The Contractor's Compass June 2016

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ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

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Who Is Managing Your Contract Risks?

Using ASA’s New Subcontract Documents Suite Sleeper Subcontract Clauses That Should Keep Subcontractors Up at Night Legally Speaking: Contract Negotiation: The Art of the Subcontract

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March 15-18, 2017 Denver, Colorado

JUNE 2016

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ASA’s

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June 2016

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.

Who Is Managing Your Contract Risks? ............................... 10

by Carrie L. Ciliberto, Esq.

Using ASA’s New Subcontract Documents Suite.................... 12

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 Eric Travers, Esq.

Sleeper Subcontract Clauses That Should Keep Subcontractors Up at Night ........................................... 17

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.

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

by Daniel F. McLennon

Departments CONTRACTOR COMMUNITY............................................................ 4 CONSTRUCTION IN THE COURTS................................................... 9

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

LEGALLY SPEAKING.......................................................................... 20 Contract Negotiation: The Art of the Subcontract

by Joe Katz

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.

Quick Reference

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

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

LAYOUT Angela M Roe angelamroe@gmail.com © 2016 Foundation of the American Subcontractors Association, Inc.

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Contractor Community Learn the ‘Keys to Improving Productivity’ in June 14 ASA Webinar Learn how to minimize waste and inefficiencies in the June 14 ASA webinar, “Driving Project Success: Keys to Improving Productivity,” presented by Stephane McShane, Maxim Consulting, Denver, Colo.

McShane will explain how to get the best effort from field forces and provide practical tools that managers can implement to lower the cost of production, as well as how to quantify losses to substantiate claims for extra costs.

McShane is a senior consultant at Maxim Consulting Group, where she is responsible for the evaluation and implementation processes with its clients. She works with constructionrelated firms of all sizes to evaluate business practices and assist with management challenges.

This live, 90-minute webinar will begin at 12:00 p.m. Eastern time/9:00 a.m. Pacific time. 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.

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ASA-Backed Suit to Block OSHA’s Silica Rule to Be Heard in D.C. Circuit Court The lawsuit initiated by ASA and seven other construction associations to block the new OSHA rule on respirable crystalline silica will be heard in the D.C. Circuit Court.

ASA, via ASA of Texas, filed suit in the 5th Circuit in April. The associations argued that OSHA’s new standard is beyond the technological limits of current dust removal equipment. Other groups filed similar motions in other court circuits, forcing judicial officials to select a venue via random lottery.

In the meantime, ASA is continuing to ask Congress to limit funding for implementation of the new rule or take other alternative steps to stop implementation of the OSHA rule in its current form.

DOL Publishes Final Overtime Rule The U.S. Department of Labor, on May 19, published its final regulation updating overtime rules under the Fair Labor Standards Act. The final rule doubles the salary threshold— from $23,660 to $47,476 per year— under which most salaried workers are guaranteed overtime (hourly workers are generally guaranteed overtime pay regardless of their earnings level). Specifically, the final rule sets the standard level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker.

The final rule also sets the total annual compensation for highly compensated employees subject to

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a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004.

In addition, the rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the new standard salary level. The effective date of the DOL rule is Dec. 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and the HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on Jan. 1, 2020.

ASA Chief Advocacy Officer E. Colette Nelson said, “Contrary to frequently expressed concerns, the DOL rule does not change the definition of primary duty, the HCE duties test or the salary basis test. It also doesn’t apply any new standards to outside sales employees or computer professionals.”

Nelson also reported, “ASA will continue to work in coalition with other business groups to ask Congress to require DOL to perform a detailed impact analysis prior to implementing its new rule.”

Among the tools that DOL has made available to help employers comply with the new rule are: • Questions and Answers • Small Entity Compliance Guide to the Fair Labor Standards Act’s “White Collar” Exemptions • Guidance for Private Employers on Changes to the White Collar Exemptions in the Overtime Final Rule

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OSHA Adds Public Disclosure to Injury/ Illness Data Collection Requirements The Occupational Safety and Health Administration, on May 12, published a final rule that requires employers in high-hazard industries, including the construction industry, to send injury and illness data to OSHA for posting on the agency’s public Web site. Although the new requirements do not add or change an employer’s obligation to complete and retain injury and illness records under the Recording and Reporting Occupational and Injury and Illnesses regulation, ASA strongly opposed OSHA making public employerspecific information when the agency published the rule in 2013.

ASA stated that it is opposed to “OSHA requiring employers to make such individual employer-related data available to the general public, particularly since there appears to be little, if any data demonstrating that such public disclosure furthers OSHA’s mission.”

Under the new rule, construction employers with 20-249 employees must electronically submit information from OSHA’s Form 300A. Construction employers with 250 or more employees must electronically submit to OSHA injury and illness information from OSHA Forms 300, 300A and 301.

According to OSHA, the availability of this data will enable prospective employees to identify workplaces where their risk of injury is lowest; thus, employers competing to hire the best workers will make injury prevention a higher priority. In addition, OSHA suggests that public access to this data also will enable employers to benchmark their safety and health performance against

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industry leaders, to improve their own safety programs and customers to evaluate the management of their vendors.

ASA Chief Advocacy Officer E. Colette Nelson expressed concern that “information provided by an individual firm, without context of explanation, could lead to faulty interpretation and misuse of the data. This is particularly critical in construction where owners and prime contractors routinely prequalify, including the evaluation of employee safety and health experience, the firms under consideration for work on construction projects.”

The new rule also amends OSHA’s recordkeeping regulation on how employers inform employees to report work-related injuries and illnesses to their employer. The final rule requires employers to inform employees of their right to report work-related injuries and illnesses free from retaliation; clarifies the existing implicit requirement that an employer’s procedure for reporting work-related injuries and illnesses must be reasonable and not deter or discourage employees from reporting; and incorporates the existing statutory prohibition on retaliating against employees for reporting work-related injuries or illnesses.

This aspect of the rule also targets employer programs and policies that, while intended to promote safety, may have the effect of discouraging workers from reporting injuries and, in turn leading to incomplete or inaccurate records of workplace hazards. Nelson said ASA intends to call on OSHA to issue further guidance on the allowable parameters of safety incentive programs.

According to Assistant Secretary of Labor for Occupational Safety and Health Dr. David Michaels, “Access to injury data will also help OSHA better

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target our compliance assistance and enforcement resources at establishments where workers are at greater risk, and enable ‘big data’ researchers to apply their skills to making workplaces safer.” The employee disclosure requirements and the prohibition on discrimination for reporting injuries and illnesses take effect on Aug. 10, 2016. The reporting requirements take effect on Jan. 1, 2017.

ASA/AGC Call on Federal Agencies to Collect Change Order Data ASA and the Associated General Contractors of America called on federal agencies to improve the usefulness of the information they collect related to change orders.

In a joint letter to the Federal Acquisition Regulatory Council on March 21, ASA and AGC proposed that the agencies collect data regarding the timeliness of action by the government contracting officer regarding unilateral change orders with respect to an ongoing construction project. In addition, the associations recommended that the agencies seek data regarding whether the contracting officer has informed the contractor whether unobligated funds were available to pay the cost of any additional work.

The associations suggested that, if adopted, their proposed changes will provide for the collection of essential data in a more readily accessible format that can assist executive branch managers and facilitate the conduct of essential Congressional oversight.

“Our members are facing increasing numbers of instances in which a federal contracting officer will direct a change in the scope of work on a construction project, followed

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by a significant delay in written change confirmation and payment,” explained ASA Chief Advocacy Officer E. Colette Nelson. “In some cases, contractors have later found that, contrary to law, the federal agency even lacked the funds available to pay for the increased costs being imposed upon the contractor. The resulting delay in payment can be extraordinarily harmful to the various subcontractors and suppliers that generally provide the vast majority of labor and materials on a typical modern construction project.”

Federal Tax Credits Available for Hiring Veterans, Reservists, Guard Members Learn how you can claim federal tax credits for hiring and employing eligible veterans, National Guard members and reservists in a free publication, Federal Tax Benefits for Hiring and Employing Eligible Veterans, National Guard Members and Reservists.

The manual includes what you need to know to decide if your company is eligible and the specific steps to take to claim the credits. The manual covers four federal tax credit programs, including returning heroes, wounded warriors, activated military reservist credit for small businesses and the federal empowerment zone employment credit. The publication also includes Internet links to the required Internal Revenue Service and Department of Labor forms that employers must submit.

The manual was prepared by the law firm of Caplin & Drysdale and published by American Jobs for American Heroes, a nonprofit

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campaign to encourage employers to post full-time jobs for veterans, National Guard members and reservists. ASA Chief Advocacy Officer E. Colette Nelson serves on the AJAH advisory committee.

ASA Calls on FAR Council to Specify Construction Sub Payment Rule In a March 21 letter, ASA called on the Federal Acquisition Regulatory Council to preserve the statutorilyrequired payment standards for construction subcontractors and suppliers in a proposed amendment to the FAR. The Council, in a proposed rule published on Jan. 20, failed to acknowledge the payment requirements for the payment of subcontractors on federal construction projects, enacted as part of the “Prompt Payment Act Amendments of 1988” (Public Law 100-496) and implemented through FAR 52-232-27. That law requires a prime contractor to, among other things, pay its subcontractors within seven days of receiving payment from the federal government for the subcontractor’s work.

The proposed amendment to the FAR is intended to improve subcontractor payment on federal contracts by implementing ASAsupported Section 1334 (Payment of Subcontractors) of the “Small Business Jobs Act of 2010) (Public Law 111-240). That statute requires a prime contractor to notify the federal contracting officer in writing if the contractor pays a reduced price to a small business subcontractor, or if the contractor’s payment to a small business contractor is more than 90 days past due.

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ASA recommended that the new final rule simply cite the current FAR rule with respect to the payment of construction subcontractors in order to assure that there is no confusion by either a contracting officer or a prime contractor of the rule’s applicability.

EEOC Implements New Procedures for Discrimination Charges The Equal Employment Opportunity Commission has implemented new nationwide procedures that provide for the release of employer position statements and non-confidential attachments to a charging employee or his or her representative upon request during the investigation of the charge of discrimination.

During an investigation of a charge, the EEOC may request the employer to submit a position statement that documents its position. EEOC’s resource guide for employers, Effective Position Statements, advises employers to focus their position statements on the facts relevant to the charge of discrimination and to identify the specific documents and evidence supporting its position. An employer generally has 30 days to gather the information requested and to submit its position statement and attachments to the EEOC. The EEOC may redact confidential information as necessary prior to releasing the information to the charging employee or the employee’s representative. The EEOC will provide the employer’s position statement and non-confidential attachments to the charging employee upon request and provide him or her with an opportunity to respond within 20 days. The employee’s response will not be provided to the employer during the investigation.

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EEOC reports that its new procedures are intended to provide for a consistent approach to be followed in all of EEOC’s offices. For more information, see: • Questions and Answers for Charging Parties • Questions and Answers for Respondents

Labor Department Publishes Final Rule on Labor ‘Persuader’ Reporting The Department of Labor’s Office of Labor-Management Standards, on March 24, published a final rule revising two public disclosure reporting forms, the Form LM-10 (employer report) and the Form LM-20 (agreement and activities report).

Generally, these reports must be filed when an employer and a labor relations consultant make an arrangement or an agreement that the consultant will undertake efforts to persuade the employer’s workers to reject an organizing campaign or collective bargaining effort by a union. The final rule pertains to the employer and labor relations consultant/“persuader” reporting requirements of Section 203 of the Labor-Management Reporting and Disclosure Act. Section 203 of the LMRDA requires employers and labor relations consultants to report their agreements or arrangements pursuant to which the consultant undertakes activities with an object, directly or indirectly, to persuade workers concerning their rights to organize and bargain collectively.

This requirement is subject to an exemption in Section 203(c) of the LMRDA, which states that no one is required to file a report covering the

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services of a consultant “by reason of his giving or agreeing to give advice” to the employer.

Under the final rule, an employerconsultant agreement is reportable if a consultant engages in “persuader activities.” These are defined as any actions, conduct or communications that are undertaken with an object, explicitly or implicitly, directly or indirectly, to affect an employee’s decisions regarding his or her representation or collective bargaining rights. Under the typical reportable agreement or arrangement, a consultant agrees to manage a campaign or program to avoid or counter a union organizing or collective bargaining effort, either jointly with the employer or separately.

The revised interpretation in the final rule states that consultant activities that trigger reporting include direct contact with employees with the objective to persuade them, as well as the following categories of indirect consultant activity undertaken with the objective to persuade employees: (a) planning, directing, or coordinating activities undertaken by supervisors or other employer representatives including meetings and interactions with employees; (b) providing material or communications for dissemination to employees; (c) conducting a union avoidance seminar for supervisors or other employer representatives; and (d) developing or implementing personnel policies, practices or actions for the employer.

Exempt “advice” activities that do not trigger reporting are now limited to those activities that meet the plain meaning of the term: an oral or

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written recommendation regarding a decision or course of conduct. Under the previous interpretation, persuader agreements were not required to be reported if the consultant had no direct contact with employees and if the consultant limited his or her activity to providing the employer with materials that the employer had the right to accept or reject.

According to DOL, the earlier interpretation of “advice” resulted in significant underreporting of persuader agreements, as it essentially limited reporting to agreements involving only direct persuader activities, not indirect activities. The final rule also requires consultants to file reports when they hold union avoidance seminars for employers, but does not require employers to report simple attendance at these seminars.

This new rule took effect on April 25. The rule will be applicable to arrangements, agreements and payments made on or after July 1, 2016.

More information on the rule is available on the OLMS persuader final rule page and employerconsultant reporting page, including the Form LM-20, Form LM-10, and corresponding instructions, as well as a persuader rule summary.

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SAVE THE DATE

March 15–18, 2017 Denver Marriott City Center Denver, Colorado

Construction in the Courts Edited by R. Russell O’Rourke, Esq., partner and chair of the Construction Law Group, Meyers, Roman, Friedberg & Lewis, Cleveland, Ohio.

A brief review of recent cases that affect your business Ohio. I am asked all the time, “If they don’t pay me, can I walk off the job?” My answer is always a very firm “maybe, but it’s a risk.” The risk is whether the court thinks that the failure to pay you was a material breach of the contract. The Hamilton County (Cincinnati, Ohio) Court of Appeals recently decided a case, H&H Glass v. Empire Building Co., that held that “not all breaches are equal.

A failure to perform a promise that is nominal, trifling, technical, or slight does not excuse performance under the contract by the non-breaching party … a breach of a portion of the terms of a contract does not discharge the obligations of the parties to the contract, unless performance of those terms is essential to the purpose of the agreement.” Whether nonpayment is a material breach is a “question of fact” for the judge, not you. So the risk is that the judge will not agree with you.

So, when you consider walking off a project for non-payment you need

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to remember that while you may think that non-payment is a “material breach,” the judge may not. Here, the judge ruled that the subcontractor could walk off the job and the Court of Appeals affirmed the judge’s decision because since it was a question of fact to overturn it would require that the judge’s decision was against the “manifest weight of the evidence,” an almost impossible standard to reach. Had the judge not agreed, H&H could have been liable to Empire for damages.

H&H has walked off the job and sued Empire, the general contractor and its surety, Travelers, for the unpaid balance of the billed labor and materials, as well as payment for custom-made items which were not readily resalable. Empire counterclaimed, suing for $25,000 in damages, claiming that Empire had breached the contract by walking off and forcing Empire to hire a replacement contractor.

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The court ruled in favor of H&H on its contract claim, against Empire on its counterclaim, and against H&H on its claim for prompt pay damages, by somehow holding that while it was a material breach for Empire to withhold payment, that material breach was actually the result of a “good-faith dispute” and therefore the Ohio Prompt Pay Law did not apply. When the Prompt Pay Law does not apply, you lose the right to be paid 18 percent interest on the undisputed amount and to recover your attorney fees.

Before you ever consider walking off a job for any reason, understand that it is very risky. Talk with your construction law attorney—first.

Russell O’Rourke is a partner and the chair of the Construction Law Department in the Cleveland, Ohio, law firm of Meyers, Roman, Friedberg & Lewis, LPA. He can be reached at RORourke@MeyersRoman.com or (216) 831-0042.

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Feature Who Is Managing Your Contract Risks?

by Carrie L. Ciliberto, Esq. One of the most important things to consider before signing a design or construction contract is whether the agreement properly allocates project risks. While it can’t be known in advance which contract provision will be most critical in the event of a dispute, certain known risks can, and should, be addressed prior to signing. One way to minimize your risk, and maximize project success, is to use contracts that are fair to all parties. Traditionally, contracts were drafted by one party, to the benefit of that party, and then the adversarial negotiations began. This old-school method of contracting is neither efficient nor generally successful in facilitating positive relationships or results. Now, the industry has a clear choice with ConsensusDocs industry standard contracts. [The

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ASA-endorsed] ConsensusDocs are the only standard contracts written by a coalition of 40-plus leading design and construction industry associations that focus on project goals versus the protection of one party. Several contract provisions that address risk allocation, often called contract “killer clauses,” are discussed below, and ConsensusDocs will be used to illustrate best practices regarding these contract provisions.

Owner Financial Information: Does the contract provide adequate opportunities to request owner financial information throughout the life of the project? Some standard contracts provide the opportunity for owner financial information requests at the beginning of the project, but often that opportunity is lost, at least in practical terms, once construction

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begins. The ConsensusDocs 290 Guidelines for Obtaining Owner Financial Information, and 290.1 Financial Questionnaire provide an easy and direct way for contractors to quickly determine the financial viability of projects. The 290 expressly highlights, “[i]n any contractual venture, each Party has a legitimate interest and responsibility in ascertaining whether the other Party is fully capable of performing all of its contractual obligations … The proven ability to pay is just as important as the proven ability to perform.”

The Douglas and Nancy Barnhart Cancer Center at Sharp Hospital in Chula Vista, Calif., is a good example of a successful ConsensusDocsbased project. The owner used the ConsensusDocs 240 Agreement Between Owner and Design

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Professional and the ConsensusDocs 500 Agreement and General Conditions Between Owner and Construction Manager to facilitate the design and construction of a 47,000 square foot, three-story medical

center featuring advanced cancer treatment technology and a new healing environment, which includes the first Varian Medical Systems’ TrueBeam STx™ radiotherapy/ radiosurgery system in San Diego.

The construction was part of a design-build development by Makena Medical. “In my 30-plus years of construction, I have used many types of contracts,” states Douglas E. Barnhart, manager of Makena Medical Buildings and past president of AGC National. “ConsensusDocs offered a straightforward and fair contract document set.”

Unknown Site Conditions: In general, contractors should make sure, whenever possible, that the risk of unknown site conditions does not fall to them. If that risk shifts from the owner to the contractor, the contractor needs to carefully evaluate the potential liability that could arise from such unknowns, and the proposed schedule and pricing should reflect those unknown risks as much as possible. For example, generally contractors should not take on the role of site and site document inspectors. Good contracts hold a contractor liable for only what can be observed by a reasonable inspection of a project site’s surface conditions and relevant documents provided by the owner, but no independent subsurface exploration is expected of the contractor. If the contract requires a review and comparison of contract documents to uncover errors, or to verify site conditions or reports on site conditions, the contractor is undertaking a risk that is likely not desirable and possibly not insurable.

For example, if a provision states that “the contractor has reviewed the site and applicable documents and is satisfied that the contractor’s pricing is sufficient to cover all work, including all foreseen or unforeseen risks, including any concealed or subsurface variances,” the contractor

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is likely taking on an unnecessary and burdensome risk, especially in regard to the italicized language. In general, the Owner is in the best position to know or have actual site conditions documented, and to bear the risk of unknown variances. Most owners do not want contractors including sizeable contingencies in their bids to cover unknown site conditions, and many contractors are not in the best position to assume those risks.

The ConsensusDocs 200 Owner and Constructor Agreement provides a good example of fair risk allocation.

Order of Precedence: It is critical to have an established order in which contract documents will be given weight in the event of a conflict. As a project progresses, there can be changes made along the way that necessarily create conflicting contract documents. Such documents can include supplemental instructions and responses to RFI’s, and even verbal directives from architects, engineers or owner representatives. The “golden rule” (He who has the gold, makes the rules.) is not a best practice. Owners and contractors should be mindful and insist that any change in scope be memorialized in a written change order. ConsensusDocs contracts provide a clear order for interpreting conflicting documents, which helps avoid unnecessary delay and expense. In general, the most recent contract documents govern with change orders being paramount. The thought being that while the parties may have understood the project needs at the time of contract signing, project developments, whether they be based on site specifics, evolving owner needs, revised designs, financial considerations or other issues, sometimes project needs must change. If that is the case, it is important that the change order detail those project changes and any related effects on price or schedule. Change orders should always be in writing and signed by the relevant parties.

As such, in the event of a dispute, the more recent change order should be given more weight than a conflicting provision in a contract that was signed in the past.

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The ConsensusDocs project history Web page includes a project from Michigan State University’s Shaw Hall project. Jack Mumma, MSU’s construction contract administrator comments, “We believe it is the only full IPD agreement signed by a public university.” Integrated project delivery (IPD) is a project where the owner, contractor and design professional all sign the same agreement. MSU chose to use the ConsensusDocs 300 Standard Tri-Party Agreement for IPD for the project, which achieved LEED gold certification.

Communication, Dispute Mitigation and Resolution: The best time to determine the process for addressing and resolving issues and disputes is before they arise. ConsensusDocs provides a multi-tiered process to address issues, and focuses on open and direct communications. Rather than the traditional silo and funnel approach to project communications, ConsensusDocs emphasizes direct communications at the first instance, with a tiered acceleration process. This provides for quicker resolution of issues before they escalate into intractable claims. All parties benefit from clear, direct and efficient issue resolution through the minimization of misunderstandings, miscommunications, unnecessary meetings, delays and disruptions.

Temecula Valley Hospital in Temecula, Calif., is another example of a successful ConsensusDocs-based project. The ConsensusDocs 300 TriParty Agreement for Integrated Project Delivery (IPD) was used with seven signers including owner, designer, contractor, mechanical/plumbing, electrical, fire protection and drywall trades. The 180,000-squre-foot, 140 bed, acute care hospital features all private rooms and a 20-bed intensive care unit, as well as six high-tech surgical suites, digital imaging and an advanced electronic clinical information system. “The owner wanted a team that could deliver a hospital that was 30 percent less in cost and 30 percent more efficient than any systems best performing facility than the average California hospital,” states Steven Wilson

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Feature Using ASA’s New Subcontract Documents Suite

by Eric Travers, Esq. Unfortunately, it is all too common for construction subcontractors to be asked to sign subcontracts that are not fair or reasonable. The worst offenders are the typical ‘proprietary’ subcontracts that general contractors prepare. Such subcontracts often try to offload risks on numerous issues (payment terms, indemnity, insurance, etc.) onto subcontractors, even when such risks are more naturally borne by others. Many of these clauses are even more significant because they transfer risks that the subcontractor may not have accounted for when it priced the work for its bid.

The question for subcontractors becomes what to do about this.

While many subcontractors are hesitant to stand up for themselves out of fear of losing a job, prudent subcontractors realize that they have leverage and the right to negotiate more favorable terms with their customers. Subcontractors must (1) educate themselves on trends involving the most common riskshifting clauses as part of an overall risk management strategy; and (2) look for ways to streamline their review of proposed contract language to ensure that the subcontracts they sign are fair, reasonable, and consistent with their expectations.

In this regard, ASA provides its members with some tremendous resources for risk management education and contract negotiations.

Some of the most useful of these tools are compiled together in ASA’s new Subcontract Documents Suite 2016. This suite, which is a no-cost

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benefit for ASA members and is available via the ASA Web site, includes a wealth of documents that give subcontractors what Brian Cubbage, the ASA Task Force on Contract Documents chair, called the “ammunition to fight back” against unfair subcontract terms. These documents include the: • ASA Subcontractor Bid Proposal; • ASA Subcontract Addendum; • ASA Short-Form Subcontract Addendum • ASA Wrap-up Insurance Subcontract Conditions; and • ASA Wrap-up Insurance Bid Conditions.

This article will focus on the subcontract addenda, particularly the full form, to show how and why ASA’s efforts in preparing these documents give its members a tremendous negotiation and risk management tool to strengthen your business and bottom line.

ASA Subcontract Addendum (Full and Short-Form) The suite includes both a short-form subcontract addendum for smaller projects, and a full subcontract addendum that ASA members can use to modify the terms of a general contractor’s subcontract to create more balanced contract language.

The subcontract addenda are drafted to redress most common risk-shifting clauses to better reflect subcontractor’s interests. To best

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use them, subcontractors should begin by prioritizing their position on key issues. Doing this can help you create a negotiation hierarchy of the issues (1) of most concern that you cannot or will not move on (the “killer clauses”); (2) that are important but may negotiable; and (3) that are not applicable or important to you.

To start this analysis you don’t even need to have a subcontract in front of you. Why? Each paragraph of the subcontract addenda addresses key areas of importance that ASA has already flagged. On its own, the ASA Subcontract Addendum in the suite provides a roadmap to not only highlight the most common clauses of concern, but gives sample language to consider with your counsel as a way to negate the risk consistent with how you have ranked the issues.

Read the Addendum, Understand and Rank the ‘Killer Clauses’ The ASA Subcontract Addendum addressed 25 specific risk areas. All 25 paragraphs raise issues that must be considered by prudent subcontractors as areas that can significantly increase the risk and cost of doing business. The following table reviews just seven of those risks to illustrate how you can use the ASA addenda to flag and discuss issues internally and with your counsel.

Obviously, not all of the 25 areas addressed in the ASA Subcontract Addendum may be a “killer” to your business, but they need to be

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Who Is Managing Your Contract Risks? continued from pg. 11 Associate DBIA™, principal at HMC Architects. “The owner also wanted it to be the fastest to market from

design to completion, and assembled a highly collaborative team and established a risk/reward contract using the ConsensusDocs 300, which would guarantee all signers labor cost, but require a guaranteed price by putting our profits into one pool.

This arrangement would insure collaboration and innovation from all signers to meet the requirements of budget and schedule while adhering to the owners establish conditions of satisfaction.”

An agreement with provisions that shift risk inappropriately can negatively impact project price, schedule, project team and overall success. These unwanted consequences can be mitigated

considered. However, the addendum helps subcontractors spot issues that your business and legal team should consider when determining: (1) what clauses have the potential to significantly shift risks that you did not expect or account for in your bid price; (2) whether the impact of such clauses is worth taking a stand on; and (3) how you wish to handle the clauses when (a) preparing your bid (e.g., bid conditions, build in a risk premium) and (b) negotiating your contract if presented with a subcontract that is not consistent with bid expectations or conditions.

Conclusion Effective subcontractors read their subcontracts and know what they say. They also understand that when

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by using a contract that puts responsibility on the party in the best position to manage the risk. In the end, by thoroughly vetting a contract before signing, contractors will better understand their roles, responsibilities and potential liabilities. ConsensusDocs are the first and only consensus standard contracts written by and for designers, owners, contractors, subcontractors and sureties, and puts the project goals as the baseline. Recognizing that every project is unique, ConsensusDocs are Microsoft Word®-based for ease of modification. A fair and balanced contract helps contractors procure the best team and the best pricing to provide better project results; and, better project results facilitate future business.

Carrie L. Ciliberto, Esq., is senior director and counsel of Contracts and Construction Law for the Associated General Contractors of America (AGC), and deputy executive director for ConsensusDocs—the only standard contracts written by a coalition of 40-plus design and construction industry organizations.

Ciliberto was the principal of Ciliberto & Associates, LLC, providing natural resources, environmental and water law counsel for 10-plus years. She is licensed in Colorado, D.C., and federal courts including the U.S. Supreme Court. She frequently speaks at industry events around the nation and has authored numerous industry articles. This article originally appeared in the September-October 2015 edition of Design Cost Data and is reprinted with permission.

they sign on the dotted line they are committing to do what the agreement requires. In a world of increasingly unfair subcontracts, prudent subcontractors will try to both understand the most common riskshifting clauses and how they impact their work, and establish a framework within which they can negotiate key terms consistent with their priorities.

The subcontract addenda in the ASA Subcontract Documents Suite 2016 do not replace the need for subcontractors to independently review the clauses internally and with construction counsel licensed in their state. But they are an integral tool ASA members can use to more quickly and cost-efficiently review contracts, and set themselves up to negotiate from a position of strength.

Eric Travers, Esq., is a director with Kegler, Brown, Hill & Ritter, Columbus, Ohio, practicing primarily in the firm’s Construction Law area, representing subcontractors, general contractors, owners, suppliers, architects, sureties, construction managers, and others. Kegler, Brown, Hill & Ritter, serves as legal counsel for ASA. Travers can be reached at (614) 4625473 or etravers@keglerbrown.com.

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13

CLAUSE

PAY IF PAID / CONTINGENT PAYMENT

ADVANCE CONTRACTUAL WAIVER OF LIEN AND BOND RIGHTS

WHAT IT DOES AND WHY IS THIS A POTENTIAL PROBLEM

Under general contract principles, a party cannot disclaim contractual responsibility on the basis of actions by a 3rd party. The risk of owner non-payment or insolvency belongs to the prime contractor.

Pay-if-paid (aka “contingent payment”) clauses shift that risk to the subcontractor by tying its right to work properly completed to the actions (and solvency) of the owner.

In many states lien rights can be waived in advance, before even setting foot on the project site.

Subcontract clauses that contain “no lien” provisions may be enforceable in your state. If they are, you have lost valuable security for your work.

A “no damage for delay” clause typically provides that if its work is delayed for any reason not its fault, it is entitled to a time extension but not additional compensation.

NO DAMAGE FOR DELAY

Some states enforce these clauses. Some prohibit them. Because time is money, if you are working in a state that enforces these clauses, you can suffer a severe financial blow if your time on the job is extended, even if the delay is not your fault.

UNCONDITIONAL LIEN WAIVERS BEFORE PAYMENT

Unconditional lien waivers may apply as soon as you sign the document, regardless of whether you received payment. If you are asked to sign an unconditional lien waiver before receiving payment, you could be found to have given up your right to a lien for that work even if the promised payment never comes.

FLOW-DOWN CLAUSES

Flow-down provisions in subcontracts are common clauses that incorporate the prime contract into the subcontract and “flow down” the prime contractor’s obligations into the subcontract, to bind the subcontractor to the prime contractor as the prime contractor is bound to the owner.

OSHA FINES AND SAFETY

Most proprietary subcontracts may, either separately or through a broad indemnification clause, seek to pass through safety responsibility on the subcontractor, including indemnity for fines from OSHA.

DEFENSE, INDEMNITY, HOLD HARMLESS CLAUSES

Many proprietary form subcontracts include “indemnification” clauses providing that the sub must “defend,” “indemnify” or otherwise “hold harmless” the upper tier for damages alleged to be caused by the sub.

Many states have “antiindemnity” statutes that void broad-form indemnity provisions that purport to require a party to indemnify another for damages that arise out of the indemnified party’s negligence.

COMMENTARY / TIPS

ASA ADDENDA

• On public jobs or jobs with a reliable and financially stable owner, a pay-if-paid clause may be less of a concern or ‘deal killer’ due to the lessened risk of owner nonpayment.

• In many states a “pay-if-paid” clause will not prohibit your ability to file/record a mechanic’s lien. But even in those states it may affect your ability to foreclose a lien or bond claim. Consultation with a construction attorney in the state(s) where you work is advised to determine the level of risk you may face if you agree to these clauses.

§ 5 of the ASA Subcontract Addendum provides a mechanism to determine when payments are due, and expressly disclaims the use of pay- if-paid clauses.

• A waiver of lien rights may be less concerning if the owner or general contractor has a payment bond in place. But if not, the clause takes away one of the most important security tools a subcontractors has to ensure payment for its work.

• In some states contract provisions that purport to waive rights under a surety bond are void and unenforceable. But such provisions may be enforceable in other states.

Addendum §22 gives subs language that seeks to nullify any subcontract term that attempts to waive lien and bond rights.

• Knowing whether your state enforces or prohibits no-damages-for-delay clauses is important. It could make the difference between this being a “killer” clause or a nonissue.

• But even states that enforce no-damages-for-delay clauses typically have a number of exceptions to enforceability. But it is better to simply avoid the clause than rely on an exception.

Addendum §8 deals with scheduling, and includes broad language designed to preserve your right to recover damages for delays.

• Because of the harsh results, unless you have absolute confidence your customer will make the payment, unconditional waivers should be considered no different than advance waivers of liens.

• A reasonable compromise if asked to agree to this is to propose giving a conditional lien waiver in advance, followed by a “trailing” unconditional lien waiver the following pay period.

Addendum §22 is designed to preserve a sub’s lien rights.

• This seemingly innocuous clause can have grave consequences to subcontractors, including potentially subrogating mechanic’s lien rights of subcontractors by binding them to a prime contractor’s lien subrogation agreement.

• You must request and review all “upstream” documents incorporated into your contract and ensure that your subcontract contains clear language establishing an order of precedence to apply to any addendum that contains your key or nonnegotiable contract terms.

• In an era of heightened OSHA enforcement and the announcement of a dramatically increased schedule of fines for OSHA violations, subcontractors must pay attention to the risks of paying for their customers’ prior history with OSHA and/or possibly accepting responsibility for site safety that was the general contractor’s responsibility.

• If the indemnity clause you are asked to sign requires you to “defend” and indemnify your customer regardless of fault, even in states that otherwise void broad-form indemnity agreements you may still be found to have agreed to pay for your customer’s legal and other defense costs before it is proven that you caused the damage. Though you may not be required to indemnify for a judgment for damages you didn’t cause, paying the freight on the defense costs can hurt. Big time.

• Ensure that indemnity provisions you are signing are insurable by sending your insurance agent the actual indemnity provisions of the contract and ask your agent to affirm that the risk is insured.

Addendum § 1 clarifies the order of precedence regarding what terms prevail if there is a conflict.

Addendum §3 makes any flow-down obligations mutual by binding the contractor to you to the same extent the owner would be bound to it under the prime contract.

Besides the indemnification restriction in §143 of the Addendum (discussed below) §18 reasonably limits a sub’s responsibility for safety to what it contractually agreed to and gives an argument against paying enhanced penalties if assessed due to the upper tier’s history.

Addendum §13 mirrors the insurable (and reasonable) indemnification language in the ConsensusDocs and AIA subcontract and restricts the subcontractors’s liability to the risks in those widely accepted trade contracts.

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Feature

Sleeper Subcontract Clauses That Should Keep Subcontractors Up at Night

by Daniel F. McLennon Subcontracts typically contain numerous “boilerplate” and other clauses that many subcontractors overlook and fail to negotiate before contract’s signing. These clauses should leave a nagging feeling in the back of subcontractors’ minds, which, quite reasonably as explained below, should be disturbing to their sleep.

Conversely, the subcontractor who properly negotiates these clauses may sleep well at night.

Additional Insured Endorsements Clauses A serious potential problem is a mismatch between the additional insured endorsement the subcontractor actually provides to the general contractor versus the endorsement called for by the subcontract’s insurance requirements.

This problem is a “sleeper,” subtle one, because the subcontractor may not be aware of the mismatch before it is too late to fix.

For example, subcontract forms typically call for the CG 2010 11 85 AIE “or equivalent.” Here is a sample clause: Subcontractor shall provide to Contractor before commencing any work under this Agreement Certificates of Insurance accompanied by endorsements duly signed by authorized insurance company personnel implementing the

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coverages required by this Agreement. Such endorsements shall: • identify specifically all Additional Insureds; • be written on unmodified ISO form CG2010 11 85, or CG2010 10 01 in conjunction with CG2037 10 01 or its equivalent for general liability insurance; • set forth any Deductibles and Self Insured Retentions; • stipulate that the insurance provided to Additional Insureds shall apply as primary insurance and that any other insurance carried by Additional Insureds will be excess only and will not contribute with this insurance.

The CG 2010 11 85 version was issued in November 1985 by the Insurance Services Office, Inc. The ISO versions issued in 2001—the CG 2010 10 01 and CG 2037 10 01 AIE forms— when used together, are generally considered “equivalent” to the 1985 version AIE. On the other hand, however, the versions ISO issued in April 2013— CG 2010 04 13 together with the CG 2037 04 13—are often assumed by subcontractors and their brokers to be “equivalent” because they have similar form numbers, but they are not, and providing these AIE’s—even if accepted by the general contractor—may expose the

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subcontractor to huge uninsured, breach of contract exposure. That is, the general contractor requires the subcontractor to provide additional insured coverage that would cover the general contractor’s own active negligence in causing injury or property damage (by calling for the 1985 version AIE), but in many states the 2013 AIE forms provide coverage for the general contractor’s passive but not active negligence. Thus, if the subcontractor has provided the 2013 AIE’s and the general contractor is found actively at fault for causing injury or property damage, the subcontractor itself may have to pay to the general contractor amounts for which the general contractor is liable to injured third parties, along with the general contractor’s costs to defend against the injured persons’ claims.

This happens because the subcontractor has breached the subcontract by failing to provide insurance to the general contractor that would have paid for the general contractor’s defense and liability.

Since the insurance is not there, the subcontractor itself must step up to provide this protection.

Subcontractors absolutely must ensure that they provide at least the exact AIE’s required by subcontracts, or modify subcontracts to specify that level of insurance the subcontractor is willing and able to provide.

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Design Responsibility Clauses The owner provides detailed plans and specifications, and the subcontractor reasonably believes it understands the labor and materials needed to perform its scope of work for the project. Indeed, the law implies a warranty by the owner that the plans are complete and accurate.

If they are not, and revised plans cause the subcontractor to incur unanticipated costs, the subcontractor will be entitled to recover those extra costs from the owner.

However, this “sleeper” clause removes that warranty and places on the subcontractor responsibility to ensure that the design is complete, is constructible, and will comply with building codes. It does this “shifting” by making the subcontractor responsible for failing to call design problems, whether known or unknown, to the owner’s attention before signing the subcontract. In effect, the subcontractor becomes the guarantor of the plans and specifications in place of the owner.

Here is a sample clause: Contract Documents Complete.

The Subcontractor represents and warrants that it has received, reviewed and carefully examined all of the documents which make up the Contract Documents, including, without limitation, the Drawings and Specifications for or related to the Work, and the Subcontractor has found them in all respects to be reasonably complete, accurate, adequate, consistent, coordinated and sufficient for the Work. The Subcontractor, after diligent and careful review of the Contract Documents, has found no significant missing elements, which would result in a change in the Contract Price or a change in its schedule for

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performance of the Work or a change in Contract Time (as hereinafter defined). The Subcontractor hereby acknowledges and agrees that neither Owner nor the Construction Manager represents or warrants that the Contract Documents are complete, accurate, adequate, consistent, coordinated or sufficient for the Work.

Under such a clause, for example, an electrical subcontractor could be required to bear the cost of the architect’s redrawing mechanical plans to resolve a conflict between plumbing pipes and electrical conduit. The subcontractor also could be forced to bear any added cost incurred to implement the redrawn plans.

Subcontractors should strike such clauses when negotiating subcontracts, or, at a minimum, limit the subcontractor’s responsibility only to calling out problems in the plans and specifications that the subcontractor in the exercise of reasonable diligence actually discovers.

Protection of the Work Clauses This “sleeper” clause lies in wait to spring to life and cause liability to a subcontractor for damage to its work that the subcontractor was powerless to prevent and did not cause. That is, this clause makes the subcontractor repair or replace its work damaged by others even though the subcontractor does not control the job site and cannot prevent others working nearby from causing the damage. Here is a sample clause: Subcontractor shall cover, crate, barricade or otherwise secure and protect their work and shall assume full responsibility for the security and condition thereof until

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completion of the entire project and final acceptance by Owner and Contractor. Subcontractor shall replace at its own cost any work damaged by any person, cause, or event whatsoever. Subcontractor shall take the necessary precautions to protect their tools, equipment and other property and shall be solely responsible or theft, loss or damage thereto.

Unfairly, this clause shifts from the general contractor—who does control the site—to the subcontractor—who does not—the burden and cost to repair or replace damaged work and then seek reimbursement from the party that caused the damage. This burden properly should fall on the general contractor who controls the site. Such clauses should be stricken in their entirety, or at a minimum changed to make the general contractor responsible to pay to restore work damaged by others.

Forum-Selection Clauses If a subcontractor lets this “sleeper” clause remain in his subcontract, he might wake up to find himself litigating a claim in a state hundreds or even thousands of miles from the project site. In Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, 134 S. Ct. 568 (2013), a subcontractor located in Texas working on a project in Texas was forced to litigate in Virginia against the general contractor running the Texas project for extras incurred on the Texas project because the general contractor’s subcontract included a forum-selection clause which stated that all disputes between the parties “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.”

The U.S. Supreme Court enforced this forum-selection clause despite

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that essentially all the witnesses, documents, and physical evidence were in Texas, and forcing the subcontractor to litigate in Virginia potentially would make the costs of litigation prohibitive. Subcontractors should be deeply concerned about the costs of litigating in a different state— including hiring out-of-state counsel and travel costs for local counsel and witnesses—and should modify such clauses to name the project locale as the jurisdiction for any claims arbitration or litigation.

Venue Clauses Like forum-selection clauses, venue-selection clauses can cause prohibitive extra litigation costs for subcontractors. For example, the cost of travel and lodging for counsel and witnesses for trial in Los Angeles for claims on a San Francisco project can be as burdensome as litigating across state lines.

Here is a sample clause: Any action between the parties arising from this Agreement shall be brought in the State Courts located in the State of California, County of __________, and the parties hereby waive any forum non conveniens grounds for removal from such jurisdiction.

Like forum-selection clauses, venue clauses should be modified to name the project’s location as the venue for any action or proceeding.

Choice of Laws Clauses Often found with forum- and venueselection clauses, “choice of laws” provisions are “sleepers” because, unless the subcontractor is expert at the laws of the chosen state, it may be in for a rude awakening if a claim governed by the contract arises. Laws affecting construction

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vary widely from state to state, and a provision unenforceable in the subcontractor’s home state may well be enforceable in the law of the state chosen by the choice-of-laws provision. For example, in California a general contractor may not force a subcontractor to indemnify or defend the general contractor for the general contractor’s own active negligence, but many other states do not have such prohibitions.

Here is a sample choice of laws provision: This Agreement shall be construed under and governed by the laws of the State of _______, without regard to the conflict-of-laws or choice-oflaws principles of such state. Any provision of this Agreement that is determined by a court to be invalid or unenforceable shall be invalid or unenforceable only to the extent of such determination and shall not invalidate or otherwise render ineffective any other provision of this Agreement.

If the state of the project does not have laws making that state’s law apply in spite of choice of laws provisions—like California does— subcontractors will want to delete such clauses, or, modify them to state that the law of the project’s location shall apply in any action or proceeding.

Conclusion Subcontractors will sleep better at night if they pay attention to and negotiate seemingly innocuous clauses to remove their hidden dangers, or at least they will have one less thing to lie awake worrying about.

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Daniel F. McLennon is a partner in the San Francisco, Calif.-based law firm of Smith, Currie & Hancock LLP. He has been in private practice since 1986, following a yearlong judicial clerkship with Justice Bill Cannon of the 14th District Court of Appeals in Houston. Before joining Smith Currie, he was managing partner of McLennon Law Corporation, which merged with Smith Currie in January 2016. McLennon’s 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. He practices in the areas of commercial and construction litigation. This includes prosecution and defense of cases in the specific subject areas of disciplinary proceedings, mechanic’s liens and stop notices, partnership disputes, payment issues under construction contracts, including acceleration and delay claims, bond claims, commercial landlordtenant disputes, construction defect actions, contract disputes, indemnity among contractors, insurance bad faith, unfair business practices, and business torts. McLennon can be reached at (415) 394-6688 or dfmclennon@smithcurrie.com.

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Legally Speaking

Contract Negotiation: The Art of the Subcontract

by Joe Katz This month’s theme is “Getting Better Contracts.” No doubt, contracts are legal documents where every word—every comma—is critical.

Much of my time is spent reviewing, modifying and negotiating contracts (and, of course, litigating them).

Indeed, one of the best values of membership in the ASA community is its detail-oriented focus on subcontract language, and the toolbox of resources it has created for negotiating fairer clauses.

From stickers to talking points to white papers, ASA has long-ago appreciated that the subcontract is the key to a subcontractor’s success.

I don’t doubt that this month’s magazine is chock-full of valuable tips and pointers with regard to avoiding the legal pitfalls inherent in an unfair subcontract.

I wanted to take the opportunity to focus on a slightly different approach to the same goal of “getting better contracts.” But first, what defines a better contract? Indeed, what is a contract? I believe a deeper understanding of what a contract represents will intuitively point to the path of achieving better and more successful contracts.

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A Contract Is a Relationship—Better Relationships = Better Contracts Ultimately, a contract defines the relationship between two parties. It identifies who is responsible to do what when, and the consequences of failure. However, words on a piece of paper (often, many indecipherable 8-point font words crammed onto many pieces of paper) can never replace a personal, human relationship. The first step to a better contract, then, is a better personal relationship.

Relationships begin by bonding.

Bonds are built, and then strengthened over time. It begins with just one link which leads to a conversation, then another, and another. Much like a bridge, built pier by pier, will eventually reach the other side, so too will a chain of links led from one individual to another.

And the more often you travel that bridge, the more familiar you will become with it, its nuances, bumps and turns. After enough travel, the initial bond has become a shared set of experiences—a real relationship.

People naturally want to work with those with whom they have a relationship. Negotiating, then, with someone with whom you have

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a relationship with becomes not so much about the negotiation at hand, but how the negotiation can further the relationship. Incredibly, the negotiation becomes yet another shared experience in the relationship, building and strengthening the relationship for the next negotiation!

Recently, I was involved in a contentious piece of litigation, representing several subcontractors in a payment bond action on a project which was long-delayed and otherwise mismanaged. The owner asserted a large liquidated damages penalty, and the GC generically passed them down to its subcontractors, without any analysis as to which particular subs may have contributed to delay. The mud-slinging was fast and furious, with no clear end in sight. However, one day I received a call from one of my subcontractor clients, asking my opinion of a very fair offer which was made directly to him by the GC’s project executive. I asked him how it came to be that such a fair, first offer was made directly to him. What he told me blew my mind— he indicated that he had at least 10 previous jobs with this GC, and that throughout the four months or so of litigation to date, he had spoken weekly with the GC project executive, whether to ask for an update, brainstorm on ways to move forward, or even just to check in and say hello.

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For my client, the litigation was a necessary evil, but it did not stand in the way of maintaining his relationship with the GC. On the contrary, he used the opportunity to strengthen that relationship, by demonstrating that even contentious litigation was just a mirage of lawyerspeak, and that in reality, their relationship remained rock strong.

The GC executive reciprocated, by making it his business to resolve this particular piece of the litigation early and on very fair terms for this client.

Creating Shared Value In Ronald Shapiro’s The Power of Nice, the concept of shared value is expertly explained—the best way to get what you want is to help the other side get what they want. And indeed, a real relationship is more about giving than taking. When that sentiment becomes mutual, amazing things can happen.

A subcontractor, by its very definition, is a support role. You are supporting the general contractor in meeting its obligations to the owner.

True, you may need the work to make payroll, but that does not diminish the GC’s very real need for your trade’s participation on the job. Generally, a GC’s needs are fairly transparent— quality trade work, adherence to the schedule, timely notification of issues, problems or delays, and working well with both its employees and other subcontractors are some of the obvious ones. If your corporate culture is how you and your team can better serve the general contractor, you will be a valuable and soughtafter asset on any job.

This is not to say that you should be taken advantage of, or sign a subcontract which makes you part bank, financing the job, part insurance company, insuring against all potential risks no matter how remote, and part casino, betting the odds of actual payment. On the contrary, in the context of a real

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relationship, when you stand up and object to the boilerplate subcontract, your objections are viewed in the context of the greater relationship.

If you have otherwise governed yourself by how you can make this and previous projects a booming success while making the GC look terrific in the process, then you will see that sentiment reciprocated right back to you.

Incredibly, Harvard researchers have recently discovered that sharing food during a negotiation—in the case study, eating chips and salsa from a shared bowl instead of individual portions—created a more relaxed and familiar environment, with the negotiators becoming more focused on creating shared value rather than competitive negotiation.

Not every subcontract needs to be negotiated over chips and salsa, but that research can still be harnessed to your advantage— negotiating within the context of a relationship will engender far greater goodwill than outside of one. Importantly, the process of relationship-building begins from the very first encounter, whether it be a cold-call, an introduction by a mutual acquaintance, or submitting a bid, and it should be the focus of all your future interactions. That way, by the time you are negotiating a subcontract, you have formed a base relationship to build from.

I know from my own practice negotiating subcontracts for my clients, if I have a relationship with the attorney on the other side it will be an entirely different discussion than if it is the first time we are speaking. The same is true of our respective clients—if the clients have either had a previous (positive) relationship, or if a solid foundation to one was begun even if this is the first time they will be working together, the general contractor will be open to ways it can modify its “no changes will be tolerated” subcontract to level the playing field.

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Cultivating real relationships with those in a position to give you work will certainly be to your advantage. Indeed, building and maintaining relationships with those you would like to do business with, especially repeat business, is a critical component of deal-making.

The contract that is formed for that work, then, becomes a reflection of the genuine relationship and shared goals between your two organizations.

Bear in mind as well that as a subcontractor, you are not simply focused on upstream relationships with general contractors, but also on downstream relationships with sub-subcontractors and suppliers.

The very same analysis applies with them as well—your success depends on your ability to marshal a strong team upon which you can rely upon to get your scope completed, on time and on budget. A robust relationship with those you need to support you in your mission will engender better contracts, better pricing, and most importantly, better motivation to see you succeed.

Joe Katz is a senior associate at the construction litigation firm Huddles Jones Sorteberg & Dachille, P.C. in Columbia, Md. Katz regularly represents subcontractors and suppliers on federal, state and municipal construction projects and has specialized expertise in guiding his clients through the various regulatory requirements unique to government contracting. He also frequently represents clients involved in private sector construction, including housing, commercial, retail and industrial projects. He is experienced in all facets of construction litigation, including mechanic’s liens, Miller Act payment bond claims, arbitration, and civil actions in both state and federal court. Katz can be reached at katz@constructionlaw.com, or (410) 720-0072.

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ASA/FASA Calendar

Coming Up

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• H-1 Visas: Improving the Quality of Life for Your Employees • Immigration 101: Strategies for Employing Foreign Workers • Legally Speaking

Look for your issue in July.

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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 or places is 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 service mark registered by CNA Financial Corporation with the United States Patent and Trademark Office. Certain CNA Financial Corporation subsidiaries use the “CNA” service mark in connection with insurance underwriting and claims activities. Copyright © 2016 CNA. All rights reserved.