The Contractor's Compass March 2015

THE

ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

Disarming A Dozen Dangerous Subcontract Clauses — Part 1 Negotiating from Strength: Making the Most of the ASA Bid Proposal and Addenda

MARCH 2015

Negotiation Strategies

Negotiation for Non-Negotiators How Lien Rights Equal the Playing Field Before and After a Dispute Arises Legally Speaking: Beware of Inadvertent Disclosure of Electronic Information

Save the Date!

March 3-5, 2016 Miami, FL • See page 16

THE

ASA’s

March 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.

Disarming A Dozen Dangerous Subcontract Clauses — Part 1.......................................................... 7

by Dan McLennon

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).

Negotiating from Strength: Making the Most of the ASA Bid Proposal and Addenda....................................... 13

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey

by Michael P. Davis

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

Negotiation for Non-Negotiators.................................................. 17

by Gregory R. Caruso, MD, CPA

How Lien Rights Equal the Playing Field Before and After a Dispute Arises................................................. 20

by Scott Wolfe

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

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.

LEGALLY SPEAKING.......................................................................... 22 Beware of Inadvertent Disclosure of Electronic Information

by James Yand

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..................................................................... 24 COMING UP....................................................................................... 24

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

T H E

C O N T R A C T O R ’ S

C O M P A S S

M A R C H

2 0 1 5

3

Contractor Community ASA Calls for ‘Targeted Congressional Intervention’ to Improve Federal Contracting Process On Feb. 12, ASA told the Committee on Small Business of the U.S. House of Representatives that construction specialty trade contractors continue to face obstacles to participation on federal construction projects.

“Contractors at all tiers need to be assured that the bidding and contract award process is clear and efficient, or the most qualified contractors will avoid federal projects,” ASA Chief Advocacy Officer E. Colette Nelson told the Committee. Specifically, ASA called on Congress to: • Stop government bid shopping by prohibiting the use of online reverse auctions on federal construction projects.

• Stop post-award bid shopping at the subcontract level by requiring subcontractor bid listing on federal construction projects.

• Reduce the cost of competing for federal design-build projects by requiring a two-step process on projects over $750,000.

“Once awarded a contract, subcontractors need assurance that they will be paid promptly for work promptly performed,” Nelson added.

Specifically, ASA called on Congress to: Protect subcontractor payment by requiring an individual surety to pledge only assets that can be easily liquidated to fund claims and to place such assets in the care and custody of the federal government.

Protect subcontractor payment by excluding Miller Act bonds from automatic cost-of-living increases.

Protect subcontractor payment by extending Miller Act bonding requirements to construction

4

M A R C H

2 0 1 5

programs and projects financed through public-private partnerships that include federal resources.

In her testimony, Nelson pointed out that each of these proposals calls for “targeted Congressional intervention” that the Small Business Committee, other committees of jurisdiction, and ultimately the full Congress should approve expeditiously.

ASA-Supported Security in Bonding Act Re-Introduced in Congress Rep. Richard Hanna, R-N.Y., chairman of the Contracting and Workforce Subcommittee of the House Small Business Committee, has re-introduced the ASA-supported Security in Bonding Act (H.R.838).

The legislation would eliminate fraud and abuse by curbing the ability of an individual surety to pledge insufficient or illusory assets and allowing the federal government to pay claims to subcontractors and suppliers more easily and expeditiously if an individual surety bond is accepted.

Current federal regulations contain two different standards regarding the assets that a surety can pledge to assure payment of subcontractors or suppliers on federal projects.

One set of standards applies to corporate sureties, but a weaker set of standards applies to individual sureties, permitting individual sureties to pledge unusual, illiquid and potentially even worthless assets to allegedly assure subcontractors of payment.

The legislation would require an individual surety to pledge solely those assets that the law currently allows to be pledged directly to the government and to place such assets in the care and custody of the federal government. H.R. 838 would also

T H E

increase to 90 percent the amount that the government will indemnify a surety for losses it suffers under the Small Business Administration’s Surety Bond Guarantee Program.

Nelson Tells IMPACT Participants to ‘Squeak’ for Payment “There is ample evidence that the squeaky wheel gets the grease” when it comes to payment, ASA Chief Advocacy Officer E. Colette Nelson told participants in a workshop at the 2015 North American Iron Workers/IMPACT Labor-Management Conference on Feb. 23. Without a carefully developed and implemented program, all of the good intentions in the world will not improve a subcontractor’s cash flow. Such a program should be built on the tenet that there is no substitute for actually getting money into your account. Only then can you cover the cost of project materials and the work that you have financed and attain a reasonable profit. During the workshop, Nelson set forth four basic principles to an effective cash flow program: • Establish a good foundation.

There are three building blocks for a sturdy foundation for your cash flow program: (1) equitable subcontract terms, (2) a billing schedule that provides adequate compensation during the progress of the job, and (3) a requisition form and system that helps your customer help you.

• Heed the lessons of a general contractor’s track record. Be prepared if, based on your past experience with the customer or the reputation of the customer, there is a history of predatory practices, such as improper back charges or excessive deductions from payments.

C O N T R A C T O R ’ S

C O M P A S S

• Use your time and employees

to advantage. Many customer collections contacts can be made during regular visits and telephone calls about other matters. Prioritize contacts, separating the unusual from the routine in assigning basic follow-up responsibilities. In most instances, administrative staff can carry out a systematic program of routine contacts so that senior staff can concentrate on exceptional conditions and major problems.

• Do not hesitate to use leverage any time you can. For example, you may be able to apply leverage when a customer is looking for a great price, a scope change, accelerated or out-of-sequence work, or whenever the customer needs your help to meet its own goals. The common element in each of these situations is that the customer needs special consideration from you. When these conditions arise, it is always best to make your agreement contingent on favorable payment terms and the removal of any obstacles to getting your money without delay.

A copy of Nelson’s handout, Improving Cash Flow: A Guide for Construction Subcontractors, is available to ASA members on the ASA Web site.

D.C. Implements Comprehensive Wage Fraud Ordinance On Feb. 26, the District of Columbia joined the nationwide trend of jurisdictions with laws intended to curb wage fraud. Under the new law, each employer and temporary staffing agency must provide each new employee with detailed written information, including information

T H E

C O N T R A C T O R ’ S

about the employer and the employee’s wage rate and payday. An employer also is required to keep a record of such notices.

During an administrative hearing, the burden of proof by a preponderance of the evidence rests with the complainant unless the employer failed “to keep records of an employee’s hours worked, or records of compensation provided to an employee are imprecise, inadequate, missing, fraudulently prepared or presented, or are substantially incomplete, and a complainant presents evidence to show … the amount of work done or the extent of work done or what compensation is due for the work done.” The new law establishes sweeping penalties for employers who fail to pay their employees the agreed upon wages.

An employer who is convicted of negligently failing to comply with the law will be guilty of a misdemeanor and fined not less than the amount of wages owed but not less than $1,000 for each affected employee. An employer who is convicted of willfully failing to comply will be guilty of a misdemeanor and fined $2,500 plus an amount per affected employee of not less than double the amount of wages owed, or imprisoned up to 30 days or both. The fines increase significantly for subsequent offenses.

The City also is authorized to collect administrative penalties for various violations. In addition, an employee aggrieved under the Act may bring a civil action and, upon prevailing, shall be awarded back wages, reinstatement, and reasonable attorney fees including expenses.

The law prohibits an employer from retaliating in any way against an employee or other person who takes action under the new law. When

C O M P A S S

a subcontractor is alleged to have failed to pay an employee any wages earned, the subcontractor and the general contractor are jointly and severally liable to the subcontractor’s employees. A subcontractor is required to indemnify the general contractor for any wages, damages, interest, penalties or attorney fees owed by the general contractor as a result of the subcontractor’s violations, unless those violations are due to the general contractor’s failure to promptly pay the subcontractor.

A temporary staffing agency and an employer also are jointly and severally liable to employees; unless otherwise agreed to by the parties, the temporary staffing firm shall indemnify the employer as a result of the temporary staffing firm’s violations of the new law.

The City Council is expected to enact provisions clarifying provisions of the new law, including clarifying that salaried employees are not covered by the specific timekeeping requirements applicable to hourly employees and modifying requirements for employers to provide employees notice of their wages at the time of hiring in English or any other language that is used in the Mayor’s model notice (versus their “primary language”).

During the last five years, state and local jurisdictions have aggressively adopted measures that penalize employers that willfully misclassify employees as independent contractors or that more clearly define what does and does not constitute an employee rather than a contract worker. Others have criminalized employee misclassification, with offenders facing significant fines ranging as high as $25,000 per violation. This trend has continued during the 2015 state legislative sessions.

M A R C H

2 0 1 5

5

NLRB Publishes Final Rule Modernizing RepresentationCase Procedures The National Labor Relations Board in mid-December issued a final rule amending its representationcase procedures to modernize and streamline the process for resolving representation disputes. The new rule: • Provides for electronic filing and transmission of election petitions and other documents.

• Ensures that employees, employers and unions receive timely information they need to understand and participate in the representation-case process.

• Eliminates or reduces unnecessary litigation, duplication and delay.

• Adopts best practices and uniform procedures across regions.

• Requires that additional contact information (e.g., personal telephone numbers and email addresses) be included in voter lists, to the extent that information is available to the employer.

• Allows parties to consolidate all election-related appeals to the Board into a single appeals process.

The new rule will take effect on April 14, 2015. For more information, including a comparison of current and new procedures, see the NLRB Fact Sheet.

ASA Urges Utah to Withdraw Bond Waiver Proposal In a Jan. 28 letter to the Utah Facilities Construction and Management Division, ASA expressed its opposition to the agency’s proposal to allow the division director to “waive any bonding requirements … if the Director finds circumstances in which the Director

6

M A R C H

2 0 1 5

considers any or all of the bonds to be unnecessary to protect the State.” ASA argued that waiving a payment bond strips construction subcontractors and suppliers of vital payment protections on sums that if unpaid by the prime contractor could be financially harmful and potentially totally ruinous to a subcontractor or supplier. ASA Chief Advocacy Officer E. Colette Nelson asserted that “[u]nder the proposed regulatory change, the Division has made the decision, on behalf of the citizens of the State of Utah, to self-insure the performance of construction contracts” while “strip[ping] subcontractors and suppliers of vital payment protections.” She said that under the proposed rule, “subcontractors and suppliers … will have their exposure to loss for work performed and supplies furnished increased by 100 percent. A loss of this nature would be financially harmful to any subcontractor or supplier.” Nelson also took issue with the Division’s broad assertion that the proposed rule would not increase construction prices; she wrote, “[B] ased on practical business reality, the prices offered by subcontractors and suppliers will increase to compensate for the greatly increased risk of loss associated with having to perform work or furnish supplies without the protection of a payment bond.

IRS Issues Standard Mileage Rates for 2015 The Internal Revenue Services issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Effective Jan. 1, 2015, the standard

T H E

mileage rates for the use of a car, van, pickup or panel truck are: • 57.5 cents per mile for business miles driven, up from 56 cents in 2014.

• 23 cents per mile driven for medical or moving purposes, down half a cent from 2014.

• 14 cents per mile driven in service of charitable organizations.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates. A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in Revenue Procedure 2010-51, the instructions to Form 1040 and various online IRS publications including Publication 17, Your Federal Income Tax. Besides the standard mileage rates, Notice 2014-79 also includes the basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan.

C O N T R A C T O R ’ S

C O M P A S S

Feature Disarming A Dozen Dangerous Subcontract Clauses — Part 1

by Dan McLennon Subcontractors have more power than they may think to protect themselves in negotiating subcontract terms. The best thing subcontractors can do to set the stage for favorable contract negotiations is to attach conditions to all bids. These conditions should cover all of the subcontract terms that the subcontractor would like included in the subcontract to be negotiated. The ASA Subcontractor Bid Proposal (2013) is an excellent tool to use as a part of any subcontractor bid. Using such conditions puts the general contractor on notice that if the general contractor wants to hire the trade contractor at the stated price, the attached terms must be included in the subcontract. If the general contractor later balks at including the terms in the subcontract form, the trade contractor may increase the price or refuse to enter the GC’s proposed contract. (See also the feature article, “Negotiating from Strength: Making the Most of the ASA Bid Proposal and Addenda,” by Michael P. Davis, Chamberlain Hrdlicka, Atlanta, Ga., for an informative discussion of the ASA Subcontractor Bid Proposal.)

Furthermore, in today’s hot construction market, subcontractors have leverage in negotiating subcontract terms, because general contractors are finding it increasingly difficult to hire qualified subcontractors. Also, the American Institute of Architects and ConsensusDocs model subcontract forms provide comparatively even-handed industry-standard forms that trade contractors may use persuasively to demonstrate that a general contractor’s subcontract form is not in step with current industry practices. For example, subcontractors may remind GCs that the ConsensusDocs documents are endorsed by

T H E

C O N T R A C T O R ’ S

ASA and more than 40 other industry organizations including AGC, ABC, and CFMA. Finally, changes in laws have limited indemnity and insurance terms that general contractors may require. While the scope of this article precludes review of these laws, trade contractors are urged to keep up with changes that may benefit them in contract negotiations.

Let’s examine how trade contractors may use legal arguments, industry standard forms, and fairness arguments to negotiate more favorable terms in subcontracts.

Limit ‘Bet the Company’ Indemnity Obligations

GCs typically require from subcontractors the broadest indemnity protection allowed by law. In California before Jan. 1, 2013, and in many states today, GCs might legally require subcontractors to pay for a GC’s liability caused by the GC’s own active negligence, so long as the liability had some connection with the subcontractor’s work. An onerous form of indemnity clause often seen, known as a “Type 1” clause, is something like this: 14. INDEMNIFICATION. With the exception that this Article shall in no event be construed to require indemnification by Subcontractor to a greater extent than permitted under the laws of the State of California, Subcontractor shall defend, indemnity, and hold harmless Owner and Contractor, including their officers, agents, employees, affiliates, and each of them, from any and all claims, demands, causes of actions, damages, costs, expenses, including actual attorneys’ fees,

C O M P A S S

costs, and expert costs, losses, or liabilities, in law or equity, of every kind and nature whatsoever arising out of or in connection with Subcontractor’s operations under the Subcontract for, but not limited to [enumerated types of injuries]. Such indemnity provisions apply regardless of any active and/or passive negligent act or omission of Owner or Contractor or their agents or employees. Subcontractor, however, shall not be obligated under this Agreement to indemnify Owner or Contractor for that portion of any Claim caused by the sole negligence or willful misconduct of Owner or Contractor or their agents, employees or independent contractors who are directly responsible to Owner or Contractor, or for defects in design furnished by such persons.

The “sole negligence or willful misconduct” language is the hallmark of a Type 1, broad indemnity in favor of general contractors. That is, a subcontractor under this clause would have to pay any liability incurred by a GC connected with the subcontractor’s work unless the GC were solely at fault or committed willful misconduct.

For contracts entered on and after Jan. 1, 2013 in California, such clauses, with certain exceptions, are void under Civil Code section 2782.05: Except as provided in subdivision (b), provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any construction contract and amendments thereto entered into on or after January 1, 2013, that purport to insure or indemnify, including

M A R C H

2 0 1 5

7

the cost to defend, a general contractor,construction manager, or other subcontractor, by a subcontractor against liability for claims of death or bodily injury to persons, injury to property, or any other loss, damage, or expense are void and unenforceable to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor, construction manager, or other subcontractor, or their other agents, other servants, or other independent contractors who are responsible to the general contractor, construction manager, or other subcontractor, or for defects in design furnished by those persons, or to the extent the claims do not arise out of the scope of work of the subcontractor pursuant to the construction contract.

In California a sub needs only to steer a GC to section 2782.05 to persuade the GC to modify its old, onerous indemnity clause. Or, the subcontractor need do nothing because the old clause would not be enforceable in court.

Subcontractors in other states presented with a Type 1 clause should argue that it is not fair for a subcontractor to be responsible for the acts

8

M A R C H

2 0 1 5

of persons, the GCs employees for example, over whose actions the subcontractor has no control and whose mistakes a subcontractor is powerless to prevent.

As mentioned above, contractor associations and the AIA have acknowledged such unfairness and accordingly have limited subcontractor indemnity burdens in their model subcontract forms.Thus, subcontractors might point to ConsensusDocs 750 Section 9.1.1, which protects the GC for damage only to the extent caused by the subcontractor or persons for whom the subcontractor is responsible: 9.1.1 INDEMNITY. To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Contractor, Architect/Engineer, the Owner and their agents, consultants and employees (the Indemnitees) from all claims for bodily injury and property damage other than to the Work itself that may arise from the performance of the Subcontract Work, including reasonable attorney’s fees, costs and expenses, that arise from the performance of the Work, but only to the extent caused by the negligent acts or omissions of the Subcontractor, the Subcontractor’s

T H E

Sub-Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Subcontractor shall be entitled to reimbursement of any defense cost paid above Subcontractor’s percentage of liability for the underlying claim to the extent attributable to the negligent acts or omissions of the Indemnitees.

AIA’s A401 subcontract indemnity clause similarly limits indemnity protections for GCs: § 4.6 INDEMNIFICATION § 4.6.1 To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Owner, Contractor, 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 attorney’s fees, arising out of or resulting from performance of the Subcontractor’s Work under this Subcontract, provided that any 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

C O N T R A C T O R ’ S

C O M P A S S

only to the extent caused by the negligent acts or omissions of the Subcontractor, the Subcontractor’s Sub-subcontractors, 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 otherwise reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Section 4.6.

Ultimately, if the GC refuses to limit the subcontractor’s indemnity obligations, the subcontractor must choose whether the indemnity risks of the project outweigh the benefit of taking the contract. Generally, however, a subcontractor need not walk away from the contract if the subcontractor obtains insurance adequate to cover the project’s indemnity risks.

It is essential that a subcontractor undertaking such contracts have them reviewed by a qualified construction insurance broker who can assure appropriate insurance coverage is obtained.

Avoid Insurance-Premium Killer Additional Insured Endorsements

GCs typically require subcontractors to provide commercial general liability (CGL) insurance and identify the GC and others as “additional insureds,” thereby covering the additional insured’s own active negligence, so long as the injury or damage is caused in whole or in part by the subcontractor’s negligent acts or omissions. Obtaining additional insured status is accomplished by a written endorsement or amendment to the subcontractor’s insurance policy. Providing additional insured coverage and the subcontractor’s carrier’s paying losses under such coverage

T H E

C O N T R A C T O R ’ S

increases subcontractor insurance premiums and is a “back door” way of shifting to subcontractors risks that they cannot control.

Many states’ anti-indemnity legislation prevent additional insured endorsements that provide coverage for the additional insured’s own active negligence. According to the author of California’s anti-indemnity bill, SB 474, the new law was intended to preclude such additional insured endorsements. However, the impact of the bill’s language is debated, and general contractors in California routinely still require the broad form additional insured endorsement.

Nonetheless, subcontractors may use the author’s intent and SB 474’s language to argue that a limited form of endorsement is appropriate.

SB 474 was codified in Civil Code section 2782.05, part of which is quoted above. Subcontractors may bring to the GC’s attention that section 2782.05 prohibits insurance for another’s active negligence: Provisions … affecting any construction contract and amendments thereto entered into on or after January 1, 2013, that purport to insure or indemnify, including the cost to defend, a general contractor … against liability for claims of death or bodily injury to persons, injury to property, or any other loss, damage, or expense are void and unenforceable to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor ….

Further, the exception allowing additional insurance requirements is limited to insurance covering the acts of the promisor, the subcontractor, but does not allow coverage for acts of the promisee, the GC: (b) This section does not apply to: ...

(6) A provision in a construction contract that requires the promisor to purchase or maintain insurance covering the acts

C O M P A S S

or omissions of the promisor, including additional insurance endorsements covering the acts or omissions of the promisor during ongoing and completed operations.

For a point-counter point article on the interpretation of SB 474’s additional insurance exception, please see: http://wp.me/p5qVnW-Gl at the McLennon Law Corporation Web site.

The ConsensusDocs and AIA forms are protective of subcontractors’ insurance programs. The ConsensusDocs, at Section 9.2.11, makes additional insured status optional, and if the option is chosen, limits the additional insured coverage to liability caused by the acts or omissions of the subcontractor: 1. [_____] ADDITIONAL INSURED. The Constructor shall be named as an additional insured on the Subcontractor’s CGL specified, for operations and completed operations, but only with respect to liability for bodily injury, property damage, or personal and advertising injury to the extent caused by the negligent acts or omissions of the Subcontractor, or those acting on the Subcontractor’s behalf, in the performance of Subcontract Work for the Constructor at the Worksite.

The AIA A401 Section 13 discussing insurance omits any additional insured requirement whatsoever.

If the GC requires additional insured status despite arguments above, a subcontractor must exercise great care to provide precisely the additional insured endorsement(s) called for by the contract. There are dozens of standard endorsements, and most do not provide the broad coverage usually required by GCs, the gold standard “CG 2010 11/85 or equivalent.” Failing to provide required endorsements puts a subcontractor in breach of the subcontract and exposes the subcontractor’s own assets to the extent of the insurance coverage that should have been provided but was not. A subcontractor must be sure to send

M A R C H

2 0 1 5

9

the subcontract insurance requirements to its insurance brokers so that the broker can cause the proper endorsements to issue.

“Disarming A Dozen Dangerous Subcontract Clauses — Part 2” will appear in the April 2015 edition of The Contractor’s Compass, covering negotiation tips for clauses on warranties, builder’s risk insurance, consequential damages, pay-if-paid, retention, and schedule cooperation.

Dan McLennon, managing partner, McLennon Law Corporation, San Francisco, Calif., has been in private practice since 1986. His legal career has focused on cases litigated in the State and Federal Courts in California, representing defendants and plaintiffs, alike.

He has resolved hundreds of cases through mediation, arbitration and trial, and he has been awarded Martindale-Hubbell’s “AV” rating, the highest rating in legal ability and ethics as established by confidential opinions of members of the Bar. McLennon represents public entities, general contractors, subcontractors, suppliers, premises owners, manufacturers, professionals, corporations, and individuals by prosecuting or defending cases in the follow subject areas: insurance subrogation and equitable contribution among carriers; licensure disciplinary proceedings; mechanic’s liens and stop notices; partnership disputes; payment issues under construction contracts, including acceleration and delay claims; bond claims; commercial landlord-tenant disputes; construction defect actions; contract disputes; indemnity among contractors; insurance bad faith; unfair business practices, and business torts. He can be reached at (415) 394-6688 or dmclennon@ mclennonlaw.com.

10

M A R C H

2 0 1 5

Can Anything Be Done About Bid Shopping?

by Donald Gregory, Esq. “Bid shopping” occurs when a general contractor discloses the bid price of one subcontractor (or suppliers) to its competitors in an attempt to obtain a lower bid than the one on which the general contractor based its bid to the owner. Put another way, bid shopping occurs when a general contractor uses the lowest bid received to pressure other subcontractors to submit even lower bids.

The Associated General Contractors of America calls the practice of bid shopping “abhorrent” and proclaims that it is “resolutely opposed” to it. ASA calls these practices not only “abhorrent” but also “unethical” and anticompetitive. Other contractor trade associations share such strident opposition (the AGC, ASA, and ASC have issued Joint Guidelines decrying the practice), and the courts that have opined on bid shopping tend to agree with the prevailing sentiment.

Perhaps nothing is more widely condemned in the construction industry than bid shopping. But, regardless of the stated consensus against bid shopping, the practice remains common.

Bid shopping almost necessarily forces subcontractors into postaward negotiations. A subcontractor that is approached by a general contractor with a competitor’s lower bid naturally assumes that it won’t get the job unless it reduces its price.

The subcontractor now knows that it stands to lose the subcontract and

T H E

the recovery of its initial costs, so there is strong incentive for it to reduce its bid and cut corners, to avoid losing the subcontract.

As the Court of Common Pleas of Cuyahoga County, Ohio, noted in Sheet Metal Employers’ Ass’n v. Giordano, “[m]any hours are invested … in preparing a bid to the … contractor. The latter may then proceed to play one bidder against another, getting each in turn to shave its bid as much as it will.

Estimated profit is drastically reduced and financial loss threatens. There is little satisfaction in such a contract. The temptation of the [ultimate subcontractor] to do inferior work and to cheat is strong.”

Another negative consequence of bid shopping is that the practice interferes with how the free market fairly sets prices. This may occur where a subcontractor artificially inflates its bid to compensate for expected bid shopping.

Once again, the owner is harmed because its costs will have been artificially inflated. Any deflation of a subcontractor’s price inures solely to the benefit of the bid-shopping general contractor, not to the owner or taxpayer footing the bill for the project.

Another way bid shopping interferes with the free setting of competitive prices is to discourage otherwise interested subcontractors from spending the time and resources to prepare and submit competitive bids when bid shopping is expected. This reduces overall

C O N T R A C T O R ’ S

C O M P A S S

competition, with the potential effect of increasing construction prices. This benefits only the general contractor, to the detriment of both the subcontractor and the owner.

One court that took on the “bid shopping” issue is the Ohio 10th District Court of Appeals, which in 2009 found that a general contractor that “bid shops” releases subcontractors from a mistaken bid or inequitable subcontract language. Complete General Construction Co. v. Kard Welding, Inc. The court found that the general contractor was obligated to timely accept the subcontractor’s offer because delaying, in hope of obtaining a better price, would similarly release the low bid subcontractor from its bid.

The legal reasoning given by the Ohio 10th District Court of Appeals in the Complete General case provides authority for courts in other states.

Under traditional concepts of offer and acceptance, if a general contractor discloses a low subcontractor bid, requests a price reduction, insists on

T H E

C O N T R A C T O R ’ S

concessions that contradict terms in a conditioned bid, or bid shops, it rejects the subcontractor’s bid and loses any promissory estoppel protection to compel the subcontractor to its bid.

Subcontractors that want to minimize the risk of “bid shopping” can condition their bids and state the bid is valid for “the earlier to occur of: (a) 30 days from the date of the bid; or (b) one business day after opening of the general contractor’s bid and notification of the Award of the general contract.” Another provision could clarify that the bid “is submitted and must be kept confidential except for disclosures required by law. Failure to keep that confidentiality, through disclosure of the attached bid or its material terms, will operate as general contractor’s rejection of the bid.”

Owners, like subcontractors, do not gain from bid shopping. Owners control the bidding process and therefore could insist that bidding general contractors provide with

C O M P A S S

their bids a list of names of major subcontractors (those providing over a certain dollar amount or percentage of the work on each job), with language that precludes substitution of such subcontractors without good cause or prior approval from the owner.

Although bid shopping is unlikely to disappear, recent court rulings, and self-help by owners and subcontractors in their bid and contract language, can go a long way to discourage the practice.

Donald Gregory, Esq., is a director and chair of the construction practice area for Kegler, Brown, Hill & Ritter, Columbus, Ohio, ASA’s legal counsel. Gregory can be reached at (614) 462-5400 or dgregory@keglerbrown.com.

M A R C H

2 0 1 5

11

1100 Via Callejon, Suite A, San Clemente, CA 92673

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

The Bond Only Agency

(800) 361-1720 DOI Lic# 0B57612

Feature Negotiating from Strength: Making the Most of the ASA Bid Proposal and Addenda

by Michael P. Davis

Trade contractors generally do not give sufficient effort to ensure that the contract language they agree to in subcontracts is fair and reasonable.

To the contrary, many subcontractors throughout the country, when asked if they try to negotiate fair contract terms with general contractors, will respond, “If I don’t sign their contract, as it stands, my competition down the road will.” In other words, subcontractors often believe that they are powerless to negotiate any favorable terms with general contractors. Two very effective tools dispel that notion: the ASA Subcontractor Bid Proposal and the ASA Addendum to Subcontract.

T H E

C O N T R A C T O R ’ S

ASA Bid Proposal The bid proposal form is an excellent negotiating tool for a variety of reasons. First, it establishes a defense to contract formation where the parties have not agreed on mutually acceptable terms and conditions. A contract may be formed when, in response to an RFP, a subcontractor submits a proposal that merely has indicated scope of work, exclusions and price, but no terms and conditions. Once the general contractor sends notice to accept a bid, a binding contract is formed, and the subcontractor can be pressured into signing a boilerplate contract with very one-sided, unfair terms.

However, if a subcontractor uses the ASA bid proposal form it will have

C O M P A S S

“conditioned” its bid on the terms therein. As a result, a contract will not be formed unless and until the parties agree to specific contract terms and conditions language.

One significant benefit of using the ASA bid form is that it conditions the subcontractor’s bid on use of the ConsensusDocs 750 (2011, revised 2014) subcontract form.

ConsensusDocs 750 is a form subcontract that fairly allocates financial and legal liability among the parties on a construction project.

ASA is a founding member of the ConsensusDocs coalition, which publishes a library of 100-plus contracts and documents. ASA members can use the promotional code ASA100 to receive a special

M A R C H

2 0 1 5

13

member discount off ConsensusDocs subscriptions. Per the language in the ASA Subcontractor Bid Proposal, should the general contractor direct or permit the subcontractor to begin work before a written subcontract is executed, the general contractor will have “accepted” all the terms of the bid proposal by its conduct, including use of the ConsensusDocs 750. Thus, by using the ASA bid proposal, the parties may form a binding subcontract through their conduct, which is favorable to the subcontractor.

At the least, the bid form establishes a legal and practical basis for negotiating terms and providing some leverage to the subcontractor. For example, on some projects the general contractor will permit the subcontractor to begin work, then present its own boilerplate subcontract and demand the subcontractor to sign it, with no revisions permitted. Given the above circumstances, ASA recommends that if the ASA bid proposal is used, deliver a ConsensusDoc 750 form per the ASA bid proposal to the general contractor. Because the subcontractor has a signed bid proposal, or, alternatively, started work on the project at the general

contractor’s direction, this will provide the subcontractor with leverage to negotiate more favorable terms and conditions. The subcontractor should never assume that it won’t be successful in achieving any changes to a boilerplate subcontract.

Remember, trade contractors build construction projects, not general contractors. If a subcontractor’s reputation is strong and its price is competitive, the subcontractor stands a good chance of obtaining at least some revisions. If the subcontractor performs work based on the ASA bid proposal, it will benefit by many favorable terms and conditions.

In practice, the way to use the ASA bid proposal form is to simply attach it to the bid. By taking this simple step, a subcontractor qualifies, or “conditions,” its bid on working under the ConsensusDocs 750 and its stated terms and conditions. Should the general contractor “accept” the price, but reject the terms and propose its own, the GC will have made a “counter offer.” Then, the subcontractor is in the position to negotiate fair and equitable terms and conditions.

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 ondemand videos at an individual workstation or in a conference room for group training. Your order includes access to the ondemand video any time, and as many times as you’d like!

This is just one of the on-demand videos available through the FASA Contractors’ Knowledge Depot to meet your business management training needs.

ASA Addendum to Subcontract ASA has both a short-form subcontract addendum for limited scope projects, as well as a full addendum. Both addenda modify the terms of a general contractor’s boilerplate subcontract form resulting in revisions to create more fair and reasonable contracts by inserting favorable language into the relationship. Both long- and short-form addenda provide that the terms therein take precedence (or control) over conflicting terms found in the general contractor’s boilerplate contract language. This term is essential since the language in the ASA addendum will generally conflict with some of the most onesided, unfair terms found in almost all general contractor proprietary contracts. Finally, both the full- and short-form addenda eliminate some of the same unfair terms, including broad-form indemnification, listing of additional insureds, waiver of subrogation, no damages for delay, and pay-if-paid. The successful elimination of these terms, or softening of the effects will help to “level the playing field” and assist in achieving more profitable projects.

Contractors’ Knowledge Network “Mechanic’s Liens: Protect and Collect” (Item #8077) Learn about mechanic’s lien laws and how you can use them to protect your company from losses, and get paid sooner, with the new video-on-demand, “Mechanic’s Liens: Protect and Collect” (Item #8077), presented by Jerry Bailey, NCS, Cleveland, Ohio. Bailey explains how to serve a preliminary notice, file for a lien or bond claim, enforce foreclosure, and use tools to make your company a payment priority for your customers.

Price: $65 Members / $95 Nonmembers

Order online at www.contractorsknowledgedept.com or call 1-888-374-3133 14

M A R C H

2 0 1 5

T H E

C O N T R A C T O R ’ S

C O M P A S S

ASA recommends that subcontractors simply sign the ASA addendum and forward it with a cover letter to the general contractor, stating that the attachment includes proposed revisions to their subcontract.

The subcontractor may request that the GC review the terms and contact the sub to discuss. The ASA addendum does not incorporate the bid proposal by reference. As a consequence, a subcontractor’s scope of work must be included on the front of the form or as an attachment.

The art of negotiation begins with staking out a position, regardless of what the parties are negotiating about — whether cars, homes, or terms and conditions for a construction project. To be successful and more profitable, follow these critical steps: 1. Read the subcontract carefully and understand the impact of key provisions.

Contingent payment language may be more important to revise than change orders.

2. Prioritize the provisions most important to you. If you anticipate possible delays to your work, you’ll want input into the schedule, duration and sequence of activity and the right to an equitable adjustment of both time and money.

3. Discuss proposed revisions from a position of knowledge and strength.

Know what effect certain terms will likely have on you and be prepared to deal with the effects.

4. Analyze the changes/ revisions the general contractor agreed to, as well as those rejected. What changes did the GC consent to? What is overall impact?

What benefits did you gain?

T H E

C O N T R A C T O R ’ S

5. Do a cost-benefit analysis.

What are the risks? How much profit is in the job? Is this an opportunity for profitable future work with this general contractor? Are you willing to assume the risks? Should you pass on this project?

In the final analysis, a successful trade contractor will try to use the ASA bid proposal and addenda in an educated effort to obtain and complete successful, profitable projects. Contract terms can and do impact profitability. Remember, a subcontractor needs profitable work, not just “work.” Use these ASA tools as a means of becoming as professional in your business management skills as you are in the actual work you perform. If you do, your company will stand out from your competitors and profits will increase.

Michael P. Davis is a shareholder with Chamberlain Hrdlicka, Atlanta, Ga. Davis maintains a construction law practice and represents a wide variety of trade contractors, prime contractors, manufacturers, owners/developers and design professionals. His practice focuses primarily on construction contract disputes in state and federal courts, arbitrations and mediations throughout the United States. He has successfully represented a broad spectrum of specialty trade contractors and prime contractors in a variety of disputes involving construction defects, labor inefficiencies, UCC warranty issues, constructive accelerations, and increased scope of work. His practice has included companies engaged in casework, drywall and carpentry, underground utilities, electrical, mechanical and plumbing contractors. In addition, Davis has significant

C O M P A S S

experience in labor and employment law, including matters involving traditional labor law (National Labor Relations Act), OSHA, Wage & Hour, employment discrimination, and restrictive employment covenants, primarily focusing on construction clients. Davis can be reached at (404) 588-3424 or michael.davis@ chamberlainlaw.com.

Learn How to Improve Bidding and Negotiating Strategies with FASA VideoOn-Demand Learn how to improve your bidding and negotiating strategies with ASA’s powerful Subcontractor Bid Proposal and Addendum to Subcontract forms in the video-on-demand, “Critical Tactics: Flexing Your Muscle With ASA’s Updated Tools,” available from the Foundation of ASA. In this on-demand video, presenter Michael Davis, an attorney with Chamberlain, Hrdlicka, White, Williams & Martin, Atlanta, Ga., explains techniques such as how to firmly establish the minimum contract terms that you’ll accept.

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.

“Critical Tactics: Flexing Your Muscle With ASA’s Updated Tools” (Item #8046) is $65 for ASA members and $95 for nonmembers. Order online.

M A R C H

2 0 1 5

15

Save the Date!

March 3-5, 2016

Hyatt Regency in Miami, Florida

www.SUBExcel.com

Feature Negotiation for Non-Negotiators

by Gregory R. Caruso, MD, CPA Tom marched out of the office trailer slamming the door behind him. His final words were, “enough, I’ve had enough.” He quit — seemingly without notice. Now, with an overflowing pipeline of complex work, his boss, Bob Brown, owner, has too many jobs to manage and has concerns about maintaining schedules and profitability.

When we think of negotiation we think about the big meeting, the John Wayne showdown, where we pull out our six-shooters and the sharpest gunslinger wins. Yet, most negotiations are much more mundane, and happen every day during endless conversations. You are constantly negotiating with your employees, your clients, your client’s employees, contractors, owners, and other tradespeople. The outcomes of these negotiations affect your work conditions, your schedules, your expenses, and ultimately your profitability. A simple result like retaining or losing a key employee can have a huge impact on your peace of mind and financial results over a six-month period. Yet, we rarely think about these continuing negotiations, much less put any thought into improving them.

Why do negotiations often turn out poorly? There are a lot of reasons.

Three major ones are: 1. We assume we know what the other side wants.

2. We do not think through clearly what we want.

3. We march through the discussion telling and knowing, which is not as effective as asking and listening — even when we are correct.

T H E

C O N T R A C T O R ’ S

The Assumption: We think we “know” what the other side wants.

We are convinced that what we “know” must be true and correct.

Yet, how the world appears to us and how it appears to the other side are often strikingly different. It is very easy to make assumptions based on similar situations in the past or past conversations with this person. This can be fatal. We needlessly lower price when they want assurances about warranty work. We provide training when they want a day off.

The list is endless.

The best route to understand what the other party wants is to ask. You may think, “But I did ask.”

Unfortunately, just asking once is generally not enough. We are asked so many questions that often the first time someone asks us something we deflect the question. For instance, when you walk into a store and the salesperson asks, “May I help you,” usually your answer is, “No, I am just looking.” Most salespeople walk away. A few will ask, “Who are you looking for, yourself or someone else.” You may actually think about this question and answer. The old expression, “the third time is the charm” has meaning here. Usually by the third question you are actually engaged. Always ask three times, three ways, if something is important before you accept a brush-off answer.

This is not a perfect solution.

Some people will try to game you with their answers and some people really do not know what they are looking for. But, go to the source.

Ask questions about what the other party hopes to accomplish, why this is important to them, how they might go about doing what they are requesting of you. Their answer is

C O M P A S S

far more likely to be correct than old assumptions.

The Take Away: Ask questions to understand what the other party wants and why they want it.

Clear Thinking: The next reason we often fail in negotiations is that we do not know what we want to accomplish prior to the conversation. Comments like “I wish I had offered more” or “now that I think about it I should have tried to keep him harder” may indicate that problem. In many negotiations it is difficult to separate our emotions from a rational assessment of the facts. We fear losing things that appear important to us. We tend to undervalue getting things that might be easy. At this point, you’re just negotiating with yourself, not where you want to be. When you combine the lack of planning with emotion and emotional responses to situations, it is a wonder people ever get what they want through negotiation.

The most effective solution to this problem is not always easy. At the start of a conversation know what your goal is, where you want to go.

Also, know what your bottom line walk away point is. Yes, plan for your negotiation or conversation. If you are not ready, buy a little time.

There is little that must be decided this second. If you find yourself in an important negotiation and you have not planned, or if upon inquiring about the wants and needs of the other side you realize your earlier planning may not be on point, ask for a break to think. Depending on the situation you might ask for 10 minutes or perhaps a few days. Whatever is appropriate, ask

M A R C H

2 0 1 5

17

and then plan. Step back, let your emotions cool and decide. Be careful about adjusting your walk away line unless it really is a different situation than you thought. Many companies took very large losses in 2010 and 2011 from exceptionally low bids made in 2009. The logic was bid low and make up the lack of margin on volume. Unfortunately all anyone did was lose money. A clear example of why you should not lower your walk away line.

Once we know what we want and what the other side wants we can begin negotiating. There are many “techniques” to negotiating. Some techniques are quite effective and really just ways to communicate clearly and others are cheesy tricks and of little use particularly in longterm relationships. The Take Away: Have clear objectives including your downside walk away line, which

provides discipline and focus in negotiation.

Ask and Listen: The best negotiation “technique” ties into our last reason why negotiations turn out poorly. We like to “tell” the other side why they should take our offer. Even when we are 100 percent right in what we are telling them, it is far more effective for them to talk themselves into taking our offer. So what does that mean? If you have done your homework, you have a good idea of what is important to the other side. For example, you can make the statement, “You have made it clear that you must have deep red even if it costs more because that is your corporate color. Using that color makes the building your building.” Certainly, you can hear the emotional pull and the logic of your prospect. But, you said it.

Think about the impact if you ask questions so the client tells you.

“You wanted a specific color — what was that again?” you ask.

The prospect replies, “Deep Red.” You say, “Yes, why was that? You know green is much cheaper?” The prospect responds, “Because it is our corporate color. It says to the world that the building is ours.” In reply, you can say, “Well, you know it costs 5 percent more. It sure sounds like deep red is worth far more than 5 percent to you.” Now, often at the table they might say “yes” right there, but they might not. Yet, usually when they think about the conversation later they will come back as they in effect negotiated themselves.

Therefore, getting the other party to acknowledge what is important to them vs. what you need in trade is a fair bargain, is the most powerful negotiating tool you will ever

find. The Take Away: Learn to use questions so your prospects in effect sell themselves.

Many negotiations fail because of a few simple points. We assume we know what the other side wants.

Even when we “win” we often don’t know what this mistake cost us.

When we lose if we inquire why we lost, we often learn we were running the wrong race. Prior to starting a negotiation, ask and ask again at least three times. Find out what the other side wants. Second, make sure you know what you really want.

Write it down. Fuzzy statements like, “I want a job,” are nice but not enough. “I want the project management job for a $100,000 salary with three weeks vacation and a $5,000 contribution to my retirement plan each year” is clear and actionable. Finally, use effective communication techniques, such as asking leading questions so the other side in effect negotiates with themselves.

Practice these three steps and you will improve both your big deal showdown negotiations and all those mundane continuing negotiations. By improving your negotiation outcomes, you will generate less stress and far more profit.

Gregory R. Caruso, MD, CPA, Certified Valuation Analyst, is a principal at Harvest Associates. He is an expert in selling and valuing privately held subcontracting, contracting, and engineering companies with over 20 years of experience. Caruso is author of the book 11 Secrets to Selling Your Business. He is a member of ASA of Baltimore. All initial consultations are confidential and free. For more information, visit www.Harvestbusiness.com. He can be reached at (410) 507-5441 or gcaruso@harvestbusiness.com.

T H E

C O N T R A C T O R ’ S

Learn Non-Negotiators’ Strategies for Negotiating Outstanding Results in April 14, 2015, ASA Webinar Knowing how to effectively negotiate can make or save you more money on an hourly basis than anything else you do.

The April 14, 2015, ASA webinar “Non-Negotiators’ Strategies for Negotiating Outstanding Results” will examine techniques to improve your results from any complex negotiation. During this webinar, presenter Gregory Caruso, Harvest Business Advisors, will explain: •

Simple conversational strategies that create advantages for you.

•

How to prepare properly — even if you have little time.

•

When aligning outcomes is important and how to do it.

•

When you should walk away.

•

How to bring the other party back into the negotiation.

•

When to stay the most focused to avoid slippage — it’s not when you think.

This live, 90-minute webinar will begin at 12:00 p.m. ET/9:00 a.m. PT. The registration fee is $99 for members and $179 for nonmembers and allows access with one Internet connection.

Project the webinar onto a screen or wall and listen to it on a speakerphone for a group training event. After the program, registrants will receive a link to a recording of the webinar, and an ASA Certificate of Completion that can be downloaded and printed for each person who watched. Register online.

C O M P A S S

M A R C H

2 0 1 5

19

Feature How Lien Rights Equal the Playing Field Before and After a Dispute Arises

by Scott Wolfe An old Scottish expression states that “possession is nine-tenths of the law.” Another popular expression satirically interprets the “golden rule” as “he who has the gold … makes the rules.”

Of course, these expressions are not literally true. Nevertheless, the expressions resonate world-wide because of their applicability to realworld events. Parties confronted with a negotiation situation typically run into the “possession” problem or the “golden rule” frustration. This is especially the case in the context of construction disputes.

Construction disputes nearly always present a catch-22 situation for subcontractors.

If there is a change order dispute, how does the subcontractor stand firm about not doing the work without running afoul of the contract provision requiring them to finish the work? When signing a contract, how does the subcontractor argue around strong-arm contract provisions (like pay-if-paid clauses) when GCs won’t budge and subs must do the work?

Subcontractors are seemingly always between a rock and a hard place, and always without possession or the gold. They are eternally trying to make payroll, while owing money to suppliers, and getting shortchanged or slow paid by GCs. Then, when a dispute arises, they must arm themselves and fight the privilege of possession.

There is some good news for subcontractors. The policy of all 50 states and the federal government is to assist subcontractors against these challenges. This article will discuss how — in large part — these protections are built into the nation’s mechanic’s

20

M A R C H

2 0 1 5

lien and bond claim laws. (For A Short History of the Mechanics Lien, published by zlien, visit http://www.zlien. com/articles/a-short-history-of-themechanic-lien/.)

Before A Dispute: Don’t Get Put in the Back of the Payment Line

The sad reality is that general contractors, developers, lenders, sureties, and other project stakeholders take measures throughout the project life-cycle to protect themselves against risks. In fact, this should be pretty obvious.

Subcontractors participate in a prequalification process, for example, and they accept numerous “riskshifting” provisions within their contracts.

What does this all boil down to?

The people at the top of the contracting chain want to maintain their possession. This is not a hidden secret, either. Consider the ENR Construction Risk summit in 2013, where those representing general contractors stated plainly that “[when trouble with a sub arises] the first question [we] ask is, ‘how much money are you holding on that sub?’”

In other words, the general contractor wants to know, “how much possession leverage do we have?”

The more possession they have, the more leverage they can assert in the dispute. Holding money and negotiating legitimate disputes is one thing, but what happens when a party stretches the truth about a dispute elements to get an even better deal?

The possession leverage works just as well in honest situations as it does in nefarious ones.

T H E

Can the subcontractor do something before a dispute arises to mitigate the possession principle from rearing its ugly head? The answer is surprising. There is something quite simple that can be done.

The general contractor quoted above is asking “how much money are you holding on that sub?” but the answer to that question depends on much the general contractor was capable of holding from the sub.

On every construction project, subcontractors and suppliers fall into a spectrum of priority. When it’s time to make a payment or when a dispute could arise, general contractors and other top-of-the-chain parties pander more to those with higher priority. In the context of handing out payments, there is literally a payment line. Some subcontractors are at the front of the line and get paid quickly and completely. Other subcontractors have a lower priority.

What is the difference? And how do you get put in the front of the payment line? The answer lies in a single, unsuspecting document: the preliminary notice.

Most states require subcontractors to deliver a “preliminary notice” to the general contractor as a prerequisite to later file a mechanic’s lien or bond claim. When general contractors receive these preliminary notices, they elevate the priority of that subcontractor. After all, not paying that particular contractor exposes the general contractor to risk.

In fact, general contractors use software platforms or spreadsheets to assist them in keeping track of these priorities. Many of the industry’s payment management portals and ERP solutions enable general contractors

C O N T R A C T O R ’ S

C O M P A S S

Mechanic’s Liens are a Patriotic Product of Our “Founding Fathers”

by Donald Gregory, Esq. Many in the construction industry are familiar with the importance of mechanic’s liens, but are not as familiar with their creation and history.

When George Washington was still President, the young country was planning to build a new capital city on the Potomac River. President Washington chose the site and a federal commission was formed to oversee construction in the newly created capital that would become the District of Columbia. In 1791, Thomas Jefferson, James Madison, and other members of that commission suggested to the Maryland General Assembly that it enact a statute “for the encouragement of master-builders to undertake the building … within the city, by securing to them a just and effectual remedy for their advances.” Late in 1791 — at almost the same time as the Bill of Rights was adopted — the first mechanic’s lien law was enacted.

Early lien laws were primarily focused on protecting the laborers and materialmen who actually performed the work, and tended to be limited to particular cities or areas. But the idea spread until almost all states enacted mechanic’s lien laws covering their entire jurisdictions.

Approximately a century ago there were some due process assaults on mechanic’s liens laws, but mechanic’s liens and their constitutionality prevailed. Many states enacted constitutional amendments that specifically barred any statute from interfering with mechanic’s lien rights.

The next time you are faced with nonpayment and considering whether or not to take action to protect your mechanic’s lien rights, remember your patriotic duty. The Founding Fathers would approve.

Donald Gregory, Esq., is a director and chair of the construction practice area for Kegler, Brown, Hill & Ritter, Columbus, Ohio, ASA’s legal counsel. Gregory can be reached at (614) 462-5400 or dgregory@keglerbrown.com.

to track who has and who has not sent preliminary notices, lien waivers, and other lien-related documentation.

There is quite literally, therefore, a dashboard to report on the priority that should be given to a subcontractor.

Subcontractors can avoid disputes and maintain leverage in the negotiation by appearing on this dashboard in a priority position, and they do that by simply keeping their lien rights alive. At the start of a project, savvy subcontractors send a preliminary notice to keep the general contractors and other top-of-the-chain parties honest, and to put themselves in the front of the payment line.

After A Dispute: Level the Playing Field with a Lien Claim

Subcontractors who deliver a preliminary notice and stay “at the front of the payment line” will avoid a lot of dispute scenarios. Nevertheless, it’s impossible to avoid problems completely, and subcontractors may still find themselves confronted with

T H E

C O N T R A C T O R ’ S

a dispute and negotiating against the possession principle. What can be done now?

When a dispute arises, it’s critical for subcontractors to pull the trigger and use their lien or bond claim rights. Sending the preliminary notice puts them in position to use the remedy, but when a dispute arises, it’s time to actually use it. It’s usually the only way to gain some leverage in the negotiation.

Mechanic’s lien claims have a number of direct consequences that yield favorable results to the subcontractor. While the general contractor may be “ahead” of the subcontractor and with the upper hand at first, filing a mechanic’s lien pushes back at this and actually lays claim to a bit of possession for the subcontractor: possession of the jobsite.

One effect of a mechanic’s lien claim is that the ownership of the jobsite gets thrown askew. The property cannot be sold, transferred, refinanced, or otherwise altered until the lien claim is resolved. Further, the mechanic’s lien typically causes

C O M P A S S

contractual complications between the owner and the lender, and the contractor and the owner. All of these things help the subcontractor offset her initial possession disadvantage, and levels the playing field.

Take Caution, and Conclusion

Proceed with caution around the mechanic’s lien process — for two conflicting reasons.

First, the preliminary notice and mechanic’s lien process is riddled with misunderstandings and fear.

A lot of subcontractors are scared to send preliminary notices to their general contractor customers thinking that it will get them black-balled from future business or will otherwise ruin the relationship. And further, when they decide to send a preliminary notice, the nuances of state legal requirements can be overwhelming. (continued on page 24)

M A R C H

2 0 1 5

21

Legally Speaking Beware of Inadvertent Disclosure of Electronic Information

by James Yand Information is the lifeblood of any business. It documents the work performed and often serves as the center point of a dispute, especially when a lawsuit is filed. Our litigation system is designed to allow each side to find and use relevant nonprivileged information in proving its case or defense. Therefore, the modern business owner must be able to navigate the information repositories, regardless of their form, including the ability to ask for and produce electronically stored information (ESI).

In addition, the business owner and its legal counsel must be able to comply with the duty to preserve information once a lawsuit is reasonably anticipated, including the obligation to identify, locate, and maintain ESI held by the business.

The failure to do so may result in serious sanctions and referral to disciplinary counsel.

New terminology helps define whether you are familiar with, and prepared to handle, the challenges of the digital world. For example, do you know what a “litigation hold” is, and how to use it? If asked by a judge, would you be familiar with your company’s computer systems, and what your record-retention policy states? Could you craft a discovery request asking for production of electronic records in a form that is readily searchable and adaptable to your litigation database?

Pitfalls of E-Discovery Requests More than 95 percent of all information is now generated in electronic form. Yet, the discovery rules that exist in many state courts are designed to deal with the world in

22

M A R C H

2 0 1 5

which typewriters and copiers were the primary means of generating and duplicating documents.

Electronic records offer a very different reality and require knowledge of a medium that is different in nature and quantity. For example, Microsoft receives from 250 million to 300 million email messages per month from outside the company. It generates another 60 million to 90 million internal emails a month. Its firewalls delete 85 to 90 percent of all incoming emails.

This task of controlling electronic information can cost millions of dollars and dwarf the dispute underlying the lawsuit itself. This has serious implications for our justice system that are contrary to the notion of cases’ being resolved on their merits in a just and efficient manner.

See Fed. R. Civ. P. 1.

ESI Is a Dynamic Medium Paper is one-dimensional. It can be stored in a file and then copied when needed. Electronic information is alive. It changes as its environment changes. It contains metadata that describes the “DNA” of the record: how it was created, when, and by whom; and how it was changed, when, and by whom. Thus, when electronic information is disconnected from its lifeblood and rendered one-dimensional by being sent to the printer, it loses its very essence.

This is why digital information is best collected, reviewed, analyzed, and offered into evidence in its electronic form. Without its DNA, the electronic information lacks authenticity, and may be easily manipulated or faked. This fact fundamentally drove the changes in the federal rules to recognize that the world of documentation now exists in electronic form in addition to paper.

T H E

Electronic discovery refers to any process in which electronic data is sought, located, preserved, and collected with the intent of using it as evidence in a civil or criminal legal case. The key is to know what you have and where it is stored and backed up.

Metadata and Unauthorized Disclosures In addition to final product data stored in the locations mentioned above, metadata is embedded within each document. The simplest definition of “metadata” is that it is data about data, similar to how DNA is the building blocks for one’s body.

This metadata includes information beyond its printable content, such as previous revisions (think “Track Changes” even if you do not see it), hidden text, comments, document properties, user email addresses, server names, and routers. Be aware that even a document that you copy for reuse (e.g., “Save As”) brings with it all previous metadata.

In everyday work product, do you want to provide recipients with a document’s hidden changes and modifications? A solution to this critical problem is to implement an outgoing email policy at your business — the sender must always scan (or at least create a PDF of) or “scrub” any electronically transmitted file. Creating a read-only PDF or scanned file breaks the metadata chain, since only an image is created.

If you create a PDF file from your desktop computer rather than a scanned image, however, metadata will still exist. Using these measures to protect your electronic records and files reduces risk of embarrassment.

C O N T R A C T O R ’ S

C O M P A S S

The best way to avoid this risk is to establish a comprehensive policy of rules to scrub metadata from all outgoing documents before they leave the company. A successful security software application will not ask the end user to remember to do something, but will automatically scrub documents before sending.

Even with the best of intentions, employees will still forget to manually scrub metadata on each document.

What Is the E-Discovery Problem?

The ediscovery problem is essentially a result of the sheer volume of business conducted electronically. Go back even 10 years — how much of your firm’s business was done via mailed letters and other documents? Do you remember waiting for a signed document to be mailed or couriered back before proceeding? Now think about how much work is accomplished based on emails, scanned documents, file-sharing, or AutoCAD. Computer forensics is booming for those companies tasked with analyzing a firm’s electronic records, everywhere they reside. And even unsolicited, deleted emails are recoverable and discoverable.

What Are Effective E-Discovery Solutions?

What kinds of ediscovery solutions are most effective? First steps involve defining record-retention policies, determining what processes and technologies will be used, training staff on those processes and programs, and then implementing them. The following are some common methods or work practices:

T H E

C O N T R A C T O R ’ S

• Doing regular backups, preferably

automatically, so that reliance on human effort is not necessary.

Backups can be disk-based/online, or on tapes.

• Using programs that start each document clean of prior metadata, but allow the same template to be used again.

• Centralizing data storage so that multiple copies are not in multiple locations.

• Managing your documentation to enable data hierarchy, versioning, and classification. There are programs to help manage tags and metadata, but they are not the whole solution.

• Saving only what is truly needed for project records. Avoid the “let’s keep everything because we may need it someday” philosophy. It may come back to bite you.

• Using email archiving programs or services. Establish an email retention policy with limits on what kind of email is to be sent and received in the workplace.

Unwanted email should be blocked or deleted immediately. Do not allow personal email to mix with business email.

• Consistently using the email subject line to identify the topic or email attachment. Send a followup email to the recipient to verify that he or she received what was needed. Also, do the same for email attachments you receive. It is hard to make or defend a case with holes in communication.

• Requesting each party that you subcontract with to abide by the same rules and policies that your firm follows.

C O M P A S S

• Eliminating potentially

embarrassing or incriminating metadata before sending documents electronically.

Metadata scrubbers are available from a number of sources.

• At the genesis of a project, establishing with clients, consultants, contractors, etc., the ground rules for dealing with electronic information.

• Considering increasing insurance coverage for potential retrieval of network/electronic document-type scenarios, and taking a hard look at your insurance limits to ensure that they cover your potential risks.

• Establishing a written documentretention policy, and being prepared to issue a litigation hold on all paper and electronic files once a lawsuit is filed or reasonably anticipated.

A company is only as strong as its weakest link, and with this area of risk, the damage from being hacked or inadvertently disclosing electronic data can be fatal to the company and its business reputation. To mitigate this risk, create a comprehensive document-retention policy and follow it! In a legal proceeding, this may be your ticket to avoiding sanctions and resting assured that the company is protected from these risks.

James Yand is a partner with Miller Nash Graham & Dunn, LLP, Seattle, Wash. He has more than 20 years of experience resolving disputes for business owners and individuals in construction law, products liability, e-discovery, franchise and commercial law. He can be reached at (206) 6228484 or james.yand@millernash.com.

M A R C H

2 0 1 5

23

ASA/FASA Calendar May 2015

26–29 — SUBExcel 2015 in Seattle, WA

12 — Webinar: Managing the Life Blood of Contracting - Cash Flow

April 2015

June 2015

1 — Webinar: Non-Negotiators’ Strategies for Negotiating Outstanding Results

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

Coming Up . . . in the April 2015 Issue of ASA’s

THE

March 2015

Theme: Building Backlog

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

• Building Your Backlog Regardless of Market Conditions • Not All Strategy Is Good Strategy: Fatal Flaws to Avoid • Benchmarking: A Road Map to Growth

How Lien Rights Equal the Playing Field Before and After a Dispute Arises

• Why Does Your Underwriter Care About Backlog?

(continued from page 21)

Do not approach the preliminary notice decision with preconceived fears, and accept the fact that you may not know very much about this process. Your general contractors actually like receiving these notices because it helps them better evaluate their risks and gives them information they don’t know.

Second, the act of filing a mechanic’s lien should not be taken lightly. It’s important to really analyze the dispute and the situation to make sure a lien claim is the right thing to do. If a company’s position is poor and they are likely to lose in an argument with a general contractor, the mechanic’s lien filing can just pile onto the subcontractor’s troubles.

Nevertheless, subcontractors who find themselves struggling in a negotiation against the possession principle will find a great friend in the mechanic’s lien process.

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.

24

M A R C H

2 0 1 5

T H E

• Disarming A Dozen Dangerous Subcontract Clauses—Part 2 • Legally Speaking: The Art of Documenting Your Project in Today’s Technological World

Look for your issue in April.

Past Issues: Access online at www.contractors knowledgedepot.com

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 IS 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.

Copyright © 2015 CNA. All rights reserved.