June  1, 2001



Bulletin #47: Enough of this Nonsense – Fire ‘Em!

It seemed like a good problem. ZZZ Sheet Metal was busier than ever, and was being considered for a multitude of new projects. When the firm accepted four jobs in a two-week period, it became apparent to management that it was incapable of getting the work done on its own. ZZZ would have to bring in a sheet metal subsubcontractor to take over part of the work.

ZZZ management had a very high opinion of its own work, but did not have much regard for the work of its competitors. Finding an acceptable sub-subcontractor would not be easy. After talking with several firms, ZZZ settled on a relatively new, smaller company named “Tinco.” Part of the theory behind the choice was that Tinco, as a smaller firm, would probably pay more careful attention to the work. On the other hand, it would be unlikely to have the capability of stealing ZZZ business or making the firm look bad by comparison. The work on the projects was carved-up (with notations on the plans as to which portion of the HVAC systems Tinco would be installing). Pricing was finalized (with a nice mark-up for ZZZ), and a standard subcontract agreement form was signed by the two companies for each project. The projects were soon off and running. Several of the Tinco-related projects proceeded reasonably well. The third did not. While ZZZ was not always a “well-oiled machine,” Tinco was a disaster by comparison. The subcontractor had difficulty providing sufficient manpower. It was frequently behind schedule. It regularly had to “borrow” materials from ZZZ simply to keep its work moving. ZZZ was also having difficulty coordinating the Tinco work and schedule with its portion of the project, and periodically had its work force take over portions of the Tinco work. The complaints from the general contractor were getting louder and more frequent. Matters finally came to a head when Tinco employees (trying to speed up the work) were found blatantly violating site safety rules. The general contractor’s project manager had come upon the employees hanging ductwork directly adjacent to an elevator shaft while standing on wobbly, jury-rigged scaffolding. The fact that the workers had no eye or head protection was also noted. The ZZZ project manager was called in for a meeting the next morning along with the Tinco manager.

The general contractor pulled no punches. He stated that Tinco had been nothing but a problem since the first day on the job, and was disrupting the rest of the work. It could not follow a schedule, and had disregarded crucial rules and procedures. The quality of its work was poor, and its workers were belligerent and unmanageable. The general contractor stated that if Tinco was not removed from the job, ZZZ would be considered in default of its contract, and the general contractor would take legal action against ZZZ. A late night meeting of ZZZ management followed. The decision was an easy one. Tinco would be fired first thing in the morning. The project manager for ZZZ decided to go right to the top. He called the president of Tinco, and told him that the sub-subcontractor should consider itself terminated from all ZZZ projects, that all outstanding pay requests would be frozen, and that any future payments to Tinco were unlikely. The sub-subcontractor was told to remove its tools, materials, and work force from the job sites immediately. In a damage control effort, ZZZ put its workers on a seven day per week schedule to make up for lost time, repair the deficiencies in the Tinco work, and complete the Tinco jobs (along with the large quantity of ZZZ work moving in parallel). Little was heard from Tinco. At the same time, ZZZ’s focus had shifted to getting the work done without bankrupting the firm. The overtime costs were huge. Rush orders on the required materials were being filled at a price premium. One whole crew was assigned simply to inspection and repair of the Tinco work. After months of strain and effort, the projects were somehow completed. As ZZZ was celebrating its survival, it was also licking its wounds, and hoping against hope that no delay claims would be forthcoming as a result of the Tinco fiasco. The storm seemed to have passed.

It would be impossible to overstate the level of shock and anger at ZZZ when Tinco’s attorneys served it with a lawsuit. The suit included claims for labor and materials supplied, costs of winding down the work, and lost overhead and profit on all of the jobs in the amounts that would have been payable had it been permitted to complete the work. Tinco also included a claim for business defamation damages. At the center of its lawsuit was the assertion by Tinco that it had been wrongfully terminated by ZZZ, and that its business had been severely damaged as a result.

ZZZ management called in the company’s attorney. He asked to review the subcontracts and other project documentation. ZZZ delivered its files, and waited for the response. When the attorney called to ask why there were no written warnings, defective work reports, or notices of termination in the files, the ZZZ project manager began to sweat profusely. The attorney was told that the complaints about Tinco were verbally communicated, and that the notice of termination of the project work had been transmitted by telephone. When the attorney asked why the sheet metal sub-subcontractor had been terminated on all of the jobs when the complaints related to only one site, the project manager informed him that ZZZ had “lost faith” in Tinco and wanted to “cut all ties” with the firm. For once, the attorney had very little to say. After a long pause, his only response was: “Does anybody around there ever even look at the contracts?”

In attempting to do the right thing, and maintain the good will of the general contractor on the one project, ZZZ had panicked. It had made a bad situation worse by handing its inept sub-subcontractor the ammunition needed to pursue a credible lawsuit. While the subcontract document required seven days’ written notice, and a cure period before termination for cause, ZZZ had given neither written notice nor any cure period (even though it was extremely unlikely that Tinco could ever have cured its multitude of faults). ZZZ had failed to document the problems with the project both before and after the termination of Tinco, and could not even establish what costs were related to remediation of faulty or incomplete Tinco work versus the performance of its own work. It had terminated the sheet metal sub-subcontractor on two projects that had no indication of significant problems solely because of the disaster on the third project. The case was ultimately settled with ZZZ making a payment to Tinco. Writing that settlement check may have been the most painful thing the president of ZZZ had ever done.

The life of a subcontractor is not an easy one. There are “pay when paid” issues, “flow down” clauses, and wrangling at higher levels that can make the subcontractor’s existence extremely difficult. However, when the subcontractor delegates a significant portion of its work to another firm, it takes on a whole new set of challenges. The subcontractor must manage its subsubcontractor. It must coordinate its work. It has legal responsibility for its performance.

In the event that the sub-subcontractor fails to perform, the subcontractor must be prepared to act quickly and decisively. However, any termination scenario, particularly for cause, is inherently risky. If the termination is found to be unjustified, the sub-subcontractor may very well recover its overhead and profit for the entire job, as well as other damages. If the sub-subcontractor has an imaginative attorney (see Tinco business defamation claim), the stakes can be raised even higher. Before considering termination of a sub-subcontractor on a project, the subcontractor should consider, among other factors, the following:

1. What does the subcontract provide as to termination rights, including notice requirements and cure periods?

2. Have the performance issues been adequately documented,and has the documentation been retained?

3. Is there any alternative, short of termination, which might be workable?

4. Is the issue solely between the subcontractor and the sub-subcontractor or must action be taken because of mandates from thegeneral contractor or construction manager?

5. Do the failures of performance run to all elements of the work or all elements of the business relationship (i.e., would termination be justified as to the entirety of the work or as to multiple projects)?

6. Are there factors that have come into play that might arguably excuse the sub-subcontractor’s nonperformance, such as unforeseen site conditions, actions of the general contractor, supply shortages, labor strife, utility issues, etc.? Unless the subcontractor can satisfy itself that it has given the sub-subcontractor appropriate notice, a reasonable chance to address the issues that exist, and has followed the requirements of the subcontract, it should be very hesitant to pursue termination of the contractual relationship. 

 

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