May  3, 2002

Bulletin #56, Lien Rights: The Problem with Changed Work (May 3, 2002)

ZZZ Sheet Metal had been working for months on a new HVAC system for a one hundred year old hotel building, in conjunction with its conversion to a modern resort. Everyone except the ZZZ on-site manager seemed to be greatly enjoying the project, with its beachfront location and hospitable climate. On the other hand, the project manager was on the verge of swimming out to sea, and feeding himself to the sharks! The project had been nothing but an exercise in frustration from his standpoint.

The first problem was with the scope of work. ZZZ’s work, under the subcontract form the firm had signed, included the HVAC system and “all items of work reasonably inferable therefrom” and “necessary to produce the intended result.” However, the plans and specifications reviewed by the subcontractor in preparing its bid were sloppy, inconsistent and incomplete. At locations on the plans where the project manager would have expected VAV boxes, there were blank spots. The project manager knew that rooftop air conditioning units were to be installed, but no locations for the units were indicated. The ZZZ manager wondered how a bid could even have been prepared from such horrible plans!

The subcontract language also stated that ZZZ “had examined all construction documents related to the Project and . . . satisfied itself as to the nature and location of the Work, the general and local conditions, and all matters which may in any way affect the Work or its performance.” Finally, the subcontract provided that ZZZ “warrants and represents that it has visited the site of the proposed Work and has familiarized itself with the existing conditions and the character of the operations to be carried on and fully understands the facilities, difficulties and restrictions attending the execution of the Work.”

Those statements could hardly have been further from the truth! No one from ZZZ had been to the site before the subcontract was signed. The only plans and specifications that the subcontractor had reviewed were the poor quality plans used for bidding. There had been no field verification of measurements, above-ceiling clearances, or other site conditions.

Within the first few months after arriving at the project, the ZZZ manager heard the general contractor recite the words “reasonably inferable” so many times that just hearing them gave him a headache. Creating openings for ductwork through foot thick brick walls was a “reasonably inferable” item. Installing fireproofing around all wall openings was “reasonably inferable.” Installing and wiring HVAC control and monitoring systems not shown on the plans were “reasonably inferable.” So were the fabrication and installation of non-standard ductwork to fit the many restricted above-ceiling areas.

The subcontractor initially responded by reluctantly taking on the additional items of work. However, when additional work started to appear almost every day, the subcontractor began submitting written requests for approval of changes (with detailed pricing information). Most of the requests came back marked, “Disapproved. See subcontract scope language.” Some of the requests simply disappeared. As the conclusion of the project approached, the original bid seemed a pitifully small amount. The total of the proposed change orders that had been rejected (or to which the subcontractor had received no response at all) was trending toward seven figures.

When the HVAC system was completed, and had passed all start-up tests, ZZZ submitted its final application for payment. The application was broken down into three general categories. First, there was the amount owing on the initial bid, which the subcontractor identified as “Balance-Original Contract Sum.” Second was the retainage of five percent that had been held back throughout the project. Third was a very substantial line item identified as “Contractor Directed Changes.” The ZZZ project manager hand delivered the application for payment, along with substantiating documentation for all of the work and required lien waivers.

Two weeks later, a letter arrived from the general contractor indicating that it would not pay for the changes, since all of the work was within the scope and price of the original subcontract. The general contractor had also deducted $35,000 for what it referred to as “Site Clean-Up Back Charges,” and $10,000 for “Administrative and Engineering Review Costs - Proposed Subcontractor Changes.” Not only was the subcontractor not being paid for the extra work, it was being presented with a deduct for the contractor’s review process of that work. ZZZ recognized that the general contractor had “thrown down the gauntlet.”

The subcontractor knew that its first step should be the filing of a mechanic’s lien against the project. Given the general contractor’s outrageous attitude toward the project work, ZZZ decided to respond in-kind. It calculated a lien amount that included the full remaining contract sum, the entire retainage, all possible change-related costs, a ten percent override for “overhead and profit,” interest on all unpaid amounts at 5% over prime, and a $25,000 amount for “change order preparation, review and submittal costs.” The total claim was in excess of $1 million, and the ZZZ project manager had the notice of lien served, and filed well within the required time period after the last work performed. The subcontractor knew that filing the lien was only half the battle, but at least its lien rights would be preserved.

ZZZ brought in its legal counsel, and prepared to pursue its remedies. The future of the subcontractor might very well be dependent upon its ability to recover a significant amount on this claim. Within a few weeks, the ZZZ attorney called the project manager with some good news. Many of the subcontractors on the project had not been paid, and multiple liens were filed. Several of the liens were already in foreclosure, and it had been determined in one of the foreclosure actions that the mechanic’s liens had priority over the project mortgages as a result of the first on-site work being performed before the mortgages were filed. The attorney reported that ZZZ, and the other lien claimants were in a far better position to recover than was normally the case. The project manager was ecstatic. The attorney promptly filed to foreclose the ZZZ lien.

The upbeat mood of the subcontractor lasted all of two weeks. Things changed when the pleadings were received from the general contractor responding in the lien foreclosure action. The pleadings argued that the entire lien must be voided as a matter of law since the subcontractor had knowingly demanded in its mechanic’s lien statement more than was justly due under the subcontract. The general contractor’s pleadings quoted extensively from state law, and related cases that supported this principle. The general contractor noted that the change order items had not been approved, but included (in bold print) specific references to the interest rate, override, interest factor and “change order preparation” claims. As stated by the general contractor’s legal counsel:

“Even if all of the change order requests of ZZZ Sheet Metal had been proper and approved, the subcontractor would have had no entitlement under the subcontract to the above-referenced charges. In fact, none of such charges were included in the subcontractor’s final application for payment. They were obviously concocted by the subcontractor to inflate its claim in an unfounded and improper manner, in bad faith, and contrary to the intent of the mechanic’s lien statute.”

The general contractor’s pleadings included a motion to dismiss the lien foreclosure action due to the bad faith overstatement of the claim.

At a hearing on the motion, ZZZ’s attorney attempted to emphasize the unjust treatment that the subcontractor had encountered throughout the project, and the unfairness of interpreting the subcontract language to deny payment for legitimate, additional work. The judge had little sympathy. He focused instead on the items he referred to as “piling on:” the interest, overhead and change order preparation costs. While the ZZZ executives left the hearing somewhat concerned, they never expected that the result would be discharge of the entire lien. However, that was precisely the result. The subcontractor was left with no lien rights to foreclose.

Non-payment is obviously a constant concern for subcontractors. Mechanic’s lien rights can be one of the most useful tools for a subcontractor in making certain that it gets paid. However, the subcontractor faces a dilemma as to changed work where the pricing or change itself has not been approved. Since mechanic’s lien laws vary greatly from state to state, the subcontractor should make certain that it understands the lien filing requirements for the state in which the work was performed. As to disputed costs, including change-related costs, the subcontractor would be well-advised to assert its lien claim only for amounts that can legitimately be the subject of a claim under the statute, and which are either (at least arguably) covered under the terms of the contract, or which represent additional, reasonable value provided by the subcontractor at the contractor’s request.


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