Originally posted 2015-11-25 11:00:01.
A new year brings with it promise and challenges. The promise is a relatively clean slate and the thought that 2015 will be a great year for construction professionals and those that assist them. The challenges come from the almost inevitable issues that can arise on a construction site with its many moving parts and enough potential pitfalls to make even the most optimistic construction attorney, contractor, subcontractor or supplier think that Murphy was an optimist.
In order to assist with the potential challenges, this post will be the first in a series of “musings” on the best way to handle a payment dispute arising from a construction contract. This week’s post will discuss what the first steps should be once a payment dispute or claim arises. We’ll assume that you, as a construction contractor, have taken early advantage of the services of a construction lawyer and have carefully reviewed your contract for issues before signing that contract.
So, how can a claim come up on the job site? Aside from just refusal of payment by either an Owner or General Contractor, one way is through the change order process. For instance, you, as a subcontractor, are ordered to perform certain additional work and while negotiating a written change order (you would of course get all changes in writing) you and the general contractor cannot agree on a price, or even on what the scope of the changed work should be. You then submit your claim in a timely fashion and move forward with the work as is likely contractually required. You submit your pay application for the claimed amount and either get no payment or less that what you believe to be full payment.
What are the next steps? One, be sure to keep all documentation of your claimed amount, your notices, and any other correspondence in an organized fashion. Two, examine your contract to see what, if any, contractual ADR requirements such as arbitration or mediation are required prior to any further legal action. Three, call a construction attorney to see if he or she can find anything that you may have missed. By doing these things and acting accordingly, you will preserve your rights for if and when you need to go to court or arbitration to enforce your claim.
Once you’ve done these three things, and only with clear legal advice, consider the financial implications of continuing with the project. In most if not all instances, continuing is better than walking because from a legal perspective, you are almost always better off finishing your work and claiming that you weren’t paid then walking and defending why you didn’t finish.
Know that if you walk from the job you will likely be subject to a claim from either the owner or general contractor and that you’ll have to justify why you walked and didn’t finish. As such, this is always a last resort, but in the rare instance (and I do mean very rare) that the financial burden of continuing caused by the lack of payment will be so great as to essentially close your company, it is a final option. I cannot be more clear than to say that this is the very last resort and that I do not recommend such action.
Of course, it’s always a good idea to keep every step of construction well documented internally and by written confirmation of verbal instructions.
By laying this groundwork both before and after a claim arises, you will increase your chances of success should you need to take further actions to enforce your claim through the legal system.
For a wrap-up on this and the other posts in this “Construction Claim” series, please click here.
As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.
Over the years I have had my share of issues.
I took the approach on several projects to have contracts to require Owner Change orders to be approved before I did the related work and delays caused by untimely approval would be added to the schedule. I got push back on this but got it approved. This was a plus to getting change orders resolved and paid. I argued that if the work was approved to conduct then the cost would have to be addressed as well before starting. I also disallowed owner and architect directives until change order addressing cost was resolved.
So often a contractor is killed by work directives and change order work where cost is disputed after the work is completed. Better to address immediately and verify the existence of funding.
I am retired now, but for 42 years I was a construction manager for a large Owner. Our “boiler plate” provided three methods for accomplishing changes to the work. One, negotiated scope of change in cost and time before extra work commenced. Two, negotiated scope and time impact with work performed on a cost plus negotiated mark-up basis. Three, if there was a potential danger to life or property, a change directive was issued in writing, and work had to proceed immediately on a cost plus basis. The mark-up was specified in the contractor’s bid. after the work was completed (or as it proceeded), the impact on project time was negotiated, and the contractor was given an opportunity to define the impact of the change directive on other parts of the contract. If the case was made for damaging other work already performed, that could be added. All change orders were issued in writing and approved by proper authorities before work could begin. Anything the contractor undertook prior to receipt of a properly executed change order was at his risk, and oral directives to change the work, by anyone, carried no weight. Rarely did we have problems with changes to the work with this method, and I can’t imagine a contractor being willing to put himself at risk by proceeding with work without a clearly defined scope and price in writing.