contract or breach of warranty.

At trial, the jury awarded the parish $350,000 in compensatory damages for breach of contract. After the verdict, Penn National initiated a declaratory judgment action in federal court asking the U.S. District Court for the Southern District of Alabama to determine whether it

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was responsible to indemnify Kiker and pay the verdict. Penn National argued it had no such obligation because a breach of contract claim was not an “occurrence” under the policy and even if such claims were an occurrence, the contractual liability and/or “your work” exclusions would bar recovery. The U.S. District Court for the Southern District of Alabama held that there was coverage for the property damage caused by the leaks because an “accident” meant an unintended and unforeseen injury and the allegedly faulty workmanship led to damage to other areas of the structure and thus damage beyond simply the cost to replace the defective roof. The court held that the “your work” exclusion did not bar recovery for the cost of the defective roof replacement because the subcontractor had performed the roofing work. However, the court used the “contractual liability” exclusion to deny coverage of any claims arising from a breach of contract, stating “under binding Alabama law the breach of contract claim and the implied warranty claim are excluded from coverage under the contractual liability exclusion.” Kiker petitioned the 11th Circuit Court of Appeals asking it to reverse or certify the question of the breach of the contractual liability exclusion to the Alabama Supreme Court.

In their brief, ASA, AGC and the Alabama AGC wrote: “The proposition that an insurer should not be obligated to pay claims that are outside the coverage of the policy is not astounding. However, some insurers are extremely adept at finding reasons, some would say excuses, to deny what otherwise appear to be claims more than arguably within the coverage of the policy. This is particularly true as to claims involving allegedly defective workmanship by insured contractors under their commercial general liability policies, and if the position

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advocated by Pennsylvania National is adopted by this Court, insurers will invariably have yet another excuse to deny legitimate claims.”

ASA, AGC and the Alabama AGC further argued in their brief that “applying the Contractual Liability Exclusion to property damage to an insured contractor’s work simply because that property damage may breach its contract has a profoundly negative effect on CGL coverage for the construction industry. It is nothing short of a radical departure from the means by which CGL coverage has traditionally been marketed and provided by the insurance industry to contractors.”

Patrick J. Wielinski, Esq., Cokinos, Bosien & Young, Irving, Texas, prepared the brief on behalf of ASA, AGC, and the Alabama AGC. ASA’s Subcontractors Legal Defense Fund financed the brief. Contributions may be made to the SLDF via the ASA Web site.

Senate Agrees to Move VA Major Construction Program The U.S. Department of Veterans Affairs’ major construction program will be shifted to another government entity, probably the U.S. Army Corps of Engineers, if the U.S. Senate has its way.

On June 18, the Senate approved a provision, as part of the National Defense Authorization Act 2016, that directs the VA “to enter into an agreement … with the Army Corps of Engineers or another entity of the Federal Government to serve, on a reimbursable basis, as the construction agent on all construction projects of the Department of Veterans Affairs … that involve an expenditure of more than $100,000.”

The VA operates the nation’s largest integrated health care system with 150 medical centers, nearly 14,000

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community-based outpatient clinics, community living centers, Vet Centers and Domiciliaries. In recent years, the VA’s management of construction has severely eroded. Although there are many examples, the one with the most public awareness is the hospital project in Aurora, Colo. The project originally budgeted at $604 million is now estimated to cost $1.7 billion.

Because of the VA’s burgeoning management problems, ASA urged Congress to enact legislation to transition the VA’s major construction program to the Army Corps. ASA Chief Advocacy Officer E. Colette Nelson said, “The Association will continue to work with Congress to assure that the VA fully cooperates with the Army Corps, or other federal agency, at each stage of design and construction and both agencies have incentives to make timely decisions.”

Ask U.S. Senators to Co-Sponsor Federal Construction Procurement Reform Contact your U.S. Senators and ask them to co-sponsor S. 1526, the “Construction Consensus Procurement Improvement Act of 2015”! On June 18, the Senate demurred on consideration of an amendment, identical to S. 1526, to the National Defense Authorization Act 2016 (H.R. 1735). However, the Senate Committee on Homeland Security and Governmental Affairs tentatively has agreed to consider S. 1526 later this summer. Introduced

by Senator Rob Portman (R-OH) and Senator Maize Hirono (D-HI), S. 1526 would: • Prohibit the use of reverse auctions for awarding contracts for federal construction and design services. This will help maintain the integrity of the bidding process for construction.

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• Curb the use of fraudulent

individual surety bonds on federal construction by using an existing standard in the Miller Act to make sure that performance and payment bonds issued by a non-corporate surety are backed by assets that are real, adequate and readily available. Construction subcontractors and suppliers rely on payment bonds for payment assurance on federal construction.

• Broaden the opportunity for small firms in the federal construction market by increasing the guarantee of SBA’s Surety Bond Guarantee Program.

• Encourage more efficient use of the design-build method on federal construction by requiring that the first step in the acquisition process is qualifications based followed by a second step that is price based.

Use the ASA alert system at https://www.votervoice.net/ASA/ campaigns/41281/respond to send an email to your senators.

DOL and FAR Council Propose Fair Pay and Safe Workplace Rules On May 28, the U.S. Department of Labor and the Federal Acquisition Regulatory Council issued proposed guidance and a proposed regulation, respectively, implementing President Obama’s 2014 Executive Order on Fair Pay and Safe Work Places. The Executive Order requires prospective federal contractors to disclose labor law violations and gives agencies more guidance on how to consider labor violations when awarding federal contracts.

DOL’s proposed guidance is intended to assist contracting agencies and the contracting community in applying the Order’s requirements, including evaluating the severity of labor violations.

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requirements and the provisions of the Labor Department’s guidance into the existing procurement rules.

Together, the proposed guidance and regulation are intended to make sure that agencies have the information they need to determine which contractors are providing their workers with protections to which they are legally entitled. They also create a process for agencies to help contractors come into compliance with labor laws. Most federal contractors will only have to attest that they comply with laws providing workplace protections.

For those contractors that report violations, designated Labor Compliance Advisors will coordinate with the relevant enforcement agency experts to help them come into compliance.

At a future date, DOL will publish a second proposed guidance addressing which State laws are equivalent to the identified 14 Federal labor laws and executive orders.

For more information on the DOL proposed guidance and the FAR Council’s proposed rule, see ASA’s Frequently Asked Questions. The deadline for submitting comments is July 27, 2015. Interested parties may submit comments and additional materials electronically at http:// www.regulations.gov, the Federal eRulemaking Portal.

FAR Council Proposes to Curb Bid Shopping and Protect Subcontractor Payment The Federal Acquisition Regulatory Council proposed regulatory changes that would curb bid shopping and protect subcontractor payment rights on federal construction. The proposed amendments to the Federal Acquisition Regulation, issued on June 10, would require an offeror to provide assurances that it will make “a good faith effort” to acquire construction work from “the small business concerns that the offeror used in preparing its bid or proposal,

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in the same or greater scope, amount, and quality used in preparing and submitting the bid or proposal.” The offeror will have considered to have used a small business concern in preparing the bid or proposal if: • The offer identifies the small business concern as a subcontractor in the bid or proposal or associated small business subcontracting plan, to furnish certain supplies or perform a portion of the contract; or • The offeror used the small business concern’s pricing or cost information or technical expertise in preparing the bid or proposal, where there is written evidence of an intent or understanding that the small business concern will be awarded a subcontract for the related work if the offeror is awarded the contract.

In addition, the proposed rule also would require a contractor to provide the contracting officer with a written explanation if the contractor fails to acquire the construction work it indicated would be performed by a small business subcontractor. The proposed rule also would require a prime contractor to provide assurances that it will not prohibit a subcontractor from discussing any material matter pertaining to payment to or utilization of a subcontractor.

ASA successfully had these statutory requirements included in the Small Business Jobs Act of 2010.

The deadline for submitting comments is Aug. 10, 2015.

Submit comments and additional materials electronically at http:// www.regulations.gov, the Federal eRulemaking Portal.

ASA Accepting Applications for 2015 Excellence in Ethics Award ASA is now accepting applications for its 2015 Excellence in Ethics Award, which recognizes subcontractors for their commitment to ASA values like quality

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construction and a safe and healthy work environment.

“The ASA Excellence in Ethics Awards are a great way for subcontractors to let their clients, employees, and others in their community know that their company is committed to professionalism and sound business practices,” said Shannon MacArthur, MEMCO, Spring, Texas, chair of the ASA Task Force on Ethics in the Construction Industry, which developed the awards.

Subcontractors should start planning now to apply for the awards.

While the application deadline is Dec. 11, 2015, a number of critical milestones must be met before then, particularly for subcontracting firms that are only now beginning to implement a code of ethics or ethics program. ASA has created a timeline to help.

Each applicant is required to respond to questions concerning the firm’s corporate ethics policies and procedures, its construction practices, and its general business practices.

Each applicant also is required to submit detailed documentation, including sealed letters of recommendation from a customer, a competitor, and a supplier.

Applicants can learn about the judging criteria and submission requirements in the awards brochure and download the application.

ASA also has developed a useful resource guide to help firms prepare and submit applications. This guide contains model documents, such as sample recommendation letter requests and model policies on topics ranging from competition and conflicts of interest to internal procedures and whistle blowing.

ASA will present the 2015 Excellence in Ethics Awards during its annual convention, SUBExcel 2016, which will take place March 3-5, 2016, in Miami, Fla. More information and details about the awards can be found under “Education & Events” on the ASA Web site.

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Feature Why Subcontractors Should Adopt a Lean ERM Process

by Scott Rasor The discussion of enterprise risk management (ERM) as a strategic business tool is a frequent topic in both general business and industry publications in today’s competitive marketplace. The ERM process is most often examined in the context of large multinational corporations where operational and people risks can span product lines and geographies. So it’s natural that small- to mid-sized enterprises, including subcontractors, might have overlooked this tool because it appears too complex and time-consuming for their needs.

However, this may be a case of the proverbial “throwing the baby out with the bathwater,” as the core concept of ERM — identifying, organizing and creating an action plan for risk — is an approach that can be adopted by organizations of all sizes. In fact, the argument can be made that smaller and mid-sized companies need ERM more than larger ones, as even a single risk that results in uncontrollable financial or reputational damage can be more difficult to overcome compared to Fortune 500 or multinational organizations that have the benefit of time, resources, and experience.

While the principles of ERM remain the same among larger and smaller organizations, there are some differences to keep in mind.

For instance, the consequences of a risk shock are far greater for a small business. As a result, a small business may never have a second chance when something goes wrong.

In the article, “Enterprise Risk Management: Are we ignoring the segment with the most critical need?” the ERM for Small Business Initiative at the University of Connecticut created a list of best practices in the adoption of ERM for smaller organizations:

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• Any risk management analysis for

a small business has to incorporate business growth strategies.

• Risks that receive focus should be reasonably likely events with serious consequences versus low likelihood events with serious consequences.

• Much of the primary input for risk analysis should be drawn directly from the business owners.

The purpose of a lean, focused risk assessment for a subcontractor is to develop a more resilient business — one that is better prepared to adapt to changing market conditions and leverage emerging opportunities, as well as anticipate surprises and recover from disruptions. In short, an effective enterprise risk management approach can create a proactive infrastructure for dealing with risks systematically and successfully.

Smart subcontractors are adopting a lean ERM approach to ensure a more resilient business operation.

Potential Benefits of a Lean ERM for Subcontractors: • Maximizes growth opportunities.

• Reduces the inconsistency of business outcomes.

• Provides better business intelligence for improved decision-making.

• Identifies and manages key exposures.

• Protects assets and ensures bottom-line profitability.

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Managing Today’s Growth Opportunities From all predictions, 2015 looks to be an opportune time for subcontractors to take advantage of an improving economy to expand their business. The Dodge Construction Outlook estimates that commercial building will increase 15 percent, led by the technology, hospitality, and financial sectors.

Institutional building is expected to grow by 9 percent supported by an increase in K-12 school construction and healthcare facility building.

“Subcontractors need to temper their enthusiasm for more projects and profits with a reality check on the increased risks associated with a strong business environment,” said John Watras, vice president of Middle Market Commercial Contractors, Zurich North America. “While the jobs are now easier to get, it’s the time when oversights in labor, contracts, materials, and backlog can turn a profitable situation into a bottom-line loss.”

An ERM process enables the creation of a written framework for a subcontractor to identify, rank, and control the most important risks to their operation. Watras suggested this four-step ERM process for subcontractors:

Step 1: Identify and prioritize risks Identify the external and internal risks and prioritize risks by levels (high, medium, low is a common ranking).

Step 2: Create action plan

High risk areas should be given top priority and plans should address how to control for weaknesses and mitigate losses. Assign personnel responsibilities and a completion date for each risk.

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Step 3: Monitor outcomes

Determine the appropriate reporting timeline on each of the priority risks, whether it is weekly, monthly, or quarterly.

Step 4: Management reporting and continuous feedback

Report outcomes to owners and key managers. ERM is not a onetime exercise, but a dynamic and continuous process for firm-wide improvement.

“The benefit of creating an ERM framework is to create a repeatable process for determining exposures,” Watras explained. “It provides subcontractors with a consistent, ongoing assessment of how they can either accept the risk or transfer the risk, and if the right resources are in place to proceed in either of those directions.”

Creating a Lean ERM for Subs A full-up ERM process for larger organizations typically assesses four main risk areas — strategic, operations/people, financial, and market. For small- to mid-sized contractors, Watras recommends a lean ERM that focuses on operations/ people, as that is the area with the most frequency of risks. He also believes it is imperative that owners and top managers be at the table together when identifying and prioritizing risks, and determining who will have the responsibility for controlling them throughout the organization.

Within the operations/people risk area, Watras encourages subcontractors to focus on risk issues around materials, contracts, labor, and backlog.

Materials • Are the right materials being

sourced?

• Are vendors available?

• Are vendors certified and verified for application?

• Are quality control/assurance procedures in place for new vendors?

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Contracts • Are owners or general contractors

asking you to take on liabilities such as onerous terms or conditions?

• Are the appropriate personnel performing the contract review?

• Has the contract been signed and formalized before work is begun?

• Has an annual contract review been established?

• Does your contract language indicate that safety programs are being met or exceeded?

• Does the contract include verification of insurance?

Labor • Do you have enough personnel to take on the backlog?

• Are there special skills required to take on the work?

• Are you going to train or hire for new skills?

Backlog • Are you at risk for taking on more work than you can handle?

• Do you have the ability to expand

or contract operations as needed to survive?

• Will your staff be overburdened or have too much inexperienced project management?

• Will your safety programs be compromised with this level of backlog?

ERM: Clarity for the Future An effective ERM framework can provide a subcontractor with a clear picture of its overall risk exposures, and improve firm-wide understanding of its ability to control the risks. “A lean ERM process can result in a more efficient use of resources and will help a subcontractor avoid addressing the same risks again and again in the future,” Watras said.

Scott Rasor is the head of Construction in North America. He has 29 years of insurance industry experience with a background in both claims and underwriting. Previously, he served as Senior Vice President for the Zurich Construction business

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group with responsibility for Specialty Risk, heading the division responsible for underwriting and technical quality for Subguard, Professional Liability and Project Risk insurance. He has an associate’s degree in mechanical engineering, a baccalaureate degree in safety and a master’s in business administration. Rasor is an active member of the Associated General Contractors of America (AGC) and the Construction Financial Management Association (CFMA). The information in this publication was compiled from sources believed to be reliable for informational purposes only.

All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavor. Any and all information contained herein is not intended to constitute advice (particularly not legal advice). Accordingly, persons requiring advice should consult independent advisors when developing programs and policies.

We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein. We undertake no obligation to publicly update or revise any of this information, whether to reflect new information, future developments, events or circumstances or otherwise.

Moreover, Zurich reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances.

The subject matter of this publication is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy. © 2015 Zurich American Insurance Company

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Feature Feeling Pressure on Your Balance Sheet?

How to Help Avoid Default

by John Watras To paraphrase Dickens, “It’s the best of times, it’s the most challenging of times” for subcontractors in an increasingly booming economy.

Skylines across the country are dotted with cranes as commercial construction reaches double-digit growth in 2015.

This recovery in the construction industry is a welcome relief for subcontractors who rode out the financial crisis of 2008-09 and the construction lull that followed. Yet the rapid inflow of new work is putting pressure on many subcontractors’ cash flow and balance sheets, which, if not properly managed, can cause defaults that result in both financial and reputational damage.

Defaults often happen when the project is more than halfway completed — when the combined pressures of meeting payroll and covering materials are at their peak.

Why do even the most experienced contractors face potential default situations?

Cash Flow Issues Subcontractor failure is most often caused when the organization simply runs out of cash. General contractors and other project partners expect subcontractors to float labor and material costs. Subcontractors pay for all materials on terms and have weekly payroll, and then are asked to wait from 30 to 90 days to get paid from the general contractor or owner.

For any company without significant capital, these are tough conditions to manage.

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Lack of Access to Capital Subcontractors need to ensure they have sufficient capital to handle the realities of extended payment terms, among others. Traditional banks shy away from providing capital to subcontractors because construction is a risky and cash-intensive business.

Despite a recovering economy, some banks still are reluctant to fund construction projects and especially those of a smaller nature. When capital is available, subcontractors often pay higher rates, forcing potentially even more cash needs to cover interest rates.

Complicated Project Workflow Subcontracting is a business that is highly dependent on the work of dozens of other parties. Project timeliness can get changed daily, depending on the completion of work by other subcontractors. The jobsite itself is a complicated environment where multiple things can go wrong, putting a subcontractor in a costly logistical or even legal situation.

So how does a subcontractor avoid the potential of a default? Consider these primary steps: Bid projects profitably. It’s important to deeply understand your cost structure. Focus on taking projects within your scope and those where you have the people in place to manage them properly.

While it’s tempting to bid on projects outside your geographic area, many subcontractors run into trouble when moving into a new municipality or state where the business and legal environment is very different.

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Manage projects proactively.

Watras recommends that subcontractors get a read on how well the job is going right from the beginning of the project. One way is to use early indicators to judge if the scope of the project is accurate and on track. For example, if you are a plumbing contractor and you estimated 500 feet of pipe being laid a day, and if you are only running 400 the first couple of days, what does this mean to the project deliverables overall?

Accept and finance projects wisely. No one likes to say no to business. But taking on too many jobs that are too complex — without the right people, tools, or knowledge in place — can quickly get subcontractors in trouble. This is where subcontractors benefit from having a strong CFO or other senior financial person who can project and manage cash flow, and serve as a trusted advisor when making decisions about how many projects to take on and which ones to accept.

An experienced CFO will also keep track of the payment terms of each general contractor and will consider proposing different fee scales for different clients, depending on their payment schedules. The best general contractors will also work with their subcontractors to ensure an effective payment process to reduce the risk of default.

Construction industry confidence is at its highest in seven years, and subcontractors can ensure their own stable growth by focusing on the above steps. Putting in place the best risk management practices to avoiding default — profitable bids, proactive project management, and

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PODCAST: PROTECTING AGAINST PAYMENT DEFAULT The ASA podcast “Protecting Against Payment Default” explains the legal rights and remedies that subcontractors have to protect against payment default and concrete steps firms can take to better manage risk to get paid on projects.

“Protecting Against Payment Default” is free for ASA members and comes with an accompanying white paper, both of which are located in the members-only section of the ASA Web site (member log-in required).

In the podcast, Eric Travers, Esq., Kegler, Brown, Hill and Ritter, Columbus, Ohio, ASA’s legal counsel, warns that the biggest risk a subcontractor takes is “the risk of non-payment after you’ve spent time and money to do some or all of the work.”

Protecting your payment starts with the “deal.” The deal is the written, legal documents (subcontract) you sign, along with any documents incorporated by reference. In most commercial subcontracts, payment is divided into two categories: scheduled progress payments and final payment.

Scheduled progress payments are paid as the project progresses.

They provide subcontractors with the cash to meet payroll, buy materials, pay sub-subs, etc. The final payment is the last payment subcontractors get and may include retainage, but accepting it may also waive all outstanding claims.

Travers warns, “Before accepting final payment, make sure pending claims for change orders, delay damages, etc., are resolved.”

In order to successfully maximize your leverage when it comes to

sound financial decision-making — can benefit a subcontractor for years to come through maintaining financial strength and a good reputation among general contractors.

John Watras, vice president of Zurich’s construction industry segment, is responsible for the middle market commercial contractor’s space. He develops national strategies around product, sales and service for this market, and he works closely with the field underwriting teams to further Zurich’s relationships with agents, brokers and customers. He holds both CPCU and AIM professional designations.

Watras can be reached at (952) 2293692 or john.watras@zurichna.com.

The information in this publication was compiled from sources believed to be reliable for informational

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getting paid, Travers suggests conditioning your bid package on use of an agreement containing acceptable payment terms. If you submitted a bid with conditions and it was accepted, the general contractor cannot force one-sided contract terms on you later. If it tries, you’ve got the “upper hand” in negotiations. For help conditioning your bid, use the ASA Subcontractor Bid Proposal (2013), which contains instructions for conditioning your bid and establishes the terms of the ASAendorsed ConsensusDocs 750 subcontract as your agreement with the prime contractor.

Another way to protect against a payment default is to identify and appropriately modify “payif-paid” and “pay-when-paid” contract clauses. Where legal, a

purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavor.

Any and all information contained herein is not intended to constitute advice (particularly not legal advice).

Accordingly, persons requiring advice should consult independent advisors when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods

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“pay-if-paid” clause relieves your customer of the obligation to pay if it doesn’t get paid. If you spot a “pay-if-paid” clause, know that it will “clearly and unambiguously” shift the risk of owner non-payment to you. “Pay-when-paid” clauses generally allow your customer some additional time to pay, but the customer still has an obligation to pay in a “reasonable” timeframe.

Timely payment is of paramount importance to subcontractors. As a creditor on a project, understanding and agreeing to fair payment terms is critical to your business’ success. By taking steps early to protect your company from unpleasant and unnecessary payment risk, you’ll increase your chances of getting paid if something goes awry.

or safety suggestions contained herein. We undertake no obligation to publicly update or revise any of this information, whether to reflect new information, future developments, events or circumstances or otherwise.

Moreover, Zurich reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances.

The subject matter of this publication is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy. © 2015 Zurich American Insurance Company

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Feature Protect Your Business in 2015 with Contractors Errors & Omissions Coverage

by Michael Ahern To help safeguard against their toughest risks in today’s competitive environment and improving economy, artisan subcontractors need the right insurance coverage. This includes coverage designed to insure against potential liability exposures, which can arise from a variety of factors and take years to materialize.

Businesses today are taking more precautions when it comes to project specifications, budgetary constraints, and timelines. And customer expectations are becoming increasingly high. That often means added pressure for your company to complete jobs on time and on budget.

Unfortunately, risks can quickly turn into costly errors, placing a project or your business into a challenging situation.

That’s why more subcontractors are seeking out contractor errors and omissions policies, aimed at insuring against a variety of risks, including claims alleging faulty workmanship, design errors, or omissions, and the use of defective materials or products.

Commercial General Liability Coverage Is Not Enough While most artisan subcontractors have commercial general liability policy, this type of coverage was never intended to serve as warranty of work. Damage to self-performed work is considered to be a “business risk” and is excluded in most situations.

Exceptions would be damage to property that is not the work itself or, possibly, damages caused by or to the work of a subcontractor done on behalf of a general contractor.

Many insurance carriers have long held that faulty workmanship never

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satisfies the commercial general liability insuring agreement. Because there is no accident, there is no property damage that could therefore be considered a covered “occurrence.”

Case law is often split by state on this issue.

Since 2005, at least 20 jurisdictions have issued decisions to support defective construction as an “occurrence” with respect to damage to property other than the work itself.

However, most courts have ruled that the faulty work, in and of itself, is not a covered occurrence. And to add another layer of complexity, state legislatures will react to those decisions, by enacting legislation to support the opinion that faulty workmanship, which causes damage to property that is not the selfperformed work, is indeed a covered occurrence.

While court decisions may change how commercial general liability policies are construed, insurance carriers do offer endorsements to clarify that the exceptions to work exclusions, and damage to property that is not the work itself, are deemed to be an occurrence. Artisan subcontractors should partner with brokers and carriers that can properly explain these options and whether they are even needed in a particular state.

But none of this addresses the risk a subcontractor faces for damages to their self-performed work, or their possible design professional liability.

Are You a Good Fit for Contractors Errors and Omissions Coverage?

against risks beyond the coverage of their general liability policies — specifically claims resulting from design errors and omissions. Today, however, professional liability policies have evolved into a more robust contractors errors and omissions policy that expands coverage to include faulty workmanship and the use of defective materials and/or products.

As an artisan subcontractor, you should understand the limitations and benefits of professional liability policies, for both your firm and the design professionals you are hiring.

More and more contract requirements are emphasizing the need for this type of coverage, which signals the need for additional in-depth coverage.

There are a few simple questions that you can ask yourself to help you better determine if you are a good fit for contractors errors and omissions coverage?

1. Are you a subcontractor with the responsibility to perform construction services?

2. Do you install products in the course of your construction services?

3. Do you provide in-house design with construction responsibility?

4. Do you subcontract design services to other parties and self perform the construction work?

5. Do you provide value engineering services?

If you answered “yes” to any of these questions, you have a unique exposure that can be addressed through a tailored errors and omissions policy.

Professional liability policies were historically designed to protect firms

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Protect Your Company’s Reputation In a competitive marketplace, your company survives and thrives on its reputation. Allegations of faulty workmanship, design errors or omissions, and the use of defective materials or products can not only put your company’s good name in jeopardy, they can also ultimately have a significant impact on your bottom line.

Let’s examine a potential design error claim scenario to highlight the value of a solid artisan subcontractors errors and omissions policy. New Line Cabling, Inc., was hired to install an underground coax cable and Internet system for a large office complex in an early phase of construction. The complex would have 12 separate offices, each of which required underground wiring and exterior receptacles, for a total job cost of $200,000.

Following installation and before construction completion, the coax system was tested by a technology infrastructure engineer. The system failed, and an investigation determined that the coax cable called for in the design, was not appropriate for underground bury — it was rated for above-ground-only systems and inadequate for underground shifts in temperature. Reinstallation would cost $150,000.

Most standard commercial general liability policies would not cover the cost to replace the cable. In this case, New Line Cabling would be responsible for pursuing its own claim against the design engineer.

However, if the firm had errors and omissions coverage within their insurance policy, it would have immediately covered the complete cost of the reinstallation, allowing New Line Cabling to uphold their commitment to a very important customer. The company’s insurance carrier could then subrogate against the design engineer for faulty workmanship.

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Get Prepared for Errors and Omission Claims with the Right Coverage With many errors and omission claims similar to the New Line Cabling example, insurance carriers like CNA have taken steps to recognize the coverage need for what had previously been considered a pure business risk. CNA’s Contractors Errors & Omissions and Pollution Liability (CEO) policy was developed in response to a number of requests for a product to address construction errors and omissions.

As opportunities for subcontractors improve with the economy, issues regarding faulty workmanship, design errors and omissions, and the use of defective materials or products will continue to grow more complex.

You need to ensure your broker and insurance company is working in partnership to fully understand and address your coverage needs.

That includes making sure you have the insurance to address an exposure from errors or omissions in construction that may cause damages not covered by the ISO Commercial General Liability (CG 0001) form or traditional professional liability forms.

Mike Ahern is an assistant vice president of construction at CNA. CNA’s construction segment provides a complete array of coverages for thousands of contractors and construction firms countrywide.

Through its unique and flexible insurance programs, CNA has earned the endorsement of many national construction trade associations for roofers, electricians, plumbers, landscapers and many more. For a complete list of CNA insurance solutions for this industry, call 800CNA-6241 or visit www.cna.com/ construction. Ahern can be reached at michael.ahern@cna.com. Any examples in this article are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental.

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This material is not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. CNA is a registered trademark of CNA Financial Corporation. Copyright © 2015 CNA. All rights reserved.

FASA VIDEO ON-DEMAND PROVIDES TIPS ON HOW TO AVOID COSTLY INSURANCE GAPS Changes in insurance and bonding policies, practices, and requirements may expose subcontractors to gaps in coverage. Find out what your company needs to do to avoid the gaps.

Presenters John Rindt, executive vice president/surety division, JDW Insurance, El Paso, Texas, and John Wiedemann, president, Joseph M. Wiedemann and Sons Inc., Arlington Heights, Illinois, discuss how subcontractors can protect their businesses from becoming unwitting victims of inadequate insurance coverage or missing payment assurances. Subcontractors will also learn which questions they should ask their insurance agent and surety bond producer.

“Insurance and Surety Emerging Risks for Subcontractors”

(Item #8050) $65 ASA members $95 nonmembers Order online

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Feature Subcontractor’s Guide to Decreasing Financial Risks

by Scott Wolfe Jr. The subcontractor sits in a perilous position on a construction job.

Suppliers squeeze the subcontractor on credit terms, retainage cuts deep into profit margins, and general contractors play games to “stay ahead” of payment requests. This leaves subcontractors with a lot of financial risk, which is another way of saying that subcontractors can wind up doing a lot of work, incurring a lot of debt, and not getting paid for it.

Defining Financial Risks and Identifying Common Risks The simple definition for the term “financial risk” is the possibility of not getting paid on a project. In other words, it’s the possibility of losing money on a project.

Subcontractors know this fear well.

They start a construction project and pour tons of resources into getting the work done, and then lose sleep over whether they will get paid the amount due to them.

Getting paid too slowly, getting paid too little, or not getting paid at all present the risk that the subcontractor will lose money. And since the subcontractor puts resources into a project before getting paid, the cost of their capital and the availability of cash throughout the job is a risk in itself.

Here are some common financial risks faced by subcontractors on projects: Not Getting Retainage Payments — General contractors typically withhold 5 percent to 10 percent of the contract price from all subcontractor payments, and hold this money hostage until the end of a project.

By the end of a project a lot could go

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wrong, including the insolvency of the owner or the premature termination of the project. This can jeopardize whether the money is available to pay the retainage amount; a risk borne mostly by the subcontractor.

Pay-If-Paid and Pay-When-Paid Provisions — The most famous (and troubling) way that general contractors “shift the risk” of losing money onto subcontractors is through contingent payment provisions; commonly referred to as pay-when-paid or pay-if-paid provisions. The central idea is that subcontractors do the work, pouring resources into a project, and then wait for payment from the general contractor. However, even though the subcontractor is owed the money and did the work, if the general contractor doesn’t get paid (for whatever reason, really), the subcontractor doesn’t get paid. According to the contractual terms, in other words, the risk of nonpayment is on the subcontractor.

Payment Abuses — Two years ago, Engineering News-Record columnist Richard Korman wrote an article summarizing a vibrant discussion at that year’s Risk Summit — the discussion was over payments. In “Views on Risks Differ Depending on Where You Are in the Payment Flow Chart,” Korman wrote about both sides of the debate.

For GCs, the challenge was to stay ahead of the subcontractors.

Subcontractors complained about payment abuses, stating “we must lead the industry kicking and screaming … to payment reform.”

Those making payments can abuse the payment process, and this is a real financial risk for subcontractors.

Unfair Lien Waiver Practices — When a payment is made on a construction project, it is oftentimes

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paired with lien waiver requests.

These requests can appear benign and standard, and subcontractors are highly motivated (by cash) to meet the request. Lien waiver language can be very ambiguous and controversial, however, leaving subcontractors with unexpected financial exposure.

Policies and Laws That Protect Subcontractors Against These Risks When it comes to financial risks, there is good and bad news for subcontractors. The bad news is that subcontractors are in an unfortunate negotiation position. Squeezed from the bottom with credit terms and from the top with delayed payments and unfair tactics, subcontractors must stretch their working capital, forcing them to balance every contractual, legal, and negotiation decision with massive cash needs. Even when the subcontractor is right they must confront the well-known and mostly true adage that “possession is ninetenths of the law.”

The good news for subcontractors, however, is that their poor position isn’t a secret. Courts and legislatures have known about these leverage problems for hundreds of years, and the general public policy behind most laws protect subcontractors against abusive practices. For subcontractors, the secret is knowing and understanding these protections, and being in a position to use them.

Generally speaking, the policy in America is to protect those who provide labor and materials to a project against non-payment. The further away from the money and leverage you go, the stronger the protections will be. Just think about

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PODCAST ESTABLISHING THE RIGHT TO PAYMENT ASSURANCES The ASA podcast “Establishing the Right to Payment Assurances” explains why payment assurances are a valuable risk management tool for subcontractors.

“Establishing the Right to Payment Assurances” is free for ASA members and comes with an accompanying white paper, both of which are located in the members-only section of the ASA Web site (member log-in required).

In the podcast, Eric Travers, Esq., Kegler, Brown, Hill and Ritter, Columbus, Ohio, ASA’s legal counsel, warns that a subcontractor “can do everything correctly on the job and still not get paid.” For example, a subcontractor could negotiate a fair contract, successfully complete a project, finish

on-time and on-budget, but if the project financing suddenly dries up, there’s a strong chance it won’t get paid. To reduce the possibility that this will happen, Travers advises that subcontractors obtain payment assurances.

One of the best ways to ensure that a subcontractor will get paid for its work is by obtaining project financing information before the project. Travers says, “Seeing project financing information at the beginning of the project puts your company in a better position to gain information that you can later use. Early knowledge of project financing arrangements is vital because, as you know, your costs (material, labor, etc.) begin accelerating as soon as you step foot on-site. Asking for project financ-

ing information is one of the most underutilized rights that a subcontractor has,” Travers says.

Even though many owners and upper-tier contractors are hesitant to share project financing information, subcontractors should still request it.

The owner’s project financing arrangements should be one of first pieces of information a subcontractor gathers when working on a project. By aggressively pursing disclosure of project financing information, the subcontractor will greatly improve its chances of getting paid. Through regular communication, the subcontractor can discover potential funding problems early on, and this could literally mean the difference between its survival or going bankrupt.

Documents like the ASA Addendum to Subcontract (2011) “set up the contractor’s obligation to provide (financial) disclosure to the subcontractor as a condition precedent to the subcontractor’s performance.”

Additionally, the ConsensusDocs forms explicitly obligate the owner to provide the subcontractor with project financing information, upon written request, and also require the owner to give notice of any changes in project financing. The ability to obtain information about project financing after starting work is a key advantage of the ConsensusDocs, over the American Institute of Architect documents.

FASA VIDEO ON-DEMAND LEARN HOW TO AVOID DANGERS OF RISK TRANSFER Can you spot contract language that unfairly transfers risks to your subcontracting firm? Don’t be a victim! Learn how to recognize and limit excessive “additional insured” requirements and hold-

harmless contract clauses. Richard Usher, Hill & Usher Insurance and Surety, Phoenix, Ariz., cites case studies and specific clauses. Usher explains why subcontractors need to be on guard against “additional

all of the protections provided to laborers and corporate employees against non-payment of wages!

Analogous protections are available to all subcontractor organizations.

A few examples are: • Criminalization against contractor misappropriation of funds.

• Retainage restrictions.

• Prompt payment laws.

• Laws invalidating pay-if-paid provisions.

• Laws that mandate lien waiver language.

• Invalidation of waiving lien rights before a project begins.

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insured” requirements, which have the same risk transfer effects as broad-form hold-harmless contract clauses, exposing subcontractors to innumerable potential claims unrelated to their work.

• Mechanic’s lien and bond claim

payment protections.

Subcontractors that survey the legal landscape will find layers of regulations to protect them against non-payment. When they aren’t paid, subcontractors can find themselves entitled to interest, attorney fees, penalties, security rights, and more.

The trick is to know about them and to be in a position to use them.

Best Practices to Decrease Financial Risks Subcontractors have lots of protections available to them against

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“Risk Transfer: Surviving the Circling Sharks”

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financial risks. It’s important that they be in a position to use these protections, however. Following some best practices can help subcontractors avoid losing these protections — and oftentimes, simultaneously losing money they’ve earned.

Keep Lien Rights Alive at All Times — Mechanic’s lien rights are a subcontractor’s north star when it comes to payment protections.

These rights were invented more than 200 years ago by Thomas Jefferson and James Madison for the explicit purpose of setting forth an American belief and policy that contractors

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should get paid for their work.

Subcontractors who stay in control of their lien rights will almost never go unpaid.

Staying in control of lien rights, however, can be a difficult task. These rights vary not only between the states, but also between each project.

The rules themselves are convoluted, and extraordinarily technical. It’s a best practice for subcontractors to leverage technology products that have been developed to assist them in managing these rights. This way, the rights will always be there, and the subcontractor need not worry about every nook of the lien laws. An example SAAS platform that can help subcontractors stay in control of their lien rights is zlien.com.

Strong Documentation Practices — In the 1992 film “A Few Good Men,” Tom Cruise’s character famously screamed, “It doesn’t matter what I believe. It only matters what I can

prove!” There is nothing about law that is truer than this statement.

In the construction context, there are so many issues and so much communication that transpires across every project. When something goes wrong and parties are squabbling about payment, being able to document a position is usually more important than the truth, or what one party believes is true.

It’s a best practice for subcontractors to leverage technology products to keep their documentation and communications in order. An example SAAS platform that can help subcontractors with daily reports, field communications, documentation, and more is fieldlens. com.

Timely Demands Citing Your Rights — When a payment is delayed or a subcontractor is otherwise facing the risk of losing money on a job, it’s important for that subcontractor

to act swiftly regarding their rights.

Document the situation with a letter that makes the subcontractor’s claims and demands, and when possible, cite the specific rights available to the subcontractor. This may include things like prompt pay regulations.

Getting these types of matters on paper is the first step to a good documentation of the claim.

Scott Wolfe is CEO of zlien in New Orleans, La., a platform that reduces credit risk and default receivables for contractors and suppliers by giving them control over mechanic’s lien and bond claim compliance. Wolfe is a licensed attorney in six states with extensive experience in corporate credit management and collections law, including the use of mechanic’s liens, UCC filings and other security instruments to protect and manage receivables. He can be reached at (866) 720-5436, Ext. 700, scott@zlien. com, or @scottwolfejr on Twitter.

ASA EXCELLENCE IN ETHICS AWARDS 2015 ASA will honor selected firms that demonstrate the highest standards of internal and external integrity during an awards ceremony at the ASA annual convention, SUBExcel 2016, March 3-5, 2016, in Miami, Florida.

HELPFUL LINKS • Watch the Excellence in Ethics Awards Video.

• Download the 2015 Excellence in Ethics Awards Brochure.

• Download the 2015 ASA Excellence in Ethics Awards Application.

• ASA provides useful model documents to help with your submission and your ethics program. View the 2015 Excellence in Ethics Awards Resource Guide.

• Download the 2015 ASA Excellence in Ethics Awards Timeline.

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APPLICATION DEADLINE: DECEMBER 11, 2015 • ASA’s Excellence in Ethics Awards Program Q&A LinkedIn Group — a forum for getting answers to your questions about the award and application process. This

forum includes current award recipients who have been through the application process and are willing to help guide new applicants through their application process.

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• Recipients of the 2014 ASA Excellence in Ethics Awards may re-apply for 2015 using the Re-Certification Form.

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New On-demand Videos from FASA When it comes to managing your business, the Foundation of ASA is your partner in education. View and listen to FASA’s on-demand videos at an individual workstation or in a conference room for group training. Your order includes access to the on‑demand video any time, and as many times as you’d like! These are just two of the on-demand videos available through the FASA Contractors’ Knowledge Depot to meet your business management training needs.

Contractors’ Knowledge Network

Managing the Life Blood of Contracting — Cash Flow (Item #8079) One of the most important issues for contractors today is cash flow. More companies go bankrupt due to cash flow issues than profitability. Presenter Stephane McShane, Maxim Consulting Group, Denver, Colo., examines cash management practices and techniques such as contractual negotiation strategies, pricing and bidding practices, and development of cost and resource-loaded schedules that tie to billing activities in the schedule of values. $65 ASA Members

$95 Nonmembers

How to Properly Manage and Terminate Employees Without Breaking the Law (Item #8080) A Labor Department study shows that 50 percent of new hires last only six months in their new job. Presenter Jamie M. Hasty, vice president, SESCO Management Consultants, Richmond, Va., provides participants with the tools to properly coach, counsel and discipline employees with proper techniques and ensure adequate documentation to best protect the employer from liability. $65 ASA Members

$95 Nonmembers

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Legally Speaking The Ten Commandments of Construction Risk Management

by Eric Travers, Esq

It is a common saying that construction projects are “problems in progress.” Subcontractors, who often are the ones financing the project through their labor and materials, bear inordinate risk that the financial impact of any problems will fall on them. If you follow the commandments below you won’t eliminate problems, but you can set yourself up to avoid some problems and minimize the cost and expense of resolving the problems that will arise.

the most sophisticated subcontractors can fall prey to charging ahead with the work without taking care to read the subcontract they are given and confirm that its terms are consistent with your bid assumptions and conditions. This is begging for trouble.

All the hard work you put into your bid, and that went into preparing a well-conditioned bid, is probably wasted if you agree to subcontract terms that differ from your bid conditions.

1. Thou shall condition thy bid The financial success of a project for many subcontractors is determined in the earliest stage of the project: the bid. And while the value of a good estimator is obvious, the less obvious but equally important, part of the bid is how you present it.

Subcontractors that “condition” their bids on fair subcontract terms (and the principal risk assumptions they made in calculating their bid price) keep valuable leverage, particularly if your customer relied on your bid to win the job, to walk away from a project if your customer will not give fair contract terms.

ASA has developed sample bid conditioning language its member can access at www.asaonline.com after logging in under “Log In/Access Member Resources with their email address and password. Review it on your own, and with your counsel, and use it or something like to ensure you’ve conditioned your proposal for the work upon acceptable contract language.

3. Thy duty to read extends to all contract documents Remember that a subcontract typically consists of far more documents than the “subcontract” you are asked to sign. A typical subcontract probably “flows down” the prime contract, incorporates plans and specifications, addenda, and supplemental conditions. Read those so you aren’t surprised later.

And don’t forget that the “subcontract documents” also include documents that may not have existed, when you bid the project, such as change orders, lien waivers, etc. Because the “subcontract” can be changed after contracting, it is very important that the care you take care not only to read the subcontract documents before you sign, but that you scrutinize any document you later are asked to sign during performance.

Your right to additional time or compensation, your right to a mechanic’s lien or payment bond claim, and a host of other rights can be affected or even waived by signing an overly broad change order, lien or bond waiver, or other document.

Know that each clause in a typical construction document is there for a reason. If you do not understand

2. Thou shall read your contract In the heady days after getting the call that you have ‘won’ the job, even

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it, ask for an explanation and do not hesitate to reach out to legal help early if necessary. A dollar spent on early advice is cheap insurance against a potentially huge unwelcome surprise later.

4. Thou shall become comfortable with using stickers (or stamps) to reserve your rights in lien waivers, pay applications, and change orders Because the fine print of many common construction documents (schedule approvals, payment applications, lien/bond waivers, etc.) often contain surprises, ASA has created a set of simple tools in the form of “stickers” that prudent subcontractors can use and keep in their “risk management” toolbox.

These stickers deal with what should be non-controversial reservations of rights that subcontractors can affix to routine project documentation to avoid the inadvertent waiver of important rights. ASA’s stickers are available as a download to members at www.asaonline.com for the following documents: • Signed change orders.

• Signed lien or bond waivers.

• Signed payment applications; and • Signed schedule approvals.

5. Thou shall educate yourself about the project contractor and owner The importance of knowing the parties for whom you are working cannot be understated. If you are not familiar with the reputation of the contractor, owner and other project participants, ask around. What you learn might save you from a costly firsthand learning experience.

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This means that when entering a subcontract you should not only consider what your contract says about payment terms, but should actively investigate the project’s financing and the reputation of those who control the cash flow in the tier or tiers above you. Many current industry forms like the ConsensusDocs 750 Agreement Between Constructor and Subcontractor expressly give subcontractors the contractual right to information about the owner’s project financing. Prudent subcontractors will exercise that right if they have questions or concerns about a project they are considering bidding.

6. Thou shall not waive your mechanic’s lien and bond rights without payment Mechanic’s lien and payment bond rights offer vital payment security to subcontractors. They should not

be waived without payment. It is a common belief, and a mistaken one in many states, that such rights cannot be waived either upfront (before starting work) or prospectively (by signing an overly broad waiver before work is complete). Think of your lien and bond claim release forms as receipts you give to evidence that you’ve received payment for certain work, but nothing more.

Understand too that mechanic’s lien and payment bond rights can be waived by inaction at the start or end of a project. Many states require subcontractors and suppliers to take certain steps up front to preserve their mechanic’s lien rights through the filing and/or service on the owner and/or prime contractor of preliminary notices and other documents, and by putting tight time limits on when you must assert those claims.

If you inadvertently waive these important rights either explicitly (by signing an overly broad waiver) or inadvertently (by not taking the steps you needed up front to preserve those rights, or waiting too long to assert them at the end of your work) you have needlessly squandered valuable leverage and almost assuredly increased the time and cost to collect what you are owed.

7. Thou shall not perform change order work without written authorization Almost every subcontract has a “changes” clause that provides that the subcontractor shall not perform additional work without first obtaining a written change order. Most every proprietary subcontract form will go a step further and state that claims for additional work performed without prior written authorization are waived.

THE

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That’s a win-win situation.

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In the heat of a project, and the desire to “get along” many subcontractors perform additional work on a “verbal” directive. Though that may sometimes work out OK, it is a recipe for disaster.

Many contractors have lost otherwise legitimate claims, even where there has been actual notice by their customer, by failing to dot the i’s and cross the t’s on what the subcontract requires as a condition precedent to performing additional work.

8. Though shall have a list of ‘killer clauses’ Part of any good risk management practice is understanding the common risk-shifting contract clauses in the industry and what they mean to your company. Each company may have a different tolerance level for the clauses, but because you will see the same clauses over and over again, it makes sense to spend time on your own and with your construction counsel to review the common “killer clauses” (such as “pay-if-paid,” “‘broad-form indemnity,” “additional insured,” “no damages for delay,” etc.) and decide what is or is not a deal killer for your company.

ASA has many resources that can help this process. You can make a contract review or negotiation process much smoother by deciding in advance what the sticking points are for your company, and creating a “bottom line” cheat sheet for management on negotiating tips, and acceptable “compromise” language or exceptions, if there are any, on some of these terms.

For example, a pay-if-paid clause may be a deal killer on most jobs, but perhaps you are less a concerned with it on public jobs, or owners and/ or contractors with a good reputation.

Know and trust. Though an absolute obligation to be paid quickly is priority No. 1, “pay-when-paid” language, giving your customer a reasonable amount of time to collect payment before having to pay you, may be a fallback compromise you can live with.

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9. Thou shall understand your leverage Many subcontractors are cowed by the inequities of the bargaining relationship between them and their customer — and there’s no denying that often the subcontractor has far less leverage than its customer.

But, you wouldn’t be talking to your potential customer unless you have something it wants, which means you have leverage.

The general contractor wants you to perform for the price you quoted (or *cough cough* a little less than that), and it (and the owner) want reliable subcontractors they can trust to complete the project and do a good job. The problem comes when you are asked to accept risk that you hadn’t factored into your bid price. As long as you are prepared to walk, have properly conditioned your bid, and your customer must pay more and/or use a less desirable replacement, you have leverage. Use it.

10. Thou shall be prepared to use your leverage See Commandment No. 9.

Subcontractors that remember these commandments, and implement procedures to follow them will minimize their financial risk and be better equipped to not only weather the inevitable difficulties that arise but to prosper. But if you aren’t prepared to use your leverage and accept that you may lose a job or two along the way, all the hard front-end work will be for naught.

Eric Travers, Esq., is a director with Kegler, Brown, Hill & Ritter, Columbus, Ohio, practicing primarily in the firm’s Construction Law area, representing subcontractors, general contractors, owners, suppliers, architects, sureties, construction managers, and others. Kegler, Brown, Hill & Ritter, serves as legal counsel for ASA. Travers can be reached at (614) 462-5473 or etravers@ keglerbrown.com.

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FASA VIDEO ON-DEMAND IDENTIFY CONTRACT DEAL-BREAKERS Beginning a contract negotiation without a clear understanding of the risks involved can be a costly proposition.

This video provides essential training for anyone involved in negotiations. Russell O’Rourke, Esq., Meyers, Roman, Friedberg & Lewis, Cleveland, Ohio, examines the riskiest contract provisions for subcontractors and helps subcontractors identify their deal-breakers.

10 Killer Contract Clauses

(Item #8055) $65 ASA members $95 nonmembers Order online

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ASA/FASA Calendar September

February 2016

15 – Webinar: The Subcontractor’s Guide to a Fair Lien Waiver Process

9 – Webinar: Negotiating Retainage

Coming Up in the August 2015 Issue of ASA’s

October 13 – Webinar: Cash Management for Subcontractors 16-18 – 2015 ASA Legal & Advocacy Meetings Austin, Texas

THE

March 2016 3-5 – SUBExcel 2016 Miami, Fla.

THEME: Banking & Credit

April 2016 12 – Webinar: The Payment Dance in the Construction Industry

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The Banking Relationship

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How to Get Surety Credit

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Establishing Bank Lines of Credit from an Underwriter’s Perspective

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Construction Credit for Subcontractors

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Procurement Cards

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Legally Speaking: Suspending Work for Non-Payment

November 10 – Webinar: Implementing Technology for the Jobsite: Turning Refusers into Adopters

May 2016 10 – Webinar: Websites, Email, Social Media and Your Domain Name

December 8 – Webinar: Employment Law Changes and How They Affect Screening and Hiring Practices

June 2016 14 – Webinar: Damages For Lost Labor Productivity

January 2016 12 – Webinar: The War for Talent Drives Construction Pay Higher: Pay Trends in the Construction Industry

Contact information for all ASA and FASA events/programs: www.asaonline.com education@asa-hq.com

Look for your issue in August.

PAST ISSUES: Access online at www.contractors knowledgedepot.com

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C O N T R A C T O R ’ S

C O M P A S S

MAY 7 TH , 8:10 A .M .

A HANDY REFERENCE TOOL BRINGS HIGHER PROFIT WITHIN REACH IN AN INS TANT, A R IK M U L L EN R E A L IZE D THE VA LU E O F M OTI O N I S M O NE Y ®

AmSlab Solutions founder, Arik Mullen, is always finding ways to solidify his concrete business. So when he learned how a simple workbook available through CNA’s Motion is Money® program could highlight hundreds of hours of worker inefficiencies, he called his Risk Control Specialist, conducted a worksite audit, and developed a plan to minimize bending, lifting and reaching for tools. Now AmSlab productivity is up 3%, and Arik’s enjoying a much healthier bottom line.

When you’re looking for programs that help keep workers safe and businesses strong … ® we can show you more.

To learn how CNA’s insurance programs for contractors can help your business grow more profitably, contact your independent agent or visit www.cna.com/construction.

The examples provided in this material are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.

CNA is a registered trademark of CNA Financial Corporation.

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