A dispute over change orders has led to a multi-million lawsuit between Austin-based HVAC contractor Dynamic Systems Inc. and Skanska USA, the Swedish construction firm’s American arm. Skanska, a contractor with US headquarters in New York City, was managing a large-scale construction project at Westchester Medical Center and Ambulatory Care Pavilion project in Valhalla, New York. Westchester County Health Care Corp. hired Skanska as the prime contractor on the $230 million project back in 2016.
A lawsuit over change orders
According to the lawsuit, a series of change orders altered the scope of the original work, increasing the total price from $17.8 million to $22.5 million. Dynamic claims those changes left them on the hook for over $4.6 million in additional work costs.
Dynamic claims in the lawsuit that Skanska approved every one of the change orders. All of the work has been completed, according to Dynamic, but Skanska has yet to pay. The lawsuit also asks for additional money to cover costs and interest.
Initially, Dynamic filed a $6.1 million lien on the project in May. That issue was settled when Skanska subsequently paid a lien discharge bond, and the completed Medical Center opened to the public in October. Representatives from Dynamic have filed a $4.2 million lawsuit against Skanska in U.S. District Court for the Southern District of New York.
In a perfect world, contracts would be carved in stone, and the scope of work would not creep as the project moves forward. If it did, all additional charges would be agreed upon by both parties and promptly paid in full as soon as the work was completed.
As the Skanska lawsuit illustrates, however, we do not live in a perfect world. While Skanska has yet to respond to Dynamic’s charges in court, a close examination of the company’s payment profile can shed some light on the risks associated with subcontracting with Skanska.
An inside look at Skanska’s payment risk
An analysis of the payment practices of both Skanska and Dynamic show that each company is considered a medium risk when it comes to receiving payment in full at the end of a project. However, a close examination of Skanska’s payment history using Levelset’s new Contractor Profile platform raises a few more red flags than Dynamic’s payment history.
In the past 12 months, four companies have filed liens against Skanska, not including Dynamic’s $6.1 million lien. In December of 2018, a subcontractor filed a $1.3 million lien against Skanska for a project in Seattle, Washington. A $35,000 lien was filed a day before a separate $13,000 lien in April 2019. Those two liens were connected to Skanska projects in Durham, North Carolina, and Houston, Texas, respectively.
Dynamic has faced two liens in the past 12 months, both in connection to a project in Austin, Texas. Both liens are in the amount of $223,415.54, and both were filed on June 31, 2019. One lien was filed by a material supplier, and the second was filed by a subcontractor. On its face, this looks like a case where the subcontractor didn’t receive the payment, so they couldn’t pay their supplier. As a result, both parties had a right to file a lien. Dynamic also experienced the threat of a lien from another contractor in the last year.
Construction payment data like this allows potential business partners to assess the risks associated with entering into contracted work agreements. In this case, it can also provide a level of insight into the ongoing lawsuit that is sure to be made public if the lawsuit goes to trial. This information may have even helped convince the leadership of Dynamic not to partner with Skanska, or at least to do so with extreme caution.
In evaluating jobs, Skanska executives have set a priority of “profit over volume,” according to a recent article in ConstructionDive. Globally, the company saw a $221.6 million profit in just the 3rd quarter of 2019. That’s a 324% increase over the same quarter last year.
At the end of the day, transparency is often the key to getting paid for your company’s work. Both parties should agree on – and solidify in writing – each and every change order before any additional work begins. On a huge project, altering the scope of work by just a few degrees can cause the overall work and costs to balloon.
The importance of a prequalifying process
Contract disputes can filter down to the bank accounts of each and every worker affected by slow or stopped payments. Nothing kills employee morale quicker than a missing paycheck. The best way to prevent problems with payment is to avoid the situation altogether. Do your background research on every contractor before you work with them. Look at their credit report, payment history, and reviews from past clients. If the payment risk is high, consider altering the construction contract to protect yourself. Always protect your mechanics lien rights.
And don’t be afraid to walk away before the project – and potential rash of payment problems – ever begins.