The Contractor's Compass January 2018

THE

ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

Top Changes You Need to

Make to Your Subcontracts

by Eric B. Travers, Esq., Kegler, Brown, Hill and Ritter

JANUARY 2018

Negotiating Subcontracts

Contract Strategies in

Challenging Markets

by Teresa Magnus, Magnus & Company

Putting Your People First

by Griff Hall, Griff Strategic Leadership

Condition Your Bid for

Leverage to Negotiate a Fair Subcontract

by Timothy Woolford, Woolford Law, PC

Using Healthcare to Build

a Pipeline of Talent

by Mike Bechtol, Redirect Health

Legally Speaking:

Negotiating Subcontracts

by Nicholas W. Schwandner, Esq., Harrison Law Group

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February 28 – March 3, 2018

TEMPE MISSION PALMS HOTEL & CONFERENCE CENTER | TEMPE, AZ

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JAN. 31, 2018

THE

January 2018

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.

Features Top Changes You Need to Make to Your Subcontracts ............ 8

by Eric B. Travers, Esq., Kegler, Brown, Hill and Ritter

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).

Contract Strategies in Challenging Markets......................... 12

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey

by Griff Hall, Griff Strategic Leadership

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.

Putting Your People First....................................................... 14

by Griff Hall, Griff Strategic Leadership

Condition Your Bid for Leverage to Negotiate....................... 16 a Fair Subcontract

by Timothy Woolford, Woolford Law, PC

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.

Using Healthcare to Build a Pipeline of Talent....................... 18

by Mike Bechtol, Redirect Health

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

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

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

LEGALLY SPEAKING.............................................................................. 20 Negotiating Subcontracts

by Nicholas W. Schwandner, Esq., Harrison Law Group

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

© 2018 Foundation of the American Subcontractors Association, Inc.

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CONTRACTOR COMMUNITY New Video Highlights Speakers and Education Offered at SUBExcel 2018 A new ASA video highlights the speakers and education topics that will be offered during SUBExcel 2018, the premier education and networking event for construction subcontractors and suppliers. SUBExcel 2018 will take place Feb. 28-March 3 at the Tempe Mission Palms in Tempe, Ariz.

Register online and make your hotel reservations in the ASA room block at Tempe Mission Palms. The early-bird deadline to register and the hotel room block cut-off date is Jan. 31. Speakers include: • Arizona Secretary of State Michele Reagan • Dave Sanderson, an inspirational survivor, speaker, and author • Teresa Magnus, Magnus & Company • Stephane McShane, Maxim Consulting Group • Stephen Rohrbach, F.A. Rohrbach • Joel Stinson, FMI • Griff Hall, Johns Hopkins University Carey School of Business • Philip J. Siegel, Esq., Hendrick, Phillips, Salzman & Siegel • Bryan Bernardo, LEED-AP, Kitchell Contractors For more information, read a brochure and visit www.SUBExcel. com.

Learn How to Get Better Subcontracts in Feb. 13 ASA Webinar by Eric Travers, Esq. Eric Travers, Esq., Kegler, Brown, Hill and Ritter, ASA’s general counsel, will explain how to negotiate fairer, and better, subcontracts in the Feb. 13 ASA webinar,

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AMERICAN

SUBCONTRACTORS ASSOCIATION

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February 28 – March 3, 2018 | Tempe, Arizona

REGISTER NOW EARLY-B IRD DISCOU NT ENDS

JAN. 31,

2018

The premier education and networking event for construction subcontractors and suppliers

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“Getting Better Subcontracts.” “It is a reality for subcontractors that on most jobs they will be asked to sign, often on short notice and with little time to consider the full implications of all the terms, a contract form prepared by their customer and containing numerous clauses that shift risk in a way that does not reflect what the subcontractor considered when putting its bid price together,” Travers said. In the webinar, Travers will focus on the most common subcontracting issues of concern that arise and will provide practical information on the unique considerations and legal risks of subcontracting. This webinar will take place from noon to 1:30 p.m. Eastern time. Registration is $99 for ASA members and $179 for nonmembers.

Register online.

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Owner ‘Unjustly Enriched’ When Sub Goes Unpaid, Says Kentucky Supreme Court The Kentucky Supreme Court ruled that a construction owner received substantial benefit in a situation when subcontractors had indisputably performed under the contract and the construction owner had never paid for that work. ASA filed an amicus brief on July 18, 2016, in Superior Steel, Inc. and Ben Hur Construction Company, Inc. vs. the Ascent at Roebling’s Bridge, LLC, Corporex Development & Construction Management, LLC, Dugan & Meyers Construction Company and Westchester Fire Insurance Company, in which it asked the Court to overturn an appeals court’s ruling that precluded subcontractors from recovering payment for their extracontractual work under a “pay-if-paid” contract clause and permitted the project owner to benefit from valuable

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extra-contractual work provided by subcontractors without payment, known as “unjust enrichment.” In its Dec. 14, 2017, ruling, the Court agreed with ASA concerning “unjust enrichment,” observing, “[A]ny recipient of a substantial benefit in the form of authorized extra work should not be surprised that payment will be due, eventually….” Thus, the Court affirmed the trial court’s decision that the owner and prime contractor must pay the subcontractors. However, the Court demurred on ruling that the payif-paid clause should not be enforced, saying that issue is better left to the state legislature. Specifically, the Court said, “After considering the various approaches of our sister states, we decline to hold ‘pay-if-paid’ terms are unenforceable as a matter of public policy…. While there are valid reasons for disfavoring ‘pay-if-paid’ provisions, any prohibition against this type of contract clause should come from the legislature rather than this Court.” ASA member Thomas R. Yocum, Benjamin, Yocum & Heather, LLC, Cincinnati, Ohio, prepared the brief for ASA. ASA’s Subcontractors Legal Defense Fund financed the brief. Contributions to the SLDF may be made online.

Court of Appeals Upholds OSHA Silica Rule In a wide-ranging decision issued on Dec. 22, 2017, the U.S. Court of Appeals for the District of Columbia Circuit decisively rejected the arguments made by ASA and the Construction Industry Safety Coalition on the crystalline silica rule issued by the Occupational Safety and Health Administration in March 2016. The rule, which OSHA started enforcing in the construction industry on Oct. 23, 2017, requires construction employers to limit worker exposure to respirable crystalline silica and to take other steps to protect workers.

In a lawsuit filed in April 2016, and

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in later briefs and oral arguments, industry coalition had petitioned for a review of five issues: (1) whether substantial evidence supports OSHA’s finding that limiting workers’ silica exposure to the level set by the rule reduces significant risk of material health impairment; (2) whether substantial evidence supports OSHA’s finding that the rule is technologically feasible for the foundry, hydraulic fracturing and construction industries; (3) whether substantial evidence supports OSHA’s finding that the rule is economically feasible for the foundry, hydraulic fracturing and construction industries; (4) whether OSHA violated the Administrative Procedures Act in promulgating the rule; and (5) whether substantial evidence supports provisions that allows workers who undergo medical examinations to keep the results confidential from their employers and that prohibits employers from using dry cleaning methods unless doing so is infeasible. The court rejected all five of industry’s challenges. However, the Court did agree with the North America’s Building Trades Unions on their petition concerning the absence of medical removal protections. The Court ruled that “OSHA was arbitrary and capricious in declining to require MRP for some period when a medical professional recommends permanent removal, when a medical professional recommends temporary removal to alleviate COPD symptoms, and when a medical professional recommends temporary removal pending a specialist’s determination.” The court directed OSHA to reconsider or further explain those aspects of its silica rule.

In the meantime, ASA will continue to work with OSHA to seek clarification of and to publish additional enforcement guidance on issues that some in the construction industry have found to be confusing.

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The Tax Bill Is Law—Now What?

Now that Congress has passed and President Trump has signed the “Tax Cuts and Jobs Act,” ASA members’ questions have ranged from “What’s in it?” to “What now?” ASA Chief Advocacy Officer E. Colette Nelson offers seven steps that ASA members should take as a result of the new tax law.

1. Consult with your tax advisor to determine how the law will impact your company. Be patient. The new law is long and complex, and even tax experts don’t agree on what some provisions mean. Interpretations may change over time.

2. Review your employee benefit structure. The new law includes provisions dealing with health insurance, family leave, transportation benefits and more.

3. Prepare for a change in your payroll system. The new law significantly alters the structure of the taxwithholding system. The IRS will have to develop and issue new tax tables, and employers will have to implement them in mid-tax year.

4. Help your employees prepare to comply with the new law. Almost certainly, every employee will have to complete a new W-4. They are likely to need help to avoid under- or overwithholding. If necessary, bring in your payroll processor or tax advisor to assist employees.

5. Watch for regulations from the Internal Revenue Service, as the agency issues interpretations and rules of how businesses and employees must comply with the law. Many of these rules will be issued as “interim final” without an opportunity for public comment before they take effect.

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6. Recognize that Congress almost certainly will revisit the law during 2018. The 1986 tax law, which passed after more than a year of hearings and drafting, needed more than 100 “technical corrections.”

The 2017 law was written in only weeks, with more than a few provisions added at the last minute.

Republican Congressional leaders already have said they will revisit some provisions. In the Senate, such corrections will need 60 votes (i.e., Democratic votes) to pass the Senate.

7. Brace for further changes to the tax code in future years regardless of which party controls Congress.

If Republicans remain in control, they will, at a minimum, consider making permanent many of the now temporary provisions. If the Democrats gain control, they will revisit the law to determine how to shift benefits from higher income taxpayers to lower income taxpayers.

Foundation of ASA Updates Lien & Bond Claims in the 50 States Construction subcontractors and suppliers rely on mechanic’s lien and payment bonds to assure their payment.

To help you learn your lien and bond rights in the states in which your company does business, the Foundation of ASA has updated its Lien & Bond Claims in the 50 States, a downloadable manual which outlines the lien and bond laws in each state and the District Columbia.

A mechanic’s lien is a claim against property to secure a debt, such as a debt owed to a construction subcontractor for the value of work performed and materials furnished on a construction project. A payment bond, which is required on most

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public construction, assures the owner that the prime contractor will pay its subcontractors and suppliers.

The FASA manual provides a summary of the basic requirements of each state’s lien and bond laws, including who is covered; critical deadlines for notices, claims and suits; filing procedures; and more. The summary of laws was prepared by Donald W. Gregory, Esq., and Eric B. Travers, Esq., Kegler, Brown, Hill and Ritter, Columbus, Ohio, ASA’s general counsel, with input from attorneys from around the country. FASA Lien & Bond Claims in the 50 States (Item #3006) is $55 for ASA members and $80 for nonmembers.

New Web Site Gives Readers One More Way to Read The Contractor’s Compass Some readers may prefer to read The Contractor’s Compass in a digital, page-flipping format, while others may prefer to be able to print out a pdf and read the magazine on paper.

Now, there’s one more way to read ASA’s official educational journal for subcontractors—online! A new ASA Web site, contractorscompass.org, devoted to The Contractor’s Compass gives readers the ability to read, and search for, articles on the Web. The seven newest articles appear on the home page, and all articles, including from past editions, can be found under the “Articles” link. Links to past PDFs and digital, page-flipping magazines are located under the “Archives” link.

Using the “Search” box at the bottom of the site, you can look for specific topics, like “Legally Speaking” or “Cash Management” for example. If you’re reading an article on a topic and you want to find other articles on the topic, simply click on the boxed keywords adjacent to the article,

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like “Taxes,” “Forecast,” “Claims,” “Bidding,” or “Contracts.” Of course, you can still access The Contractor’s Compass under “News & Periodicals” or “Foundation of ASA Home” via the ASA Web site, www.asaonline.com.

ASA Releases New FAQ on Retainage Retainage, the holding of funds from a contractor until the completion of a contract, is a serious problem in the construction industry. Because of retainage, many contractors and subcontractors do not receive funds they already have earned for work properly performed. Contractors and subcontractors frequently are asked to act as bankers, financing in addition to building, the construction projects on which they work. ASA’s new Frequently Asked Questions on retainage is designed to provide tips on dealing with retainage to both the most experienced in as well the newcomers to the construction industry. The FAQ reviews the types of retainage clauses a subcontractor is likely to encounter and provides guidelines on how to deal with them. The FAQ is available to ASA members as a downloadable PDF document under “Contracts and Project Management” in the Member Resources section of the ASA Web site.

ASA Adds Complimentary ‘Harassment Training’ Webinar to Schedule on Feb. 6 Harassment is rampant. Whether it’s Hollywood, politics, academia or business, you cannot escape the reports. With the heightened awareness employers must do what they are required by law and in their power to prevent harassment in the workplace. In this webinar, Jamie Hasty, SESCO Management Consultants, will explain the broad

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definition of unwelcome sexual conduct and the problems caused by this inappropriate behavior. She will discuss why preventing sexual harassment helps everyone; how to respond to quid pro quo harassment; how to confront harassers and tell them to stop unwelcome behaviors; the negative impacts of workplace flirtations; proper procedures for reporting and investigating complaints; and consequences of false accusations.

This webinar is complimentary for ASA members and nonmembers. Register online.

California Becomes First State to Enact Payment Transparency California Gov. Jerry Brown (D) signed AB1223 on Oct 8, 2017, making the state the first to enact a payment transparency law. The new law requires state agencies to put on their Web sites information that will help construction subcontractors and suppliers determine when and how much their prime customers are responsible to pay them. Specifically, the new law requires that within 10 days of making a construction contract payment, a state agency must post on its Web site the following: 1. The project for which the payment was made.

2. The name of the construction contractor or company paid.

3. The date the payment was made or the date the state agency transmitted instructions to the Controller or other payer to make the payment.

4. The payment application number or other identifying information.

5. The amount of the payment.

“One of the challenges for subcontractors working under the prompt payment laws and ubiquitous pay-when-paid clauses is finding out when their customers are paid,” said

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Daniel F. McLennon, a partner in the San Francisco office of Smith, Currie & Hancock, and the 2017-18 chair of the Government Relations Committee for ASA of California. “This new California law directly addresses that problem.”

He added, “This payment transparency law was motivated by problemsolving discussions in meetings of ASA’s Task Force on Government Advocacy.” ASA Chief Advocacy Officer E. Colette Nelson called on other ASA chapters to follow the lead of ASAC, saying, “California is a bellwether for legislation across the states. Other ASA chapters should follow the lead of ASA of California.” The new California law applies to state contracts valued at $25,000 or above.

Are You Evaluating The Prime Contractor Factor Subcontractors and specialty trade contractors assume the greatest risks and reap the smallest rewards of all the participants in the construction business. In such a hostile environment, subcontractors must take all reasonable precautions to minimize or control risks. One of the surest ways to reduce risks is to be highly selective in choosing its prime contractor partners. Not only is it appropriate for a subcontractor to discriminate when selecting contractors with which it wishes to do business, it is absolutely necessary. ASA’s white paper The Prime Contractor Factor sets forth a process to help an individual subcontractor develop and implement its own program to evaluate and select contracting partners that will treat it reasonably, fairly and honestly in a subcontractor relationship. The white paper addresses: • Characteristics of quality prime contractors.

• Discusses how a subcontractor can develop criteria for evaluating its potential contracting partners.

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• Outlines sources of information.

• Describes procedures to help a

subcontractor develop its own rating system.

• Suggests a process for setting up a preferred contractor program.

The white paper is available free for ASA members under “Bidding and Market Development” in the Member Resources section of the ASA Web site.

ASA’s Glossary of Terms Answers ‘What Does That Word Mean?’

Have you ever read a subcontract document and wondered “What does that word mean?” Do you wish you had a tool to help an employee, new to the construction industry, understand the industry jargon? ASA’s Glossary of Common Construction Contract Terms might be just what you’ve been looking for. The 16-page glossary provides an alphabetical list of terms and acronyms—from AAA to xcu— frequently used in construction contracts and subcontracts and discussions about them, as well as the definition of such terms. The ASA Glossary of Common Construction Contract Terms is available under “Contracts & Project Management” in the Member Resources section of the ASA Web site.

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Top Changes You Need to Make to Your Subcontracts

by Eric B. Travers, Esq., Kegler, Brown, Hill and Ritter In the excitement that comes after getting the call that you have “won” the job, it is easy for even the most conscientious subcontractors to sign the subcontracts they are sent with only a cursory glance at price, scope, and time, and charge ahead with the work. This is a big mistake.

Construction projects are notorious for being “problems in progress.” With so many parties having a hand in the end product, and so much often at stake for the owner, invariably the path to completion of a construction project is fraught with risk.

Compounding this, subcontractors often assume risk that is unfair and disproportionate to their involvement.

Subs finance projects through their labor and materials (providing them

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to the project for a promise of future payment), and while that brings with it enough risks, as the “lower tiers” subs often are asked to sign subcontracts that shift or pass-through risks that more naturally should be borne by others.

Though there is a laundry risk of unfair subcontract provisions that subs could see at any given time, some such clauses consistently find their way into subcontracts. This article will help you identify five of the most offensive provisions, so you can better spot and, if the clause is relevant to you, insist on changes to mitigate, if not eliminate, the risk.

In no particular order, here are the top five changes you need to make to your subcontract.

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Top Change #1—Change Pay-IfPaid to Pay-When-Paid Payment Terms There is a massive difference between a “pay-when-paid” and “pay-if-paid” payment clause.

Pay-when-paid clauses deal with timing of payment, while pay-ifpaid clauses deal with timing and entitlement. The problem is that the clauses can look similar.

A typical pay-when-paid clause may read that “Subcontractor will be paid within seven days after General Contractor receives payment from the Owner.” Though this might appear to suggest that the owner’s payment must come first, and if the owner never pays then the payment requirement

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will kick in, this is not the case in most states. Most courts will interpret such language (variations of which can be found in the trade association forms like the ConsensusDocs and AIA subcontracts) to give the prime contractor a reasonable amount of time to first obtain payment from the owner, but to still carry an absolute obligation to pay the subcontractor if the owner doesn’t pay within such reasonable time.

In contrast, a pay-if-paid clause will (in the states that enforce them, which is most) operate to bar the subcontractor’s right to payment if the owner for any reason fails to pay the prime contractor. Pay-if-paid clauses may state, “The obligation of Contractor to make payment to Subcontractor is subject to the express condition precedent of Contractor’s receipt of payment from Owner.”

Some states void pay-if-paid clauses. But most don’t, so long as the language is unambiguous. Though the language in such clauses can vary widely, a big tip is to look for “condition precedent” in the clause.

If it is there, presume the worst: that you have a pay-if-paid clause, and modify the language. You are not likely to eliminate conditional payment language entirely, but a reasonable compromise is to simply change the language so it mirrors ConsensusDocs or AIA language. If you accomplish this, you will have a pay-when-paid clause, and that can be the difference between eventually getting paid and never getting paid.

That’s a big difference.

Top Change #2—Insist You Are Provided All Subcontract Documents That Are Relevant to Your Work Don’t forget that the “subcontract documents” include documents beyond the “subcontract.” This includes not only the prime contract but documents that may not have existed,

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when you bid the project. Perhaps most important, prime contract responsibilities that the general contractor agrees to are commonly “passed through” to subcontractors via a “flow-down” clause. A flowdown (or “pass-through”) clause is a common provision providing that the terms of the prime contract are binding on the subcontractor, and the result can even be found by a term that makes the prime contract a subcontract document.

Unfortunately, though many subcontractors assume the extent of any pass-through is limited to assuming responsibility for the portion of the prime contract work they are performing, this may not be the case.

Things like prime contract notice provisions, warranties, upfront waivers or agreements to subjugate mechanic’s lien rights, and insurance requirements are all examples of things that a subcontractor might be found to have “agreed” to be bound to through operation of a flow-down provision or incorporation of the prime contract into the subcontract.

Some of this is fair enough, and unavoidable, but if the subcontract is silent on your right to all such documents, you must insist to be given any documents your customer contends relate to your work and subject of to the flow-down clause.

And, so you have a meaningful remedy or defense if you are later caught in such a clause, but were not provided the document in advance, you need to ensure your subcontract makes this obligation a contractual requirement on your customer.

And, if the subcontract only states that such documents “may” or will be made available to you on request, you need to exercise your right to all contract documents up front, before you sign the subcontract, so if there are material or unacceptable provisions, you can resolve them then, before you find yourself in a world of hurt.

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Hundreds of thousands to millions of dollars in mechanic’s lien rights can be lost if your customer agrees to waive its lien rights up front and the court agrees that such waiver (or subjugation of lien rights) was agreed to by subcontractors who signed a subcontract that passed down all prime contract obligations. Similarly, hundreds of thousands to millions of dollars in claims can be lost through untimely notice if the prime contract contains different (shorter) deadlines to provide notice of claims you were not aware of.

In the hurry to get moving on a new job, don’t take on unseen and potentially devastating risks by ignoring a thorough review of all contract document that apply to your work, and making sure your customer contractually commits to providing you, before execution of the subcontract, with all documents it contends form the subcontract documents.

Top Change #3—Do Not Agree to Upfront Waivers or Restrictions on Your Mechanic’s Lien Rights You should never waive lien or bond rights for anything other than payment (and only for the payment received).

Period.

Yet this happens. More often than you would think.

Contrary to popular belief, in many states an “upfront” mechanic’s lien waiver in a subcontract (signed before work begins) can be enforceable.

As important as such rights are to subcontractors, there rarely is good justification for being asked to sign such a waiver, and even less to agree to it.

About the only time a waiver of mechanic’s lien rights on private jobs may be palatable is if the owner is requiring a payment bond for the protection of subcontractors is available to provide the security otherwise available with the liens

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rights. Otherwise, on private jobs, giving up such rights before you even begin work can make it much more difficult to have leverage later on if payment problems arise.

Note, too, that while subcontracts may not have such a waiver or limitation on mechanic’s lien rights, you should care if the prime contract does, because the subcontract will invariably have a flow-down clauses discussed above. Subcontractors working for general contractors who have agreed to upfront mechanic’s lien waivers have opened themselves up to the argument that by agreeing to the flow-down clause they agreed to assume all responsibilities and duties your customer’s agreed to, including to any upfront lien or bond waiver. The way to deal with this situation (upfront lien waiver in a prime contract) is to ensure your subcontract clearly states that notwithstanding anything to the contrary in the subcontract documents: (1) you retain all applicable mechanic’s lien rights available under applicable law; and (2) it is agreed that only you can waive, limit, or subrogate such rights in a separate writing signed by you in exchange for consideration.

Top Change # 4—Ensure You Do Not Accept Design Responsibility An unfortunate trend of late, particularly as “fast-track” construction has become more common, is for subcontracts to impose, either explicitly or through ambiguous language, what is known as “Big D” design responsibility on subcontractors. This can be a big mistake.

Not only does agreeing to design responsibilities impose a whole new set of risks and warranties, damages arising out of allegedly faulty design will not be covered by your insurance unless you carry design professional liability insurance. In many states it is illegal for anyone other than a

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properly licensed design professional to perform architectural or engineering design services.

Tough subcontractors routinely submit shop drawings “up the chain” for approval, the generally described purpose of this is not to be responsible for the “Big D” design, but to show how their portion of the work will be fabricated and installed, and flesh out details on the architect’s drawings or specifications.

If the subcontract expressly requires that a design professional stamp drawings, that is clear. But even seemingly innocuous (and prevalent) language agreeing to comply with applicable codes, certain warranty provisions, or even accepting such responsibilities by operation of a passthrough clause arguably can result in a subcontractor having to defend the claim it agreed to assume an uninsurable design-risk.

In a similar vein, many subcontracts contain provisions obligating the subcontractor to, before starting work, “study and compare” the various contract drawings relevant to the work, and the existing conditions, and report any problems to the contractor or accept responsibility for the costs to correct. The problem is, these provisions also can be a means for the contractor, architect, or owner to argue that either that design responsibility shifted to the subcontractor and/or the subcontractor waived damages resulting from errors or omissions in the contract documents.

In short, unless you have a licensed professional on staff to stamp, have design insurance (and have cleared with your broker that your CGL policy is not affected by it), and are willfully agreeing to purposely Bid D design a portion of the work, all design responsibility for your work should stay with the architect. In the first instance, this may mean completely striking any provisions that shift that risk expressly or impliedly. In the

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second instance (the obligation to “study and compare”) it may mean both striking any language that waives claims for failing to report errors or omissions in the document, and/or insisting that your customer also agree that any such prior review is simply for purposes of your starting construction and is not intended to shift design responsibility to you, or for discovering errors, omissions, or inconsistencies in the contract documents.

Top Change #5—Remove Any Provisions That Attempt to Shift the Risk of Subsurface Conditions Onto You One of the biggest drivers of increased cost on a project is the risk of changes, delays, or additional costs incurred due to the differing subsurface conditions. Not surprisingly, many subcontracts thus attempt to shift the risk of such conditions onto the subcontractor.

Subcontractors should be entitled to rely on the information you are given to bid and build the work. If your subcontract requires you to inspect subsurface conditions before you start work, or to shift onto you the risk of unknown site conditions, including subsurface conditions, you should remove that language. A good middle ground is to modify all such clauses so they appropriately reflect the real life purposes for which you would visit the project site pre-bid (to consider known and observable conditions when preparing the bid).

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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Feature Feature Contract Strategies in Challenging Markets

by Teresa Magnus, Magnus & Company As the construction industry experiences its greatest expansion in a generation, the project owner community is becoming increasingly challenged with achieving positive project results. With straining labor markets and full backlogs, owners turn to their contracting strategies to mitigate risk. Relying on Draconian terms and conditions of the past will not yield the desired results because of the tension and distraction it creates in the project execution team.

To improve the outcome of construction projects, we must first change the dynamics of the relationships between the parties. And while team-building activities and mobilization meetings can improve the way project teams function, ultimately it is the contract strategy in general, and the contract documents specifically, that set the tone and pace of the project and determine the opportunity for success.

Contract Strategies and Process Both the conduct of the owner organization in its approach to the contract strategy and contracting process, and the language of the contract documents, define the relationship among the parties at the inception of the project and for its duration. Focusing the process and the documents on the expected outcomes for the project, communication and issue resolution protocols, and roles and responsibilities for each party will improve the relationships between the parties and yield better results. Too often contracts focus on dispute resolution procedures for the end of a failed project, archaic “notice” obligations, and unrealistic allocation of risk. In addition, many projects have multiple prime contractors and A/E firms, layers of subcontractors, and hundreds of suppliers. With traditional contracts only requiring “cooperation” without necessary process or

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actual intent to cooperate, there is little chance of actual collaboration within the project team. Owner organizations must focus their process on building relationships with the parties to their agreements and amongst the parties, both through requirements in their documents and in their actions.

Contract Packaging In challenging markets, contract packaging can increase an owner organization’s control of the work, reduce project risk, increase the pool of qualified contractors, increase access to experienced, frontline supervision, and increase access to skilled craft workers. Breaking large projects, and especially the construction scopes of work, into smaller packages broken down by areas or trades increases the number of qualified contractors for each of those packages. It also gives the owner organization more direct contact with the contractor planning and performing the work. Bringing specialty contractors into the planning process increases knowledge, reduces costs, and improves schedule. In addition, those specialty contractors employ experienced frontline supervisors and craft workers. This process is in contrast to the more traditional approach of packaging everything into a single document with the expectation that all risk is shifted to the large firm, and that the project will have positive results because the selected firm is “too large to fail.” Actually, what this traditional model accomplishes is building the first wall of separation between the owner and its project. With each additional layer of contracting, the owner is moved further from the work.

Disconnected from the parties performing the work, the owner becomes less informed and less able to react to changes in the project or negative

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trends. And unwinding these contract strategies to take back control of the work when failure becomes eminent is nearly impossible and extremely costly.

Changing Dynamics Contracts should be designed to help the project team remain laser-focused on the construction project and achieve the working dynamics of the team required to be successful. Collaborative agreements are the most successful form of agreement to promote these positive working relationships and address these three main components: fair risk management, the intent to collaborate, and the intent to work efficiently and productively.

The Fair Allocation of Risk Contracts designed to allocate risk fairly focus on defining the party with the greatest ability to control or mitigate the risk, assigning the risk to that party, and outlining the process for resolution if the risk is realized. Allocation of any and all risk to the contractor (and to subcontractors through flow-down procedures) encourages stacking of contingencies, distracts project leadership, and creates tension among the project team. In contrast, highly functioning teams work together to mitigate or manage risks. PDRI and other project management risk assessment tools will identify, document, and rate risk. Kept at the forefront of routine communication and project management, risks are managed by the team together. There are some risks, however, that cannot be controlled by any of the parties. In these instances, the risk must remain with the owner organization, and managed collaboratively with the project team. Especially under these circumstances, a project team alert to the risks is important. The following are a few

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standard areas of risk for construction projects: • Material Escalation • Labor Rate Risk • Foreign-Sourced Materials and Equipment • Change in Law • Schedule Compression

The Intent to Collaborate Contracts designed with the intent to collaborate comprehensively across the project team create and foster an environment of trust and respect amongst the team members and improve project outcomes. These integrated forms of agreement or collaborative contracts include the owner, architect/engineer, construction manager, contractors, subcontractors, suppliers, vendors, and any other party key to the success of the project under a single agreement.

Through the process of developing and signing an integrated form of agreement, the owner signals the intent to collaborate to all parties, and then contractually requires it. In contrast, the tone and approach of the owner organization to a more traditional competitive bidding contracting process may signal something else, and cause project team members to focus more attention and resources on defensive positions, documentation, withholding information, and other counterproductive activity. Under the collaborative agreement, the team functions as one team because the failure or success of one depends on the same for all. The collaborative agreement encourages joint planning and scheduling to improve overall performance of the project schedule. The agreement also outlines joint work processes to improve overall productivity and efficiency, among other benefits.

One last highlight from this form of agreement is the “safe harbor” clause on group-made decisions, risks realized

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during the project, and joint mistakes.

The language requires the team to jointly resolve (and absorb the cost of) these project events. And while the language of the agreement obligates the parties to participate in joint planning and work processes, the project management team has generally built a level of trust during the contracting phase that makes them want to collaborate with the project team. That level of trust and commitment to the project among the project management team creates an environment for having a much more successful experience.

The Intent to Work Efficiently and Productively Contracts designed to promote efficiency and the productivity of the entire project team yield better results in the field and overall. While it may appear obvious that an owner organization expects project teams to be efficient and productive, most traditional contracts contain language quite to the contrary and their projects suffer because of it. At a recent industry event, the president of a global oil company stated that 35 percent of construction costs resulted from material waste, overlap, and mistakes or rework. If that is an indicator of the market, then it is no wonder that the construction industry struggles to achieve stronger productivity results. Language in agreements that requires owner organizations to make timely decisions, foster honesty in sharing known conditions and schedule information, and promote joint planning processes improve the efficiency and productivity from the project management team, through engineering and procurement, and down to the craft in the field.

Agreements that limit liability between parties for shared equipment and resources reduce waste and congestion. Project teams that honestly plan and execute work under reasonable

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schedules and work conditions reduce rework and mistakes. Language that defines roles and responsibilities, especially for shared resources, reduce overlap and rework. Traditional contracts that do not collaboratively address, nor incentivize, the efficiency and productivity of the project team are less successful.

In summary, the challenge of achieving positive results on construction projects in the current marketplace requires owner organizations to assess the dynamics created in their project teams by their traditional approaches to contracting strategies and documents. With strained labor markets and busy contractors, owners turn to their contracting strategies to improve the outcome of construction projects. Changing the dynamics of the relationships between the parties will help the project team remain laser focused on the construction project. Collaborative agreements are the most successful form of agreement to promote these positive working relationships and address these three main components: fair risk management, the intent to collaborate, and the intent to work efficiently and productively. Strong teams, fairly contracted, will yield the strongest results in the field.

Teresa L. Magnus, CPA, JD, is the principal of Magnus & Company, a construction advisory firm committed to improving the experience of the industry by challenging conventional business models through unique thinking, creative solutions, and intelligent execution. Her perspective is based on her 20-plus years of experience in the construction industry serving in roles as the owner, contractor, subcontractor, laborer, and consultant. Magnus will be a featured presenter at SUBExcel 2018, Feb. 28-March 3, in Tempe, Arizona.

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13

Feature Putting Your People First

by Griff Hall, Griff Strategic Leadership Imagine for a moment that $1 million dropped from the sky and landed in your company’s bank account. This money is completely legal and has no strings attached. The only stipulation is that you dedicate the entire amount to one area of your company. How could you spend the money so that it has the most significant impact on the health and success of your business?

Do you focus on equipment and upgrade tools and machinery? So much of your time and energy is spent on ensuring a safe working environment, so new equipment would facilitate your safety goals.

Would it be better to target performance platforms and purchase a dynamic software program?

Technology is the wave of the future so it would make sense to invest in your company’s ability to estimate and project costs, better manage projects, streamline accounting, and accumulate real-time data. Better software saves money in the longterm.

Or should you focus on your people? Traditional practices suggest you hand out raises, but maybe a more competitive and robust salary structure would have a sustainable impact on retention rates and employee satisfaction.

Surely, whatever you choose, you will be better off tomorrow than you are today. But, the question still remains. What would be the best choice?

In 2014, as 24 leaders sat around the table to discuss the strategic plan for a $14 million organization, they considered this very quandary. Let me assure you there was no million-

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dollar gift at stake. But, the executive team entertained the question and discovered that it focused their attention on the most valuable asset to the organization—their people.

As I was facilitating the planning process, I proposed this question of “what if?” At the time I was using it as a conversation starter, but the discussion that followed has had a dramatic impact on the financial health and value of the organization.

The answers to the question took the organization on a new and exciting journey. Those answers led us to a fundamental shift in how they approach their mission and invest time, energy, and money. The team’s ultimate decision to invest in a different staffing model than their industry norm has set this organization apart and made it a model in its region. Not surprisingly, this organization’s retention rate increased 10 percent.

As a student of leadership, it is my mission to help people become better leaders. Of course, as a leadership champion I am going to encourage any company to look at how it can develop its people. When companies take a people-centric approach to running their business, it is the people that grow the business.

I am honored to be speaking at SUBExcel 2018 in Tempe, Ariz., this March. I want to use this opportunity to build the case for why developing your people is so critical to the success of your company. In March, I will discuss how company leaders can better harness the strengths of the their workers and better manage the people equation. Spoiler alert— traditional management practices don’t work here.

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The answers to building a successful, people-centric company are simple. But, they are not easy. It has been over 25 year since the term “employee engagement” entered the workplace arena, yet companies still struggle to implement sustainable engagement practices, instead relegating engagement to include job satisfaction surveys, internal marketing communications, and awards programs.

The forces driving many organizations to perform are not necessarily focused on developing leaders at all levels. And there are good reasons CEOs look with skepticism on corporate-wide people development: 1. It takes the time and dedication of the top leadership to step back from the day-to-day business of running a company and look at the big picture.

2. Traditional management practices do not easily incorporate leadership models that require the scarce resources of time and money. Engagement models can be difficult to maintain over time.

3. Employee engagement cannot be relegated to a program or a department. To be effective, engagement practices must incorporated throughout the organization.

4. The return on investment is hard, but not impossible, to quantify.

Without a clear ROI, it can be more difficult to bring decisionmakers on board in a companywide development program.

Regardless of the natural impediments to changing corporate culture, building new employee

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development programs, or aligning departments across the board with people-development best practices, companies that want to continue to grow and perform must look to supporting their biggest asset every step of the way. It is not enough to hire the right people, and then pat them on the back when they do a good job. The ability to attract, engage, and retain talent should be a No. 1 objective of every successful modern leader and company. With an aging population, a shrinking workforce, and a growing intolerance for the immigrant population that provides much of the unskilled labor in the United States today, there is a growing talent and labor crisis that is affecting highly skilled and the unskilled alike.

Why Putting All Your People First Is Good for Business Let’s be honest about the “T” word.

Turnover is a top reason to make an investment in how your company supports your workers. While the construction industry’s 20 percent rate of turnover is just under the national average, it was still high for the industry. Moreover, for workers 25 or under, turnover has been recorded as high as 38 percent, according to Construction Dive. We can expect this figure to remain high as the economy improves overall, and workers have more opportunities to leave for better paying jobs.

While determining a specific dollar amount for just how much turnover costs your company can be difficult, we can make a realistic estimation.

Calculate separation costs, including administrative process time,

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vacancy costs (added overtime, lost productivity - downtime), search (advertising), selection and sign on costs (screening, interview, drug testing, orientation and on-the-job training). These don’t include soft costs, such as ramp-up time to bring a new employee up to speed. Add all of these up for each departing employee and the numbers start to look pretty expensive. For some companies, this can range from tens of thousands to 1.5 times annual salary per person.

Imagine a company has a 20 percent turnover annually. If, with the broad support of the company leadership, steps are taken to reduce turnover to 10 percent, that savings drops straight to the bottom line.

A 400-employee janitorial company out of Cincinnati, Ohio, had a big problem. Their turnover was 107 percent. Yes, that is as bad as it sounds. In less than a 90 days, 428 employees had cycled through the company. Admittedly, this is just above the industry standard. The jobs are low paying, with little opportunity for advancement. Not surprising, team spirit and employee moral were low. But, there was a lot of work available, and the leadership team was very busy running the company.

It wasn’t until they started losing clients that the owner and general manager sat down to address the issue.

By talking with their employees they were able to determine a solution that would affect a significant percentage of their staff. When the owner hedged at the $15,000 a month cost, the general manager handed him a breakdown of what their turnover cost—based on their current

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payroll, turnover was, conservatively, costing them $2 million a year. That’s almost $170,000 month, or $40,000 a week.

I will be speaking more about this company at SUBExcel 2018. The company spent three years solving their turnover problem, but the time and energy was well-worth the effort.

They have had a 7 percent turnover rate for the last 5 years.

The big question is, how do you manage the people equation? Thanks to technology we have a lot of data at our fingertips. But data is only as valuable as the decisions it enables.

The first step is talking with your employees, whether you have 25 or 2,500. Whether you choose to use a survey, focus groups or face-to-face, start small and act, publicly, on the information you receive. This show of good faith will help you more successfully identify many other pieces of the complicated puzzle of employee engagement.

Griff Hall has held three chief executive positions, been a commercial and social entrepreneur, and is part of an academic community studying and teaching leadership, strategy, and ethics. He has been on the faculty at Johns Hopkins University Carey School of Business for 19 years, focusing on strategy, leadership, and ethics. Three years ago he led a team researching high performance cultures in the technology industry together with successful practices for large scale organizational transformation.

Hall will be a featured presenter at SUBExcel 2018, Feb. 28-March 3, in Tempe, Arizona.

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Condition Your Bid for Leverage to Negotiate a Fair Subcontract

by Timothy Woolford, Woolford Law, PC Many subcontractors often incorrectly perceive that they are powerless to negotiate better subcontract terms.

After the bid process is complete and price and scope negotiations are concluded, general contractors usually send the subcontract to the subcontractor advising that it has to be signed on short notice. Over the years, these subcontracts have become more and more complex and very one-sided.

Many subcontractors believe that if they object to the contract terms— or request changes—they will alienate the customer, lose the job and the customer will move on to the next bidder, who will happily sign it without modification. GCs often tell subs that their “policy” prohibits any changes to the subcontract or that all other subs

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think the subcontract is fine and sign it with no hassle. If you tell the customer that you will not sign the subcontract, the customer might argue that you are bound to the subcontract even if you refuse to sign it. In many states, the customer might be correct based on the legal doctrine of promissory estoppel. This doctrine provides, in essence, that where a GC reasonably relies upon a subcontractor’s bid and uses the bid in the computation of its bid to the owner, an implied agreement is formed and the subcontractor is bound to its bid. If the subcontractor refuses to perform, or “jumps,” the customer can sue for breach of contract and recover the additional costs incurred in using another subcontractor.

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One of the most effective ways to avoid this dilemma—and a tool that can dramatically increase your bargaining power so you can negotiate changes to the subcontract later—is to condition your bid. Very few subcontractors condition their bids, but more should. A simple but effective way for a subcontractor to condition its bid or proposal is to include the following language: “This bid is subject to mutually agreeable contract terms being reached.”

If you’ve conditioned your bid in this way and the customer accepts your price and scope and later sends you an unacceptable subcontract, you would be within your rights to refuse to sign the subcontract and to

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walk away from the job without liability. With a properly conditioned bid, you could not be held liable if you refused to sign the customer’s onesided subcontract. This is because the customer would probably not be able to successfully argue that it reasonably relied on your bid. After all, your bid specifically informed the GC that it was conditioned on a mutually acceptable subcontract. The customer would not be able to claim that it relied on your bid when your bid clearly stated that it was conditioned on a mutually acceptable subcontract. The doctrine of promissory estoppel would not apply, and a subcontractor can walk away without liability if it wishes.

When the customer realizes you can walk away without liability, it is usually much more willing to accept some or all of your proposed revisions. Simply by conditioning the bid with the above language, you now have more leverage to negotiate and convince the customer to accept your changes. If your bid is conditioned, a legal and binding subcontract is not formed until you and your customer agree on the terms. Because it may be impractical for the customer to “switch horses” at that stage of the game, the customer is much more likely to negotiate with you to reach a fair contract.

A more aggressive approach to conditioning a bid is to include a set of terms and conditions with the bid and to state that the bid is conditioned upon acceptance of the terms and conditions. ASA members are encouraged to review the bid proposal form available in the ASA Subcontract Documents Suite located under “Contracts and Project Management” in the Member Resources section of the ASA Web site at www.asaonline. com. You can use that form or customize one to suit your company’s preferences. (You are well advised to

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consult with an experienced construction attorney about the terms and conditions of your bid). If the customer tries to accept the price and scope but reject the terms and conditions, it will have made a “counteroffer” and you are again free to walk away without liability. Once again, rather than let you walk away, the customer will probably be much more receptive to entertaining your subcontract revisions. If the customer says nothing about the terms and conditions and instead directs you to start work before a subcontract is actually signed, a binding subcontract may have been formed consisting of your bid and its terms and conditions. Remember, an offer (such as a bid or proposal) can be accepted by conduct—signing is only one of several ways for a binding contract to be formed. A subsequent demand by the customer that you sign a new subcontract in order obtain payment would likely put the customer in breach of the subcontract. As in the prior situation, you may not want to walk away because you may want or need the work. However, because you have conditioned your bid and created a strong argument that a contract was already formed, you now have much greater leverage to convince the customer to eliminate the unfavorable terms in the subcontract.

Still another option is to condition the bid to the use of a specific contract form. An example would be the following: “This bid is subject to a mutually agreeable contract and if none can be reached, the parties agree to use the Standard Form AIA A4012017 Subcontract Agreement (or the ConsensusDocs 750 Agreement between Constructor and Subcontractor).

If your bid is conditioned with this language and you are asked to start

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work before the contract is provided to you, the subcontract would consist of the AIA contract and the terms contained in your proposal. If a onesided subcontract is sent later, you have the right to reject it and insist that the subcontract consist of either the AIA or ConsensusDocs agreement. You might elect not to insist on the use of the AIA or Consensus Docs subcontract if the GC agrees to your reasonable changes to make the subcontract fair. The point is that by conditioning your bid, you have now obtained considerable leverage in the negotiations. When the customer realizes that you could walk away or that you have the right to insist on the AIA or ConsensusDocs agreement, it is often suddenly willing to negotiate fairly.

(The ASA Bid Proposal, which is part of the ASA Subcontract Documents Suite, conditions your bid on the ASAendorsed ConsensusDocs 750 subcontract document.)

Having conditioned your bid in any of the foregoing ways, you may now have the leverage to negotiate fair terms such as: eliminating onerous conditional payment clauses like payif-paid, eliminating retainage (or at least reducing it when your work is 50 percent complete), work stoppage if you are not paid, payment for stored materials, striking liquidated damages, an acceptable procedure for resolving disputes, and so on. Even one or two targeted revisions to a one-sided subcontract can sometimes make a huge difference in whether you get paid or not. Follow these tips to gain critical leverage to work out fair terms.

Timothy Woolford, Woolford Law, PC, is a construction attorney in Pennsylvania that represents subcontractors and other construction professionals. He is also an adjunct professor of law at the Penn State Law School where he teaches construction law to second- and third-year law students.

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17

Feature Using Healthcare to Build a Pipeline of Talent

by Mike Bechtol, Redirect Health Most business owners view healthcare as a giant hassle, enormous expense and necessary evil. For companies that provide health benefits, it’s one of the costliest items on the P&L. With the ongoing rise in insurance premiums, healthcare takes a bigger bite out of profits every year.

But companies actually can grow their businesses by providing free healthcare.

This sounds outlandish and backward. The majority of employers pass a portion of costs on to their employees, but healthcare expenses still eat into the bottom line. If anything, it seems like offering free healthcare would kill profitability altogether.

Yet companies nationwide are using free healthcare to attract top talent, retain key employees, and expand their businesses. It’s not hurting the bottom line—it’s boosting business—and nowhere is this more evident than construction trades.

Building a Pipeline of Talent Competition for talent is very high.

Employers often feel like they can’t be choosy with their hiring—that they need someone (anyone) on the job immediately. It’s a bad position to be in, and the inevitable result is high turnover. This costs a business dearly, even if turnover is among low-wage employees. For example, the cost to replace a $10-an-hour employee is estimated at more than $3,000 when factoring in lost production, training costs and hiring.

Every business owner would much rather hire the right person who will stick around and help grow the business over the long haul.

Offering free healthcare gives businesses a significant edge in recruiting and retaining top talent.

Consider this real-life scenario: an

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employer in Arizona was seeking to hire two employees for his business. He placed an ad on Craigslist that included an offer of free healthcare. In two hours, he received nearly 300 calls. The two men he hired were vastly more qualified than the 20 people he already employed. He learned he could afford to be choosy.

But how could he afford to offer free healthcare?

A Smart Healthcare Strategy Traditional medical insurance is expensive and unpredictable. In most cases, companies pay a percentage of the premium—say 75 percent— and employees pay the balance.

Since health insurance is so expensive, companies often choose plans with a lower monthly premium and a higher deductible, meaning employees pay their portion of the premium along with a deductible in the order of $3,000, $6,000 or even $9,000.

According to the Social Security Administration, 51 percent of working Americans earn less than $15 an hour. This is true of a majority of workers in the building and construction trades. Many workers decline to participate in employer-sponsored health benefits because they simply can’t afford their share of the costs.

The one-size health plan clearly does not fit all.

Self-insurance is a better way. It might sound risky or expensive, but businesses that self-fund take back control of their spending and customize their health plans to meet the needs of employees across the pay scale. In fact, a smart self-insurance plan is considerably more affordable for businesses than traditional medical insurance—even for companies that provide free healthcare.

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What Is Self-Insurance?

Companies that self-insure assume the claims risks of their employees in a limited and predictable way. Instead of paying premiums to an insurance company, they fund a claims pot and pay providers directly. In most cases, businesses that self-insure hire a third-party administrator to handle all claims processing, administration and other paperwork. They also purchase stop-loss insurance to cover health expenses beyond a certain threshold.

A strategic plan like this—one that limits financial risk and meets the needs of low- and high-wage employees—pays considerable dividends when it comes to building a quality workforce. The offer of free healthcare—especially for workers who don’t traditionally receive benefits at work—is too good to pass up.

Employers have plenty of candidates to choose from. Meanwhile, turnover decreases because workers have a reason to stay and healthcare they can actually use—not a high deductible they can’t afford.

Building a Strategic SelfInsurance Plan A smart plan includes the following components: • Free Routine Care: Most traditional plans include deductibles and co-payments, creating a barrier to care. Lowwage earners, especially, may choose not to seek treatment because they’re concerned about the money. This may result in extra sick days or reduced productivity.

In some cases, health issues left untreated may become worse— and much more costly. A smart self-funded plan offers routine health services at no cost to

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employees. Treatment of common conditions like sinusitis, flu, colds, and minor injuries is inexpensive for the business, but highly valuable for employees.

• Stop-Loss Insurance: Companies that self-fund often purchase stop-loss insurance to cover claims that exceed a certain dollar amount. For example, claims costs may skyrocket for an employee who receives a cancer diagnosis or is injured in a workplace accident. Stop-loss ensures the employee receives the necessary healthcare while protecting the business from unexpected financial loss.

• Lower Workers’ Comp: A worker

without health coverage might use workers’ compensation to cover treatment of a minor injury—even if the injury was sustained outside the workplace—and the cost to the business could be significant. A smart self-funded plan will reduce workers’ comp claims by giving employees an appropriate and affordable route to receive care.

This will also improve eMod scores over time.

• Care Coordination. Most companies that self-fund hire a TPA to administer the plan. To realize the full benefit of self-insurance, many businesses partner with

a third-party organization like Redirect Health to help workers navigate the healthcare system and get the care they need, at the right price and at the most appropriate site of service.

Mike Bechtol is director of membership of Redirect Health, a Scottsdale-based company that makes healthcare easy and affordable for individuals, employers and brokers. For more information, visit redirecthealth.com or call (888) 995-4945 or send email to nextsteps@redirecthealth.com.

New On-demand Video from FASA When it comes to managing your business, the Foundation of ASA is your partner in education. View and listen to FASA’s on-demand videos at an individual workstation or in a conference room for group training.

Your order includes access to the on‑demand video any time, and as many times as you’d like! This is just one of the on‑demand videos

“Using the ASA Subcontract Documents Suite” (Item # 8093) In this video-on-demand, presenter Eric Travers, Esq., Kegler, Brown, Hill and Ritter, ASA’s legal counsel, examines the ASA Subcontract Documents Suite and explains how these tools provide subcontractors with the “ammunition to fight back” against unfair subcontract terms. $65 ASA members | $95 nonmembers This and other on-demand videos are available through FASA’s Contractors’ Knowledge Depot.

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Legally Speaking CONTRACTOR COMMUNITY Negotiating Subcontracts

by Nicholas W. Schwandner, Esq., Harrison Law Group Back in my high school football days, one particular coach loved to walk into the weight room and yell the old adage that, “proper preparation prevents poor performance.” There was an extra word in the phrase, but you know what I mean. After hearing the phrase yelled so many times, it has been burned into my brain. The adage certainly applied to football, but since then it has proven true in virtually all aspects of life including negotiations.

Proper preparation is critical in subcontract negotiations because the starting point is typically the general contractor’s standard subcontract, which was written to favor the general contractor. General contractors also have the benefit of being familiar with their own subcontract. Subcontractors, on the other hand, may need to evaluate and comply with different subcontracts on each project.

Identify the Risks The first step in negotiation preparation is reviewing the proposed subcontract terms and comparing them to the specific project to identify which risks are present and which risks are not. For example, if the subcontract’s progress payment terms require lien waiver/ release forms to be submitted with each requisition, but form is not attached, it becomes a significant risk.

General contractors will occasionally require a previously undisclosed waiver/release form that is unconditional (i.e., it may be enforceable even if payment is not received) or that imposes new obligations on the subcontractor that were not included in the subcontract (such as adding an indemnity obligation). Identifying these risks prior to executing the subcontract provides an opportunity to negotiate a fair waiver/release form before the general

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contractor has the leverage of withholding payment.

Another common risk is dispute provisions that require litigation to be brought in the general contractor’s home state, which may be far from the subcontractor’s headquarters.

Litigating in a court that is a hundred miles away—or more—can put the subcontractor at a disadvantage for enforcing payment obligations. Identifying an unfair forum-selection clause prior to executing the subcontract allows the subcontractor to negotiate a revision so that litigation will be where the project is located, which puts the subcontractor on equal footing.

Pick Your Battles Picking your battles wisely is a combination of choosing to negotiate provisions that actually are negotiable and that are worth negotiating. If a mechanic’s lien or payment bond claim will available on the project, the risk of nonpayment presented by a pay-if-paid clause may be reduced and the juice may not be worth the squeeze to conduct a difficult negotiation to strike the pay-if-paid clause from the subcontract.

On the other hand, if payment bonds will not be available and the subcontract contains an advance waiver of lien rights that the governing jurisdiction will enforce, the general contractor may be the only entity the subcontractor can look to for payment making a negotiation to remove the pay-if-paid clause worthwhile.

A subcontractor is more likely to be successful in negotiating its subcontract if it considers the terms, project at issue, past and future business relationship with the general contractor, and then limits its requested revisions to key issues. This stage is also when the subcontractor should identify what

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leverage it has to demand subcontract modifications.

First a Phone Call, Then in Writing Phone calls are a great start to negotiations. Use an opening phone call to determine if requested revisions will be agreed to or, if not, why the general contractor is resistant to a revision.

A phone call is an efficient way to learn the specific basis for refusal so that it can be addressed. After the phone call, a written follow up by letter or email is advisable. Letters and emails allow the subcontractor’s arguments to be easily and accurately circulated amongst the higher-tier decision making team as well as forwarded to the project’s owner if necessary.

Written communications also facilitate setting forth the subcontractor’s reasoning instead of bare requests for revisions. It should not be assumed that the general contractor will automatically understand why a revision to the subcontract is requested. To avoid having a request cursorily denied, an explanation of the reasoning increases the chances of success because most people can be persuaded when presented with practical and legitimate reasoning.

Use Project-Specific Arguments When Available Develop project-specific arguments for why your requested changes are appropriate. Arguing that your company should not be required to provide a bond because the project characteristics make it likely to experience significant delays, such as government projects, and that the bond will tie up a significant portion of your bonding capacity is more persuasive than an unexplained request to omit bonding.

C O N T R A C T O R ’ S

C O M P A S S

Negotiating Tone and Style Negotiating tone and style is largely dependent on the individual negotiator’s personality. Most effective negotiations, however, maintain a businesslike and evenhanded tone. An aggressive or heavy-handed style may occasionally work and in limited instances possibly be called for. But more often than not it causes the opposing negotiator to dig in his or her heels. No one wants to feel bullied, so a heavy-handed style risks the opposing negotiator rejecting a request, that they otherwise would have agreed to, simply to avoid the appearance of being pushed around.

Tone and style has to fit the individual, but maintaining a professional posture is frequently the greatest chance of negotiation success.

Frequently Successful Arguments There are many types of arguments that can be made in subcontract negotiations. The following, in no particular order, are arguments that tend to fit the construction industry well: Prohibited by Law. A subcontractor can argue that certain requirements are prohibited by law. For example, in certain jurisdictions government construction projects are subject to a statutory prohibition against sole source requirements. If the specifications require that a product be used that is only available from one supplier, i.e. a sole source, the requirement may be contrary to law and the subcontractor is entitled to substitute the specified product with an equal product available from multiple sources. This argument can make competitively priced materials available.

Value Engineering. Similarly, value engineering arguments that the same quality end-product can be achieved by

T H E

C O N T R A C T O R ’ S

an alternative lower cost method are compelling.

Mutual Benefit. A subcontractor can argue that its requested revision will benefit both the subcontractor and the general contractor. For example, revising the subcontract’s scope of work addendum may clarify what services will be provided if the project’s specifications are ambiguous.

Past Success. Providing an example of a previous project where the requested revision was made and had a successful result is persuasive. This argument lessens the risk perceived by the general contractor that it will be the first to try something and the result is uncertain.

Anchoring. Anchoring, which is intentionally asking for considerably more in the opening offer than the ultimate goal, plays on the mental effect the strategy causes. A subsequent lower offer appears more reasonable by comparison to the intentionally high opening offer.

Uniformity. A subcontractor can also take the position that it’s request is reasonable because the requested change brings the subcontractor’s rights in line with the general contractor’s own rights. For example, in a negotiation to remove a lien prohibition from a subcontract, the subcontractor may argue that the general contractor’s prime contract does not include a lien prohibition, so the subcontractor is merely asking to enjoy the same protections for its business that the general contractor has.

Horse Trading. If there are multiple points of contention in a negotiation, horse trading may be effective.

Agreeing to concede on one issue if the general contractor will concede on another is commonplace and a good way for both parties to walk

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away satisfied—or at least equally unsatisfied.

Framing. Framing is strategically describing the issue. A subcontractor can strategically describe the requested revision not as changing an unfair contract provision but rather as the need to protect its business, which is a sentiment all construction companies can identify with.

Inappropriate for a Particular Trade.

Finally, a great argument is that a particular subcontract provision does not fit your particular trade. It is difficult to dispute that the site work subcontractor should not be subject to a boilerplate retainage provision that does not release retainage until the entire project is completed. A subcontract provision that in practice has one effect on the painter may appear quite unreasonable when negotiated by the site work subcontractor who will complete its work months or years before the project is completed.

These are only a few of virtually unlimited negotiation arguments. With the proper preparation of identifying risks, picking the right subcontract terms to negotiate, and then pursing the negotiation with sensible arguments, subcontracts can effectively be negotiated despite the tendency to view them as take it or leave it.

Nick Schwandner is a construction litigator at Harrison Law Group and practices in Maryland and Ohio. He represents subcontractors and contractors on public and private construction projects with a particular focus on payment-related and defective work disputes. He can be reached at (513) 284-7893 or nschwandner@harrisonlawgroup.com.

J A N U A R Y

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ASA/FASA Calendar

Coming Up in the February 2018 Issue of ASA’s

6 — Complimentary Webinar “Harrassment Training” presented by Jamie Hasty, SESCO Management Consultants

THE

February 2018

13 — Webinar “Getting Better Subcontracts” presented by Eric Travers, Kegler, Brown, Hill and Ritter

Theme:

28–March 3 — SUBExcel 2018, Tempe Mission Palms Hotel, Tempe, Ariz.

Engaging with Customers

March 2018 13 – Webinar “Technology and Transparency, Part II— Linking Technology to Performance” presented by Stephane McShane, Maxim Consulting Group April 2018

• 10 Tips

to Prevent the Afternoon Slump

• Innovative

Legal Procurement Models

• Education

10 — Webinar “Lien & Bond Claims” presented by Timothy Woolford, Woolford Law, P.C.

Offerings at SUBExcel 2018—Tempe, Arizona

• No

May 2018 8 — Webinar “Change Orders” presented by Joe Katz, Huddles Jones Sorteberg & Dachille, P.C. June 2018 12 — Webinar “Cash Management” presented by James L. Salmon, Benjamin, Yocum & Heather, LLC

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

More Cold Calls—Better Ways to Get Your Foot in the Door

• Legally

Speaking— ICE Worksite Raids

Look for your issue in February.

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

AMERICAN

SUBCONTRACTORS ASSOCIATION

TM

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