The Contractor's Compass March 2017

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ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

MARCH 2017

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What Subcontractors Need to Know About Getting Paid on P3 Projects Payment Issues and Public-private Partnerships Protecting Your Payment Rights on Public-Private Partnerships Protect Your Rights: Pay-if-Paid Clauses The Right Way to Stop Work: A Subcontractor’s Nuclear Option, or Making a Bad Situation Worse?

Legally Speaking— Holding the Surety’s Feet to the Fire

SAVE THE DATE! February 28 – March 3, 2018

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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.

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).

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

ADVERTISING Interested in advertising? Contact Richard Bright at (703) 684-3450 or rbright@ASA-hq.com 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.

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.

LAYOUT Angela M Roe angelamroe@gmail.com © 2017 Foundation of the American Subcontractors Association, Inc.

March 2017

Features What Subcontractors Need to Know About.......................................8 Getting Paid on P3 Projects

by Thomas R. Yocum, Esq., and Patrick M. O’Neill, Esq.

Payment Issues and Public-Private Partnerships...........................10

by Mark A. Cobb

Protect Your Rights: Pay-If-Paid Clauses..........................................12

by Eric Travers, Esq.

Protecting Your Payment Rights on...................................................11 Public-Private Partnerships

by American Subcontractors Association

The Right to Stop Work: A Subcontractor’s.......................................15 Nuclear Option, or Making a Bad Situation Worse?

by Joseph L. Katz, Esq.

Departments CONTRACTOR COMMUNITY..... ........................................................... 4 LEGALLY SPEAKING............................................................................... 17 Holding the Surety’s Feet to the Fire—Recent Cases Confirm Subcontractors’ Rights to Maintain Miller Act and Little Miller Act Suits Despite Subcontract Pay-If-Paid Clauses and Prime Contract Dispute Procedures

by Brian S. Wood

Quick Reference ASA/FASA CALENDAR...........................................................................19 COMING UP............................................................................................. 19

Contractor Community Congress Begins Work to Force Withdrawal of Regulations Both the U.S. House of Representatives and Senate have started a series of votes to force withdrawal of controversial rules issued in late 2016. Congress is using the Congressional Review Act, a mid-1990s law that allows it to review and reject any new regulation within 60 legislative days of its final publication—that is, final rules issued after mid-June 2016.

Of particular interest to many ASA members is H.J. Res. 37, which would force the withdrawal of the of the “Fair Pay-Safe Workplace” rule, issued by the Federal Acquisition Regulatory Council on Aug. 26, 2016. That rule requires federal contractors and subcontractors to disclose labor violations when bidding and performing on federal contracts. The rule, which took effect on Oct. 25, 2016, already is subject to an injunction issued by the U.S. District Court for the Eastern District of Texas on Oct. 24, 2016; however, that injunction did not apply to the paycheck transparency requirements in the rule.

Because Senate rules require at least 10 hours of debate on each rule considered under the CRA, the Senate could consider as a few as 10 rules. Most of the rules under consideration for CRA review involve energy, environmental and financial issues.

Federal Agencies Begin to Publish Rules Subject to Regulatory Freeze In response to a memorandum requiring federal agencies to delay the effective date of final rules published before but effective after Jan. 20, 2017, federal agencies have started to

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announce delays in the effective dates of affected rules. Among the delayed rules of most interest to ASA members are:

• Federal Motor Carrier Safety

Administration’s final rule, published on Dec. 8, 2016, establishing comprehensive national minimum training standards for entry-level commercial truck operators seeking to obtain a commercial driver’s license or certain endorsements.

• Occupational Safety and Health Administration’s final rule, published on Jan. 9, 2017, reducing the eight-hour permissible exposure limit to beryllium from the previous level of 2.0 micrograms per cubic meter (2.0 mg/m3) to 0.2 micrograms per cubic meter (0.2 mg/m3) for general industry, construction and shipyards.

• Office of Energy Efficiency and Renewable Energy, Department of Energy’s final rule, published on Jan. 10, 2017, that implements provisions in the Energy Conservation and Production Act that require DOE to update the baseline federal energy efficiency performance standards for the construction of new federal lowrise residential buildings one year after the date of approval of each subsequent update of the International Energy Conservation Code.

The rules were delayed until at least March 21, 2017. However, after they are reviewed by Trump Administration officials, they may be subject to further action. “Before you assume a new rule is impacted by the regulatory freeze, be sure you know the difference between the effective date and the compliance

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date of the rule,” said ASA Chief Advocacy Officer E. Colette Nelson. She used the OSHA rule on crystalline silica as an example, pointing out that the effective date of the rule was June 23, 2016, even though the compliance date for construction is June 23, 2017. Thus, the regulatory freeze does not apply to that rule.

Trump Targets OverRegulation with Executive Order Making good on a campaign promise, President Donald Trump, on Jan. 30, signed an executive order targeting federal regulations. The “Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs” requires federal agencies to withdraw two regulations for each new regulation they issue.

Under the directive, federal agencies will self-identify which regulations to cut based on their estimates of the cost. The process of revoking old rules apparently does not have to take place concurrently with the proposal of a new rule. Ultimately, the White House will make the decision on which regulations to withdraw. The new executive order does not apply to the military or national security. It also does not apply to regulations that are mandated by law.

In a webinar conducted in December 2016, ASA Chief Advocacy Officer E. Colette Nelson used federal regulations governing payment to subcontractors as an example of how the new process might work. She said, “In the Congressional mandate area, the Federal Acquisition Regulatory Council cannot revoke the rule requiring federal prime construction prime contractors to pay their subcontractors within seven days of receiving payment from the government. Indeed, almost all of the

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regulation is word for word from the Prompt Payment Act Amendments of 1988. On the other hand, the FAR Council could revoke the regulation prohibiting routine retainage on federal construction. That rule is not statutorily-based—other than in the broad regulatory authority granted to the FAR Council. Instead, it was initiated by a policy letter issued in 1983. It could be gone with a simple directive and a regulatory revocation process.”

Nelson added, “ASA will closely monitor and provide input both on new proposed regulations and those proposed for revocation.”

New Guide Explains Value of Surety Bonds In a new guide developed for government policymakers, The Surety & Fidelity Association of America in partnership with Governing Institute explains the value of “using surety and fidelity bonds to protect taxpayers, empower businesses and enable innovation.” A Government Leader’s Guide to Bonds is intended to serve as a powerful education tool for public officials at all levels, from Congress to local school boards, from the GSA to local procuring agencies. According to the Governing Institute, “Contract commercial and fidelity bonds each serve a critical risk management and public policy function” and are “protection that government entities and businesses shouldn’t by-pass—the potential consequences are just too great to shirk this responsibility.” The new guide explains: “Contract surety bonds, which include performance and payment bonds, help provide assurance to the public, subcontractors and suppliers that companies and individuals will meet their performance and financial obligations when they undertake

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a project, and that taxpayers and consumers aren’t on the hook financially in the event they fail to do so.”

The guide also states: “The payment bond guarantees that covered subcontractors, suppliers and laborers on the job will get paid. A payment bond often is the subcontractor’s and supplier’s sole recourse for non-payment on public projects. A mechanic’s lien generally cannot be asserted against public property, and subcontractors and suppliers usually look to the payment bond for financial protection. Without a payment bond, a subcontractor has no remedy. Subcontractors cannot make a claim on a letter of credit.

Requiring payment bonds is sound public policy for the protection of subcontractors and suppliers, which often are small businesses.”

ASA Chief Advocacy Officer E. Colette Nelson said, “The new SFAA/ Governing Institute guide also will be a great tool for subcontractor advocates who are working on issues such as assuring that subcontractors have payment protections on publicprivate partnerships and Little Miller Act reform.” The Governing Institute is a well-respected thought leader that advances better government and is relied on by public officials across the country. The Surety & Fidelity Association of America is a trade association representing companies that represent the majority of surety and fidelity bonds in the United States.

Guideline Provides Clear Ethical Statements on Bid Shopping/Peddling Few ethical problems are as widespread in the construction industry as bid shopping and bid peddling. Much of the reason for this is the nature of the

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sealed competitive bid process itself.

The buyer of construction services is put into a privileged position of knowing what its customers’ proposals are while the sellers do not have access to their competitors’ information or customers’ communications to competitors, so the process is open to abuse. When sellers and buyers of construction services are honest, the process works. When they are not, it doesn’t. Subcontractors that have concerns about bid shopping and bid peddling do not have to reinvent the wheel to express concerns to customers or potential customers. The “Guideline on Bid Shopping and Bid Peddling” jointly developed by ASA, the Associated General Contractors of America and the Associated Specialty Contractors provides clear statements regarding the ethical considerations surrounding bid shopping and bid peddling. For example, the guideline says that the “bid amount of one competitor should not be divulged to another before the award of the subcontract or order, nor should it be used by the contractor to secure a lower proposal from another bidder on that project (bid shopping).” The guideline includes an equally clear statement regarding bid peddling.

“Subcontractors can also use the guideline as a teaching tool within their own companies to acquaint employees with company ethical standards. Employees— and especially those who are not acquainted with business practices in the construction industry—may not know what is acceptable when handling a customer’s request for additional information about a bid.”

An excellent point for both customers and employees to recognize is that a bid proposal contains valuable information from the perspective of the company that bid the work—and potentially to its competitors. Improper disclosure of

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that information damages the bidder’s business interests. The guideline says: “An important, but often unrecognized, business asset of the construction contractor is its proprietary information. Proprietary information includes the price, the design or novel technique, or an innovative approach used in preparing a proposal.”

Customers and employees should both respect the principle that how bids are calculated to include materials and methods of construction, profit, labor and other factors is proprietary and valuable information and can provide a valuable business advantage to the bidder. Bid shopping and bid peddling are not, of course, limited to bids transmitted through the mail or by fax or courier. In the Digital Age, bid shopping and bid peddling may take place through electronic reverse auctions but all of the principles enunciated in the “Guideline on Bid Shopping and Bid Peddling” still apply in such electronic formats. What’s different if a general contractor or construction manager asks you to submit a lower bid price while you are participating in a live online bid auction and your identity is anonymous to your competitors who are also participating?

The “Guideline on Bid Shopping and Bid Peddling” is part of the AGC/ ASA/ASC Guidelines for a Successful Construction Project.

Good Payment Procedures Help to Keep Payments on Schedule For subcontractors, getting paid is often the most difficult part of any project, but you can be your own worst enemy if you don’t follow orderly

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payment procedures. ASA’s Professional Standards of Practice for Construction Subcontractors recognizes this problem with a standard charging the responsible subcontractor to: Assure that all of its invoices and change order requests are presented on time with complete documentation to meet project payment requirements and thereby promote orderly payment procedures and prompt receipt of remittances for its work each month.

Before a subcontractor starts a job, it should know where to send the requisition, who approves it, who is the check issuing party, who signs the check, and what the time frame is for payment. Common mistakes subcontractors make that slow down the payment process are:

• Failing to have proper insurance certificates.

• Failing to get an executed

subcontract.

• Submitting inaccurate requisitions for the work completed.

• Failing to get proper lien waivers from sub-subcontractors and suppliers.

Just as important as submitting an accurate requisition is obtaining approval of your requisitioned amount.

The professional standards try to smooth the requisition process by counseling subcontractors to: Furnish quickly a schedule of values confirming the dollar amounts of subcontractor’s work from mobilization services through final adjustment for the customer representative to use in evaluating performance and progress billing amounts.

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The professional standards counsel responsible subcontractors to “practice what they preach.” If they owe money to sub-subs or suppliers, they should treat them as they wish to be treated by processing their billing and change orders promptly and passing on progress payments without delay.

Complimentary FASA Videoon-Demand Examines OSHA Transgender Bathroom Requirements The Occupational Safety and Health Administration now requires all employers under its jurisdiction to accommodate employees based on which gender that employee identifies with. In the new, complimentary video-on-demand, “OSHA Transgender Bathroom Requirements,” available from the Foundation of ASA, presenter Jamie Hasty, SESCO Management Consultants, reviews the OSHA requirements and explains what employers should be doing to be in compliance with all applicable policies and practices. 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. “OSHA Transgender Bathroom Requirements” (Item #8099) is free for ASA members and nonmembers. Order online.

OSHA Issues a Final Rule on Beryllium Exposure On Jan. 9, the Occupational Safety and Health Administration issued a final rule that would dramatically lower workplace exposure to beryllium.

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Contractor Community

This strategically important material can cause devastating lung diseases when beryllium-containing materials are processed in a way that releases airborne beryllium dust, fume, or mist into the workplace air that can be then inhaled by workers.

In the construction industry, abrasive blasters and their helpers may be exposed to beryllium from the use of slag blasting abrasives. Work done in these operations may cause high dust levels and significant beryllium exposures despite the low beryllium content.

The new beryllium standards for general industry, construction and shipyards require employers to take additional measures to protect an estimated 62,000 workers. According to OSHA, recent scientific evidence shows that low-level exposures to beryllium can cause serious lung disease. The final rule will reduce the eight-hour permissible exposure limit from the previous level of 2.0 micrograms per cubic meter (2.0 mg/m3) to 0.2 micrograms per cubic meter (0.2 mg/m3). Above that level, employers must take steps to reduce the airborne concentration of beryllium.

The rule requires additional protections, including personal protective equipment, medical exams, and other medical surveillance and training. It also establishes a short-term exposure limit of 2.0 mg/m3over a 15-minute sampling period.

To give employers time to meet the requirements and put proper protections in place, the rule provides staggered compliance dates. The rule became effective on March 10.

Employers have one year to implement most of the standard’s provisions.

Employers must provide the required

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change rooms and showers beginning two years after the effective date.

Employers are also required to implement the engineering controls beginning three years after the effective date. For more information, see the OSHA Web page on the new rule.

The Trump Administration is likely to consider this rule for review and revocation.

Court Denies DOL Motion to Stay Proceedings on Overtime Rule On Jan. 4, the U.S. Court of Appeals for the Fifth Circuit denied a motion by the U.S. Department of Labor to stop proceedings in litigation over the overtime rule. That regulation, which would have taken effect on Dec. 1, 2016, would raise the salary threshold for those eligible for the overtime exemption to $47,476, which would have made more than 4 million workers eligible for overtime pay of time and a half for hours worked over 40 hours. As a result, the case pending in the Eastern District of Texas will move forward.

Plaintiffs in the case—21 states and several business associations—have moved for summary judgment. In December 2016, the appeals court granted DOL’s request for an expedited hearing of its appeal, but oral arguments were not set to begin until after Jan. 31.

Because the Trump Administration is not expected to continue to defend the DOL rule, the Texas AFL-CIO has asked the District Court for the Eastern District of Texas for the ability to intervene as a defendant in the lawsuit.

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Help ASA Advocate for Subcontractors in the Courts While ASA and its chapters represent subcontractor interests before legislative and executive bodies at all levels of government, all too often the Association finds that the courts interpret the laws and regulations approved by these other government bodies. That means ASA also has to muster the financial resources to represent subcontractor interests in the courts on issues like contingent payment, mechanic’s liens, indemnity, insurance coverage, and no damage for delay.

Fortunately, ASA can tap its Subcontractors Legal Defense Fund and the Foundation of ASA’s Subcontractors Legal Research Fund to finance its briefs on important court cases. These two funds finance ASA’s advocacy on behalf of subcontractors before courts all across the country. Both are funded entirely by voluntary contributions that are earmarked for precedent-setting cases where subcontractor rights are at stake.

ASA can’t continue its work in support of subcontractors unless it has the funds to pay for participation in the court cases that matter most to subcontractors. With the help of ASA members, ASA can marshal the financial resources needed to invest in precedent-setting litigation to establish subcontractor rights. You can make your contribution through the ASA online store. For more information, visit the ASA SLDF Web site at www.sldf.net.

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Feature What Subcontractors Need to Know About Getting Paid on P3 Projects

by Thomas R. Yocum, Esq., and Patrick M. O’Neill, Esq. Public owners exploring alternative delivery models are turning, more and more, to so-called “public-privatepartnerships,” commonly known as P3s, to construct complex public works projects. Public projects as diverse as airports, hospitals, roadways, bridges, waterworks and sewer systems lend themselves to completion under a P3 delivery approach. The typical P3 arrangement involves a long-term contract between a private party— often a coalition of investors similar to a real estate investment trust that may include constructors, designers, lenders and others—and a government entity seeking delivery of a public asset and long-term services related to that asset. In most P3 arrangements the private party—or coalition of investors—bears significant risk and management responsibility, but stand to earn significant performance-based fees over the life of the public asset.

Many argue that assets procured via the P3 procurement model perform more efficiently and ultimately save the taxpayers money, as opposed to the traditional design-bid-build system.

The Future of P3s A P3 differs from a service contract, turnkey construction contract and other delivery models best categorized as public procurement projects in that a P3 leverages the ownership interest

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and profit motive of the private players. Increasingly, jurisdictions that adopt P3 delivery models pass laws and regulations intended to facilitate procurement of public assets via the P3 approach. The current political climate at both the state and federal levels increases the likelihood of more massive infrastructure projects—like airports, sewer systems, water treatment plants, bridges and highways—via a P3 procurement method. However, the increased use of P3 as a procurement method raises concerns for subcontractors and suppliers of construction equipment, components and materials.

property) is not subject to mechanic’s liens, one arrow is missing from the subcontractor/materialman’s quiver. The absence of a payment bond removes another. Deprived of two important mechanisms that ensure payment, subcontractors and suppliers on P3 projects may be exposed to additional risks. In the foregoing scenario, there is no assurance of payment to subcontractors and suppliers. So what steps must subcontractors and suppliers take to protect themselves on such projects?

Impact of P3 Delivery on Subcontractors

The first and most important step to protecting your position as a subcontractor is to understand the scope and nature of any P3 project on which you intend to bid. Specifically, lower tier stakeholders need to know precisely what lands or what portion of any project are public or private and who, if anyone, is responsible for obtaining payment bonds for the project. If the entire project is located on public lands, and all portions of the project are public, then payment can only be assured via a public lien on funds or a claim against as a payment bond. Most P3 projects, however, involve a hybrid combination of public and private property rights, and the need to record traditional liens that

Subcontractors and suppliers are concerned about the proliferation of P3 as a delivery model, because the hybrid public-private nature of a P3 confuses application of lien laws and may dilute the effectiveness of public payment bonds and key contract provisions that provide assurance of payment. The conundrum, from a subcontractor or supplier’s perspective, is that mechanic’s liens do not attach to public property, and the private players in a P3 arrangement may not require posting of a payment bond, as would be required on a public project.

Since public property (unlike private

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Protecting Subcontractors on P3 Projects

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attach to private property cannot be ignored. Accordingly, a thorough investigation of the project is required.

Further, careful review of contract terms related to payment, interest on unpaid invoices, right to recover attorney fees, and similar provisions is imperative.

Fully understanding what action may be necessary to fully protect payment rights requires consulting legal counsel at the outset. Lien laws vary from state to state, so consulting counsel familiar with the laws of the state where the project is located is key. Generally, subcontractors are required to strictly follow the law to properly perfect and enforce a lien. Subcontractors should not attempt to file liens without legal assistance. Experienced counsel should be consulted to prepare, file, and enforce a mechanic’s lien. The following discussion presents an example of issues that can arise on P3 projects, and what actions can be taken to assure payment. This discussion focuses on Ohio law. Local counsel should be consulted to ascertain to what extent these strategies may apply in a particular jurisdiction.

Notices of Commencement (NOC) are required at project inception in Ohio on both private and public projects. The contents of the NOC and procedures relating to the NOC are quite different between private and public projects.

The private NOC includes a legal description of the property which can be used to lien the project. The public NOC does not contain a legal description, but is required to contain information regarding the payment bond posted for the project. Although the private NOC also provides for disclosure of payment bond information, usually there is not a payment bond on private projects. Unfortunately, subcontractors are discovering that some P3 projects do not have payment bonds that would typically be required on public projects.

This information should be available by obtaining a copy of the NOC. Since liens cannot be filed against public property, the remedy on a public project is either to lien project funds

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payable to the prime contractor or to assert a payment bond claim. Where a prime contractor defaults, there may not be funds available to lien, so the availability of a payment bond takes on increased importance. Unfortunately, on P3 projects, payment bonds may not be posted the same as they would be required on a purely public project.

This may come as an unpleasant shock to a subcontractor who experiences nonpayment.

Kenwood Towne Place Clients represented by the authors of this article experienced the impact of a P3 project relating to the construction of a new public parking garage and retail complex known as Kenwood Towne Place in Cincinnati, Ohio. The project consisted of a public parking garage which supported private commercial and office space above.

This $175 million project was woefully under-funded. After funds ran out and construction stopped, approximately $50 million of liens (both private and public) were filed.

As subcontractors scrambled for sources of payment, they realized there was no payment bond on the project. Many expected there to be a payment bond, since it was a “public parking garage.” However, the funding for the garage was actually through private investment bonds, which enabled the developer and the public “port authority” to circumvent Ohio’s payment bond requirements on purely public projects.

Most of the subcontractors worked on the private part of the project and could only file liens on the private property.

The mortgage exceeded the value of the property, so the private liens (for the most part) were worthless. Funds were available on the garage to pay about a third of the amount of the public lien claims. Liens could not attach to the public garage itself.

The authors’ client group of 15 subcontractors and suppliers (owed about $8 million) came together to

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vigorously pursue multiple legal claims against the developers, constructor, lenders and others. The public-private jumble on this project provided fertile legal ground for creative legal claims.

Discrepancies existed between the initial NOC filed by the developers on the “private project” and a subsequent NOC filed relative to the “public project.” The mortgage omitted a key parcel of real estate which became a powerful bargaining chip for those subcontractors that liened this parcel.

Many subcontractors did not lien this parcel, since its description was not included in the NOC. After years of bitter litigation members of the authors’ client group recovered most of what was owed to them, whereas, other subcontractors received little or nothing.

Lessons Learned • Understand the nature of the

project and what payment assurances exist.

• Ascertain whether there is a payment bond.

• Determine if the project is adequately funded.

• Press for a proper Notice of Commencement.

• Take steps necessary to preserve lien and bond rights.

• File liens against both the project funds (as on a public project) and against private property.

• Involve experienced counsel early.

The above discussion illustrates the potential complexities and payment problems that a P3 project can present.

It also illustrates the difference that experienced counsel such as are available through the ASA Attorneys’ Council can make.

Thomas R. Yocum and Patrick M. O’Neill are partners with Benjamin, Yocum & Heather in Cincinnati, Ohio.

Yocum has been the ASA attorney in Cincinnati for over 30 years and is currently vice president of ASA of Ohio.

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Feature Payment Issues and Public-Private Partnerships

by Mark A. Cobb When payment issues arise in the general business world, the parties involved in the dispute may have multiple claims which they can pursue based upon contract law, common law, and equity among others. These claims are, generally, limited to those parties who executed the contract.

Those in the construction industry, however, have additional, unique opportunities to recover the money they are owed from other sources who are not party to the contract.

In addition to the typical remedies stated above which the subcontractor can use to pursue payment from the other contracting party, many nonpayment situations allow the subcontractor or supplier to hold the owner (or even the project itself) responsible for payment through the use of mechanic’s and materialmen’s liens. In addition, subcontractors and suppliers may also be able to hold a surety responsible through a timely payment bond claim. In the simplest terms, lower-tiered subcontractors may be entitled to something analogous to an after-the-fact, thirdparty personal guarantee to make sure they get paid. This possibility, of course, gives a significant advantage to subcontractors and reduces the risks which they would otherwise assume. Public-private partnerships, or P3s are they are commonly called, however, do not always offer the same advantage to subcontractors as found in more traditional construction projects, so it is vital to understand and assess these risks prior to entering into agreements to work on P3s.

What is a P3? A P3 is a collaboration between a public entity (such as the federal government, a state or municipality) and a private party. Thus, the combination of the parties make it apparent that the project is simultaneously (i) both a

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public works project and a private construction project, and (ii) neither a public works project nor a fully private construction project. The purpose behind the P3 structure is to allow a private party, often called the concessionaire, to deliver a public service (such as an airport, toll-road, hospital or student housing), and in exchange, the public entity grants the concessionaire exclusive rights to engage in the activity which, more typically, would be a public responsibility (e.g., collecting tolls).

Although there are increasingly different scenarios utilizing the P3 system, the “typical” P3 structure has the following characteristics: The public entity owns the real estate, and the concessionaire builds and operates new infrastructure on the government land and collects some of the revenue generated by the facility or service; eventually—even decades later—the buildings and infrastructure built by the concessionaire becomes the government’s property. This structure, unfortunately, often undermines the subcontractor’s typical ability to secure any money they are owed by either filing a lien or making a claim against a payment bond.

For the proponents of this public-private collaboration, P3s are perceived to be useful when a governmental entity has a need for improved infrastructure, but lacks the budget to accomplish the task. In June 2016, New Hampshire became the 35th state in the United States to authorize the use of P3s (in addition to the District of Columbia and Puerto Rico). Consequently, there is reason to believe that more and more P3 projects will occur. Thus, it is necessary for all participants to understand how these projects differ from more typical construction projects.

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In the event that a subcontractor experiences payment issued while providing services on a P3 project, the rules and rights impacting the recovery are different. Consequently, it is important that the subcontractor calculate the additional payment risks associated with participation in a P3.

If a subcontractor does not receive payment for its work on a P3, can a lien be filed to secure the debt? As discussed above, the typical P3 occurs on real estate owned by the public entity. Also, as a general rule, liens are not allowed on public land. Thus, there is a conflict and unpaid subcontractors are generally prohibited from filing a lien on P3 projects. Before embarking on a P3 project, an understanding of that jurisdiction’s law on filing liens will help a subcontractor understand the risks.

Since subcontractors may not be able to file a lien, will there be a payment bond to assure the subcontractor’s payment?

Since liens cannot be filed against publicly-owned projects, the Miller Act and individual state’s Little Miller Acts typically require the public works project to include a payment bond for the protection of lower-tiers subcontractors. Unfortunately, these Acts do not generally apply to P3s. In the event that there is a surety involved on a P3, no assumptions can be made regarding the amount of the available payment bond coverage, the duration of the payment bond or the notice and procedure for making a claim.

Thus, the hybrid nature of the P3 being part-governmentally owned and part-privately owned, places the projects in the no-man’s lands between the ability to file a lien and the requirement that a payment bond substitute for the ability to file a lien.

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Protecting Your Payment Rights on Public-Private Partnerships

by American Subcontractors Association In states where the laws authorizing P3 projects do not require the prime contractor to require a payment bond, a subcontractor or supplier considering work on a P3 project needs to be extra cautious to protect its payment rights.

This should include: Evaluating the authorizing statute, the P3 agreement, the concessionaire and the project. P3 agreements can cover a period of as long as 99 years. A concessionaire may be a single-purpose entity that is thinly capitalized. Contractors and suppliers at all tiers need to make sure that the concessionaire and the prime contractor are financially sound at all times.

Determining whether the prime contractor has provided a payment bond or whether another contractor in the tiers above you has provided a payment bond. If not, determine whether any other subcontractor payment assurances (e.g., letter of credit, parental guarantee) are in place.

Obtaining a copy of any payment bond provided by the prime contractor or other contractor higher in the tiers.

Verifying the authenticity of the bond. The Surety & Fidelity Association of America’s Bond Obligee Guide contains a list of surety companies that have volunteered to be included on this list along with information as to how they can be contacted for the purposes of authenticating

Do Prompt Payment Acts help an unpaid subcontractor? Prompt Payment Acts may not always apply to P3s. In addition, Prompt Payment Acts may provide separate rights and remedies for public works projects and private projects further confusing which rights apply in a particular situation. Each jurisdiction will address this question differently, so it’s important to know whether that vehicle is an option to addressing payment issues encountered by a subcontractor.

Beware of Non-Project Related Interference: Due to the increasing use of the P3 formatting, there is also an increasing use of litigation related to non-construction issues which may negatively impact the project and its subcontractors. Although “outside” issues can topple any project, P3s have a higher risk of interference from others, since the public is actively

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a bond. Subcontractors and suppliers also can determine if a surety is admitted in the jurisdiction of the project by checking with the state insurance department; the National Association of Insurance Commissioners’ Web site has an interactive map that links to each state’s department. The Department of Treasury’s Circular 570, commonly known as the Treasury List or T-List, contains a list of approved sureties for federal projects.

Reading the payment bond and determine if it meets your needs. Are you covered? Is the bond for a sufficient amount? Can you meet notice and claims requirements?

Are there any other terms that would make it difficult or impossible to meet claims requirements?

If the concessionaire or prime contractor has provided other payment assurances in lieu of a or in addition to a payment bond, such as a letter of credit or a parental guarantee, determining whether it meets your payment assurance needs and whether you can meet notice and claims requirements, etc.

Determining if the state’s prompt payment laws apply to the project and, if so, whether they provide adequate protection. It is unlikely that a state law governing prompt payment on public work will apply. However, in many states, the prompt payment law governing private work will.

involved and public policy might be a part of the project.

In 2016, for example, a federal case in Indiana shut down a project after a citizen’s group alleged that a P3 established for processing solid waste violated the Commerce Clause of the U.S. Constitution. The claimants alleged that it was not fair to give one contractor the exclusive right to process solid waste. As a result, the court allowed an injunction against the project. (National Waste & Recycling Association v. Warrick County Solid Waste Management District No: 3:15-cv-00158-rly-mpb (USDC, SD Ind., March 2016) (order granting preliminary injunction). This case did not address the role of subcontractors or suppliers on the project, but it’s easy to imagine that the project was stopped—at least temporarily—and that funding and payment issues ensued. Thus, it is easy to see that, in

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addition to traditional, construction payment issues such as funding, disputes about the work, and delays, there are multiple outside forces which can increase the likelihood of a difficult project.

What can the subcontractor do to protect itself?

1. Perform Due Diligence on the Parties. Prior to entering into a contract, it is important to perform due diligence on every party upstream.

This is even more vital in P3 situations.

Unfortunately, P3 concessionaires are often a newly created entity existing for the sole purpose of operating the concession after the project’s completion. This makes it more difficult for subcontractors to

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Feature Protect Your Rights: Pay-if-paid Clauses

by Eric Travers, Esq. One of the most controversial “killer” subcontract provisions subcontractors face is a clause known as “pay-if-paid” or a “condition precedent payment” clause. General contractors love them. Subcontractors don’t.

Pay-if-paid clauses generally state something to the effect that the subcontractor assumes the risk of nonpayment by the owner, and payment by the owner to the general contractor is a condition precedent to the subcontractor’s right to payment from the general contractor. In this way, the general contractor is attempting to insulate itself from any liability to the subcontractor if the owner has not paid for the work.

Some typical example of a payif-paid and pay-when-paid contract language could be: Pay-If-Paid Clause Example: Receipt of payment by the Contractor from the Owner for the Subcontractor’s Work is an express condition precedent to payment by the Contractor to the Subcontractor. The Subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor for payment of Subcontractor’s Work, and that it shall have no right to payment from Contractor unless and until Contractor has first received payment from the Owner.

Pay-When-Paid Clause Example: Payment to the Subcontractor shall be made within seven (7) calendar days after receipt by the Contractor of payment from the Owner for such Subcontract Work.

While most courts look with disfavor on pay-if-paid clauses, because they amount to a forfeiture, in many states a pay-if-paid clause

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will be enforced if it is clear and unambiguous and meets certain criteria.

What makes a pay-if-paid clause uniquely important to subcontractors is that the clause attempts to make the subcontractor’s right to payment for its work (payment coming from the general contractor it contracted with) conditioned upon the general contractor’s first receiving payment from the owner. To make matters worse, in some states agreeing to a pay-if-paid clause could also forfeit your right to a mechanic’s lien, if the court determines that the payment you are attempting to secure via a lien is not contractually due to you because of the failure of the condition precedent.

Because a pay-if-paid clause dramatically shifts normal contracting risks, with harsh consequences that amount to the subcontractor’s forfeiture of payment rights, several states (including but not limited to California, New York, and North Carolina) have made such clauses void and unenforceable. But most of the states that have considered the issue allow and enforce payif-paid clauses with a requirement that the subcontract language be so plain and unambiguous that a reasonable subcontractor had to have known what it was accepting as a payment condition when it signed the subcontract.

In simple terms, subcontractors should be vigilant on their subcontract terms, and should presume, unless they have specific legal advice otherwise, that if their payment clause law to create an enforceable condition precedent to payment, the subcontractor (who entered its subcontract only with

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the prime contractor) may be at the mercy of the owner’s solvency and creditworthiness. And, in a worst case scenario, the subcontractor may have no right to be paid for its work if the owner for any reason (including reasons unrelated to the subcontractor’s work) fails to pay the prime contractor.

This differs from what would be case under the common law.

It similarly differs from what the situation would be under traditional “form” subcontracts like the ConsensusDocs documents (which are endorsed by ASA) and even the AIA form contracts. Under normal contract and common law, each party would bear only the risk of nonpayment from the party they have contracted with.

Court decisions in many states have upheld the validity of pay-ifpaid clauses if they unambiguously express the parties’ intention to shift the credit risk to the subcontractors.

Most courts, however, will strictly construe the language of the clause to limit the impact of these clauses and, if there is any ambiguity, will convert the clause to a “pay-whenpaid” clause that does not forfeit the right to payment and is far less offensive to subcontractors.

Because state law varies widely, ASA publishes a 50-state review of conditional payment clauses. The manual, , available in the member resources section of the ASA Web site under “Contracts and Project Management Documents,” is updated periodically and gives a state-by-state snapshot of the enforceability of such clauses. This manual is a great starting resource for subcontractors attempting to negotiate such clauses (albeit, it is a resource that is not

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legal advice and does not replace the need for subcontractors to engage competent legal counsel in the state in which they work).

What is true, is that in most states, unless a subcontract payment clause plainly and unambiguously provides that owner nonpayment to the prime contractor is a “condition precedent” to the prime’s obligation to pay the subcontractor, the courts will deem the clause to be a “pay-when-paid” clause. Industry form contracts like the ConsensusDocs have pay-whenpaid payment language that ties the prime contractor’s obligation to pay to its receipt of payment from the owner.

A pay-when-paid clause differs from a pay-if-paid clause in that most courts interpret pay-whenpaid provisions as an unconditional promise to pay, but with the time of payment (to the subcontractor) postponed to first allow the general contractor a reasonable amount of time to attempt to collect payment from the owner. But, if that payment does not come within a reasonable period of time, the general contractor still has an absolute obligation to pay its subcontractor.

That raises the questions of what is a “reasonable” amount of time.

Although what is “reasonable” can always be disputed, a good general rule of thumb is that by the time you are litigating the question, a “reasonable” period has passed.

Unfortunately, having to litigate a question is perhaps the most inefficient way to quickly and costeffectively resolve a dispute and be paid. Ultimately, what you agree to in the subcontract will be the single largest factor in determining your right to payment, assuming you have properly performed your work.

So what can a prudent subcontractor do? Many subcontractors are, understandably, reluctant to raise these issues early out of fear it will poison the relationship. But problems,

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even small ones, should not be allowed to fester. And troubling signs on things like payment terms are the biggest concern and warning flags of potentially ruinous financial woes and litigation.

One way to avoid the unpleasant experience of needing to litigate the question of the enforceability of a payif-paid clause, or the “reasonableness” of time to wait for owner payment, is for subcontractors to condition their bid upon acceptable contract language.

The ASA Subcontract Documents Suite—which is free to ASA members, also located under the “Contracts and Project Management Documents” section of the ASA Web site—has extensive resources on conditioning bids to get more fair subcontracts. A simple example of how a conditional bid may preserve your ability to fight unfair subcontract terms, such as a pay-if-paid clause in the subcontract, is including language in the bid proposal that: “This bid is conditioned upon the use of the ConsensusDocs 750 (2011, Revised 2014).”

Conditioning your bid is crucial for subcontractors who may otherwise be bound to their bids, if the contractor for the work is awarded the job and then sends you an unacceptable subcontract.

Another example of language to condition your bid to avoid pay-ifpaid language would be to subject your bid to the condition that, “In no event will Subcontractor’s right to payment from the general contractor be conditioned upon or subject to general contractor’s prior receipt of payment from the owner or any third party.”

Note that the above conditions simply preserve your right to insist on subcontract language that mirrors the conditions. You can waive your bid condition if you sign a subcontract with different payment terms. A

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conditioned bid helps preserve your right to negotiate if the general contractor uses your bid, and then asks you to sign a subcontract with language that differs from what you assumed when pricing the work.

Finally, if a pay-if-paid clause is a “killer” clause for your company, it is always wise to not only understand the impact those clauses may have on your right to payment and your right to a lien, but to get with counsel licensed in your state to come up with fall-back language that would be acceptable to you depending on the situation.

For example, if you have a comfort level with the owner’s creditworthiness (a public job, a credible and trustworthy owner), or can live with pay-when-paid language or alternate language, think about that in advance, as it could help smooth negotiations later.

Similarly, sometimes you might find it acceptable to agree to subcontract language that explicitly preserves your mechanic’s lien and bond rights notwithstanding anything to the contrary in the subcontract.

The bottom line is that while payif-paid clauses are among the most potent of killer clauses, there is room to negotiate and find middle ground if you have properly conditioned your bid. And if you are prepared to walk away from a bad deal, sometimes that is, unfortunately, a much better decision for your company than compromising on something as important as payment for your work.

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

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continued from pg. 11 understand the risk as the entity likely has no track-record and, more importantly, may not be sufficiently capitalized to provide protection to anyone, much less the subcontractors or suppliers.

2. Use a Solid Contract: This article has addressed much of the potential loss of the subcontractors’ right to file a lien and payment bond claim, but the subcontractor’s strongest claim is always against the party with whom it contracted. Thus, it is important to use a written contract which sets out the payment details, how disputed amounts are handled, specific payment expectations, nonpayment remedies, damages and dispute resolution to strengthen your contractual rights to payment as much as possible.

3. Consider Requiring a Personal Guaranty/Joint Check Agreement/ Indemnification: Depending on its bargaining strength, a subcontractor may be in a position to negotiate or require a personal guaranty from an individual or a viable entity associated with the P3 upstream. Similarly, a strong joint check agreement might decrease the odds of nonpayment or tie in a higher tier for a potential claim against them.

4. Look for a Payment Bond or Other Security: Although a true public works project requires a payment bond for subcontractor protection, payment bonds are used on many private projects as well.

There may be a payment bond covering the P3. Keep in mind that a subcontractor would be wise to read and understand any payment bond covering the project, as the payment bond may differ from the commonlyused payment bonds required under the Miller Acts or Little Miller Acts.

Also, review the notice procedure required by the bond and confirm that the subcontractor can comply with all of the procedures.

5. Understand your Lien/Bond Rights for that Jurisdiction: In the event of payment issues, a subcontractor may find itself with some lien rights or some payment bond rights depending on the specific laws covering the project. In order to adequately weigh the risks, get the facts for that project in advance. If a payment bond covers your P3 project, confirm your ability to make a claim.

Unfortunately, P3s may structure the project with multiple organizational layers, which push subcontractors so low that they may not have rights under the payment bond (or as a lien claimant).

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 on‑demand 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.

6. Make Your Opinion Known and Work to Improve the Laws Controlling P3s: Although P3s have been around for a while, the number of P3s and the size of the P3s are getting significantly larger.

Legislatures have an opportunity to clarify and require the protections needed by subcontractors and suppliers. This is an ideal time to talk to your representatives and senators and support legislative initiatives from groups such as the ASA. Until such time as governments bring uniformity and predictability to P3 projects, most of the participants will be wading in uncharted waters. In the meantime, the more information that can be gathered prior to entering into a contract will make it easier to understand the benefits and risks of working on a P3 and will decrease the likelihood of problems.

Mark A. Cobb, Cobb Law Group, has been practicing construction law throughout the State of Georgia for almost 25 years. He is active in many professional organizations, and he speaks and lectures extensively on Georgia’s mechanic’s and materialmen’s law, payment bonds, and construction contracting. He can be reached at (770) 886-5890, Ext. 2, or mark@cobblawgroup.net.

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“Change Orders—The Bane of All Subcontractors” (Item #8096) How should subcontractors maximize their collection of change orders?

When should subcontractors be concerned? Should subcontractors ever refuse to perform change orders without a signed change order?

What happens when the general contractor or owner disagrees with the proposed change value? In this video-on-demand, Joseph Sweeney, Esq., Sweeney, Mason, Wilson and Bosomworth, Los Gatos, Calif., answers these and other questions about change orders.

This webinar is $65 for ASA members and $95 for nonmembers.

ORDER ONLINE AT www.contractorsknowledgedepot.com

Feature The Right to Stop Work: A Subcontractor’s Nuclear Option, or Making a Bad Situation Worse?

by Joseph L. Katz, Esq.

At press time, there has been much discussion in the media as to whether the GOP-controlled Senate will exercise the “nuclear option” in the confirmation process of Judge Gorsuch to the Supreme Court. No discussion regarding timely payment to subcontractors would be complete without mention of the subcontractor’s own nuclear option—the so-called right to stop work, including whether such a right exists, and if so, how to correctly trigger it.

While this may come as news to some general contractors, construction subcontractors are not finance companies, and actually rely upon timely payment from their customers to make payroll, purchase supplies and material, and otherwise keep the lights on. In fact, many construction equipment and other material suppliers will cut off a customer once the aged receivable reaches 60 or 90 days, or at minimum, will switch to a COD arrangement. Moreover, once a subcontractor has consecutively not been paid two or more monthly invoices, particularly on a large project, the subcontractor’s jobsite performance will almost certainly take a serious hit, and the long-term detrimental impact could be irreparable.

It is no surprise, then, that subcontractors routinely ask whether they can stop work at a project on account of late payment from the general contractor. These are serious inquiries, and a thorough review of the relevant contract documents will determine the state of the project.

While stopping work on account of nonpayment can be an effective negotiating tool, it can also be a catastrophic breach of contract in its own right. Each situation will be different and must be independently reviewed.

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What Does Subcontract Say? As with virtually any other issue that may crop up on a project, the first question to ask must be what does the subcontract provide? Generally, contractual agreements operate parallel to one another, as opposed to being contingent on the other. That is, each side must perform its agreed upon obligation, irrespective of whether the other party is performing its obligation.

Of course, relief is available through the courts in the form of a breach of contract lawsuit. Importantly, however, the side bringing the lawsuit must have performed its obligation to be entitled to judicial relief.

Applying this principal to a subcontract, then, means the general contractor’s obligation to pay is separate from the subcontractor’s obligation to perform. Taken to its logical conclusion, a subcontractor would have to fully perform its agreed upon scope of work, and only then file suit for breach of contract to recover the contractually agreed upon sum due and owing. This, of course, will wreak havoc for the subcontractor’s cash flow, and can spell disaster not only for performance on the job in question, but for the company as a whole.

Of course, a subcontractor can argue that payment for its work is a “material” term of the contract.

Generally, when a party’s breach of contract is deemed to be a “material” breach, it absolves the other party from the continuing obligation to perform its duties under the contract. While at first blush payment for work performed will certainly seem like a “material” requirement, the lines are often not so clearly drawn. For example, the general contractor may have partially paid—how much payment, then, is considered “material”? There may be

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a payment delay—is delayed payment as “material” as no payment at all?

What if the general contractor has raised deficiencies in the work, or even fears of deficiencies—is that a justification to withhold payment, while still requiring the subcontractor to continue performance? Or, can the failure to timely pay be deemed an “anticipatory breach,” thereby absolving the subcontractor of continued performance?

The first place to address these questions, of course, will be the language of the subcontract itself.

Beware of Subcontract’s ‘Claim’ and ‘Flow-Down’ Clauses Today’s subcontracts generally address an entire gamut of potential situations, and often, the right to stop work is discussed. Unfortunately for subcontractors, however, the general contractor’s boilerplate language will almost always provide that the subcontractor must continue its work at all costs. Even worse, this requirement will often be hidden or obscured from plain view (likely because of the absurdity of it!). For example, a “claims” section usually requires that work continues despite claims, which are to be resolved at the end of the project. While this sounds reasonable enough, bear in mind that your outstanding A/R is a claim, no different from a differing site condition, a conflict in the drawings, or any other more intuitive “claim” you may be used to encountering.

Another common trap for the unwary is a flow-down provision, obligating the subcontractor to the general contractor in the same manner the general contractor is obligated to the owner.

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Even the federal FAR clauses, and many state equivalents, will obligate the general contractor to continue working notwithstanding pending claims.

Through both of these provisions, the subcontractor’s obligation to proceed with its work is separate from the general contractor’s obligation to pay for that work, without ever actually stating that the subcontractor must proceed with its work despite nonpayment. Amazing, but true …

Negotiate a Right-to-Stop Work within Subcontract That is not to say, however, that a savvy subcontractor cannot negotiate the boilerplate subcontract language to include a right to stop work clause in the event of nonpayment. A simple inclusion of the following one-liner anywhere within the subcontract will do the trick: “Notwithstanding anything herein to the contrary, Subcontractor shall have the right to stop work in the event it fails to receive payment for any work following 45 days after satisfactory performance thereof.”

The ASA published a tip sheet on exactly this topic, complete with talking points in support of such a right to stop work. The ASA tip sheet, “Inability to Stop Work for Nonpayment,” is one of dozens of free members-only resources.

ASA is making this tip sheet available here, but to access other tip sheets and resources, you’ll have to become a member.

While gunning for a stop work right net 30 will often be met with substantial resistance during negotiation of the subcontract, resistance decreases as the length of time the subcontractor is willing to wait increases. Do not underestimate the value of such language, even at 45, 60 or 75 days, as the benefits are worth their weight in gold.

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First, it effectively short-circuits a pay-if-paid or pay-when-paid clause.

While the general contractor may not have to pay the subcontractor if and until it receives payment, the savvy subcontractor will not have to continue working for free. Note, this only works if the amount of time is tied to when the work is performed, or at minimum, when the invoice is issued, and not when payment becomes due—under a pay-if-paid or pay-when-paid scheme, payment does not even become due until the general contractor has received payment from the owner, which itself could take months.

Second, it similarly disables a flow-down obligation requirement.

Although the general contractor may be required to continue working in the face of nonpayment, again, the savvy subcontractor will not be. Tremendous leverage can be achieved when a subcontractor provides notice that in compliance with such-and-such section of its subcontract, it will be pulling off the job on account of nonpayment.

Third, it is general and far-reaching enough to include all amounts, including change order or other extra work, even if not yet “approved.” As long as the subcontractor performed it and billed for it, it can stop work if not paid by the agreed-upon timeframe. Again, one small change to the language with very far-reaching consequences.

Fourth, and perhaps most importantly, it stops the hemorrhaging which occurs when a subcontractor works for months on end without payment. A stop-work clause stops the bleeding before it becomes catastrophic, and does not leave the subcontractor vulnerable to an even more devastating breach of contract action.

Option of Last Resort It is important to note that even without a specific stop-work right built into the contract, it may be the only and/or wisest course of action, but only

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as a last resort. There are other steps which should first be exercised, which include the filing of any statutorily required mechanic’s lien notices and/ or payment bond demands. These steps will certainly bring the lack of payment to a head, forcing the general contractor to either pay up, or go on record as to why it is not.

Speaking of a record, it is vitally important to maintain a steady written/ electronic record of all project-related events, including the failure to receive timely payment. Once payment has become overdue, a letter or even email should be sent at least once a week tracking how aged the receivable has become, as well as the impact the payment delay is having on the subcontract deliverables. Do not wait for a response to engage again, as there often will not be any response.

Be persistent, and if nothing else, you can set the stage for a convincing demonstration that you stopped work as a last resort, and only on account of a material and egregious breach or anticipatory breach of the general contractor’s obligation to pay for work performed.

Joe Katz is a senior associate at the construction litigation firm Huddles Jones Sorteberg & Dachille, P.C. in Columbia, Md. He 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. Katz 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. He can be reached at (410) 7200072 or katz@constructionlaw.com.

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Legally Speaking Holding the Surety’s Feet to the Fire—

Recent Cases Confirm Subcontractors’ Rights to Maintain Miller Act and Little Miller Act Suits Despite Subcontract Pay-If-Paid Clauses and Prime Contract Dispute Procedures

by Brian S. Wood The U.S. government, states, and municipalities are protected by sovereign immunity. As such, mechanic’s liens are not an available payment collection tool for subcontractors working on public works projects—some states provide for liens on payments from the public agency to the contractors, but these exist only to the extent the agency has not already paid the contractor. Recognizing that subcontractors might avoid working on federal projects because of the lack of payment security, Congress in 1935 enacted the “Miller Act” to provide protection to the government and subcontractors. The Miller Act requires contractors with contracts in excess of $100,000—the Federal Acquisition Regulations, meanwhile, require bonds on projects over $150,000—on federal projects to furnish a performance bond to secure the performance of the contract work—and a payment bond—to ensure the payment of subcontractors

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and material suppliers. States followed suit, passing laws, commonly referred to as “Little Miller Acts,” providing similar protections to the state, its political subdivisions, and subcontractors.

While subcontractors generally understand their rights to make claims against a contractor’s payment bond under the Miller and Little Miller Acts, many are unsure as to how these rights are affected by contractor payment terms in subcontracts.

One common area of confusion is whether pay-if-paid or paywhen-paid clauses in subcontracts prevent the subcontractor from suing on the payment bond if the contractor has not been paid. If not precluded altogether, must the suit under the bond be stayed pending the satisfaction of the conditions of payment? Recent cases in Maryland and the District of Columbia clarified the law on these questions resoundingly in favor of subcontractors.

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U.S. ex rel. Tusco, Inc. v. Clark Construction, 15-2885, 2016 WL 4269078 (D.Md. Aug. 15, 2016) In Tusco v. Clark, a subcontractor on a federal construction project in Maryland sued a contractor and its surety for nonpayment of subcontract balances, including amounts for extra work alleged by the subcontractor.

As is common in subcontracts, the subcontract included a pay-if-paid clause (emphasis added), as follows: Subcontractor agrees that payment by the Owner to Clark for work performed by the Subcontractor … is a condition precedent to any payment obligation of Clark to Subcontractor. Subcontractor agrees that the liability of Clark’s sureties on any bond for payment to Subcontractor is subject to the same conditions precedent as are applicable to Clark’s liability to Subcontractor.

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The subcontract also contained language binding the subcontractor to claims and disputes procedures in the prime contract for the pursuit of payment for changed work. The subcontract further conditioned payment for changes on the contractor’s receipt of payment from the owner for such changes.

Relying on these conditions of payment, the contractor moved to dismiss the subcontractor’s suit and the contractor’s surety moved to stay the litigation. The court denied the contractor’s motions to dismiss the suit on the basis that (1) it is a question of fact whether the owner caused the changes; and (2) the subcontractor may have a right to recovery on a basis other than breach of contract, thus avoiding the pay-ifpaid language. Importantly, the court refused to grant the surety’s motion to stay the suit. In so doing, the court made it clear that the action against the surety could be sustained and pursued even if the suit against the contractor was dismissed.

In its motion, the surety argued that, because its liability for payment of the bond is based upon the obligations of the contractor under the subcontract, the surety is entitled to protections of the pay-if-paid clauses and disputes procedures.

The court rejected this argument unequivocally and emphatically, holding that the subcontractor’s Miller Act claims are not precluded by or otherwise conditioned upon subcontract payment conditions or disputes procedures in the prime contract. The court declared that the “purpose of the payment bond under the Miller Act is to shift the ultimate risk of nonpayment from workmen and suppliers to the surety.” The court looked to the plain language of the Miller Act to conclude that it the subcontractor’s rights under the bond accrue 90 days after completion of the subcontractor’s work, “not ‘when and if’ the prime contractor is paid by the

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government.” Importantly, the court ultimately confirmed the broader legal proposition that subcontract terms which conflict with the Miller Act are “ineffective in a suit against the surety on the payment bond.”

District of Columbia ex rel Strittmatter Metro, LLC v.

Fidelity and Deposit Co. of Md., 15‑2114, 2016 WL 5108021 (D.DC September 20, 2016 In Strittmatter, the U.S. District Ct. for the District of Columbia reached the same conclusion regarding a subcontractor’s claims under D.C.’s Little Miller Act. There, a contractor and its surety sought to dismiss or stay a suit by a subcontractor for nonpayment on a D.C. school construction project, arguing that dispute resolution procedures in the prime contract are a condition precedent to payment. Specifically, the contractor and surety contended that the subcontractor must submit its claims for payment, through the contractor, to mediation. If mediation failed to resolve the dispute, the matter could be submitted to the D.C. Board of Contract Appeals. As in Tusco, the court in Strittmatter rejected this argument and denied the motions, holding that subcontractors are not required to exhaust any contractually prescribed administrative remedies before bringing a claim under D.C.’s Little Miller Act (“DCLMA”).

The court gave two reasons for denying the motions. First, the court determined that, although the subcontract incorporated by reference the disputes procedures in the prime contract, the prime contractor could not extend to the subcontractor a direct right to the disputes procedures, as the District of Columbia does not allow subcontractors to bring claims under the procedures directly. Second, even if the contractor submits the subcontractor’s claims under the prime contract disputes procedures,

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the subcontractor does not have to wait the outcome of such procedures to bring suit under the DCLMA. The court concluded that requiring the subcontractor to await the resolution of the claims process would not only “undermine the DCLMA’s purpose of providing subcontractors on government projects with a prompt remedy,” but it would also place the subcontractor at risk of waiving its claims because of the expiration of the statute of limitations under the DCLMA. If the prime contract dispute process exceeded the one-year DCLMA statute of limitations and the subcontractor did not prevail, it would be left with no recourse.

The Take-Away One practical effect of these rulings is that subcontractors can apply pressure against nonpaying general contractors by maintaining actions against their sureties, despite the existence of a pay-if-paid clause and/ or claims and disputes procedures in the prime contract. To maximize this pressure, subcontractors may wish to consider suing sureties separately, unless local laws or rules demand that the contractor and surety be joined in the same action. Such separate suit may help prevent a court from extending the contractor’s pay-if-paid defense to the claims against the surety.

Brian S. Wood is Of Counsel in the Washington, D.C., office of Smith, Currie & Hancock. Wood is the former General Counsel of Keller Foundations, LLC, and its U.S. subsidiaries. Prior to his 12 years with Keller, he was a construction lawyer in private practice. Wood is highly experienced in matters involving both public (state and federal) and private construction and in his legal career has represented owners, contractors, and subcontractors. He can be reached at (202) 735.2451 or bswood@smithcurrie.com.

C O N T R A C T O R ’ S

C O M P A S S

Coming Up

ASA/FASA Calendar

in the April 2017 Issue of ASA’s

April 2017 25 – Webinar: Most Popular Benefits Employees Are Purchasing Without Employer Contribution May 2017 9 – Webinar: Prompt Payment and How/When to Suspend Work 23 – Webinar: Technology and Transparency

THE

11 – Webinar: Incentive Compensation Plan Best Practices

THEME: Documentation • A Winning

June 2017

RFI System

• Why

Submittal Approval Does Not Get You Off the Hook

13 – Webinar: Killer Contract Clauses February 2018 2/28–3/3 – SUBExcel 2018, Tempe, Ariz.

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

• Overcoming

Safety & Health Documentation Challenges: Ensuring Legally Defensible Paper Trails

• Evolving Your

Document Handling with Paperless Takeoff

• Legally

Speaking: The Most Dangerous Subcontract Clauses that Affect Payment

Look for your issue in April.

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

Combat veteran and champion athlete Redmond Ramos was a keynote speaker at SUBExcel 2017 in Denver. Ramos is a cast member on Season 29 of CBS’s The Amazing Race, which premiered on March 30.

TM

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C O M P A S S

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