Why Should Subcontractors Care About Implementing Lean?

February 2019

 

by Jim Cavaness, MMC Contractors West, Inc.

You have probably been using Lean ideas for years but did not know the process was called Lean. It is hard to build a team or to get a group of people to achieve a common goal without using some Lean principles. It is not that Lean invented these efficiency ideas but more that Lean has gathered them into a process that can be studied and implemented. Not only can these ideas be studied, the ideas themselves become a common language for the team.

When bringing people and companies together to achieve a common goal, most bring their communication skills and processes with them. This can create confusion for the team. This confusion can lead to miscommunication, which can lead to mistakes that affect the bottom line and ultimately the delivery and quality of the project. Wouldn’t it be nice if everyone spoke the same language and had an agreed upon process for the achieving the common goal! The Lean process and Lean tools are just such a system.

There are many types of Lean practitioners. There are the ones where they have heard of it and are sitting on the sidelines to see if they ought to get involved. There are those that have been directed by their boss to become Lean. Sometimes even the boss does not know what he means by that statement. There are those that are accused of practicing “Lean Lite.” Then there are the Lean practitioners who believe that you use all the Lean tools, all of the time.

These are all stages of the growth in someone’s Lean journey. They represent a willingness to change, to try to do better. Like any new endeavor, it is nice to start at the beginning. However, where is that? The beginning is anywhere you start. Just start somewhere. Pick a Lean tool and start to use it. See where it fits in your operation. See how you can possibly make your operation better or improve the use of the Lean tool.

Lean is not a panacea. It is not something you can buy. It is not a commodity. It is not a pill you can take or a single book you should read. It is a process of learning as individuals and teams of people with common goals, to add value to the end product. It is a lot of hard work. It is thinking outside the box. It is taking chances. It is a way of doing things differently. You have heard it said that the definition of insanity is doing the same old things, the same old way and expecting a different result. Being a Lean practitioner, working to become “Lean” is like searching for Nirvana. You cannot really get there, but you can get closer!

In the Lean world, everyone is held accountable. That’s right. Accountable. It is a staple of the Lean process. Everyone is counting on everyone else to do what he or she said they were going to do, when they said they were going to have it accomplished. It is better to admit a problem in the early stages of a project than it is to wait until it becomes an emergency. This applies to all team participants. All team members hold themselves and each other accountable and look for ways to either get help for themselves or help others meet their goals and deadlines.

So, why should you care to start on your Lean journey? Money. The short answer is money. However, money is only one of the many conditions of satisfaction why subcontractors are in business or should care about implementing Lean. Most subcontractors and specialty trade contractors have already developed a process where they are as efficient at making money as they can be, or so they think. It is a belief of the general Lean practice population that you can always do better. There is always room for improvement, which is one of the two pillars of Lean. Although, money may be one of the many reasons to practice Lean, there are many connected benefits. Employee engagement, employee satisfaction, employee safety and value delivered to the customer.

Efficiency equals money, right? Nevertheless, it is the efficiency of the whole system that is truly important. There is a paradox between the efficiency of the resource and the efficiency of the flow. One department in the system may become incredibly efficient unto itself. However, the department that feeds into very efficient department may experience a backup and not be able to effectively transfer work into that very efficient department. At the same time, the very efficient department may take longer to be so efficient that they slow their feed into the next department. This creates a “log jam” and destroys the flow of the process.

The second pillar of Lean is respect for people. Respect is given in many ways and employee satisfaction comes in many forms. Ownership in the process is one way to show the employee that the company does not just look at them as a number. That they and their families matter. When employees have input as to how a process is supposed to be, they will more often follow it because it was their idea. It is easy to understand. If people and not computers or machines do all this work, how our people think and feel will greatly affect the quality of the work being put in place.

Everybody gets to go home as they left their home to go to work. Safety is of the utmost importance. People have many reasons for being in the construction industry but most of them stay because it affords them a good living. Now, if they get hurt in anyway, it will affect their ability to do so. Therefore, it is imperative that working safely should always be planned and thought about when executing the job. This planning starts before actually doing the work. It is well documented that if accidents happen on a project, its costs will affect the bottom line. It also makes sense that no team members or owners will want to work with a company that has a history of accidents. The accidents they cause sometimes affect others and are not always confined to their own employees.

Customer satisfaction is another reason to practice Lean. The customer most always wants what they want, when they want it and the value they expected to get. If the customer feels like you really want them involved in the process, they will feel they have a better chance of getting what they want. By participating in the process, the owner will also understand why certain things need to happen the way they do. This can help to solidify a relationship for future work. It is hard enough to get new customers. It is easier to keep existing customers.

As owners, general contractors and trade partners continue to evolve toward Lean, it only benefits the whole if everyone shares a common language. It benefits the individuals by giving them a vehicle that at least has the tools to assist them in being successful in their journey. It is really not that difficult. You are already doing it under a different or no name at all.

Jim Cavaness is the service general manager for MMC Contractors West, Inc., Las Vegas, Nevada. He can be reached at (702) 889-6800 or jcavaness@mmccontractors.com.

 

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Lean Construction: A Primer for Subcontractors

February 2019

 

by Jim Cavaness, MMC Contractors West, Inc.

There are so many different variables and conditions of satisfaction that must be considered by all involved in trying to bring a project to successful fruition. As a specialty contractor, we have a unique perspective on the use of Lean construction processes. This perspective is simply that—a personal and professional perspective. It may not work for everyone and every situation. Lean is constant improvement!

In its simplest form, the Lean construction process is meant to improve how owners, architects, engineers, general contractors, and specialty contractors work together to achieve a successful project with the least amount of waste. While a simple idea in nature, there are many obstacles to overcome when it comes to practicing Lean construction. However, when we focus on working together and building the right team, we’ve found that’s the best approach to accomplish goals.

In the traditional way that a project is conceived and brought to completion, there are many areas of apparent wasted time, effort and resources. So let’s review a hypothetical traditional project from a specialty contractor’s point of view, and see individuals and teams would benefit from a project being completed with a process that allows for an on time, under budget, and gives the owner what it originally envisioned. For discussion purposes, various steps have been left out of this review.

The Current Landscape

There are many routes that a project can take, yet, there is a general direction that is followed at the inception of a project.

  • The Idea. The owner has something in mind and is ready to make the investment to make it happen. There’s a general idea of budget and timeline and a Performa that makes economic sense. In order to make this idea into a reality, an architect can become involved as one of the first step in the construction process.
  • The Drawings. Given the input and budget from the owner, the architect begins designing using the specifications available. The goal at this stage is to provide excellent customer service and deliver an exceptional final product. Once the team has created plans that are at some stage of completion, or complete, they are then sent out to be priced by general contractors.
  • The Bids. Usually, general contractors will work closely with specialty contractors to outline bids for a project. Once bids have been obtained, they are turned in and all contractors anxiously await to hear if they’ve been awarded the business.

In a perfect world, the next phase includes the owner carefully evaluating all project bids and choosing the right team for the job based on merit, past performance, reputation, and detailed pricing. However, it’s not uncommon for owners to have sticker shock at this point and request design changes from the architect to help them get to a more digestible number. This step back slows the momentum of a project and also means everyone involved has expended energy on something that will not come to fruition.

A Team Approach

A successful Lean project usually starts with a Target Value Design and Conditions of Satisfaction discussion between the owner and the team members it would like to include in the initial informational planning. This helps to eliminate the wasted time in effort of designing and planning a project that doesn’t fit the Performa.

The usual next step is to utilize the Last Planner® System to look at schedule, identify tasks and milestones that need to be implemented into the project for a timely delivery.

A guiding principle of Lean construction is maintaining the flow of a project. When we stop moving forward, we start accumulating waste. Complementing this, Lean construction is also based on the idea of “pulling” a project rather than “pushing” it. Ideally, the owner receives exactly what it has asked for and the construction team has offered solutions that everyone is comfortable with. But we do not live in a perfect world.

Common language and improved communication is one step toward finding the sweet spot in satisfying the needs of everyone involved. When we use unifying language and Lean processes, we’re able to work together more efficiently. Not only that, but we avoid veering off track and slowing the project.

Creating a cohesive team is the very root at what makes a successful project. Relationships are built on trust and communication and when those two principles are in place, the team functions like a well-oiled machine.

For example, general contractors rely on specialty subcontractors to execute a big portion of the work on a project. It takes a lot of time to continually educate specialty subcontractors on the processes and language they use to ensure they are following their guiding principles. The more specialty subcontractors understand the process, the better their performance will be. Having a solid team of specialty subcontractors gives the general contractor a significant competitive edge. When the general contractor can spend less time focused on re-educating the specialty subcontractors, more time is dedicated to the project, thus helping ensure it stays on track.

From the specialty subcontractor perspective, this is their opportunity to be of service in the project, and in doing so, make themselves invaluable to the owner and general contractor. Being part of a good team helps the team become more profitable, which subsequently results in more people wanting them on their team.

Learning the Language

The Lean Construction Institute has put together an exhaustive and comprehensive process that teams can use to develop a common language and process. This language and process can be used within their own company or organization to eliminate waste from their own processes. This process can be taught from the top down, bottom to the top, or can start in the middle of the owners’ team and work both ways until every team member is on board.

Let’s take a brief look at a few of the Lean terminologies and processes:

Target Value Design—In any purchase or investment, it is extremely beneficial to design the project to fit within the available funds or Performa.

Conditions of Satisfaction—What actual and detailed results are to be achieved? The owner obviously gets to sit in the driver’s seat for the project. But it is important to remember that all parties involved have their own conditions of satisfaction that they want to achieve for their participation.

The Last Planner® System—Brings stability to the project by giving attention to the flow while reducing the variation in the hand-off of work between the specialty subcontractors in a continuously improving work situation.

The language can be utilized throughout all touchpoints on a project—business development, estimating, engineering, fabrication, project management, and field operations. The Lean process keeps companies competitive in the market place and should be engrained in the culture of a company.

It is important to remember that Lean in itself is built on two pillars of thought. Continuous Improvement and Respect for People. The best processes in the world are of no use if there are no people to perform them. Lean offers the opportunity for the team members to bring their ideas and consequently their ownership to a project increasing the satisfaction of all involved.

Jim Cavaness is the service general manager for MMC Contractors West, Inc., Las Vegas, Nevada. He can be reached at (702) 889-6800 or jcavaness@mmccontractors.com. This article originally appeared in the August 2018 edition of The Contractor’s Compass.

 

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ConsensusDocs 305 – New Tool to Contract for Lean Projects

February 2019

by Joel W. Darrington on behalf of the ConsensusDocs Coalition

As the awareness and embrace of Lean construction continues to expand in the construction industry, ever-increasing numbers of projects grapple with the question of how to address Lean construction principles and methods in their design and construction contracts. Project owners have taken primarily three approaches on this:

  • Seeking the highest level of Lean performance, owners have used Integrated Project Delivery agreements, such as the ConsensusDocs 300, sometimes called integrated forms of agreement.
  • When they or their team are not willing or able to use an IPD agreement, other owners have used legal counsel to custom-draft design and construction contracts under more conventional project delivery models such as CM-at-Risk, to address Lean design and construction methodologies.
  • Other owners will seek to promote Lean behaviors among the project team independent of what is in the design and construction contracts.

Now, project teams have a new option for contracting for a Lean project when they cannot implement an IPD agreement. In 2018, ConsensusDocs published the ConsensusDocs 305 Lean Construction Addendum. For the first time, there is a non-IPD contract document available to the whole industry that provides for a wide spectrum of Lean design and construction practices. With the CD305, an owner can use either an industry standard form front-end contract or its own standard contract and add to it a Lean Construction Addendum that reflects the best thinking in the industry around Lean design and construction.

What is the CD305?

Let’s be clear right up front. The CD305 is not a complete contract. It has no compensation terms, no schedule, no project scope. Instead, the CD305 is a document you add to a project contract to provide for selected Lean project features.

Fig. 1

Fig. 1

In Fig. 1, the bi-directional arrows show the contracts for the project. There are separate contracts between the owner and each of the design professional and general contractor and also separate lower-tier subcontracts or design contracts. The CD305 gets added to each of those contracts as an addendum. Note, however, that the CD305 is not intended for use on design-build projects (a future ConsensusDocs document on Lean construction is under development for design-build projects).

The CD305 does not change the compensation or liability of the parties under the contracts it gets attached. Its exclusive focus is providing clear terms for the parties to agree on how they will incorporate Lean design and construction methods into their project.

Using the CD305

Because the CD305 is attached to both the design professional (architect or engineer) and constructor (general contractor or construction manager) agreements with the owner, it requires a joint negotiation between the owner, design professional and constructor and ideally their key design consultants and trades. Once the CD305 is finalized among the parties, then it gets separately attached and incorporated into each party’s contract, binding everyone to the same set of Lean construction provisions. Also, the CD305 provides that it governs over any contrary provisions in the front-end agreement, so that project teams can be assured that their implementation of the Lean methods in the Addendum will not trigger a breach of their main contracts.

ConsensusDocs recommends finalizing the CD305 as early in the project as the owner can accommodate. Certain Lean project features are for the conceptualization and design phases, so a team loses the benefit of those features by waiting until later in the project. However, there is still value in implementing Lean only during the construction phase, so if that is your project’s situation, you can still use the CD305.

The CD305 was designed to be flexible so that it can be adapted to a variety of project contexts and Lean deployments. It uses a check-the-box approach to allow project teams to select the Lean features that will apply to their project. The CD305 allows teams to selectively address one or more of the following Lean practices during the design and pre-construction phases simply by checking the applicable boxes:

  • Joint Worksite Investigation: the project team evaluates what site information is needed, comes up with options for different levels of site investigations, aligns on the appropriate level of investigation and reports the investigation’s findings and recommendations.
  • Evaluation of the Owner’s Program
  • Validation Study: the project team validates whether the owner’s program for the project can be designed and constructed within the owner’s maximum budget. A conceptual (or schematic) level of design and cost estimating is done to give an early check on whether the owner’s business case for the project is viable.
  • Construction Team Cost Modeling
  • Target Value Design: Section 6.5 describes an integrated design process featuring Target Value Design. TVD is one of the key Lean design and construction methods for achieving greater project value. It requires intense collaboration of the designers and constructors and a disciplined approach to value determinations and decision-making.
  • Risk Identification and Management Planning: the project team conducts a risk workshop to identify and evaluate risks, then prepares a risk register to describe key risks and who is responsible for monitoring and leading team efforts at managing that risk. A risk management plan is developed to put in place contingency plans for addressing specific risks.

General Lean Principles & Methods

The CD305 also has standard provisions that apply to any Lean construction project. Article 3 of the CD305 starts by laying out the major objectives of Lean Project Delivery:

(1) collaborating throughout the project with all members of the design and construction team;

(2) planning and managing the project as a network of commitments;

(3) optimizing the project as a whole, rather than optimizing particular pieces; and

(4) tightly coupling learning with action, which promotes continuous improvement throughout the life of the project.

Article 3 also describes the principle of making reliable commitments and keeping them, which is fundamental to reliable workflow and the process of planning and managing the project as a network of commitments.

The CD305 provides for a collaborative leadership structure by forming a Core Group. Article 4 describes the Core Group’s role and operations. Each of the owner, design professional and constructor appoint a Core Group representative empowered to direct and coordinate its company’s work. The Core Group together manages the work using Lean methods for the best interest of the project. They are responsible for the project’s key decisions, and they make consensus decisions. They are also responsible for regular team performance evaluations to foster continuous improvement.

If the Core Group cannot come to a unanimous decision, the owner may issue directions it believes to be in the best interest of the project, but that will be subject to any further dispute resolution provisions of the contract to which the Addendum is attached.

Article 5 of the CD305 requires the project team to use a pull scheduling approach to planning and scheduling the work. The CD305 describes features of the planning system that the team must incorporate, all of which would be satisfied by a full implementation of the Last Planner System® promulgated by the Lean Construction Institute.

Construction Phase Lean Methods

The last article of the Lean Construction Addendum provides for construction phase Lean methods.

Section 7.1 provides for a Lean approach to quality. To avoid addressing quality through re-work, it provides for the team to develop and implement a “Built-In Quality Plan” that addresses standardized work, agreed levels of quality, good hand-offs of work between trades, and continuous improvement.

Section 7.1 also provides for the construction team to develop an operations quality plan using the Lean principles of “5S”: sort, set in order, shine, standardize and sustain.

Under Section 7.2, the constructor develops a materials logistics plan that promotes just-in-time delivery of material to the worksite consistent with the current pull-planning work plans.

In Sections 7.3 and 7.4, the CD305 provides for a Lean approach to submittals and requests for information. The basic idea is that the team member needing information directly contacts the team member who can provide the information, figuring out the resolution together, and then documenting the resolution for the benefit of the entire project team.

Finally, Section 7.5 requires the team to develop a phase plan specific to closing out the project so that everyone is aligned as to what needs to be done to satisfy the project stakeholders without needing a long process of inspections and re-inspections for reaching substantial completion.

Conclusion

ConsensusDocs has provided a great resource to the construction industry with its recent publication of the CD305 Lean Construction Addendum. For the many projects that are not able or ready to utilize an IPD agreement, now there is an industry standard form that can be added to a project’s design and construction contracts to provide for a wide range of Lean design and construction practices without triggering violation of the front-end contract’s provisions. For helpful resources visit https://www.consensusdocs.org/lean_webinar and https://bit.ly/2Rbv2sp.

Joel W. Darrington is the contracting counsel at DPR Construction and a member of the Lean Construction Institute. He has published and presented widely on Integrated Project Delivery, Lean construction and contract incentives for improved project outcomes. © ConsensusDocs Reprinted with permission by ConsensusDocs. http://www.consensusdocs.org

 

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‘Pay-If-Paid’ Clauses—The Freedom to Contract vs. the Subcontractor’s Statutory Rights to Enforce Payment by Mechanic’s Liens or by Payment Bond

by James Palecek, Palecek & Palecek, PLLC

It has been noted that a majority of states in America allow a general contractor and a subcontractor to enter into a construction contract which “shifts the risk” of non-payment from the owner to the subcontractor. See “PAY IF PAID” CONTRACT PROVISIONS, Providing Some Enforcement Consistency and Predictability in an Unsettled Area of Law, 57 No. 2 DRI For Def. 23, February 2015, by Ronald P. Friedberg. On the other hand, a vocal minority of states do not allow this contractual risk-shifting, and part of the reasoning in some of these states, including California, addresses the subcontractor’s statutory rights to lien property or to make a bond claim when there has been non-payment from the general contractor, regardless of the reason for the non-payment. See FREEDOM FROM THE FREEDOM-TO-CONTRACT: CALIFORNIA SUPREME COURT INVOKES PUBLIC POLICY TO INVALIDATE “PAY IF PAID” CLAUSES IN CONSTRUCTION CONTRACTS, 21 T. Jefferson L. Rev. 253, October 1999, by Eric N. Larson. However, for the majority of states, a valid “pay if paid” clause will invalidate a subcontractor’s lien or payment bond remedy.

This article will first address the state of the “pay if paid” law in Arizona. Then, it will compare it to California’s public policy against such clauses. Finally, this article will discuss the majority rule whereby such clauses are enforceable and address the inherent conflict in not allowing subcontractors the rights to enforce lien and bond claims when payment is not made by the owner.

Arizona Enforces Valid ‘Pay If Paid’ Clauses

The current case precedent in Arizona on a “valid” pay-if-paid clause is L. Harvey Concrete, Inc. v. Agro Constr. Supply Co., 189 Ariz. 178, 939 P.2d 811 (App. 1997). In Harvey, the trial court concluded as a matter of law that the pay-if-paid provision in the subcontract created a condition precedent to contractors’ obligation to pay subcontractor. Id. Defendants argued and the court agreed that, “Arizona law permits an absolute shifting of the risk of nonpayment through a pay-when-paid provision that clearly and unambiguously establishes an intent to create a condition precedent.” Id. at 180. No “magic words” are required, just “contractual language demonstrating the parties’ unequivocal intent that the obligation be paid out of that fund and not otherwise.” Id. at 182. The relevant contract language in the Harvey case reads as follows:

Notwithstanding anything to the contrary in the preceding paragraphs of this agreement, subcontractor agrees as a condition precedent to payment, of either progress or final payment, that the owner shall have first paid the payment applied for to the contractor, and that payment for either progress payments or final payment is not due and owing to the subcontractor as provided for herein until the owner has made such payment to the contractor. The subcontractor recognizes that the source of funding for this subcontract agreement are [sic] the progress and final payments that are to be made by the owner to contractor. Id. at 180, 939 P.2d at 813 (emphasis added).

However, not all “contingent payment” language in contracts in Arizona constitute “pay IF paid” clauses. Some clauses, depending on the language, constitute merely “pay WHEN paid” clauses, which do NOT absolutely shift the risk of payment from the general contractor to the subcontractor.

In Watson Const. Co. v. Reppel, 123 Ariz. 138, 140, 598 P.2d 116, 118 (App. 1979), the Court of Appeals considered language in a construction subcontract that said the general contractor would pay the subcontractor “promptly upon receipt from the Owner, the amount received by the Contractor on account of the Sub-Contractor’s work to the extent of the Sub-Contractor’s interest therein.” The subcontract in Watson also had language that said “[a]t all times subcontractor shall be paid to the extent that the contractor has been paid on his account.” Id. Considering the language of the subcontract, the court in Watson held that the subcontract “created fixed obligations” to pay the subcontractor, and the payment provisions “merely provid[ed] a convenient or normal time for payment.” Id.

Similarly, in Darrell T. Stuart Contractor of Arizona, Inc. v. Bridges & Rust-Proofing, Inc., 2 Ariz. App. 63, 64, 406 P.2d 413, 414 (1965), the Court of Appeals addressed language in a subcontract that provided, “The contractor shall pay the subcontractor’s pay estimate (less ten percent (10%) retainage within ten days after receipt of payment by the contractor and as allowed by the Government.” In an opinion that reviewed the history of pay-if-paid and pay-when-paid provisions, the court in Darrell Stuart held:

[T]he plaintiffs’ entitlement was not conditioned upon the receipt of the money by the defendant. If and when the defendant received money from the contractor, the defendant was obligated to pay the plaintiffs within 10 days from said receipt. If the defendant did not receive all of its money from the contractor, the defendant nevertheless remained indebted to the plaintiffs and the plaintiffs were entitled to payment within a reasonable period of time following the completion of the performance of their contract obligation. Id., 2 Ariz. App. at 65, 406 P.2d at 415.

Third, the court in Pioneer Roofing Co. v. Mardian Constr. Co., 152 Ariz. 455, 733 P.2d 652 (App.1986) reviewed contract language that provided “the recovery by Subcontractor for [additional] work shall be conditioned upon a prior recovery therefore by Contractor from the Owner.” 152 Ariz. at 469, 733 P.2d at 666. Even with language saying that payment was “conditioned” on approval by the owner, the court rejected the general contractor’s defense, holding, “we find no proof of an intent that payment to [the subcontractor] was to be made exclusively or only from funds paid by or on behalf of [the owner].” Id. at 470, 733 P.2d at 667.

The emphasized language from the contract in L. Harvey is distinct from the three earlier cases, Watson, Darrell Stuart and Pioneer Roofing. The subcontract in L. Harvey specifically referred to a “condition precedent to payment:”

The language used here is much stronger than that used in Watson or Pioneer Roofing in showing an intent to limit recovery to the payments received from the owner. The contract between Agate and Harvey expressly states that receipt of payment from the owner is a “condition precedent” to recovery. It further states that “payment for either progress payments or final payment is not due and owing … until the owner has made such payment to the contractor.” Finally, the contract identifies as the source of funding for the subcontract the “progress and final payments that are to be made by the owner to the contractor.” We find the language here sufficiently reflects the concept of exclusivity necessary to demonstrate that the parties clearly and unequivocally intended to create a condition precedent shifting the risk of nonpayment from Agate to Harvey. Thus, the condition precedent is valid and enforceable. L. Harvey Concrete, Inc. v. Agro Const. & Supply Co., 189 Ariz. at 182, 939 P.2d at 815 (emphasis original).

California’s Supreme Court Invalidated “Pay If Paid” Clauses in 1997

In 1997, the same year that L. Harvey was decided in Arizona, the California Supreme Court affirmed (4-3) the Second District’s decision upholding the right of subcontractors to collect from a general contractor’s surety when there is a valid “pay if paid” provision and when, upon the owner’s default, the general contractor refuses payment to the subcontractor. Wm. R. Clarke Corporation v. SAFECO Insurance Company of America, 15 Cal. 4th 882, 886, 938 P.2d 372, 374, 64 Cal. Rptr. 2d 578, 580 (1997).

The California Supreme Court went much further though by invalidating all “pay if paid” clauses because, in short, they amount to a waiver of subcontractors’ constitutionally protected rights to mechanic’s liens, which rights are found throughout the California laws, including, among other provisions, the right to lien property where one has provided labor or materials (Cal Const. of 1879, art. XIV, Sec. 3 (1976), the preclusion of the waiver of such liens in contractual provisions where the terms “waive, affect, or impair the claims and liens…shall be null and void” (Cal Civil Code Sec. 3262). Moreover, the Cal Civil Code Section 3096 defined the parameters for which bonds could be issued, allowing a contractor to “foreclose the liens provided for in this title, and, finally, Section 3226 mandated that sureties would be “released from liability…by reason of any breach of contract between the owner and the original contractor.” See “Freedom from the freedom to contract…, Larson, at 276-277.

In this law review article, the author, Eric Larson, does an in-depth analysis of the case and the many issues that were addressed. Importantly, he provides a critique on the Supreme Court’s decision and finds that the court got it right. He addresses the various arguments made by general contractors in favor of pay if paid clauses, including freedom to contract. Id at 272-281.

He also alludes to courts in other states that have found “ambiguity” in these contractual payment provisions (Florida, as an example) so as to not invalidate the subcontractors’ rights to mechanic’s liens, while a Virginia court took great pains in its analysis before it was fully satisfied that the subcontractor “truly intended” to share the risk of owner default.

Larson concludes that California’s Supreme Court got it right because invalidating “pay if paid” clauses will bring predictability to the ambiguous area of contract interpretation: “Building contractors will be able to focus on their business of constructing projects, as opposed to the wrangling over contractual vernacular and the legal nuances that emanate there from. Subcontractors may now take solace with the assurance that their mechanic’s liens will protect them as designed, and that sophisticated contract drafters will not be able to undermine the important constitutional protection.”

The Alternative (and Majority) View: Ohio’s Transtar Electric Case

In contrast, the majority of states allow the enforcement of pay if paid provisions. Ronald Friedberg analyzed the “state” of this contingent payment clause in a variety of states and found that there is still a lack of “settlement” in the states. “PAY IF PAID” CONTRACT PROVISIONS, Providing Some Enforcement Consistency and Predictability in an Unsettled Area of Law, 57 No. 2 DRI For Def. 23, February 2015, by Ronald P. Friedberg.

In Transtar Electric, Inc. v. A.E.M. Electric Services Corp., 140 Ohio St. 3d 193, 16 N.E. 3D 645 (2014), the Ohio Supreme Court reversed the Sixth Appellate District Court of Appeals saying, essentially, that the words “condition precedent” in the pay if paid clause ARE clear and unambiguous (by themselves) to clarify to a subcontractor that it is giving up its rights to enforce payment if the Owner does not pay the general contractor (including the giving up of its mechanic’s lien rights).

Friedberg finds this decision to be right and to create some certainty in Ohio law. He further believes that the “transfer of non-payment risk through a “pay if paid” condition precedent does not bestow undue hardship upon a subcontractor, een one who has less sophistication, economic wherewithal and/or bargaining power vis a vis the general contractor” because “the risk-assuming subcontractor can, and should, take into account this transfer of risk in setting the subcontract price…” He further says that the “prevention” doctrine will prevent an unsavory general contractor from enforcing the clause.

However, while noting that in the robust minority of states (California, New York, North Carolina, and Massachusetts, as examples), the courts have addressed the constitutionally or statutorily-protected rights of subcontractors to enforce mechanic’s liens, nowhere in his conclusions does it appear that Friedberg addresses this same public policy protection in his state of Ohio.

There are those states that clearly see that a contractual pay if paid provision cannot undermine a subcontractor’s lien and bond rights protected by the laws of a state; however, contractual waiver of lien and bond rights is found in a majority of states, which is dubious. Clearly, no subcontractor ever intends to “waive” its mechanic’s lien or bond rights. However, until such time that the issue reaches the highest court of these states, general contractors will continue including and asserting these provisions to keep subcontractors from enforcing their payment rights.

James Palecek is a co-managing member of Palecek & Palecek, PLLC. He started out his legal career in Ohio as an associate in a law firm founded by his father, and, for the last 20 years in Arizona, he has advised construction and other corporate clients in business transactions and in litigation. His clientele has included suppliers/vendors, subcontractors, general contractors, developers and consultants in both the commercial and residential construction arenas and in both the public and private sector. In addition to a focus in construction law, he has also led the firm’s corporate transactional and real estate practice areas for over 14 years. He can be reached at (602) 522-2454 or  jpalecek@paleceklaw.com.

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CNA Ad - May 2018 The Contractor's Compass

 

Additional Insured Provisions, Traps and Pitfalls

by Jonathan A. Cass and Michael Metz-Topodas, Cohen Seglias Pallas Greenhall & Furman, P.C.

Many, if not all, construction subcontracts contain a provision requiring the subcontractor to name the general contractor, owner, and others as “additional insureds” on the subcontractor’s liability insurance policies. Contractors include such “additional insured” clauses, or AICs, to obtain coverage under the subcontractor’s insurance policies for claims against the contractor, and the other additional insureds, related to the subcontractor’s work.

Not all AICs, however, are created alike. Sometimes even small changes in the language used can significantly affect the coverage the subcontractor needs to have to satisfy the subcontract’s requirements. Subcontractors need to understand what coverage such AICs require, so they can verify with their insurance lawyer and agents or brokers whether they have the required coverage and, if not, negotiate revised subcontract terms. Failing to do so could open up a subcontractor to unexpected additional insured claims. Worse, it could leave a subcontractor in breach of the agreement and thus liable for all “uncovered” claims—which can reach amounts that would jeopardize a business’s very survival.

Determining the coverage an AIC requires depends on its particular terms. The following offers examples and explanations of key AIC provisions that often affect the scope of the coverage required.

  • Whom the Subcontractor Must Name as “Additional Insured”: Typically, an AIC requires the subcontractor to name the contractor and owner as “additional insured.” But, some clauses expand the scope of coverage to unnamed individuals, as this example illustrates: “The Subcontractor shall cause the commercial liability coverage required by the Contract Documents to include the Contractor, the Owner, and any of their agents as additional insureds.” Unfortunately, this language does not specifically identify these “agents.” This group could include individuals or entities that the subcontractor would not have agreed to name as an additional insured if specifically identified. As a result the subcontractor has agreed to provide additional insurance coverage to unknown parties. Agreeing to such a requirement could lead to unexpected additional insured claims and higher future premiums on the subcontractor’s liability policies.
  • The Primary/Non-Contributory Requirement: More often than not the AIC will require that the subcontractor provide the additional insureds coverage that is “primary and non-contributory to any of the additional insured’s general liability insurance policies.” This provision means that the subcontractor’s policy must provide that in the event of a claim for which the policy provides coverage to the additional insured, the subcontractor’s policy responds to that claim first, with the owner’s and general contractor’s policies providing coverage once the subcontractor’s policy is exhausted.
  • Ongoing and Completed Work Requirement: Typically, the AIC demands that the subcontractor’s coverage for additional insureds applies to both “ongoing and completed ” This means that the subcontractor’s insurance would cover not only claims that arise while the subcontractor is actually performing work, but also those related to claims arising from the subcontractor’s work once completed. Accordingly, the subcontractor needs to make sure that its policies cover both scenarios.
  • Coverage for Claims Where Additional Insured Is Solely Liable: Often, an AIC will require the subcontractor’s policies to cover the additional insureds “even for any of their sole negligence.” At first glance it may seem odd that a subcontractor would have to provide coverage where others, such as the contractor or owner, have sole responsibility. This requirement, however, is meant to address a particular situation. Where a subcontractor employee suffers injury, illness, or death, workers’ compensation laws limit the employee’s recovery against the subcontractor. Those laws, however, do not apply to general contractors or owners, as they are not the injured person’s employers. Consequently, employees often bring an action against just those entities, making them “solely liable” based on the allegations. AICs’ “sole negligence” language addresses this situation. Such language, however, puts the subcontractor in a problematic situation. Few insurers will easily provide subcontractors additional insured coverage for that additional insured’s “sole negligence,” making it very difficult to comply with a subcontract’s “sole negligence” requirement.
  • Policy Endorsements: In some cases, an AIC will require the subcontractor’s insurance contain particular additional insured endorsements, almost always referenced by a number, e.g. CG 2010 1185 (the “1185 Endorsement”). These endorsements refer to prescribed policy provisions used throughout the insurance industry. For example, the 1185 Endorsement “include[s] as an insured” any entity listed on a prepared schedule “with respect to liability arising out of [the subcontractor’s] operations.”

Although the 1185 Endorsement was once widely available, times have changed. To limit losses, the insurance industry has moved aggressively to rein in the scope of coverage available to an additional insured. This creates a problem where a subcontractor agrees to provide the coverage required by the identified endorsement, but then fails to obtain that exact coverage because the endorsement no longer exists or is available. In that case, the subcontractor has breached the terms of the subcontract’s insurance requirements. So, for any claim for which the subcontract required the subcontractor to obtain coverage, but the subcontractor failed to do so, the subcontractor would bear full responsibility. The subcontractor would effectively become the insurance carrier for the additional insureds—an extremely undesirable position.

As the above illustrates, AICs present many traps for the unwary. To avoid falling into these, subcontractors must have their counsel and insurance agents or brokers (the “Advisory Team”) review additional insured requirements (plus all other subcontract insurance requirements). The Advisory Team needs to make sure the insurance policies comply with any AICs and other insurance requirements. Subcontractors can help this process by using the above discussion as a guide to make sure to ask their Advisory Team the right questions. Failure to conduct a proper insurance review could subject a subcontractor to unintended and undesired liability. The subcontractor could become a project insurer—exposing the business to liability that could ruin the company.

Jonathan A. Cass is a partner in the Commercial Litigation Group and the chair of the Insurance Coverage and Risk Management Group at Cohen Seglias Pallas Greenhall & Furman, P.C. He concentrates his practice in commercial litigation, representing individuals and businesses in a wide variety of disputes, including breach of contract matters, employment disputes involving restrictive covenants, and claims arising from tortious interference and misappropriation of trade secrets. He can be reached at (215) 564-1700 or jcass@cohenseglias.com. Michael Metz-Topodas is an attorney in the Construction Group at Cohen Seglias Pallas Greenhall & Furman, P.C. He represents commercial and construction clients in all stages of litigation from assessing claims and developing case strategy to final resolution or adjudication. He also counsels clients on business disputes and compliance issues in ongoing public and private construction projects. His practice also includes preparing and reviewing construction and commercial contracts. He can be reached at (215) 564-1700 or mmetz-topodas@cohenseglias.com.

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Kahua Ad - May 2018 The Contractor's Compass

Recommended Do’s and Don’ts in Project Scheduling, Schedule Analysis and Delay Claims

by Jason Ebe, Snell & Wilmer, LLP

Our construction attorneys frequently represent subcontractors and other construction professionals in disputes regarding delays, disruption, acceleration, inefficiency, cumulative impact and alike. Based on that experience, this article provides a summary refresher on some of the more important do’s and don’ts with respect to subcontractor project scheduling and claims analysis.

Do prepare a schedule at the time of the bid. Your superintendent and other time-based costs are tied to that schedule. Don’t assume that the time allowed by the owner or the general contractor will be sufficient and that you can come up with a schedule to fit the work after the subcontract is awarded. Under applicable case law, the subcontractor’s bid could be argued as a warranty to the general contractor or owner that the subcontract time is sufficient (not the other way around). Do document your bid assumptions as to the schedule including, where applicable, a critical path, logic ties between activities, and resource allocation.

Do seek to use subcontract form or terms that provide a fair allocation of rights and obligations with respect to project scheduling. For example, use the ASA Subcontractor Bid Proposal—part of the ASA Subcontract Documents Suite available free to ASA members under “Contracts and Project Management” in the Member Resources section of the ASA Web site by logging in at “LogIn/Access Member Resources”—to condition your bid on the use of a ConsensusDocs 750 Standard Agreement between Constructor and Subcontractor. The ASA-endorsed ConsensusDocs subcontract form provides the following language:

Subcontractor shall provide Constructor with any scheduling information proposed by Subcontractor for the Subcontract Work. In consultation with Subcontractor, Constructor shall prepare the schedule for performance of the Work (“Progress Schedule”) and shall revise and update such schedule, as necessary, as the Work progresses. The Progress Schedule binds each Party and all subsequent changes and additional details shall be submitted to Subcontractor promptly and reasonably in advance of the required performance. Constructor shall have the right to determine and, if necessary, make reasonable changes to the time, order, and priority in which the various portions of the Work shall be performed and all other matters relative to the Subcontract Work. To the extent such changes increase Subcontractor’s time and costs, Subcontractor may seek equitable adjustment in the Subcontract Amount or Subcontract Time in accordance with the Subcontract Documents.

Need tips to negotiate this language with your general contractor? Do use the ASA Subcontractor’s Negotiating Tip Sheet on Project Schedule—also located under “Contracts and Project Management” in the Member Resources section of the ASA Web site. This tip sheet includes helpful points to negotiate your terms:

When the GC Says: “You’re going to have to be flexible and adjust your schedule as necessary.”

The Sub Should Say: “I understand that you may have to make subcontract schedule changes, but I can’t agree in advance to adapt and adjust my work to suit your needs without the right to more money and an extension of time for me to finish my work.”

When the GC Says: “Don’t worry. We’re going to have everything ready for you.”

The Sub Should Say: “I can’t make the schedule unless your jobsite utilities are ready on time, and my submittals are approved and returned promptly.”

When the GC Says: “We don’t pay for acceleration. You just have to be flexible.”

The Sub Should Say: “If my work doesn’t start on time because of project delays, I’ll need to be paid for my acceleration costs or be allowed more time to finish.”

When the GC Says: “Time is of the essence on this project. There’s never an excuse for not getting the job done on time. You’ll be held fully responsible.”

The Sub Should Say: “We agree to make a good-faith effort to help you meet your completion date, but we can’t give up any delay claim rights if we incur more cost for reasons outside of our control.”

Do keep your schedule updated—not just short-term, look-ahead schedules but the project schedule as a whole. Do it regularly, perhaps with every pay application, so all parties are apprised of the impact of conditions as they occur. Send out notices of impacts, in accordance with the claims provision in the subcontract, if at all possible. Moreover, even if you fail to provide the contractually required notice, submission of periodic updates should help in disputes where one party argues it had no idea that the schedule was being affected.

Do provide prompt written notice of all delays and impacts to the schedule, and comply as best as possible to all contract notice provisions to avoid having your claim disapproved for a failure to provide notice. Don’t assume a prior course of dealing with respect to claims or actual notice is an appropriate substitute for compliance with the contract requirements. It will only cost you additional attorney fees to argue over the notice issue.

Do include as much information as you can at an early stage even if time and cost impacts are estimates only at the time of the notice. Do include downstream subcontractors and suppliers.

Do review your subcontract to see what is recoverable in addition to a time extension. Many contracts may have limitations on recovery of overhead (direct and/or home office), profit and the like on delays even if compensable. Do negotiate these provisions if possible. Use the ASA Subcontract Addendum—also part of the ASA Subcontract Documents Suite—which provides:

Subcontractor shall be entitled to equitable adjustments of the contract price, including but not limited to any increased costs of labor, supervision, equipment or materials, and reasonable overhead and profit, for any modification of the project schedule differing from the bid schedule, and for any other delays, acceleration, out-of-sequence work and schedule changes beyond Subcontractor’s reasonable control, including but not limited to those caused by labor unrest, fires, floods, acts of nature or government, wars, embargos, vendor priorities and allocations, transportation delays, suspension of work for non-payment or as ordered by Customer, or other delays caused by Customer or others. Should work be delayed by any of the aforementioned causes for a period exceeding ninety (90) days, Subcontractor shall be entitled to terminate the subcontract. Subcontractor change proposals must be processed in not more than thirty (30) days or as otherwise indicated on the change proposal.

Do know whether there is any case law or statutes that affect the enforceability of these provisions and consult with a knowledgeable construction attorney if needed. Do expressly reserve any claims that you can’t completely or quantify right away (for example, cumulative impact). Failure to do so may result in waiver of that portion of the claim.

Do keep track of all your costs from the impact and put in place accounting mechanisms to track such charges. Do reserve your rights to pursue these claims, in your contracts, change orders, lien waivers, and pay applications. Don’t assume you can compute a persuasive damages figure by comparing total costs to bid costs. The total cost method is disfavored and is widely rejected, particularly now with scheduling and claim digger software.

In the event of a delay claim or dispute during the project, and subject to the contract requirements, do keep working. Suspending work without justification under the law or the contract will usually make a bad situation much worse. Don’t terminate or threaten that action without a comprehensive review of the contract, key project documents and the pertinent facts, and legal consultation with your construction attorney. Aside from personal injury or death, contract termination is the most disruptive event that can occur on a construction project and will almost certainly result in contentious and expensive litigation. If you are on the receiving end of the termination threat or notice, do immediately seek experienced legal counsel. Time will be of the essence. Any wrong move can have long lasting consequences.

When resolving claims, do be mindful of waivers. Pay applications and acceptance of payments (whether progress or final) may constitute waivers of claims that arose prior to the application for payment and not preserved depending on your contact and pay application form. In addition, be careful when signing lien waivers. Lien waivers by their language may waive not just liens but claims of any nature. Under general case law, acceptance of final payment by a general or subcontractor could be a waiver of any claims for payment not reserved. From the owner’s perspective, making final payment in most cases is a waiver of any claim for delay, for example, liquidated damages.

Do comply with all applicable notice of claim statutes or ordinances. This is even more critical in claims involving public owners for which state statutes, local ordinances, and/or other requirements may apply for timely and proper notice of claims. Don’t expect the court to excuse your failure to comply. Don’t create another issue for your attorney to fight about. If you lose the issue, the claim may be dismissed.

Do engage the appropriate professionals at an early stage. This includes not just legal counsel experienced in delay claims but also the right expert (either as a consultant, testifying expert, or both). Do find an expert who has performed critical path analysis both in and out of claim situations (in other words, with real world experience). Do make sure the expert has a plan for analysis and presentation of the claim in a manner that has already been accepted by the court. Don’t assume that an expert’s creative approach will translate into recovery if the methodology has not previously been accepted as legitimate by the counter. Do take time to walk the expert through not just the documents but also provide the expert with the opportunity to interview the key project personnel in the trenches so the expert has an adequate picture of what happened. Do be sure that your claim shows entitlement, causation and damages. Don’t assume that if you can show enough impact the court will award your damages without a showing of causal connection.

Jason Ebe is a partner in Snell & Wilmer, LLP’s Phoenix office and leads the firm’s national construction practice. He is a former chair of the ASA Attorneys’ Council. He can be reached at (602) 382-6240 or jebe@swlaw.com.

 

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Design Responsibility

by J.T. Gallagher, Esq., Hendrick, Philips, Salzman and Siegel, P.C.

Should a subcontractor with absolutely no control over a scope of work be responsible for the proper performance of that work? It seems like a no brainer that the answer should be no. As examples, an electrical contractor would not guarantee the proper performance of a roof; nor would a masonry contractor guarantee the functionality of an HVAC system; and for good reason—that work is outside their expertise and they would typically have no control over its performance. Such uncontrollable risk is something that a prudent subcontractor should not take on, unless it is paid accordingly. Yet, there are multiple clauses commonly seen in construction contracts that shift what should be a designer’s risk to contractors and subcontractors.

It is standard industry practice for subcontractors to rely upon the designer to properly design the project so that the work can be constructed in accordance with the plans and specifications. When the work is constructed in accordance with those contract documents, it should be the designer’s responsibility to ensure that the project will comply with the applicable code requirements and perform as the designer intended. Indeed, that is the task a design professional is paid to perform. Typically, a subcontractor does not have control over the design of the project nor does it have the right to unilaterally make changes to the design. So why should a subcontractor agree to take on the risk of a defective design? Unless the subcontractor expressly intends to take on design responsibility and is being paid to do so, it should not.

Accordingly, it is important that subcontractors closely examine contracts for clauses that shift design responsibilities from the designer to the contractor and subcontractors. These clauses come in multiple forms and some seem rather innocuous, but each clause shifts significant uncontrolled risk to the subcontractor. The intent of this article is to help subcontractors identify the trigger language commonly seen in the common “design responsibility” clauses and understand the risks of those clauses so that subcontractors can take appropriate measures to mitigate those risks.

Design ‘Intent’ Clauses

The first commonly seen class of contract clauses seeking to shift the designer’s responsibility are clauses that place the burden on the contractor or subcontractor to satisfy the “design intent” or “to produce the intended result.” The basic problem with theses clauses is that the subcontractor is typically not the designer and cannot know the designer’s intent. The subcontractor can only rely on the plans and specification, which should be the designer’s expression of its intent. As such, a subcontractor’s responsibility should be limited to performing in accordance with the contract documents and its work should include only what can reasonably be inferred from those documents. In fact, even the architect’s standard form, AIA A201-2007, requires only that the contractor perform the work “in accordance with the Contract Documents.” See AIA A201-2007 ¶ 3.1.2.

An example of one of the many iterations of a design “intent” clause is as follows:

The intent of the Contract Documents is to include all items or services necessary for the proper execution and completion of the Work by Contractor.

Conflicting Design and Performance Specifications

Another commonly seen class of design responsibility clauses are those that require a subcontractor to strictly comply with the contract documents and, at the same time, to ensure that the building component or system constructed will function properly. “Performance” requirements in a contract should always pique a subcontractor’s attention. The danger in theses clause is that the design may be defective and prevent the finished product from performing properly even when the work was constructed as specified. When a subcontractor is required to install the work in accordance with the contract documents, that should be the subcontractor’s sole responsibility. If the subcontractor does not have control over the design, it should not be responsible for guaranteeing that the design will result in a properly functioning system.

An example of a conflicting design and performance requirements is as follows:

Contractor shall furnish all Work in accordance with the plans, specifications and other Contract Documents, such that the completed Work shall ensure a functional and complete facility meeting the owner’s intended purpose.

Design Coordination Responsibility

Design responsibility can also be shifted by clauses that make the subcontractor responsible for identifying design conflicts, errors, and omissions. This requirement is often imposed through a clause requiring the subcontractor to investigate and affirmatively discover design issues in the plans and specifications and immediately report them to the owner or designer. Subcontractors should avoid clauses that impose affirmative duties to ensure the design is appropriate, because, the contractor is typically not a design professional and not being paid to ensure the propriety of the design. Therefore, a subcontractor’s review of plans and specification should be limited to the subcontractor’s expertise; the constructability of the scope of work.

Latent Ambiguities

Contract clauses can also seek to shift design responsibility through provisions that provide that, in the event of conflicts, ambiguities, or discrepancies among or between various contract documents, the most stringent, most exacting, most expensive, or otherwise most onerous requirement will prevail. In the case of latent ambiguities and conflicts, the subcontractor’s reasonable interpretation of the contract documents would typically prevail under general legal principles. Thus, a subcontractor faced with a provision imposing the most expensive, onerous, exacting, or stringent standard or means and methods in the case of a latent ambiguity or conflict should seek to modify the terms to allow for instead what is reasonable under the circumstances. An appropriate resolution may be that the designer provides a reasonable interpretation in response to an RFI and the subcontractor submits a corresponding change order if necessary. Indeed, the designer is the party who likely created the conflict and should be responsible for providing a reasonable and cost effective resolution.

An example of this type of clause is as follows:

If the Contract Documents do not specifically allow the Contractor a choice as to quality of items to be furnished, but could be interpreted to permit such choice, they shall be construed to require the Contractor to furnish the best quality. . . . Owner will not accept Work which fails to comply with such standards, unless the departure from such standards is specifically identified to, and thereafter authorized in writing by, Owner’s Representative.

Incorporation by Reference

Contract clauses that incorporate terms and conditions not specifically set forth in the language of the contract can be especially dangerous for subcontractors because, when the subcontractor signs off on the contract, it is presumed to know what is in the referenced documents even if they are not attached to the contract. These clauses are often used to incorporate upstream contracts, but can also include standards, laws, regulations, or other secondary sources that can impose design or performance requirements. At a minimum, a subcontractor should investigate and understand what is contained in any referenced document and how the document will affect the subcontractor’s performance. However, it is typically better practice, if possible, to strike or significantly modify contract language that expands a subcontractor’s obligations to referenced materials that were not included in the bid or contract documents.

Building Code Compliance

Finally, subcontractors should be wary of contract clauses that require them to investigate and discover non-compliance with the applicable building codes. A subcontractor should not be required to assure that the design is in compliance with applicable building codes. Instead, the subcontractor should have the right to rely on the fact that the design professional has designed the work to meet the applicable code requirements. No more than a good faith duty to perform a reasonable review should be imposed on a subcontractor and that review should not be for the purpose of discovering code violations, but, instead, for facilitating construction.

An example of this type of clause, which also serves as an example of an incorporation by reference clause, is as follows:

Compliance With Applicable Laws. Contractor shall reasonably ensure that the Services and Work are performed, and the Project is constructed in a manner which meets the requirements of all applicable laws relating to the design, construction, occupation, and operation of the Project, including, but not limited to, building codes, fire and safety regulations, and environmental regulations. Such Applicable Laws shall be deemed minimum standards for the Project. Contractor shall immediately notify the Owner’s Representative in writing of any known violation by Architect or any Subcontractor of any Applicable Law, or any such violation of which the Contractor reasonably should have known.

Subcontractors are typically not design professionals and should not be forced to take on liability for the errors and omissions of the designers unless they have explicitly agreed to do so and are being compensated accordingly. A subcontractor should be able to rely on the designer to properly design the work just as the subcontractor will be relied upon to properly construct the work. Therefore, subcontractors should diligently identify risk shifting contract clauses and seek to appropriately modify the clauses when they can—during contract negotiations.

J.T. Gallagher, Esq., is an associate with Hendrick Phillips Salzman & Siegel, P.C., Atlanta, Ga. He brings a breadth of experience in the field of construction law with a targeted focus on construction litigation. He can be reached at (404) 522-1410 or jtg@hpsslaw.com.

 

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