The Contractor's Compass June 2015

THE

ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

JUNE 2015

Contracts TM

10 Killer Contract Clauses Subcontractors Should Watch Out For ASA Provides Big Protection Tools in Small Packages Indemnity Obligations vs. Obligations to Provide Additional Insured Coverage: And How AIA & ConsensusDocs Compare Key Elements of an Effective Joint Check Agreement Change Orders ­— The Bane of All Subcontractors California Prompt Payment Statutes (or Maybe Not) Legally Speaking: Federal Contracting and The False Claims Act

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June 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.

10 Killer Contract Clauses Subcontractors Should Watch Out For........................................................................ 6 ASA Provides Big Protection Tools in Small Packages.............. 8

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 Michael J. Pappas, Esq.

Indemnity Obligations vs. Obligations to Provide Additional Coverage: And How AIA & ConsensusDocs Compare........................................................ 12

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey 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.

by Charles W. Surasky, Smith Currie & Hancock, LLP

Key Elements of an Effective Joint Check Agreement........... 14

by Eugene J. Heady, Smith Currie & Hancock, LLP

Change Orders — The Bane of All Subcontractors................. 18

by Joseph M. Sweeney, Esq. and Scott A. Mangum, Esq.

FASA BOARD OF DIRECTORS Richard Wanner, President Letitia Haley Barker, Secretary-Treasurer Brian Johnson Robert Abney Anne Bigane Wilson, PE, CPC SUBSCRIPTIONS The Contractor’s Compass is a free monthly publication for ASA members and nonmembers. Subscribe online at www.contractorsknowledgedepot.com.

California Prompt Payment Statutes (or Maybe Not)............. 20

by Joseph M. Sweeney, Esq. and Scott A. Mangum, Esq.

Departments

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

CONTRACTOR COMMUNITY............................................................ 4

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.

LEGALLY SPEAKING.......................................................................... 22

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.

Federal Subcontracting and The False Claims Act

by Paul H. Sanderford

Quick Reference ASA/FASA CALENDAR..................................................................... 24 COMING UP....................................................................................... 24

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

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Contractor Community

ASA and AGC Officers Discuss Top Industry and Public Policy Issues In April in New York City, ASA officers met with officers of the Associated General Contractors of America, as they do annually, to discuss top industry and public policy issues. Topics of discussion included the U.S. Department of Veterans Affairs’ construction program, federal procurement reform for construction, the impact of tax reform on passthrough entities, infrastructure funding, OSHA activities, labor shortages in the construction industry, and ConsensusDocs.

ASA and AGC officers meet each year to discuss issues and explore new ways in which the associations can work together.

ASA’s representatives were 201415 President Brian Johnson, Soil Consultants Inc., Charleston, S.C.; 2014-15 Vice President Letitia Haley Barker, Haley-Greer, Inc., Dallas, Texas; 2014-15 Treasurer Robert Abney, F.L. Crane & Sons, Inc., Southaven, Miss.; and ASA Chief Advocacy Officer E. Colette Nelson.

U.S. Announces New Rules for 2B Visas In response to recent court decisions that have created significant uncertainty around the H-2B temporary foreign nonagricultural worker program, the U.S. Departments of Labor and Homeland Security, on April 29, published an interim final rule to reinstate and make improvements to the program and a final rule to establish the prevailing wage methodology for that program.

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These rules allow employers to access foreign workers on a temporary basis when U.S. workers are not available. The rules include several provisions to expand recruitment of U.S. workers, including more real-time recruitment efforts, requiring employers to offer work to former U.S. employees first, and establishing a national electronic job registry. In addition, they strengthen worker protections with respect to wages, working conditions, and benefits that must be offered to H-2B and U.S. workers covered by these regulations. They also establish the prevailing wage methodology for the H-2B program, reinstating the use of employer-provided surveys to set the prevailing wage in certain limited situations.

OSHA Seeks Comment on Better Protections for Communication Tower Workers The Occupational Safety and Health Administration is seeking information from tower workers, wireless carriers, engineering and construction management firms, tower owners, and tower construction and maintenance companies about how to improve worker safety in communication tower construction and maintenance activities.

During the past 30 years, the increased demand for wireless and broadcast communications has spurred dramatic growth in communication tower construction and maintenance. In order to erect or maintain communication towers, employees regularly climb anywhere from 100 to 2,000 feet.

Communication tower workers face the risk of falls from great heights, T H E

structural collapses, electrical hazards, and hazards associated with inclement weather.

According to OSHA, more than 30 communication tower workers were killed in workplace accidents during the past five years.

“We understand the importance of this industry, but workers’ lives should not be sacrificed for a better cell phone signal,” said David Michaels, assistant secretary for occupational safety and health.

“OSHA is inviting the public to tell us what we can do to better protect these workers.”

The deadline for submitting comments is June 15. Interested parties may submit comments and additional materials electronically at http://www.regulations.gov, the Federal eRulemaking Portal.

EEOC Issues Proposed Rule on Employer Wellness Programs The U.S. Equal Employment Opportunity Commission in April proposed a rule describing how the Americans with Disabilities Act applies to employer wellness programs that are part of group health plans.

The proposed rule provides guidance to both employers and employees about how wellness programs offered as part of an employer’s group health plan can comply with the ADA consistent with provisions governing wellness programs in the Health Insurance Portability and Accountability Act, as amended by the Affordable Care Act. Many employers that provide health insurance also offer workplace wellness programs

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intended to encourage healthier lifestyles or prevent disease. These programs sometimes use health risk assessments and biometric screenings to determine an employee’s health risk factors, such as body weight and cholesterol, blood glucose, and blood pressure levels. Some of these programs offer financial and other incentives for employees who participate or achieve certain health outcomes.

Although the ADA limits the circumstances in which employers may ask employees about their health or require them to undergo medical examinations, it allows such inquiries and exams if they are voluntary and part of an employee health program.

EEOC’s proposed rule requires that if an employee health program seeks information about employee health or medical examinations, the program must be reasonably likely to promote health or prevent disease.

Employees may not be required to participate in a wellness program, and they may not be denied health coverage or disciplined if they refuse to participate.

The EEOC’s proposed rule makes clear that wellness programs are permitted under the ADA, but that they may not be used to discriminate based on disability. The rule explains that under the ADA, companies may offer incentives of up to 30 percent of the total cost of employee-only coverage in connection with wellness programs. These programs can include medical examinations or questions about employees’ health (such as questions on a health risk assessment). This limit is generally consistent with limits that HIPAA imposes on wellness programs.

The rule also makes clear, however,

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that the ADA provides important safeguards to employees to protect against discrimination based on disability. Accordingly, medical information collected as a part of a wellness program may be disclosed to employers only in aggregate form that does not reveal the employee’s identity, and must be kept confidential in accordance with ADA requirements.

EEOC has published a Fact Sheet for Small Businesses and a Question and Answer document on the proposed rule.

OSHA Establishes Categories for Handling Reported Fatalities and Injuries The Occupational Safety and Health Administration outlined interim enforcement procedures for the new fatality and injury reporting requirements that took effect on Jan. 1, 2015. The internal memorandum to Regional Administrators from OSHA Deputy Assistant Secretary Dorothy Dougherty established a triage process to determine whether the agency will open an inspection which will include an actual onsite visit or initiate what is being called a “Rapid Response Investigation” or “RRI.” Under the process, OSHA will inspect all reports classified as Category 1, including: • All fatalities and reports of two or more inpatient hospitalizations.

• Any injury involving a worker under 18.

• Known history or multiple injuries.

• Repeat offenders, those with a history of egregious, willful, failure to abate or repeated citations.

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• Employers already part of OSHA’s

Severe Violator Enforcement Program.

• Those fatalities or injuries arising out of a national emphasis or local emphasis program.

Reports falling in Category 2 may be inspected at the discretion of the area director. For a report to fall into this category, it typically involves two or more of the following: • Continued exposure to the hazard.

• Safety program failure such as lock out/tag out.

• Exposure to serious hazards such as falls.

• Temporary workers.

• Referral from another government agency.

• Employers with a prior inspection history.

• Employers with a pending whistleblower complaint.

• Employers in a cooperative program such as the Voluntary Protection Program.

• Health issues such as chemical exposure or heat stress.

All other reports are considered a Category 3, under which the employer will be informed that it will receive a letter requesting information about the employer’s investigation into the reportable incident. OSHA will then send a letter to the employer asking the employer to: • Conduct an incident investigation.

• Document findings and send corrective actions.

• Post a copy of the letter where employees can review it.

• Fax or email a copy of the signed certificate of posting.

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Feature 10 Killer Contract Clauses Subcontractors Should Watch Out For “Agreeing to risky contract terms can have severe, even ‘killer,’ consequences, such as increased liabilities, slow pay, and nonpayment.”

Agreeing to risky contract terms can have severe, even “killer,” consequences, such as increased liabilities, slow pay, and nonpayment.

Subcontractors that are able to recognize adverse contract terms can put themselves in a better position to negotiate contract terms.

Russell O’Rourke, Esq., Meyers, Roman, Friedberg & Lewis, Cleveland, Ohio, examines 10 of the riskiest contract clauses for subcontractors in the video-on-demand “10 Killer Contract Clauses” (Item #8055) from the Foundation of ASA: Contingent payment clauses — Both “pay-if-paid” and “paywhenpaid”

IN THIS ARTICLE . . .

• Establish entitlement to be paid promptly.

• Don’t give up rights to collect money owed to you.

• Negotiate better subcontracts with the ConsensusDocs 750 and ASA addendum.

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clauses may legally prevent a subcontractor from collecting timely payment if the owner fails to pay the general contractor, regardless of the reason for nonpayment. Court rulings have held that “pay-whenpaid” clauses generally authorize payment delays for a reasonable period of time. O’Rourke warns there is a degree of uncertainty. “It is better that the subcontract contains clear payment entitlement language to avoid misunderstandings,” he says.

Retainage — Subcontracts often allow the prime contractor to retain a greater percentage from the subcontractor than the owner retains from the prime contractor.

The practice of retainage can severely reduce a subcontractor’s cash flow, often even below its profit margin on the job, forcing the subcontractor to borrow just to cover overhead.

Written change orders — Requiring change orders in writing is a good business practice, but, O’Rourke says, it is “often ignored for convenience.” Document changes in a formal change order, a letter of agreement, even “on the back of a napkin.” “If you cannot document in a signed writing, try to save yourself by confirming the change in your own letter or email,” he says.

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Prospective lien waivers — Lien waivers may release your lien rights before you have received partial or final payment. Waiving lien rights before one is paid is enforceable in many states, but not all.

Dispute resolution — Subcontracts often require subcontractors to jump through too many hoops for disputes to be resolved. “Are you required to participate in an out-of-state arbitration lawsuit?” O’Rourke asks.

“Are you required to participate in a multi-party arbitration, even though you may have a small, unrelated claim?”

Indemnification — Subcontracts may include broad-form indemnity requirements that impose indemnity obligations on a subcontractor that is without negligence or fault. “You can be responsible for damage or personal injury and property damage even if the cause wasn’t your fault,” O’Rourke warns.

Incorporation by reference— Contracts usually contain an “Incorporation by Reference” clause, also known as a “flow-down” or “conduit” clause. Such clauses may require subcontractors to agree to supplemental conditions, drawings, plans, specifications, schedules and other information that may not be provided.

Scope of work — Subcontracts may expand the scope of work set

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forth in a subcontractor’s proposal.

For example, a subcontractor may be required to perform and complete all work under the subcontract documents or “reasonably inferable therefrom.”

No damages for delay — Delays can be caused by any number of factors. “When the factors are the responsibility of the owner, contractor or other subcontractors, you should be entitled to an extension of time and a reimbursement of additional costs,” O’Rourke says.

Acceptance of final payment — Proprietary forms often state, “Acceptance of the final payment

by Subcontractor shall constitute the full and final acceptance and resolution of all outstanding claims.”

“Be careful when accepting ‘final payment’ where payment is tendered in full and final settlement of all claims, especially when you have outstanding or unresolved claims,” O’Rourke warns.

O’Rourke says subcontractors should keep two basic points in mind when negotiating for fair payment terms. “Establish unrestricted entitlement to be paid promptly upon satisfactory performance of work and delivery of material, including the release of retainage as fast as it is released by the owner,” he says. “Do not give up any legal right that might adversely affect your ability to collect money when problems arise.”

Using industry best practices

to negotiate contract terms gives subcontractors more leverage than simply saying, “that’s not fair,” O’Rourke says. He explains that subcontractors can use industry contract documents and forms, such as the ASA-endorsed ConsensusDocs 750 Standard Agreement Between Constructor and Subcontractor, as well as the ASA Addendum to Subcontract and ASA Bid Proposal, to obtain better contract terms.

The FASA video-on-demand “10 Killer Contract Clauses” (Item #8055) is $65 for ASA members and $95 for nonmembers. This article was originally published in the Fourth Quarter 2012 edition of The Contractor’s Compass.

LEARN HOW TO EFFECTIVELY ‘SELL’ YOUR CUSTOMER ON YOUR TERMS AND CONDITIONS One of the most difficult challenges for subcontractors is convincing a reluctant customer to accept changes in a contract. But, “in business, you don’t get what you deserve, you get what you negotiate,” the old corporate axiom states. Subcontractors can learn how to develop negotiating tactics that effectively “sell” their customers on the terms and conditions they want with “Negotiating Skills: Secrets to Selling Your Customer on Your Contract Changes” (Item #8021), a video-on-demand from the Foundation of ASA. Presenter Seth Price, an attorney with Chamberlain Hrdlicka, Atlanta, Ga., explains how to get hesitant clients on-board with contracts that fairly

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distribute risk. He also provides insights into why customers may resist your contract terms and how to help them feel like you are working to find an equitable middle ground.

“Ultimately, it is an issue of how badly they want you and how badly you want them,” Price says. “Don’t agree to stuff when you don’t know what it means and don’t leave important issues hanging, because the bid is just the beginning.”

Price encourages subcontractors to negotiate to get the terms and conditions they want, or at least identify a reasonable compromise that might not be exactly what the subcontractor would want but that

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the contractor client might accept.

Unreasonable contract terms, such as pay-if-paid clauses, can have severe impacts on subcontractors.

“You’ve got to really want the work badly to accept a clause like this, because this is truly a risk-shifting clause, though it is illegal in some states,” Price says. “If you agree to a clause like this, you’ve got to be thinking you’re going into the contract and you are assuming all sorts of risks.”

Price also provides negotiation tips on suspension of work for nonpayment, scheduling, delay damages, indemnification, and lien rights.

He recommends subcontrac-

tors use the ASA Subcontractor Bid Proposal, ASA Addendum to Subcontract or the ASA ShortForm Subcontract Addendum to obtain better subcontracts. These documents are available in the members-only section of the ASA Web site and come with instructions.

Play this on-demand video with a free media player like Windows Media Player, and use it for group training by projecting it onto a screen or wall in a conference room. $65 for ASA members $95 for nonmembers Order online

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Feature ASA Provides Big Protection Tools in Small Packages

by Michael J. Pappas, Esq. Far too often, language in lien waivers, change orders, payment requisitions, and other contract documents requires construction subcontractors to unnecessarily waive their rights or accept risks.

Subcontractors should be wary of the pitfalls of using “form” or “boilerplate” documents and the transfer of risk provisions typically included in those documents.

Often, a subcontractor will execute such documents, despite such language, because of the “take it or leave it” message from the contractor. In many cases, however, subcontractors blindly sign the documents without fully reading them or without fully appreciating the legal implications of the language, which is often buried in fine print. In these latter examples, many subcontractors do not take the time to carefully review the documents because of a misconception that “boilerplate” documents do not merit the same type of attention or present the same risks. Many subcontractors, upon hearing that they have waived their rights or accepted additional risk, often declare: “What are we supposed to do, have a lawyer negotiate every document we sign? We’d go broke!”

While not every document needs to be read or negotiated by an attorney, a subcontractor can take simple steps to avoid waiving or releasing claims and accepting unnecessary risk. One simple step is to be absolutely sure to fully read each document and understand the implications of the language in the document before signing it. When subcontractors have any doubt as to the implications of language in documents, subcontractors should consult their legal counsel. That stated, subcontractors have another tool available to them that is the result of the ASA Attorneys’ Council.

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The ASA Attorneys’ Council examined “form” contracts and the problems subcontractors face with overbroad release language and the transfer of risk in many of these contract documents. The council discussed inserting language on lien waivers to limit the extent of the waivers to the amounts that subcontractors had actually been paid. The discussion resulted in the creation of easy, cost-effective stickers containing uniform language that ASA members could place on documents to reserve their rights and disclaim risk transfer.

These ASA model stickers are designed to be affixed to form contract documents by subcontractors when they sign them or submit them to general contractors and owners. ASA members can access these model stickers on page 6 of the members-only “Contracts and Project Management Documents” section under “Advocacy & Contracts” of the ASA Web site at http://bit.ly/ i964DX. Since each state has unique laws and has made its own public policy decisions regarding the protection of subcontractors and suppliers, no model language can be effective in all situations and in all locations. ASA and its Attorneys’ Council, however, have attempted to provide a series of stickers that will preserve rights or, at a minimum, accurately express the intention of the person signing a document at the time it was signed.

The ASA model stickers are intended for the following types of contract documents:

ASA Change Order Reservation of Rights The ASA Change Order Reservation of Rights Sticker is intended to allow a subcontractor to sign the

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change order, but attempt to reserve its rights to additional claims for delays, inefficiencies, disruption or suspension, extended overhead, acceleration, and the cumulative impact of the current and other change orders issued through the same date.

Commonly, change orders are printed on forms that attempt to require the subcontractor to disclaim or waive any additional claims that are not included in the pricing of the change order. In many instances, change orders are issued at a time when exact costs cannot be calculated or ascertained. As such, the subcontractor cannot fully express the true costs in a change order. At the same time, other contract language often requires the subcontractor to perform the change order when issued and not to perform unless the change order is in writing and signed by both parties. This scenario puts the subcontractor in the awkward position of being required to perform work, but not being allowed to be paid for the work without a written change order. These stickers enable subcontractors to add common reservation language to any change order they sign.

ASA Lien Waiver Reservation of Rights The ASA Lien Waiver Reservation of Rights Sticker clearly indicates the subcontractor’s intention not to waive any lien or bond rights securing payment of retainage, unbilled changes, and claims that have not been asserted in writing or that have not yet become known to the subcontractor at the time it signs the waiver.

Many “form” partial lien waivers have language that requires a subcontractor to waive its payment

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LEARN WHICH QUESTIONS TO ASK CUSTOMERS BEFORE SIGNING THE SUBCONTRACT The construction business is all about relationships, and subcontractors can help protect their companies by learning more about the companies they want to do business with. But which questions should subcontractors ask about their customers’ businesses, relationships with subcontractors,

business practices and contracts?

In “Seller Beware! Why You Need to Know Your Customer BEFORE Signing the Subcontract” (Item #8049), a video-on-demand from the Foundation of ASA, presenters David Walls, Esq., and Michelle Campney, Esq., Phillips Murrah, PC, Oklahoma City, Okla., examine

the critical questions subcontractors should ask before signing a subcontract.

“Doing your due diligence, even if you know the client, is extremely important,” Walls says. “In this era of easy access, a quick Google search will give you the start-

ing point for your search.” Play this on-demand video with a free media player like Windows Media Player, and use it for group training by projecting it onto a screen or wall in a conference room.

Making assumptions about who’s responsible and will pay for responsibilities like site access, security, the project schedule, restroom facilities, and even parking can be an expensive mistake.

To avoid putting decisions about project responsibilities and compensation in the hands of a jury or a judge, make sure the final subcontract explains and accounts for all such items, even those you’d expect a prime contractor “normally” to perform.

Travers refers ASA members to ASA and ASA-endorsed resources that will help them ensure that

nothing important is left out of the final subcontract. These include the ASA-endorsed ConsensusDocs 750 Standard Form of Agreement Between Constructor and Subcontractor, which addresses issues like project scheduling, security and storage space, and the ASA Addendum to Subcontract, which also contains language addressing responsibilities too often “not in the contract.”

$65 ASA members $95 nonmembers Order online

WHAT’S NOT IN THE CONTRACT In the ASA/FASA podcast “What’s Not in the Contract,” attorney Eric Travers, Kegler, Brown, Hill and Ritter, Columbus, Ohio, tackles subcontract omissions, i.e., specific responsibilities simply not addressed in the subcontract. Too often, Travers explains, subcontractors end up “on the hook” for performing and paying for omitted responsibilities like security or parking. He discusses the hazards of signing a subcontract that doesn’t clearly state the expectations of all parties involved, including how certain clauses can increase scope of work and costs.

Over the years, Travers explains,

courts have found that contractors must act in good faith and deal fairly with subcontractors.

For example, even absent a written agreement about job site safety, a general contractor is still responsible for supervising the job site, making sure that it is clear of hazards, and that workers are in compliance with all local, state and federal safety regulations.

Subcontractors can’t, however, depend on the courts to enforce what’s “common sense” or “what’s normally expected” in the industry.

“Courts are still unpredictable,” Travers warns.

security (lien or bond claim) rights for all work performed prior to the date of the waiver. This language is far too broad and is the most common mistake that construction attorneys see clients make on a daily basis.

There are fair “form documents” in use that allow for the expression of outstanding claims and require waiver of lien rights only for work on which the subcontractor has actually been paid. Other “form” documents also allow for the subcontractor to expressly exempt open active claims that are known, but don’t reserve for the unknown claims. Unfortunately, the more common “form documents” require complete waiver of claims through a certain date without regard to the actual payment for the

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underlying work. Waiving all claims may be acceptable on a final lien waiver, but it is often an unfair transfer of risk to subcontractors on partial lien waivers. Indicating an intention not to waive rights at the time you sign documents is very persuasive evidence if you end up in court.

ASA Payment Application Reservation of Rights The ASA Payment Application Reservation of Rights Sticker expresses the subcontractor’s intent to release or waive its rights effective only to the extent of payments actually received and attempts to make releases or waivers inapplicable to work performed and/or materials

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Members can access this and other ASA/FASA podcasts in the members-only area of the ASA Web site.

furnished for which payment has not been received.

This sticker is intended to be utilized on payment requisition forms that require subcontractors to waive their rights in order to submit the application. The language most commonly used in these forms is similar to the language discussed above for partial lien waivers.

This common language requires a subcontractor to waive and release its claims for compensation or claims related to work performed through a certain date. These stickers are intended to accurately express the intent of the subcontractor at the time the application is signed — to only waive or release amounts for which it has actually been paid in full.

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surety@southcoastsurety.com www.southcoastsurety.com (949) 361-1692 Fax (949) 361-9926

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ASA Schedule Approval Reservation of Rights

to make claims for the impacts of the same on the costs incurred by the subcontractor. In the most common The ASA Schedule Approval scenario, the subcontractor is Reservation of Rights Sticker expresses required to sign an acknowledgment a subcontractor’s intent to reserve of receipt of schedule changes or its right to claims for additional costs updates that alter the original planned with respect to unresolved issues and sequence or timing of the work to be claims resulting from work that does performed. The sticker is intended to not proceed in accordance with the clearly articulate the subcontractor’s schedule because of the actions of intent to reserve its rights to make others. such claims despite its compliance This sticker is a response to a with the requirement to sign. requirement included in many contracts The ASA model stickers are merely that a subcontractor be bound by one tool that subcontractors can schedules created by others and for use to attempt to protect their rights which they have no direct control to seek compensation and to avoid other than for their own scope of work. unnecessary risk transfer. To have the It is also in response to a common highest potential effect, these stickers defense asserted to claims for delay, should be used in conjunction with acceleration or impact — namely, that sound business practices and solid the subcontractor’s required “approval” record-keeping. If used regularly, of a schedule was a waiver of its rights

these simple stickers could help subcontractors ensure that they are paid what they are rightfully owed.

Michael J. Pappas, Esq., counsel, Miles & Stockbridge P.C., can be reached at (410) 385-3577 or mpappas@milesstockbridge.com.

This article is for general information and is not intended to be and should not be taken as legal advice for any particular matter. It is not intended to and does not create any attorneyclient relationship. The opinions expressed and any legal positions asserted in the article are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge P.C., its other lawyers, or The Contractor’s Compass. This article was originally published in the Second Quarter 2013 edition of The Contractor’s Compass.

ASA NATIONAL CONSTRUCTION BEST PRACTICES AWARDS 2015 ASA offers national recognition to prime contractors that are committed to superior business practices like prompt payment. ASA’s annual National Construction Best Practices Awards, developed by the Task Force on Ethics in the Construction Industry, recognize elite prime contractors that uphold best practices and refuse to do business according to the “lowest common denominator.”

The deadline for prime contractors to submit applications is Nov. 13, 2015. The application fee is $495. Each prime-contractor applicant must supply three sealed business-practices recommendations from specialty trade contractors that have worked for it in the past year, along with a copy of its standard subcontract, with its application.

ASA will honor recipients during an awards ceremony at the ASA annual convention, SUBExcel 2016, March 3-5, 2016, in Miami, Florida.

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HELPFUL LINKS Watch the National Construction Best Practices Award Video.

Prime contractors: Download the 2015 National Construction Best Practices Award Application Form.

Specialty trade contractors: Download the 2015 National Construction Best Practices Award Form for Evaluating the Applicant’s Business Practices.

ASA Chapters: Download the ASA Chapter Guideline for Processing the 2015 National Construction Best Practices Award and other materials under “Industry Relations” in the ASA Chapter Toolbox.

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APPLICATION DEADLINE:

NOVEMBER 13, 2015

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Feature Indemnity Obligations vs. Obligations to Provide Additional Insured Coverage: And How AIA & ConsensusDocs Compare

by Charles W. Surasky, Smith Currie & Hancock, LLP One of the most important riskshifting devices in a construction contract is the indemnification provision because it protects one party from financial loss and damages arising from future problems occurring during the project.

Indemnification is a promise that one party will make good on any loss, damage, or liability incurred by another. There are two parties in an indemnity relationship — an indemnitor and an indemnitee. An indemnitor gives protection while the indemnitee receives protection. When triggered, the indemnitor covers potential losses of the indemnitee, including third-party claims. For example, an

IN THIS ARTICLE . . .

• If not carefully drafted, an indemnification can pass all risks away from a negligent party.

• An overly broad indemnification clause may be declared unenforceable under a state’s law.

• State anti-indemnity legislation emerged to protect subcontractors and suppliers.

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indemnification clause may require a general contractor to protect an owner from a subcontractor’s employee work injury.

If not carefully drafted, an indemnification can pass all risks away from a negligent party to a party that otherwise would be blameless. On the other hand, an overly broad indemnification clause may be declared unenforceable under a state’s anti-indemnity law.

For example, indemnifying a person’s loss from that person’s intentional or willful misconduct may be ruled unenforceable. State anti-indemnity legislation emerged to protect subcontractors and suppliers who are often in a much weaker bargaining position in the negotiation process.

State anti-indemnity law may limit the powerful protections afforded by an indemnification provision.

Two common examples of indemnification clauses are contained in standard contract documents called the American Institute of Architects (AIA) A201 and ConsensusDocs 200. In section 3.18.1 of AIA A201-2007 (General Conditions), the indemnification provision states in pertinent part: To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from

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performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.

In other words, under section 3.18.1, the contractor must indemnify and “hold harmless” the owner against claims arising out of the performance of the work by the contractor, a subcontractor, or anyone employed by them and covers the owner’s loss only to the extent that it was caused by such act or omission.

Another example of an indemnity clause is contained in ConsensusDocs 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS which is significantly different from the indemnity clause in AIA A201-2007.

ConsensusDocs 200, section 10.1.1 states: To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others

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(the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below.

10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others.

The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above.

The ConsensusDocs 200 indemnity obligation is vastly different from the indemnity clause 3.18.1 in AIA A201 in several ways. First, the duty to indemnify is reciprocal between the

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contractor and the owner. Contractors and owners are responsible for their own negligence and it covers only insurable risks such as personal injury and property damage. Also, either party is entitled to reimbursement of defense costs paid in excess of that parties’ percentage of liability for their underlying claim.

Although often confused for each other, an obligation to provide “additional insured coverage” is not equivalent to an indemnity obligation.

Since the ability to indemnify the indemnitee is tied to the indemnitor’s financial ability to pay such losses in the future, standard contract forms contain an added protection in detailed insurance clauses requiring a party to procure insurance coverage.

In AIA A201, Article 11 sets forth the contractor’s requirement to purchase and maintain insurance to protect the contractor from claims arising out of its operations and completed operations for which it may be legally liable. Article 11 also requires the contractor to provide commercial general liability (CGL) insurance and identify the owner, owner’s lender, owner’s landlord, the architect, and the architect’s consultants as “additional insureds” for claims caused in whole or in part by the contractor’s negligent acts or omissions. Obtaining additional insured status is accomplished by a written endorsement or amendment to the named insured’s policy. An additional insured may receive the benefits of the coverage and make a claim directly against the named insured’s insurance company.

Companies who are named as additional insureds under a policy are subject to the same policy exclusions and exceptions as the policy holder.

In ConsensusDocs 200, the insurance clauses are found under Article 10 under “Indemnity, Insurance, and Bonds.”

ConsensusDocs 200 requires that the parties purchase and maintain CGL insurance, employers’ liability

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insurance, and business automobile liability insurance. However, in contrast with A201, ConsensusDocs 200 contains no requirement to identify any party as an “additional insured.” Rather, the owner has the option to require that the contractor maintain additional liability coverage in the form of providing additional insured status under the CGL policy or an Owners’ and Contractors’ Protective Liability insurance policy at the owner’s expense.

Construction projects are risky financial endeavors for all project participants. Both indemnification clauses and additional insured status are a means to manage those risks.

A party subject to either of these two devices should consult an attorney to review the contractual language and the applicable insurance policies.

An indemnity obligation may be restricted or deemed unenforceable by a state’s anti-indemnity law.

Also, an additional insured may be unpleasantly surprised when a claim is denied under a policy exclusion or exception. One thing that is certain is that no one wants to be left holding the bag long after the project is over.

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). This article was originally published in Smith, Currie & Hancock LLP’s newsletter Common Sense Contracting, and the ConsensusDocs Construction Law Newsletter, and is being reprinted with permission courtesy of Smith, Currie & Hancock and the ConsensusDocs. For questions, please contact Kirk D. Johnston at kdjohnston@smithcurrie. com. Smith, Currie & Hancock LLP is a national boutique law firm that has provided sophisticated legal advice and strategic counsel to the construction industry and government contractor clients for 50 years.

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Feature Key Elements of an Effective Joint Check Agreement

by Eugene J. Heady, Smith Currie & Hancock, LLP

A joint check is simply a check issued by one party, the payor, and made payable to two parties as co-payees. The use of joint check agreements and the issuance of joint checks are practices well-established by custom in the construction industry and are typically used to get downstream subcontractors and suppliers paid as soon as the upstream subcontractors are paid.

Typically, a joint check arrangement involves an agreement between the prime contractor and its firsttier subcontractor whereby the two parties agree that the prime contractor will issue all or part of a progress payment as a joint check, or as a series of individual joint checks, payable to the subcontractor and one of the subcontractor’s material suppliers or lower-tier subcontractors as co-payees.

Joint check arrangements are also sometimes made by using a threeparty agreement where one of the first-tier subcontractor’s material suppliers or lower-tier subcontractors is also a party to the formal joint check agreement. While seemingly simple in concept, joint check agreements and the issuance of joint checks raise several important issues, which, if not properly addressed, could defeat the purpose of using joint checks in the first place. I suggest that you read the article: Soon as I Get Paid—The Use of Joint Check Agreements on Construction Projects.

Before issuing a joint check, make sure that there is a signed joint check agreement between or among the relevant parties. Without a contractual right, a contractor cannot unilaterally

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institute a joint check requirement. In fact, the contractor’s issuing a joint check in the absence of an agreement with the subcontractor will not satisfy the payment obligations of the contractor and may be a breach of the subcontract.

The respective needs and concerns of the project participants may vary widely from project to project and thus there is no industry standard form for a joint check agreement.

Well-drafted joint check agreements should consider and address the unique needs and concerns of the project participants. With that in mind, below is a topical checklist of some of the important terms and conditions that you should consider and address when negotiating or drafting a joint check agreement. Because each situation is different, this checklist is not an exhaustive list. This checklist assumes the use of a three-party agreement where the parties to the joint check agreement include the contractor, subcontractor and one of the subcontractor’s vendors (a sub-subcontractor, material supplier, equipment supplier, or other vendor).

Consider including or addressing the following in your joint check agreement: • An introductory paragraph detailing the consideration given in exchange for the agreement, the name of the construction project, and the names of the parties bound by the agreement.

Typically, the parties to the joint check agreement will include the contractor, subcontractor, and vendor. Consideration for the agreement could include, for example, the vendor’s extension

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of credit to the subcontractor and the vendor’s supply of materials, equipment, labor or services to the project.

• Language expressing an agreement to use, issue, and accept joint checks. Ideally, the underlying subcontract should contain language authorizing the contractor’s use of joint checks in the event that the subcontractor fails to make payment to a vendor for work properly performed or material or equipment suitably delivered. The subcontract language should give the contractor the right, but not the obligation, to issue joint checks if necessary.

• A statement regarding the purpose of joint checks and details explaining how the joint checks will be delivered to the subcontractor and vendor. Include the address to which joint checks are to be sent.

• A requirement that the subcontractor shall submit the separate outstanding invoices of the vendor to the contractor for the purposes of providing the contractor with the necessary information that the contractor requires to issue a joint check to pay the vendor.

• An agreement that the contractor may rely on information provided by the vendor regarding the total indebtedness of the subcontractor to the vendor.

• Subcontractor’s promise to endorse and deliver the check to

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the vendor. Identify the party that bears the risk of one party to the joint check cashing the check and failing to disburse the proceeds to the other co-payee. Include an express acknowledgement that the vendor will be deemed by reason of its acceptance of a joint check to have received the full amount of the joint check. Alternatively, and if practical, include a requirement that the subcontractor visit the contractor’s office to endorse the joint check so that the contractor can then deliver the joint check to the vendor. If that is not practical, consider including the subcontractor’s limited power of attorney allowing the vendor to endorse the joint check on behalf of the subcontractor so that the joint check can be sent directly from the contractor to the vendor.

• Vendor’s release of claims against the contractor. Consider including a waiver, release and relinquishment of any and all claims, demands, or right of lien for all work, labor material, machinery, equipment, fixtures, and services performed or furnished for any payment previously received. Require that the subcontractor provide a signed and notarized original lien waiver from the vendor, in a form acceptable to the contractor, stating the amount of all funds previously received by the vendor.

• A provision that the delivery of the joint check acts as a release of the subcontractor’s and vendor’s claims regardless of whether the subcontractor or vendor execute a separate formal waiver or release of lien.

• A provision requiring the subcontractor to continue performing its contractual obligations.

• Agreement by the vendor to credit its billings in accordance with the joint check. Disputes sometimes

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arise over the allocation of the proceeds of the joint check. In order to avoid disputes later, the parties should specify how the joint check proceeds are to be allocated between the subcontractor and the vendor.

Alternatively, include language that the amount of the joint check shall be solely in an amount owed to the vendor and shall not include any amounts owed to the subcontractor on its own account or on the account of any other supplier or subcontractor.

• Language limiting or capping the contractor’s liability to the amount owed to the subcontractor, less deducts, change orders, back-charges and credits. If the contractor has multiple subcontracts with the subcontractor for other unrelated projects, consider expanding the limiting language to make the cap or limitation of liability subject to the contractor’s setoff rights, if any, arising from any damage claims against the subcontractor on other projects.

• A provision making clear that the joint check agreement creates no independent obligation on the contractor’s part to pay the vendor out of the contractor’s own funds. Include language that the contractor shall only make joint check payments when there are funds that are due and owing to the subcontractor.

To avoid any argument that a “pay-ifpaid” provision found in the subcontract has been waived,

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include an express pay-if-paid provision in the joint check agreement making clear that the contractor has no obligation to issue a joint check if the contractor never receives payment from the owner.

• An agreement that the joint check represents the full amount owed to the subcontractor and vendor.

• A requirement that the subcontractor and vendor will execute lien releases upon receipt of payment.

• An agreement that any joint check funds are the property of the vendor and not the property of the subcontractor. In the event of a subcontractor bankruptcy, including such a provision may help the vendor fend off claims that the funds are the property of the bankruptcy estate.

IN THIS ARTICLE . . .

• Joint check agreements are used to get downstream sub and suppliers paid as soon as upstream subs are paid.

• Joint check arrangements usually are between the prime contractor and its first-tier subcontractor.

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• A provision defining the limits

of liability. Include a statement disavowing that the contractor is a guarantor of the subcontractor’s obligations to the vendor or that the vendor is a third-party beneficiary of the underlying subcontract. The contractor should make clear that the payment arrangement is being made merely as an accommodation to the vendor and should not be relied upon to establish any contractual obligations flowing from the contractor to the vendor.

Include a provision that the vendor shall have no direct right of action against the contractor for nonpayment.

• A disclaimer of any liability arising from the contractor’s forwarding of any proceeds other than by joint check, either through negligence or otherwise.

• An agreement that the parties’ respective rights or defenses under the federal Miller Act, state little

Miller Act or state lien laws are neither diminished nor enlarged by virtue of the joint check agreement.

Also, consider including language clarifying that the existence of the joint check agreement or the exchange of information between or among the parties, including the presentation of vendor invoices, does not constitute any of the formal notices that may otherwise be required of the vendor to make a claim or protect its rights under the federal Miller Act, state little Miller Act or state lien laws The process of establishing formal joint check agreements, issuing joint checks, and negotiating joint checks carries with it important rights and obligations that may vary based on the contractual agreements involved, the relationships among the various parties, representations made to the co-payees, and applicable law.

Accordingly, whether you are the anticipated payor or co-payee, you should not hesitate to seek the advice

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of your construction attorney when considering establishing or carrying out a joint payment arrangement.

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). This article was originally published in Smith, Currie & Hancock LLP’s newsletter Common Sense Contracting, and the ConsensusDocs Construction Law Newsletter, and is being reprinted with permission courtesy of Smith, Currie & Hancock and the ConsensusDocs. For questions, please contact Gene Heady at gjheady@smithcurrie.com. Smith, Currie & Hancock LLP is a national boutique law firm that has provided sophisticated legal advice and strategic counsel to the construction industry and government contractor clients for 50 years.

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Feature Change Orders — The Bane of All Subcontractors

by Joseph M. Sweeney, Esq. and Scott A. Mangum, Esq.

Subcontractors are aware that construction is a high-risk business.

On most projects, subcontractors are at risk for both the owner’s and general contractor’s financial wherewithal. While the work contracted is defined in the original scope of work, that scope of work may be expanded, reduced, disrupted, delayed, altered or modified by a request, assumptions gone awry or unforeseen job site conditions. In order to protect themselves, every subcontractor needs to be aware of the three “Rs” — Recognize, React and Respond.

Getting paid for change order work actually starts before a subcontract is signed. If possible, subcontractors should negotiate into their

IN THIS ARTICLE . . .

• Getting paid for change order work actually starts before a subcontract is signed.

• Once a project is complete, an owner and GC have no incentive to negotiate fairly.

• Subcontractors must be aware of the three “Rs” – Recognize, React and Respond.

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subcontracts a provision that change orders will be billed for the work performed in the month performed.

Further, change orders should be invoiced and paid as part of the project progress payment sequence and not at the end of a project. On numerous occasions, subcontractors accept the standard terms of the general contractor’s subcontract, which often have no contractual provision requiring prompt payment for change order work. This results in change orders not being processed, not being billed, and not being paid.

Carrying change orders to the very end of a project is not only bad for cash flow, but many times results in non-payment or disputed change order work being paid at cents on the dollar. Once the project is complete, the owner and general contractor have no incentive to negotiate fairly, and the subcontractor will be at their mercy.

After the contract terms are negotiated, getting paid requires strict procedural compliance with the contract requirements. Recognizing a change may be easy when the change is requested or directed, but may require more astute project management when the change is the result of unanticipated project conditions, defective design documents or constructive changes from the owner and/or general contractor. A constructive change occurs when the scope of work or time of performance is changed by factors not within the risks originally assumed by the subcontractor. When that occurs the law implies a

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change. Proper administration of the change order process and prompt recognition of the issues entitling the subcontractor to additional funds or time is a prerequisite to successful change order processing. The importance of providing proper notice of change orders in accordance with the contract cannot be overstated.

Procedural compliance clears one of four obstacles to payment.

After a change situation is recognized, it is imperative that the subcontractor react to ensure the change order is successfully processed. Reaction not only includes procedural compliance with the contract provisions, but documentation reflecting substantive entitlement to a change order and causation of the change, as well as quantification of the impacts to the subcontractor. It is critical to not only submit the change order request timely, but to document the conditions regarding entitlement to such change order, including correspondence, emails, photographs, videos, and reports, all of which enhance the subcontractor’s ability to get paid for work or conditions it did not anticipate and did not assume at the time of entering into the contract. Substantive entitlement is the second obstacle to payment.

The third obstacle is causation. The subcontractor must establish that the change of which it notified the prime contractor and which entitles it to additional costs actually did affect the costs and/or time of performance.

Recognition of a change order may result from directed changes, constructive changes, delays, disruption and/or acceleration. Failure to recognize change order entitlement and react to such recognition with

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proper contractual compliance may negate the subcontractor’s opportunity and entitlement to get paid for work outside the original scope of the subcontract. Once the change is recognized and you react you must of course respond to the owner or prime contractor with notice and documentation to support the change.

Woe to the subcontractor who only recognizes at the end of a project that its job cost report exceeds the contract price it is entitled to receive.

Rather, immediate recognition, reaction and response at the time

aware of the site conditions justifying a claim for impacts or additional work but they must be cognizant of the contract procedure requirements regarding notification, recognition and quantification. It does no good for the project superintendent in the office to be aware of these requirements if the field personnel are uninformed, fail to recognize the need for immediate procedural compliance and fail to understand the necessity of documenting the quantification of the change. Quantification is the fourth obstacle to payment.

Performing work and hoping (or

within a designated number of days after performance, the subcontractor may either (a) refuse to perform additional change order work, (b) cease performing contract work until change orders are settled and paid, or (c) limit the obligation to perform change order work to a percentage of the original contract, i.e., control the exposure to change orders.

Educate field personnel as to the contract requirements regarding notification of change order work, including the basis for a change order claim, the justification for it, the quantification of it, and the procedural

of the underlying occurrence or changed assumption will enhance the subcontractor’s ability to get paid the additional costs incurred through no fault of the subcontractor, at the request of the general contractor, or as a result of added scope, unforeseen conditions and/or deficient design documents.

Project personnel must not only recognize and react, but they must respond. They should not only be

praying) to get paid for it after it has been performed will, at best, limit payment or worse result in nonpayment for the work.

The bottom line for subcontractors wanting to enhance the likelihood of payment for change orders can be summarized as follows: Negotiate provisions into the subcontract stating that change orders will be billed and paid upon performance, and that if not paid

requirements for noticing and submitting change orders. Explain to field personnel that they must be diligent and intensely document the labor and material performed relating to the change order work.

Create cost codes internally to track work performed on changed conditions. Total cost claims are disfavored. Tracking discrete

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Feature California Prompt Payment Statutes (or Maybe Not)

by Joseph M. Sweeney, Esq. and Scott A. Mangum, Esq.

ASA of California is supporting the implementation of Assembly Bill No.1347 and asking its members to contact their representatives to express their support of improving time for payment on change order work in California and the passage of Assembly Bill No.1347.

Payment to contractors and subcontractors reached such a level of delinquency that, in 1991, the California Legislature enacted a series of statutes known by contractors as the “Prompt Payment Statutes.”

Under California Civil Code § 8800 through § 8820 (i.e., The Prompt Payment Statutes), subcontractors are entitled to 2 percent per month penalties (in lieu of interest), plus attorney fees, in the event

IN THIS ARTICLE . . .

• California AB 1347 attempts to improve payment for change order work on public projects.

• AB 1347 would require public entities to identify the disputed and undisputed parts of the claim.

• ASA of California asks its members to contact their representatives to express their support.

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the prime contractor (codified as the “Direct Contractor”) does not forward payment within 10 days after receipt of funds from the owner and said code sections cannot be contractually waived. On public work, California subcontractors can assert a violation of the Business & Professions Code § 7108.5 and Public Contract Code § 10262.5 for failure to remit payment within seven days of receipt of funds.

Further bolstering subcontractors’ rights to prompt payment, in the seminal case of Wm. R. Clark Corporation v. Safeco Insurance Company (1997) 15 Cal.4th 882, the California Supreme Court declared a “paid if paid” provision in a subcontract (i.e. making payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to pay the subcontractor for work the subcontractor has performed) contrary to public policy and, therefore, void and unenforceable. The court held that such a provision creates an impermissible indirect waiver or forfeiture of the subcontractor constitutionallyprotected mechanic’s lien rights. Unfortunately “paid when paid” provisions remain viable

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and many subcontracts contain language such as: If Owner or other responsible party delays making payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor.

“Reasonable time” shall be determined according to the relevant circumstances, but in no evident shall be less than the time Contractor, Contractor’s sureties, and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment including (but not limited to) mechanic’s lien remedies.

In 2011 to further assist contractors, the Legislature passed Public Contract Code § 7201 which limits retention on public works contracts entered into on or after Jan. 1, 2012, to 5 percent.

Despite these efforts by the California legislature and judiciary to improve the flow of funds on construction projects from owners through the general contractors to the subcontractors, claims for change orders remain one of the greatest business concerns of subcontractors in the state.

ASA continues to push for legislation improving the flow of funds, including for change order work. The current attempt to improve payment for change order work

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costs to the change or discrete changed conditions enhances the subcontractor’s ability to invoice and get paid for the out of scope work.

Also, track the time impact of the change order work and/or changed work.

Documentation to support the claim is imperative. This includes photographs, videos, notes on project plans, daily reports, labor and material records, cost coding the changed work, and emails or correspondence to the prime contractor. If a claim for supervision is to be made, the project supervisory personnel must track the actual time spent on the project for which a claim is to be made, being careful to segregate time on other projects. Attempting to allocate or “ball park” time after the fact is typically unsuccessful.

Without supporting documentation, the subcontractor’s change order may

be rejected in whole or significantly negotiated down.

Aggressively and timely submit change order requests. Deferring the submission of such requests to the project end is ill-advised and may preclude you from getting paid.

The four obstacles to payment are procedural compliance, substantive entitlement, causation and quantification. When you Recognize, React and Respond, those obstacles can be overcome and you can successfully collect for change order work and/or extend your time to perform utilizing the records you have carefully maintained.

Joseph M. Sweeney is a shareholder with Sweeney, Mason, Wilson & Bosomworth, Los Gatos, Calif. Since 1978, he has focused on construction and real estate law, both transactional and litigation.

He has successfully represented owners, general contractors, subcontractors, material suppliers

and design professionals in multiple aspects of construction law through negotiations, mediations, arbitrations and trials. His successful jury verdicts and arbitration awards include recovering damages for fraud, breach of construction contract claims, defense of a multi-million dollar personal injury claim, and successful defense of liquidated damages claims in the millions. Sweeney can be reached at (408) 356-3000 or jsween@ smwb.com. Scott A. Mangum is an attorney with Sweeney, Mason, Wilson & Bosomworth, Los Gatos, Calif., where he assists his clients in a variety of litigation matters, focusing primarily on construction and real estate disputes. Prior to joining Sweeney, Mason, Wilson & Bosomworth, Scott practiced law at Ropes & Gray LLP, where he focused primarily on securities matters for public companies. He can be reached at (408) 356-3000 or SMangum@ smwb.com.

on public projects is Assembly Bill No. 1347, introduced by Assembly Member Chiu and co-authored by Assembly Member Frazier, which was submitted for consideration on Feb. 27, 2015. If passed, Assembly Bill No. 1347 would require public entities, upon receipt of claims sent by registered mail, to provide a written statement within 30 days identifying both the disputed and undisputed parts of the claim. The bill provides an alternative procedure if the public entity fails to issue the written statement and in that event would require the claim be approved in its entirety. Furthermore, the proposed law would require disputed parts of the claim to be subject to non-binding mediation.

In the event the claim is that of a subcontractor, the bill provides that a subcontractor may make a claim through the prime contractor.

It also provides that any purported contractual waiver of such rights granted by the bill would be void and contrary to public policy.

On April 29, 2015, in a positive step the bill was passed out of the Assembly Accountability & Review Committee by a 10-0 vote, despite staunch opposition from public entities, adverse lobbyists and agencies.

ASA of California is supporting the implementation of Assembly Bill No. 1347 and asking its members to contact their representatives to express their support of improving time for payment on change order work in California and the passage of Assembly Bill No. 1347.

While the dilatory processing of change orders is an issue in California as in other states, the passing of Assembly Bill No. 1347 would be a start toward improving the process.

Joseph M. Sweeney is a shareholder with Sweeney, Mason, Wilson & Bosomworth, Los Gatos, Calif. Since 1978, he has focused on construction and real estate law, both transactional and litigation.

He has successfully represented owners, general contractors,

subcontractors, material suppliers and design professionals in multiple aspects of construction law through negotiations, mediations, arbitrations and trials. His successful jury verdicts and arbitration awards include recovering damages for fraud, breach of construction contract claims, defense of a multi-million dollar personal injury claim, and successful defense of liquidated damages claims in the millions. Sweeney can be reached at (408) 356-3000 or jsween@ smwb.com. Scott A. Mangum is an attorney with Sweeney, Mason, Wilson & Bosomworth, Los Gatos, Calif., where he assists his clients in a variety of litigation matters, focusing primarily on construction and real estate disputes. Prior to joining Sweeney, Mason, Wilson & Bosomworth, Scott practiced law at Ropes & Gray LLP, where he focused primarily on securities matters for public companies. He can be reached at (408) 356-3000 or SMangum@ smwb.com.

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21

Legally Speaking Federal Subcontracting and The False Claims Act

by Paul H. Sanderford

Both civil action and criminal prosecution under the False Claims Act (“FCA”) have significantly increased over the past decade.

Statistically, the FCA primarily involves actions against parties having a direct contract with the federal government. For the federal subcontractor community, this can create a false sense of security and lull a subcontractor into a state of complacency. As noted below, however, federal subcontractors have significant FCA exposure.

This potential liability is greater today as a result of the plethora of new procurement regulations and programs that increase the number of compliance conditions as a basis for procurement participation. This article is not intended to provide an exhaustive list of particular areas of risk, but will highlight a full range of areas where federal subcontractors need to be cognizant and vigilant.

The False Claims Act Generally, the FCA embodies the following basis of liability: • False Claim: Occurs when a Contractor knowingly submits a false claim to the government or a recipient of government funds, such as another contractor, or causes another to submit a false claim.

• False Records or Statement: Occurs when a contractor knowingly makes a false record or statement material to a false claim.

• Reverse False Claim: Occurs when a contractor knowingly makes a false record or statement material

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to an obligation to pay money to the government, or knowingly or improperly awards an obligation to pay money to the government.

• Conspiracy: Occurs when a contractor conspires with another to a) submit a false claim; b) make a false statement, or 3) submit a reverse false claim. (See generally 31 USC §3729).

It is well established that subcontractors are fully subject to the FCA and all the potential penalties and repercussions that accompany a violation of the act.

The Reach of the FCA Has Expanded In 2009, the Fraud Enforcement and Recovery Act (“FERA”) became law.

(Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009)).

FERA included several enhancements to the FCA. First, it expanded the scope of the FCA to include contracts or grants funded by the federal government. Thus, a false claim need not be presented directly to a federal agency to be actionable under the FCA. An obvious example would be federal highway funds being spent through state DOT contracts.

Second, FERA removed the “intent” to defraud element and replaced it with a much less onerous requirement that the false claim (statement or document) be “material” to the government’s decision to pay the claim. In sum, FCA liability today covers a broader area of contracting activity, and from the government’s perspective, is easier to prove.

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The Qui Tam Component As noted above, FCA exposure has been heightened under the FERA, which was enacted in 2009. In addition, Qui Tam suits, commonly referred to as whistleblower actions, further expand federal subcontractors’ exposure to FCA actions. (31 USC §3730 (b)). The FCA provides for this “private” cause of action against those who may have FCA liability. Although the structure and requirements for such Qui Tam actions is beyond the scope of this article, a subcontractor should understand that Qui Tam actions can be initiated by disgruntled employees, former employees, competitors or even seemingly benign individuals in the contracting chain that may be exposed to documents and other affirmative assertions made by a subcontractor.

FCA Category Awareness Set forth below is a non-exclusive list of areas in federal subcontracting that may carry FCA implications.

Solicitation Stage In the world of best value procurements and evaluation criteria, key subcontractors and key subcontractor employees are often included in the general contractor’s proposal package. (FAR 15.304, Evaluation Factors and Significant Sub-factors.) Representing to the general contractor that key team members will be used knowing they will not or that they possess certain qualifications which they do not possess, could have FCA implications.

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A subcontractor certifying itself as a small business based upon a certain NAICS code, knowing that it is not, may have FCA implications. A small subcontractor that combines with another subcontractor having a small disadvantaged business (SDB) certification in a manner that constitutes a sham in order to present itself jointly as a DBE for the proposal, may have FCA implications. (Agencies can use evaluation factors and subfactors for subcontracting pursuant to SBA 125.3 (g).)

Project Certifications Just about any federal acquisition regulation (“FAR”) provision that requires a subcontractor to certify compliance carries FCA implications, including but not limited to: • Davis-Bacon Certification. This includes not only wage, but classification and hours worked information, just to name a few.

• Buy American Act Certification.

• General certifications of work being performed in accordance with plans, specifications, codes, etc.

• Compliance information included in monthly pay applications.

Subcontracting Plan Requirements The subcontracting plan requirements set forth in the FAR’s (52.219-8, Utilization of Small Business Concerns and 52.219-9, Small Business Subcontracting Plan) are applicable to first-tier subcontractors. Although a strict compliance obligation is not mandated; only a “good faith effort,” any deception in either reporting attempts to comply with the subcontracting plan or utilizing sham pass-through entities in an attempt to reach the subcontracting plan goals can have FCA implications.

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Change Orders and Contract Disputes Act Claims Traditionally, this category has garnered the most attention.

Contractors and subcontractors are obligated to utilize and submit current, accurate and complete cost and pricing data in the pricing and negotiation of certain qualifying change orders (both additive and deductive) and claims. Although the compliance metrics associated with the submission of current, accurate and complete cost and pricing data are beyond the scope of this paper, subcontractors should always expressly identify any cost or pricing data that it considers estimates or based upon judgmental factors.

Under the Contract Disputes Act of 1978, subcontractors are required to certify claims that are passed through to the government by the general contractor.

Violations of the FCA carry both civil penalties and criminal risks.

Besides the monetary penalties and criminal implications, subcontractors can be subject to suspension and debarment from federal contracting, which can threaten a company’s viability. FCA action emanating directly from the federal government or in the form of Qui Tam suits have become much more prevalent in the past five to 10 years.

Federal subcontractors need to be vigilant in how they conduct business from the proposal stage to the submission of final close-out O&M Manuals.

Awareness of the full range of risks, a thorough understanding of federal procurement

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requirements and a detailed training and compliance program are key components to avoid the significant jeopardy posed by the FCA. Paul H. Sanderford is a shareholder with Sanderford & Carroll, P.C., Temple, Texas. He brings 25 years of active trial experience to his clients.

In addition to his considerable state construction law practice, Sanderford frequently represents clients in litigation against federal agencies before the Armed Services and Civilian Board of Contract Appeals. He has handled many federal bid protests and frequently advises clients and industry groups concerning compliance with small business administration programs including those designed to assist small, disadvantaged, service disabled and veteran owned businesses.

Sanderford’s practice includes the representation of general contractors, subcontractors and owners in both private and public sectors. He can be reached at (254) 773-8311 or paul@ txconstructionlaw.com.

IN THIS ARTICLE . . .

• Federal subcontractors need to be cognizant and vigilant about significant FCA exposures.

• FCA exposure has been heightened under the FERA. • Qui Tam suits (whistleblower actions) further expand federal subcontractors’ exposure.

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ASA/FASA Calendar June 2015

October

9 — Webinar: Bidding from the Other Side: How GCs Use GradeBeam to Find Subcontractors

13 – Webinar: Cash Management for Subcontractors

3-5 — SUBExcel 2016 Miami, Fla. September 15 – Webinar: The Subcontractor’s Guide to a Fair Lien Waiver Process

in the July 2015 Issue of ASA’s

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

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

THEME: Risk Management •

Enterprise Risk Management in Construction

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Protect Your Business with Contractors Errors & Omissions Coverage

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Mitigating Financial Risk

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