After unexpected change orders put the company “under economic duress,” general contractor Direct Steel, LLC filed a lawsuit against subcontractor American Buildings Company (ABC) on January 13, 2022.
In January 2021, Direct Steel entered into two subcontracts with ABC for the design and furnishing of a supply support warehouse and three covered storage buildings. The construction project was located at Fort Hood Army Base, between Waco and Austin in Central Texas.
Per the lawsuit, District Steel claims that it was compelled to pay $406,859 in change orders to ABC after the company “demanded” changes to its contract — changes that ABC apparently acknowledges were due to “delays and cost increases…through no fault or action of Direct Steel.”
Direct Steel claims that ABC threatened to terminate the contract if Direct Steel did not agree to the “vastly increased payment amounts” they were demanding.
Direct Steel notes that it hasn’t paid the full amount claimed by ABC, claiming that the project’s change orders are “enforceable” given that they are “a result of the economic duress imposed upon it by ABC.” In fact, Direct Steel is actually claiming $32,050.60 in damages, saying that it has already overpaid.
Direct Steel argues that they didn’t have time to challenge the change orders while also finishing the construction project on time and on budget. The lawsuit documents state:
“Direct Steel was in an untenable position. [They] could not immediately initiate legal action and risk being unable to complete the Project. […] Such a delay would have exposed Direct Steel to liquidated damages, extended overhead costs, significant damage to [their] reputation, and other delay-related damages.”
All in all, Direct Steel’s lawsuit is asking for a permanent injunction keeping ABC from enforcing the payment amounts in its prior change orders — and keeping the company from taking any further retaliatory action against Direct Steel, as well as the aforementioned damages.
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Dealing with change orders can be a difficult process for general contractors and subcontractors alike, though this is a particularly unique situation. Requests for overpayment can put contractors in a difficult position, and the threat of mechanics liens on projects can hold back people on all sides of a dispute.
Disputes over change orders and overpayment can frequently lead to litigation.
“While mechanics liens provide a powerful way to ensure payment of what is due, the power can sometimes also be used to attempt to gain more than what has actually been earned,” writes construction lawyer Nate Budde.
“…it can be almost impossible to stop somebody from filing a lien, even if the lien is invalid or otherwise inappropriate, if they really want to,” Budde continues. “When a lien is improper, a property owner may usually institute an action challenging the lien and demanding its removal. Or, the owner could wait until (if) the claimant files an action to enforce the lien, and defend against the claim in that action.”
Supply chain delays and hiring difficulties allegedly put Direct Steel in an especially difficult position, as well.
According to the lawsuit, “Direct Steel explored the possibility of contracting with other manufacturers, but, among other things, the lead times were running approximately 30–40 weeks. If Direct Steel had been aware that ABC would not honor the Contracts, Direct Steel would have pursued other avenues.”
This could continue to impact projects worldwide — industry experts note that shortages of products like steel will very likely continue in 2022, with IHS Markit analyst Matteo Fini claiming that, “If the question is whether this gets fixed right away, the answer is no.”
Though it’s the one that has filed the lawsuit, Direct Steel already has a reputation for payment difficulty.
One subcontractor that purportedly worked with the GC on a previous project noted that, “They give you a contract and you do everything right on the job. Then they hold back 10% because of bogus back charges that they won’t show what you did wrong,” while additionally claiming that Direct Steel has given owners “bogus change orders” of their own.
Another subcontractor echoed this position, saying “I would be very careful working with this company as a subcontractor, you will NOT ever get paid in full.”