July  17, 1998



Bulletin #18: The "Killer Contract" Part 1

The construction boom had hit a fever pitch in the region where Acme Sheet Metal did most of its work. The general contractors were swamped with new projects and Acme found itself receiving more bid requests than at any time in memory.

To deal with the rush of new work, the HVAC subcontractor had added to the size of its office staff and more than doubled its field work force. Despite the hiring, it seemed as if the Acme office operation was barely keeping up. New employees were learning on the job and normal training and supervision processes could no longer be followed. However, revenues were coming in at a record rate, all of Acme’s employees were working, and the overall situation for the subcontractor could not have looked any better.

When Acme was approached to install an HVAC system in a large office building being constructed, it appeared that the subcontractor’s streak of good fortune was continuing. The job would be one of the largest ever undertaken by the subcontractor. The developer and general contractor were well-known nationally, but Acme had not yet worked with either of them. The office building looked like a great opportunity to develop new sources of potential business and to greatly enhance its bottom line. The office building project would keep a large portion of the Acme work force busy for at least 18 months.

Since the general contractor was already behind schedule, Acme was under pressure to rush through the plan review process and submit its bid.

Acme had a good working relationship with the project architect and most of its questions concerning the bid package were resolved over the phone. Working through several nights, Acme’s estimators completed the bid and the general contractor accepted the subcontractor’s bid number.

A 40-page proprietary subcontract form was sent over by messenger the next day and the general contractor insisted that the subcontract be signed immediately. The "scope" section of the subcontract was quickly checked against the plans and one of the office staff flipped through the other pages and declared it "pretty standard stuff." The president of Acme signed the subcontract late that afternoon and the subcontractor’s staff set to work on the ordering of materials, scheduling of the work, etc. The subcontract form was thrown into a folder in the back of the new project file.

Unfortunately, the office building project proved to be anything but "standard." The subcontractors heard rumors about developer financing problems and the first several draw requests went unpaid for a number of weeks. The architect left 90 days into the project, although it was not clear whether the departure was the result of a resignation or termination.

The project schedule became increasingly chaotic and unreliable. More often than not, Acme’s work force would arrive on the site only to find that the areas in which it work was to be performed were not nearly in a condition to permit the work. Significant gaps existed in the project specifications and the subcontractors regularly argued with the general contractor over what was actually included in their bids.

The new architect was unsympathetic to the subcontractors’ complaints and interpreted the scope of their work as broadly as possible. The new architect also regularly rejected portions of their draw requests. With several million dollars worth of materials and components delivered or on order, Acme found itself in an increasingly difficult position on the project.

The most serious problem for the subcontractor related to the project schedule. The delays were impacting Acme’s workforce productivity, its costs, and its performance on other projects. Unless the course of the project changed dramatically (and there was no reason to believe that it would do so), it appeared likely that the project would cost Acme 30 percent or more in excess of its bid.

Delays had existed since the very beginning of the project, but Acme had submitted no claims, not wanting to alienate the general contractor early in the progress of the work. However, as the situation worsened, the subcontractor knew that action had to be taken. In the fifth month of the project, Acme submitted its first request for a change order, demanding a major price adjustment as a result of the delays.

The contractor promptly rejected the request for a change order as to pricing and referred Acme to the "claims" and "delay" sections of the subcontract. The "claims" section stated:

"The Subcontractor shall give the Contractor written notice of all claims within five days after the occurrence of the event upon which such claim is based; otherwise such claims shall be deemed waived."

Five months into the project, it appeared that Acme had waived hundreds of thousands of dollars in potential claims.

The "delay" section was even worse. That section stated:

"The Contractor shall have no liability to the Subcontractor for any damages or compensation as a consequence of delays in any way contributed to by any person other than the Contractor, unless the Contractor has first recovered such damages or compensation on behalf of the Subcontractor from said person, it being understood by the Subcontractor that the Subcontractor’s sole and exclusive remedy for delay shall be an extension in the time of performance of the Subcontractor’s Work."

The general contractor attributed the delays primarily to the developer’s change in architects and indicated that it had no legal responsibility for the delays. The general contractor offered only a change order to extend the time for Acme’s performance.

Appalled at the general contractor’s reaction to its legitimate claim for delay compensation, Acme delivered a letter threatening to pull its personnel off the job site. A letter from the general contractor’s attorney arrived the next day referring to yet-another section of the subcontract that stated:

"The Subcontractor shall proceed diligently with its performance of the work pending resolution of any claim, appeal or action arising under this Agreement. Subcontractor’s failure to diligently continue its performance pending such resolution shall result in the Subcontractor’s being liable for all damages (including consequential damages) suffered by the Contractor as a result thereof."

Acme management reluctantly decided to continue working on the project.

Having received such shoddy treatment at the hands of the architect and general contractor, Acme began to take the subcontract procedures more seriously. Its project file quickly filled with copies of notices of delay delivered to the general contractor and architect on a regular basis.

When an issue arose as to the scope of its work, a demand for a change order was immediately submitted (and ultimately rejected). When its pay requests were not fully funded, Acme formally protested the refusal to pay.

Relations with the general contractor and architect deteriorated further, but at least Acme was taking some steps to preserve the claims that might exist under the "killer contract." However, the day of reckoning was yet to come. The massive number of claims submitted by Acme and the other subcontractors still had to be sorted out and the subcontractors were nervous about whether they would ever receive final payment or release of the 10 percent retainage.

Acme began meeting with its attorney to discuss how its claims would be resolved under the subcontract and how it could enforce its right to final payment. The outcome of the office building project would depend not on the quality or timeliness of Acme’s work, but instead on the claim and enforcement provisions in the subcontract.

Next month’s "Contracts Bulletin" will discuss how the subcontractor asserts its claims in the face of the "killer contract."

 

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