General contractors (GCs) and subcontractors (subs) work together closely on projects. With money, reputation, and egos on the line, disagreements are bound to happen. Property owners, GCs, and subs all need each other in order to complete a project. It’s critical that everyone on the job understands how to prevent construction disputes, and resolve them when they arise.
Common types of construction disputes
Although every project is different, the relationships are often the same. Here are three of the most common disputes between subcontractors and general contractors, and how to best address them.
Disputes about scope of work
Nothing creates more conflict than the scope of work that the subcontractor is responsible for performing. A scope of work document contains details about the work that the GC expects subs to perform. Disagreeing about roles and responsibilities is not a good way to start a project.
Subcontractors can start on the right foot by clearly defining the work they will perform in their bid. The more detail, the better! Detailed documentation helps prevent construction disputes before they have a chance to start. Include both the work that you are including and what you are excluding. Unless the project calls for a unit price contract, most GCs will ignore any quantities shown in the bid. They will expect that you have included everything shown in the plans for your scope of work, so make sure you call something out if it isn’t included.
A detailed definition is best for both parties, as there is less chance for confusion.
Make sure the construction contract documents, drawings, and specifications are clearly detailed in both the bid and the contract. The drawing dates should match what was distributed during the bidding process. If any addendums were included, make sure these are noted on the proposal and in the contract.
General contractors will usually be the ones issuing the contract to their subcontractors, and that means that they have more control when defining the scope of work in the contract. Some GCs very loosely define the scope in the contract in the hope of sneaking more work onto the sub’s task list. It’s called scope creep, and it’s a common problem. Subs should read the scope definition closely – and push back if it gets too broad.
Disputes about change orders
Extra work, or the perception of extra work, is a common bone of contention between GCs and subs. A good definition of the scope of work in the contract will help to clarify what is extra and what is not. Unfortunately, not all contracts are that clear.
The subcontractor should read the subcontract and prime contract closely, so they know the procedure for the notification, pricing, and submission of change order requests. Contracts have a time limit for a sub to notify the owner or the GC of potential extra work. There may be limits on overhead and profit markups for change orders, especially on public projects. Make sure change order requests are submitted within the deadline and with the right markup, so they don’t get rejected due to these mistakes.
When submitting a change order request for review, make sure the documentation is complete. Include a price breakdown and backup documentation to prove your point. Clear pricing and documentation will help to avoid many disagreements. Ultimately, contractors don’t get paid for the work they did; they get paid for the work they documented.
Follow up with the GC a few days to confirm when approval is expected. If there are questions regarding the request, provide a response as quickly as possible. A prompt response can help get the change approved quicker.
Sometimes the GC or owner may ask you to do extra work without a formal change order. Maybe it’s a last-minute change on a Friday afternoon, and nobody wants to do the paperwork. At the very least, ask them to send an email approving the work and the price. That way you have proof of the change request.
Disputes over payment
Some of the most difficult conflicts in construction revolve around payment issues. In construction, payment flows “downhill.” And it doesn’t move fast. First, the owner or lender pays the general contractor. The GC sends payment to the subcontractors. Subs can then pay their subs or suppliers.
The lower levels often have to wait 60 to 90 days for payment. Cash flow is already difficult for contractors. his can be difficult for new companies or small businesses that need money sooner to keep their cash flow positive.
General contractors and subcontractors can both take steps to help ensure payment flows as smoothly as possible.
Send visibility documents
One of the first things that companies at all levels can do to prevent construction disputes is send visibility documents. Subs and suppliers send visibility documents, like preliminary notices, to the GC, project owner, and financing institution. This will make sure that the parties who control payment are aware that the company is on the job, and that they’re serious about protecting their lien rights.
Even if notice isn’t required in the state the project is in, it is a good idea to send one just for the visibility it provides. Often, companies get paid faster simply because the GC knows they’re on the job.
Submit complete invoices
When submitting an invoice, at any level, make sure that all the required documents are included and that the invoice is turned in before the deadline. Review the prime contract and subcontract closely and know the billing requirements. It may seem like some of the documentation is excessive, but, in most cases, it is designed to protect all parties and help ensure that everyone gets paid.
Once an invoice has been submitted, maintain lines of communication with all the parties up the chain. This goes both ways – the GC needs to let a sub or supplier know if there is a problem with their bill, and the sub needs to provide a prompt response to any questions and follow up to make sure there are no issues if they don’t hear anything.
Use lien waivers appropriately
In the construction industry, a lien waiver is used as a receipt for payment. Though there are different types of waivers, when a subcontractor signs one, they are saying “I got paid, so I give up my right to file a lien to recover this amount.” When used correctly, lien waivers can help speed up payments and reduce payment disputes. In short, they can keep everyone happy. The subcontractor walks away with a check, and the GC and property owner can breathe easier without the threat of a mechanics lien.
All contractors need be aware of lien and notice filing deadlines. Some states require monthly notices to maintain lien rights. Keep talking and trying to work things out, but keep an eye on the calendar. You don’t want to give up your right to legal action if you aren’t paid.
Remember that filing a preliminary notice, and even a lien, is just a part of doing business in the construction industry. It is okay to protect your legal rights to the money you earn.
File a mechanics lien
If a contractor isn’t paid, they have a powerful tool to use to resolve a dispute: The mechanics lien. Filing a mechanics lien are incredibly effective at speeding up payment. Often, hiring a lawyer or enforcing the lien isn’t even necessary to recover payment. Simply filing a lien gets the attention of the people controlling the purse strings on the job.
Preventing and resolving contractor disputes
If communication breaks down and contractors can’t agree, the contract will usually spell out how to resolve the issue. It is becoming more common for construction contracts to require some form of Alternative Dispute Resolution (ADR) in the event of disagreement, rather than litigation.
Ultimately, most construction disputes arise out of poor communication and a lack of transparency on job sites. When communication is consistent and clear, everyone on a project benefits. GCs and subs can both take steps to improve communication, visibility, and transparency on their projects. Those steps start with the request for proposals (RFP). They continue through the bidding and contract process. And they end only when everyone on the job has been paid and the project is complete.