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http://money.cnn.com/2009/01/06/news/economy/smart_grid/index.htm?postverson=2009010808

Do your homework: Require Personal Guarantees, Deposits or Bonds if Necessary.

Before entering into contracts it is important to evaluate potential clients to assure they are capable of performing their contractual obligations.

Contractors should first determine whether the party they are considering working with is financially sound. If there are any questions in this regard, it is important to obtain financial information, check references, and ask questions of both project owners and subcontractors about recent projects. Request information regarding project financing and be prepared to provide the same information to subcontractors. This injury is particularly necessary if you have not worked with the client in the past.

If clients are reluctant to provide this information, that hesitance should raise a red flag and call into question whether you really want to be working with this customer. If the answers received in regard to your financial inquiries still leave concerns, it is appropriate to request larger deposits, bonds or personal guarantees to assure that you get paid for the work. Remember the axiom that having no work is better than not getting paid for work performed.

Include Contractual Payment Terms which Protect Your Interests.

To the extent possible, general contractors should attempt to negotiate payment provisions to protect themselves in both their owner contracts and subcontracts.

An example of a key provision which contractors should always include in their owner contracts is a work suspension provision. A properly drafted work suspension provision will provide for an absolute right to stop work if a progress payment is more than specified period of time late. The provision should provide that in the event of a work stoppage due to late payment, the contractor is entitled to additional costs, demobilization and remobilization expenses, additional time to complete the contract, and in the event that the payment default is not cured that the contractor can terminate the contract and seek past due payments and lost profits on unperformed work.

In subcontracts, contractors should insist on including pay-if-paid provisions which require the general contractor to pay the subcontractor only if general contractor is paid by the project owner for the subcontractor's work. Such provisions make receipt of payment from the owner by general contractor for the subcontractor's work an absolute condition precedent to subcontractor's right to payment.

While it is always advisable to include such provisions in contracts, understanding, including and enforcing such provisions in contracts is essential to protect contractors in the present economy.

Secure your Lien Rights.

Equally important to protecting a contractor's interest is knowing the rules of lien and other contractor payment security rights, which may exist.

The most common payment security device utilized by general contractors is the private construction lien, known as a "mechanic's lien." Such liens are a statutory right that attaches to real property on private projects for the benefit of general contractors-or anybody providing labor services, materials or equipment to the project. If a party has lien rights it can foreclose the lien subject to any other senior interests in the property (e.g., a deed of trust encumbering the property before the contractor commenced work) and be paid from the project proceeds. In order to preserve lien rights contractors are required to follow strict statutory guidelines and in some instances provide pre-lien notices. Successfully protecting lien rights and securing a proper lien can be a valuable payment tool. The value of liens may be limited in the current economy where the equity in property is more and more often very limited.

Contractors should also familiarize themselves with the statutory procedures relating to "stop notice" rights. Stop notices are essentially "liens" on construction funds which exist on any private project in Washington where a payment bond has not been posted for half of the amount of the construction financing. When properly prepared and served, the stop notice lien attaches directly to the funds and requires the lender to withhold payment of the funds or be subordinated to the entity providing the stop notice who has not been paid. This can be an effective, though often underutilized, collection tool.

Bond rights may also exist to assure payment, though in most instances these bonds are provided for the benefit of subcontractors and suppliers, rather than general contractors. Who may take advantage of a private payment bond depends upon the language of the particular bond involved. At the onset of any project contractors should ask what bonds have been provided to the project and review the terms of the bond.

Contractors should familiarize themselves with all requirements of lien, stop notice and bond claims and consult an attorney early on should issues arise on a project. Most importantly, be diligent in pursuing collections when not timely paid and be careful who you do business with to assure that other parties financial difficulties do not become your own and you get paid for work performed.

Editor's Note: The original version of this article was published in the Associated General Contractors of Washington Newsletter, AGC Works.

 

The first is a recently published final rule requiring contractors to maintain a written code of business ethics and conduct a sound practice for any business (whether or not it sells to the government).  See A+C Blog Date April 2, 2008

The second and more significant is a proposed rule that would require contractors to maintain a compliance program that moves beyond the final rule and includes specific integrity reporting requirements converting actions that in the past were purely voluntarily to contractual obligations, and thereby raising significant practical and even constitutional concerns.  The proposed rule is a response to current congressional and Department of Justice concerns regarding the integrity of the procurement process.  The Contractor Code of Business Ethics and Conduct can be found at 72 Fed. Reg. 65873 and the proposed rule concerning contractor Compliance Program and integrity reporting can be found at 72 Fed. Reg. 64019. 

Clearly, well thought out codes of business ethics and conduct and training to explain and reinforce those requirements are good business.  The proposed rule, however, goes beyond the traditional approach that has allowed contractors to run their businesses - including establishment of ethics and compliance programs, in a way that makes sense in their particular circumstances.  Mandating morality as a contract requirement moves the government into a new and questionable procurement role. 

This decision will obviously have ramifications on Washington's tax payers.  Particularly when this state is in need of transportation improvements, reducing the buying power of tax payers dollars for transportation seems to make little sense.  We can expect that based on its ruling in this case, DLI will expand its ruling to T-bulb girders for pre‑cast bridges, detention ponds and perhaps even sophisticated electrical and utility manholes.

Incidentally, the general contractor in this case was not assessed prevailing wages because the assistant director found that its own Department was estopped (precluded) from taking any compliance action in this matter.  The pre‑caster had relied on a Department statement that the fabricated pre‑cast rate of pay was the appropriate rate of pay and the Department told the pre‑caster it would contact the pre-caster if that rate of pay was inappropriate.  Apparently, relying on the estoppel arguments that were espoused in Silverstreak v. Dept. of L&I, 159 Wn. 2d 868, 154 P. 3d 891 (2007)  The Department did not retroactively assess the prevailing wage rate, we can expect in future instances that the Department will not be so charitable.

Download Depatment of Labor & Industries letter here.

Finally, in the Colorado case, the courts spelled out what is required to establish a differing site condition, a contractor, in order to recover, must prove "the conditions indicated in the contract differ materially from those actually encountered during the performance; the conditions actually encountered were reasonably unforeseeable based on all information available to the contractor at the time of bidding; the contractor reasonably relied upon its interpretation of the contract and contract-related documents; and the contractor was damaged as a result of the material variation between the expected and unexpected conditions.  URS Group, Inc. v. Tetra Tech. F.W., Inc., Ct. of Appeals #06-CA-1243 and #06-CA-2220 (Feb. 7, 2008).   ___ P. 3d ___, 2008 WL 323767 (Colo. App.)

Similarly, this pricing guide recognized that contract pricing deals with "estimates of future events" and that "[a]n estimate is a prediction of what the cost of future events will or should be."  Id. At 2A4.  Given the "error inherent in estimates," the "art" and "subjective evaluation," and the "prediction" of future costs, the federal pricing guidelines demonstrates the judgmental estimates are inconsistent with the objective falsity standard under the False Claims Act.

Hanks and Wilson filed a counterclaim in the amount of $800,000 asserting that the work was shoddy. At the arbitration Rita Wilson, Tom Hanks' wife is said to have "leaped from the witness stand" . . . "and started screaming hysterically" she then stormed out of the room. The arbitrators ruled in favor of the contractor, awarding the contractor almost 100% of its damages. The contractor was paid and had no further contact with Hanks or Wilson until November 2007, when Hanks and Wilson filed a second arbitration against the contractor asserting this time $2.5 million in damages for "construction defects."

The contractor brought this case in court seeking to dismiss the second arbitration and countersued Hanks and Wilson for abuse of process. Asserting that the Hanks and Wilson arbitration demand is "motivated by revenge." The contractor's lawsuit requests that the judge award the contractor damages and deny the Hollywood actors' request for yet another round of arbitration.

The contractor is represented by the Seattle law firm of Stanislaw Ashbaugh (R. Miles Stanislaw). This case promises to provide some interesting insights on the way our court system views these far too prevalent and often frivolous "construction defect" claims. For a copy of the complaint filed by the contractor filed against Tom Hanks and Rita Wilson, see

http://www.aolcdn.com/tmz_documents/1221_tom_rita_wm_.pdf

 

Thanks to the website TMZ.com for bringing this tidbit to our attention.

Practical Considerations:

There are a number of implications that this decision will have on both contractors and owners.

Owners: Construction project owners, based on the American Safety decision will likely continue to bolster their contracts with specific provisions preventing any finding of implied waiver with provisions such as:

"The fact that the Owner and the Contractor may continue to discuss or negotiate a Claim that has or may have been defective or untimely under the Contract, shall not constitute a wavier of the provision of the Contract Documents unless the Owner and Contractor sign an explicit, unequivocal waiver approved by the Owner."

The Owners can also be expected to send contractors who submit a written claim a document that says the Owner is not waiving any written notice requirements, and that no waiver of the claim provisions can be construed from their actions.

Contractors: In light of the MMJ and American Safety cases, to preserve construction claims, the best advice for contractors remains to follow the contract's written notice requirements to the letter. Overcome the notion that providing written notification when changes occur will spoil the working relationship with the owner or face forfeiture of valid claims