March 17, 2016

1. Understand the Payment Process In The Contract
(Since you are doing a top “five” you might want to number the paragraphs rather than use letters. )

All too often the parties to a contract – or at least one party – does not truly understand the payment process required by the contract documents. Frequently, the parties rely on what they have one in the past and do not dig deep into the contract because, well, it is a thick document and they have been in the industry for twenty years and they “know what to do.” Unfortunately, not all contracts are “standard” and the terms and conditions for AIA and ConsensusDocs contract documents are all subject to significant modification. It is important to understand the schedule of values, payment application requirements, progress payments, certifications, withholding for retention, final payment, releases, and pay-when-paid, clauses that are frequently used in most construction contracts. It is not uncommon for relationships to sour following a situation where one or more parties do not fully understood the requirements and timing of the payment process. So if you are an owner, review it with the General Contractor. If you are a Prime Contractor, make sure this is covered in any bid meetings.

2. Fill Out And Submit The Right Paperwork
This is a subset of the first issue. As a general rule, the larger the project, the greater the administration and paperwork. Getting the payment application done correctly is of paramount importance. The parties need to recognize when and how to use partial or full lien waivers, or conditional final or unconditional final lien waivers. These forms differ from project to project and state to state. Do not think there is a “standard” form. Sometimes hiring requirements are in place and result in situations where subcontractors are not as familiar with all the required paperwork. Owners and Prime Contractors need to be aware that often times small “Mom and Pop” operations do not have the experience or sophistication to handle all the requirements of a large job. It is not uncommon for Prime Contractors to have to loan out administrative personnel to the subcontractor to make sure they can keep up with the paperwork and do it correctly.

3. Get or Give A Written Change Order For That Extra Work
There is a lot of pressure to finish the job on time and within budget. There is usually no “one” decision-maker for time and price adjustments and it is difficult to get all the decision-makers to sign off on a change order within a short period of time. Despite this, the project must go on. Many problems arise because there is not a true understanding of the scope of work or what was excluded from a bid. As an example, if a subcontractor’s bid excludes “sealants and caulking” but the contract requires “sealants and caulking” within the scope of work, there will be an issue. If the Prime Contractor issues a change order to the subcontractor to keep the job running, the Prime Contractor would likely have an uphill battle in passing that along to the Owner. There are literally thousands of decisions like this that need to be made on projects and if the contract was followed down to the letter, the job would not finish on time. Trust plays a
key role here. If there is trust, the paperwork can catch up to the decisions. In situations where there is little trust, one party will want the signed paperwork in hand before doing any extra work.

Changes and extras play a prominent role in contract litigation and liens. If extra work is contemplated, get the change order drafted and submitted before doing any of the work. Send a confirming email that the change has been requested and send the proposed change order immediately. Even if you decide to start the work before receiving a fully executed change order, at least the paperwork is in the owners hand and the email is in place to establish reliance. The worst of all worlds is starting the extra work without documenting anything until after the work is underway.

4. Identify Lower-Tier Contractors and Suppliers
The ability of lower tier contractors and suppliers to lien jobs differs from state to state. There is no uniform rule. Many contractors believe that third tier subs cannot lien projects. Do not fall victim to this assumption simply because there is no national “Miller Act” since there are many “Little Miller Acts”. Unidentified lower-tier claimants are a constant source of frustration for owners and Prime Contractors. Many states have notice provisions that result in the early identification of these parties. Some states do not. You need to be aware of who can lien your job in the state in which the project sits and make sure these contractors and suppliers are identified. You also need to make sure that when payments are made to a subcontractor, lower tier subcontractors are also paid , which is usually evidenced by partial lien releases. If you are a Prime Contractor, you might want to consider asking your subcontractors to identify their own subcontractors and materials suppliers so that those persons can be tracked and verification of payments can be made.

5. Stay Classy
Let’s face it. Many minor disagreements blow-up or go off the rails because of personality differences (the owner likes Coke, but the Prime likes Pepsi), or some other event created bad blood (the Prime’s PM is dating the ex-spouse of the concrete sub). You need people who can maintain their professionalism when things do not go as anticipated. Inartfully drafted emails are a frequent source of tension. Email is the type of medium where it is easy to come off passiveaggressive, snide, snarky, or just plain rude when there is no intent (or maybe just a little) to do so. Communications in person have less margin for error because of tone and body language,
among other things, help keep the discussion from veering into a full blown code red. Emails are great for documenting things but they are lousy when it comes to conducting a back and forth dialog that is important for any negotiation. Face-to-face meetings are most productive because people tend to want to work together to get things done. Even then, in the words of the immortal and legendary news anchor Ron Burgundy, stay classy.