Construction Project Record-keeping Essentials In California
What we’ll cover:
- Understanding written notice requirements
- Protection of change order claims
- Statutory release forms and their effect on lien rights and other collection remedies
- Significance of maintaining licensing status
The presentation will be followed by a live Q&A with Mary!
Hi, everybody. We’ll get started in just about a minute. Let everyone come into the meeting for today’s webinar. I’m Katherine Berona with level-set and I will introduce our speaker Mary in just about a minute when we get started. Okay. Um, thanks for joining us everyone today. Um, I’m Catherine Berona with level-set and I work on the community engagement team with construction lawyers and con connecting construction lawyers all over the country with contractors and construction professionals professionals. And today we have Mary Salamone from Procopio she’s based in orange County, California, and she’ll be presenting essentials of record-keeping and the overlooked key to project success. So I will let Mary get started now and she can further introduce herself. Thanks Mary, for being with us. And one other thing, if you have any questions at any time in the presentation, just type it in the chat box or the Q and a panel. And we’ll be sure to get that question over to Mary. All right. Thank you.
Thank you, Catherine. And, uh, good afternoon and welcome to everyone. And thank you for joining us today for this informative webinar. Um, I’m just going to start by giving some very brief background about myself. Uh, I guess just to give everyone some level of confidence that I may know a little bit about the subject on which I’m speaking today. Um, I’ve been practicing exclusively in the area of construction law for the past 33 years. I’ve had the privilege to represent all participants in the construction industry, um, from both public and private owners, general contractors, subcontractors, uh, designers, and even suppliers. I actually cut my teeth in this business starting by representing, uh, suppliers on, uh, collecting for materials using the various statutory remedies like mechanics lanes, stop payment notices and payment bond claims. So, but I think this very background, um, gives me a unique perspective when I’m trying to resolve disputes.
I’ve been recognized by both chambers USA and best lawyers in America as a leader in my field. And I also serve as an arbitrator with the American arbitration association. I sit on their large complex construction disputes panel, and I’m also an arbitrator with the office of administrative hearings. The public works contract arbitration program. Today’s webinar addresses the essentials of record-keeping far too often. I have found that a party’s failure to keep proper and accurate records results in needless problems on a construction project. I hope that you will be able to take away from the seminar, a few good practice pointers to implement in your day to day construction operations, to avoid some pitfalls. And with that, let’s jump into the materials now to just quickly highlight these are the topics. Um, I intended to cover today of the importance of project documentation, uncovering best practices for record keeping, understanding, written notice requirements and contracts and why they’re important, protecting change order claims. Uh, I’m going to discuss statutory release forms and their effect on lien rights and other statutory collection remedies. And then I’m going to wrap up by talking about the significance of making sure that you are properly maintaining your contractor’s license status.
Now, why, why do we have to keep records at all? And I think we can all agree, um, that it is painful to have to do that. Uh, I know as a lawyer, uh, I have to be diligent and meticulous about my, my record keeping and, uh, you know, it takes a lot of time out of the day. Um, but it, it serves some very important purposes, uh, particularly on a construction project. You know, first off records are necessary for just effective contract administration. They also promote the continuous monitoring of project status and facilitate day to day management of a project. They can also be used as an aid in the early identification of problems and assist later in the investigation and resolution of any subsequent claim or dispute. There are also particularly vital in the event of turnover of project personnel. Um, this is kind of prone to people coming and going to different companies.
And if the person you had in charge of a project, everything they know about that project was up in their head. And none of it is documented anywhere when that individual goes. And particularly if they leave on bad terms, for some reason, they take the corporate memory with them, so to speak. Um, so that’s another reason why it’s important. And then just lastly written documents are given more weight, uh, in a court of law than what a person’s memory is given in determining what actually happened, because we all recognize that our memories just fade over time. And sometimes before these cases get to a court, the project may have concluded four or five years prior to that, uh, before somebody is testifying. So none of us have, um, impeccable memories where we can remember those types of details and that’s why having records becomes particularly important.
So then the next subject I want to segue into is just some record keeping guidelines. Obviously, uh, the pictures you see as is a situation that we’d like to avoid on a construction project. So when you are keeping records, you want to make sure that letters or emails, any type of communication is clearly written and it’s easy to follow. You always have to bear in mind that it’s some point somebody who may not be familiar with that project may read those records. In other words, if, if you’re in court, a judge or a jury may end up having to look at these documents as exhibits, trial exhibits, um, or even in arbitration. So you have to make sure that they’re easily understandable. Um, they need to be contemporary contemporaneous record of events that are prepared in a timely manner. You don’t want people going back writing about what happened three, three weeks prior, three months prior, and they should be compiled by the person with direct knowledge of that event.
And they need again, to be sufficiently detailed for third-party understanding. And you should determine an organization organizational system in advance, for instance, creating, tracking logs for requests, for information change, order requests, submittals, things of that nature. Um, I represented a client a number of years ago, they were general contractor and, uh, they did mostly industrial type work. And I went in and they were having some claim issues. And I discovered that their record keeping was just abysmal. Uh, they, they weren’t even keeping tracking logs of change orders that subcontractors were submitting to them. Um, and, and their change orders to the owner. Weren’t getting tracked in any way. Um, and it was so bad actually, they lost the estimate for the project even. So I tried to gently, uh, discuss with them the fact that, you know, you, you’ve got to keep some organizational structure to, to these types of records.
It’s going to be the key to your success, that they kind of scoffed at my advice. And a few years later, they, they basically had to close their doors in California because they were just hemorrhaging money on projects. Um, continuing again, with some record keeping guidelines, you want to be factual with whatever you’re writing. You need to be extremely careful of giving opinions or what I’ll call editorializing. Um, that’s very dangerous. You want to state things that, you know, you can prove, you know, you can demonstrate, um, it gives you more credibility. You also want to reference any underlying, um, contract provisions, specifications, and the like to support the position you’re taking in, whether it be an email, a letter, um, et cetera. And, and you want to make sure you’re avoiding personal attacks in any colorful language, always asking yourself, you know, would I be proud of this document if it were a trial exhibit I’m I know sometimes things can get pretty contentious on these construction projects and, you know, four letter words may abound on a job site, but it doesn’t mean they should find their way into rent communications though.
I have seen that happen on a number of occasions, and I just think in front of a judge or a jury or an arbitrator, um, that type of verbiage terminology, um, doesn’t necessarily reflect well on the individual author. And you want to be careful as a final note of what I’ll call marginalia and, and what do I mean by that? That’s just a fancy legal term. It means a little note. You may write on the, the margin on whether it be meeting minutes or a letter you got, um, you want to be careful of those types of notations, because they can all get discovered if you get into litigation. And, and if you get into little litigation, there’s no such thing as a personal file, all that becomes unclothed. So you have to be very careful about what you’re writing. I remember a case I was handling once, um, in my client had taken a position in a letter to the owner and somebody on my client’s staff, um, had disagreed with that position and wrote a little note in the margin that said, this is total BS.
I don’t know why we’re saying that. Well, we got to litigation and outcomes. This notation not particularly helpful. Now I’m going to segue to talking about correspondence and emails and in some helpful hints in dealing with that type of record keeping first off, you want to use a single reference line when possible one subject matter when possible. Um, and it, it just makes matters easier to retrieve when you’re looking through hundreds or thousands of emails to find an email you recall writing, um, if, if you’re writing about different subjects and you’re never changing that subject line in the email, it’s going to become much more difficult to find the needle in the haystack. Um, you want to relay the circumstances and the reason for the communication, and you always want to have backup of all that electronic data, and you want to store it offsite.
You need to caution folks working for you that storing things solely on their laptop without backing it up on a server, uh, is unacceptable practice. Uh, I’ve heard stories about laptops being left in trucks, um, and the laptops, you know, the trust got broken into the laptop has been stolen. And now all of that information has been erased because it was never backed up. Um, also hitting a delete button on the computer does not mean it’s gone in today’s technology. There are these, uh, computer forensic folks that can track down this information. You will be surprised. And again, never assume any emails are private or confidential unless they’re being exchanged with your lawyer. Do not say anything in an email, you would not want someone else other than the recipient to read. I, I have found that, uh, you know, with the advent of emails, this boundary that people used to observe between the written and spoken word is often lost in these emails.
So conversations that I would dub like water cooler type conversations, or finding their way into emails, where they would never have found their way into written letters. Let’s talk about notice requirements. You need to make sure you’re very carefully reading your contract, because I have yet to see any construction contract with owners that doesn’t require some written notification being given by the contractor. Um, and, and often that notification must be followed by things like detailed schedule analysis or submission of costs and supporting documentation and the like, and you have to make sure you’re strictly complying with those notice requirements. California is, uh, pretty strict about compliance, not as strict though, as other States back East, but still, um, they’re, they’re not going to allow you to utterly waive notice requirements and fail to adhere to them all together. I’ve listed here just a few types of notices that can be given.
And again, as I said, a failure to provide that notice to an owner could constitute a waiver of rights by the contractor because it’s denying the owner an opportunity to conduct an investigation and to actively participate in some potential resolution. One of the, you know, more Seminole cases, I just want to highlight for everyone to kind of drive home. The point about the significance of notice is this Greg Penske construction versus city of Oakdale case decided 2011, uh, just very quickly. These are the highlights of the facts of that case. The contract required a written change order for all modifications to price your time. Uh, the contractor was required to submit any requests for a time extension within 30 days after that triggering event. And the contract said no extensions would be valid unless they were made in accordance with the contract. The contractor completed the work late, the city assessed liquidated damages contract or argued. It was excused from the notice requirement because it was the city that caused the delay. Well, in that case, the court held because the contractor failed to give a notice of any delay claim in accordance with the contract, it barred any defense based on the city’s alleged fault. And as a result, the court upheld the assessment of liquidated damages and the court refused to consider any evidence that the timely performance was rendered impossible.
I want to talk next about daily progress reports, because I cannot emphasize enough the significance of maintaining these because when Humpty Dumpty falls off the wall and the project is miserably late and there’s crossover ones, and we’re trying to figure out who pushed Humpty Dumpty. The first thing that consultants I hire want to look at are things like daily progress reports, because they are supposed to tell the story of what happened on the project contemporaneously while you should record your weather conditions. Um, that’s not all you should record far too often. All I see in these daily progress reports are things such as sunny and 75. Well, we know most of the time in Southern California, that that is the weather. Um, there’s many other things you need to be reporting. And, and this is a list of just a few of them. So I’m going to highlight some of them, but you want to always talk about any problems or difficulties you may have encountered in the site. Um, you want to note any significant conversations or instructions you received maybe while you were on the site. Um, you want to record any safety inspections and accidents, um, and any controversial matters that arose
Mary Salamone:: (16:31)
Another very important thing to document is progress information such as quantities installed, uh, delays action, taken actions contemplated. You also want to make sure you’re recording labor information, the number of workers on site by trade and the specific area they’re working on. I remember I was representing a general contractor on the construction of a very large hospital project, um, that was delayed and we made a very concerted effort to work with the subcontractors, to create a site plan that, you know, divided it and various grids and told them you, if you’re working in this section, this is a one, this section is a two, this sections, a three, et cetera. When you’re on the second level was B one B2 B3. And that was distributed to the subcontractors to get everyone on the same page. So we were very clear where they were working on a given day. Otherwise we would have no idea where, where they were working on a very large, uh, hospital project with multiple
Um, wrapping up on some daily progress report items that should be documented as, um, you, you want to prepare these on a daily basis. Um, you, they want to be, you want to prepare them at the time the events occur for the same reason why I made that comment about some of the other record keeping is that you want to do it when your memory is fresh and you recollect distinctly what occurred. Um, and again, objective commentary only. This is not intended to be a dear diary. Um, I was working on, uh, uh, this was again a cancer center project, a little different project than the hospital I referred to. And on that one, um, the, uh, subcontractor had created volumes and volumes of handwritten daily reports. Um, and the judge was I on that, I had the owner and contractor with teamed up against the subcontractor on that project. And the judge was so thoroughly impressed at the thoroughness of these, but when you delve into them, you had the superintendent making comments about their claim, um, and that it was meritless and that they were grossly exaggerated. The changes that had been made on and on and on if at the end of the day, uh, I believe their claim was about two and a half million dollars. I got a defense verdict. They were awarded nothing.
The next set of documents that are again keenly important, uh, to, to try and tell a story of what happened on the project are photographs and videos. And it, it brings back the old adage, a picture speaks a thousand words, and it, it truly does. You want to take pictures at regular intervals and at milestone dates, you want to take them at each elevation North, South East West when you’re doing so though you should identify a precise location and date. You’re taking those photos that will help support the progress schedule today. A lot of folks are using webcams again, you know, great, uh, helps you document what’s going on in the project where people are working on any given day, um, you know, helps you record, you know, bad soil conditions and poor workmanship and the like, um, in the event you’re ever terminated for default on a project, you want to make sure you get in there and you’re either, uh, videotaping or taking lots of photographs.
So now we’re gonna segue to a, again, another form of record keeping, um, and it relates to project meetings. Now there’s numerous types of meetings that are held on projects. You know, you have, you know, meetings with the, you know, owner and architect team. You’ll have meetings with subcontractors. You may have dedicated meetings to talk about schedule. You know, you may have dedicated meetings to talk about change orders, et cetera, but, you know, generally speaking, there should be procedures implemented for these meetings, or it’s going to become a free for all is preferred. If, if you conduct these meetings at the construction site, if at all possible, you want to have kind of a standing date and time for those meetings. So everyone has it on their calendar. You want to prepare an agenda to organize that meeting and distributed beforehand, and you should designate a chairperson. That’s going to take control of that meeting and make sure the discussion is on track. And I know in today’s technology, it’s very difficult, but you want to try and limit distractions. People getting on their cell phones are having, you know, sidebar discussions. And then you want to identify, discuss the issues and agree on a course of action.
Then after those meetings, minutes are typically circulated of what took place. And in those minutes, you want to identify areas of concern or problems. You want to identify action items with a responsible party, and very importantly, assign a deadline to tasks. Otherwise they’ll just linger. Um, you want to prepare those circulate and properly for commentary. And I always suggest that you volunteer to maintain the minutes again. I know it it’s added work, but you control what said if you control those minutes. And I always tell people if it isn’t written it, wasn’t said, that’s why it’s important to see if you can control the drafting of those meeting minutes. I’m going to talk about schedules just quickly, because we could spend hours talking about schedules, but, you know, typically on any construction project, you’re going to develop what is called the baseline schedule from which you’re going to construct the project, and that will serve as kind of the measuring stick for any delays.
So when you prepare that baseline schedule, these are just some of the reviews you should conduct, um, to make sure that the schedule is complete and adequate for your purposes. Then as you go along, I think you all should be aware already that you have to update that schedule typically on a monthly basis. Um, and it’s very important to update your schedule because it will help you plan the work. And it is this little cartoon shows, mirror miracles do not happen. Um, so you have to manage the schedule. So, uh, as to the schedule updates, um, you have to make sure you’re using them as a planning tool and not a billing tool far too often. I see contractors just submitting these, you know, to get paid and they may, you know, state certain amount of work, uh, has been accomplished when it hasn’t been accomplished.
Um, and I just don’t think that’s to anybody’s benefit to do that because sometimes you’re pulling the wool over your own eyes when, when you engage in that type of practice. Um, so if you’re adequately monitoring your schedule, you should start recognizing problems before they really become of critical concern. And, you know, you should always be careful to monitor his work, being performed out of sequence. Um, are you having to change logic? Um, and are you consuming, float and float? Is that additional time you have to complete the work before that activity is falling on what we call the critical path of the project, which means it controls when the work is ultimately done. So by monitoring that schedule and accurately reflecting what is going on on that project, you will have a better command of the construction project.
Now I’m going to turn to a discussion about change orders. Um, as I say here on the slide, barring miracles, you know, change orders are just a fact of life. And these are just a few of the reasons why I believe that there are inescapable fact of life. You know, every project is unique, it’s never been designed or built. Um, and a drawing is a small scale representation and it cannot reflect the full detail of work. And I, I know if we have any architects or engineers on this webinar, you will be stunned. If I say that, uh, architect, engineering and design are not exact science sciences. Um, and, and so th there’s, you know, the possibility of error, um, and then you have, if you go in and you, and you alter one detail in one area, this could have a ripple effect and affect countless other, uh, detail, sheets and components.
And then you just have the reality of sometimes you’re just going to encounter different site condition on the site. You know, you, you may encounter utilities that weren’t shown soil conditions that were not known, uh, et cetera. So it creates a need for change orders, which you have to hope is you’re not in this situation where the value of the change orders now is eclipsing the base contract and change orders just have a very bad reputation in the construction industry. Uh, this little picture, uh, describes the contractor’s perspective of himself, but I think this picture more adequately describes the owner’s perspective of a contractor, where they feel that, you know, the project may be getting under bid and the contractor is just going to, as they say, change, order them to death, um, and, and make up, you know, what they may have left on the table, uh, in change orders.
So owners are not very receptive to change orders. Um, so you have to make sure that, you know, you’re being meticulous in how you document that changed work and how it’s getting priced. So a few words of caution on that subject, you, you just want to generally avoid any verbal orders or directives for extra work in particular, when it comes to working on public works of improvement, those verbal orders are not binding on any public agency. So if the public owner’s representative comes to you and says, yeah, go do that work. I promise you, I’m going to pay you for it. Um, that promise is not binding on them. There’s, there’s been a reported case where even when the owner’s representative stated and testified under oath, yes, I directed that work and I told them I would pay for it. Um, because that those oral verbal type instructions are not binding on public agencies.
The court wouldn’t allow the contractor recover because he did not adhere to the contract requirements for change order work. You want to track labor and material costs on a daily basis. And at a minimum, you’d want the owner to at least sign and verify crew size equipment on site. And the hours worked. If the owner wants to dispute entitlement, that’s fine, but at least you want at the end of that work day or the very next morning, get the owner signature on like a time and materials ticket, acknowledging at least the crew size, the equipment, et cetera, because, um, you can have the entitlement dispute later, but at least the parties then have an agreement on quantification, um, and do not execute change orders. If you believe there’s any schedule impact, um, look forward. If there’s zero days that the owner’s inserted, you may want to change it to the wonderful acronym TBD to be determined.
Uh, and then I wanna, um, wrap up a change order discussion, uh, just, you know, calling some attention to certain waiver and release forms that owners may tend to use. Uh, this image I know is hard to see. So I’ve got to blow up the language that’s at the bottom and the fine print. As a lawyer, my eyes always get directed to the fine print at the bottom of a document. That’s, that’s usually where the bombs are buried. Um, and certainly that’s where this language is contained. I simply blew it up at the bottom of the document and it’s release language is what we call it in our industry. And it starts off just fine by saying, by signing the change order, the contractor acknowledges that it’s been fully compensated, but the problem starts when it says that you’re acknowledging you’ve been paid for all impact ripple effect or cumulative impact on all other work under the contract.
And the reason why I call this potentially dangerous language to your attention is if you have a project where maybe each change is not of such significant magnitude, but you have hundreds of them to the point where you get into that situation of that other picture, I showed you where the number of change orders ends up eclipsing the contract, um, and the industry dubs that a death by a thousand cuts. I don’t know if any of you’ve heard that expression, but it’s an expression that’s often bandied about in our industry. Um, if you find you’re getting into that situation, you don’t want to be signing, uh, change orders that has that Burbage on it, where it talks about ripple effect or cumulative impact on other work. The concept is that a large number of changes, not only effects change work, but can start affecting work that wasn’t changed.
Um, and it starts, you know, releasing productivity claims, lots of efficiency, claims and things of that. Like, so let’s transition now to talking about statutory release forms in the state of California, uh, the law, uh, restricts the types of waivers, uh, that can be signed in exchange for payments received on construction projects and, um, their statutes that are contained in what are called our civil code in the state of California, that prescribes for different release forms. And the law says that those forms must substantially follow the statutory language that’s laid out for them to be enforceable. Um, those forms are basically a conditional waiver and release on progress payment and unconditional waiver and release on progress payment, a conditional waiver and release on final payment and an unconditional waiver and release on final payment. So there’s four of them. And only by the use of those four forms that substantially follow the statutory language can any claimant in California be deemed to have released mechanics lien rights, stop payment, notice rights, and payment bond, right? Having said that signing those forms does not release any claim for breach of contract that may be asserted. It just releases the statutory remedies that are provided in the state of California, uh, to assist you in getting paid for work
Speaker 3: (30:40)
Performed. Now, um,
Speaker 2: (30:45)
As I mentioned, there are four release forms, um, but they can be bundled into two forms, one a conditional release form, and the other, an unconditional release form. Each of these pertain to whether it’s a progress payment or a final payment. And that’s how you get four, but talking at a higher level about a conditional release, those depend on the payment of money. So without the actual payment of money, that release has no effect. So that is the type of release. Typically you’re either going to provide, um, you know, whether you’re general to the owner or whether you’re a subcontractor to the general contractor, um, every month in order to get paid for that month, you do not provide an unconditional progress payment. That release is only provided once you have been paid and you have confirmed, the funds have cleared the bank. If you provide an unconditional release form and you have not been paid, um, there’s no attorney, that’s going to be able to save you from that because the law says your lien claims are extinguished. Now having said that, um, it doesn’t extinguish necessarily your breach of contract claim, but your statutory remedies, the mechanics lien, the stop payment, notice the payment bond remedies. Those are now gone.
Speaker 2: (32:14)
So let’s look real quickly at, uh, just a couple of examples of these forms. Now, um, this form, uh, mirrors, the statutory language that has to be used, um, just as a footnote to everyone in 2012, the California state legislature decided that, um, they were going to go in and overhaul, um, the statutory release forms and, um, revise them. So if, if you have release forms that you kept in your drawer and you just keep xeroxing, um, if they don’t bear a date after 2012, uh, you should probably dispose of them. Um, and these forms are readily available on the internet. The internet is a wonderful thing, uh, and you can download these, uh, from the internet. This particular one is a conditional waiver and release on progress payments. And what I’ve done is just blown up the language that’s in the highlighter at the top of the form, and it tells you right there, um, that this document waves lien stop payment notice and bond rights, and it’s effective on receipt of payment. A person should not rely on this document unless satisfied that the claimant has received payment. Also, just, I want to call to your attention some additional language, um, towards the bottom of the form under the header exceptions, this was verbiage that was newly added by the legislature in 2012. Make sure you’re, you know, when you fill out this form, you’re also completing this portion as well. So it’s very clear, uh, what date this release goes through, um, and the amount of unpaid progress payments that still remain.
Speaker 2: (33:54)
Now. I wanted to just show you by way of comparison, the verbiage at the top of the unconditional waiver and release on progress payment for one, I’m going to blow it up for ease of reading. Um, and it says this document waves and releases, lien, stop payment notice, and payment bond rights, unconditionally, and States that you’ve been paid for giving up those rights. This document is enforceable against you. If you sign it, even if you have not been paid, if you have not been paid, use a conditional waiver and release form. So it’s cautioning you right here that if you’ve not been paid, you should not be using this release form for that particular month.
Speaker 2: (34:42)
And then the last topic I want to touch upon, um, is a discussion of contractor license laws in the state of California, your license that you’ve been issued by the California state contractor’s license board. Um, that’s the little icon you see on the right. They go by the acronym. CSLB, uh, is basically good for two years and the license expires on the last day of the month when it was issued. Um, and you have to make sure that somebody at your office is calendaring that expiration date. Now the CSLB does send a renewal notice approximately 60 days before expiration, but if you moved offices and if you’ve not notified the CSLB, your license may expire before that notice catches up with you. If you haven’t also calendar to reminder to yourself. So with the wonders of outlook, uh, it’s very simple, um, to, you know, make sure that that date is, uh, is placed on your calendar.
Speaker 2: (35:41)
Uh, so it does not pass you by now who needs a license in the state of California? Well, you need a license. If you’re working on construction projects that are priced at $500 or more in both labor and materials, and no, you cannot break the project down into little $499 pieces to avoid the licensing law. Um, and you cannot charge an hourly rate to try and get around the law either. Um, and what is below is an excerpt from the business and professions code, where the legislature has defined what a contractor is. So if you fall within that definition, you see on the slide, you better make sure that you have a license. Well, why, why is that so important? Why does Mary keep telling me over and over again that I need to make sure I have a license. I need to make sure that it’s active and in good standing well it’s if you perform work and you don’t have a license, you’re subject to civil and criminal penalties for that, um, such as one year of imprisonment, uh, which I’m sure nobody wants to happen.
Speaker 2: (36:47)
You’re also precluded from maintaining a lawsuit to recover compensation for work performed, but just when you thought that was bad folks, it gets worse. Um, you’re subject to what is called discord judgment. Uh, and that word is sounds ugly because it is ugly. And it’s just a fancy legal term for meaning, to the extent you performed work, when you weren’t licensed and you were paid by whether it be the general contractor or the owner for that work, they have the right to take back whatever you were paid for that work, even if there was no issue with the work you performed, there’s no claim that it was defective in any way. And even if the owner knew that you were not licensed, uh, at the time of entering into the contractors case, right on point in that regard where an owner admittedly knew that the contractor was not licensed and the court did not care, um, there’s such a strong public policy behind this principle, um, that the, the courts are extremely harsh and draconian and their enforcement of these laws.
Speaker 2: (37:59)
And I I’ll tell you just a very quick story. I, I, as I mentioned early, um, in my introduction, I’m an arbitrator with the American arbitration association and a case came before me. I was on a panel with three arbitrators, and one of the parties was seeking to discord, um, from the, uh, mechanical subcontractor, $12 million for work on a project that was performed without fault, without issue. Um, and the general contractor had no dispute with the sub. Other than that general contractor happened to discover that there was a lapse and that labs could be even a short is one day doesn’t have to be weeks or months. One day of a lapse is all it takes. And the mechanical subcontractor in that case, try to make an argument that their situation fell within what is called the substantial compliance doctrine, which meant they had to demonstrate and satisfy these three prongs that they had been duly licensed prior to the, um, performance of the contract that they acted reasonably in good faith to maintain a proper license, and they acted promptly and in good faith to remedy the failure upon learning of the failure.
Speaker 2: (39:17)
Well, this particular mechanical sub was licensed at the time the performance began, but at a period of time, they lost their RMO. They did not replace them in a timely way where there was a lapse in the license and the panel, I sat on found that the problem was the contractor did not meet number three, and you have to show all three. That’s why I have an in bold and caps and underlined on this slide. They could not satisfy that third prong of this task. We ordered that, that mechanical subcontractor returned $12 million to the general contractor for not being properly licensed. So I give you that example to highlight the significance of the licensing laws in the state of California. And on one final note on that subject, you should be aware that was a recent case. Just decided you should see your August 26th of 2020.
Speaker 2: (40:13)
So just a couple months ago, um, the legislature had never given us guidance on what the statute of limitations was for somebody to go back and try and discourage money. I’ve heard stories of very large general contractors in the state being sued years, seven years after they completed a project by an owner now trying to seek discouragement. So finally, we’ve gotten some, uh, guidance here from a court recently that imposed a one-year statute of limitations, uh, which accrues or begins to run from the completion or cessation of the performance of the contract. So that is certainly helpful now that this is a one-year statute of limitations. Um, and, uh, we’ll hopefully stop people from trying to go back years after the fact, uh, to discourage money’s paid. So, um, with that, I have a few minutes left for any questions you may have Katherine, I don’t know if we’ve received any questions.
Speaker 1: (41:12)
Yes, we did. Mary. Um, thank you so much for that presentation. That was excellent and very helpful and informative. So there is one question from Tiffany, how can material providers protect themselves when customers file a credit card charge back after the 20 day delivery period?
Speaker 2: (41:37)
Um, I’m not sure I’m understanding that the 20 days I’m assuming is being referred to the 20 day delivery period. Um, I think what is being referred to by Tiffany is in California. There’s what, what used to be called a 20 day preliminary notice. And if you want to make a claim on a project, meaning recording mechanics lien or service, stop notice, you have to serve a preliminary notice. And in that 20 day, preliminary notices typically served within 20 days of your first furnishing, labor and materials on the project. Um, and it, it reaches back 20 days and reaches forward for forever more. So if you, if you’re continuing to provide materials, um, and you hadn’t gotten that notice out, you should immediately send it out because it’s, it’s never late. It’s just going to control how far back it reaches. So I’m not sure I’m understanding her question entirely, but tell you what, um, if Tiffany or others want to contact me, that’s my email address. You can reach out to me and I can, um, maybe probe a little further as to what exactly that question is, but if you serve that preliminary notice and an owner paid, um, and then, uh, or your customer paid, and then, and then try to reverse the payment, you have the right to put a mechanics lien down on that project. You have a right to serve a stop payment notice on that project. Um, and you know, that’s why those statutory remedies exist is to protect you.
Speaker 1: (43:11)
Okay. We have a few more questions popping up. And Brian asked, how do subcontractors use the prime contract to enforce payment or the receipt of a formal change order?
Speaker 2: (43:27)
Well, uh, they would, I would have to look at your subcontract to see did the provisions of the general contract flow through to you. Um, but you know, if you’ve not been paid and you’re trying to enforce payment, you have a number of what I’ll call arrows in your quiver. Um, one is, you know, just a routine breach, a contract cause of action, a lawsuit against the general contractor, but then you also have these three other remedies we’ve, we’ve talked about, you have a mechanics lien, right? If it’s not a public work, you can’t lean public property. Um, so you have a stop payment notice, right though on public property, which is a trade off for not being able to lean it. And if it’s a public work of improvement, you, you have a right to make a claim against what’s called a payment bond, which is a mandatory bond that the general contractor has to post on a public work of improvement.
Speaker 2: (44:24)
So if it’s a private job, um, and it’s owner financed, you can either put a mechanics lien or you can survey stop payment notice, and you can Sue the general contractor for breach of contract claim. Um, and for the change order issue, you would have to document that there was a change scope of work and detail what your costs were, and that’s recoverable just as, um, you could recover work, you performed under your base contract. Again, if there’s further questions or follow up needed, you have my contact information, write it down, happy to answer questions by email as well.
Speaker 1: (45:03)
Okay. We have a couple more if you have a minute for them. Sure. Okay. Robert asked, um, first is a prelim valid when only an LOI is in place. Meaning is the notice requirement in place when the, when the subcontract is finally live.
Speaker 2: (45:23)
I’m sorry. Read the last portion of that again to me. Okay.
Speaker 1: (45:26)
Yeah. This is the notice requirement in place when the con, when the subcontract is finally live.
Speaker 2: (45:34)
Yeah. Um, speaking of that too, I noticed that you can never serve it too early. So if you’re saying the preliminary notice was served when there was just a letter of intent. Um, but then at some point later, the contract becomes, I think the terminology that Robert used was Y it’s it’s actually going forward. Um, you can never serve that preliminary notice too early, where it’s premature and it’s an invalid having said that though, you would want to make sure that you still have all the accurate information about who the owner is, who the general contractor is. Is there a lender involved or not? Um, and you know, you would want to verify that, um, once the contract becomes live, because sometimes some of that information like about a lender or something may change potentially, but it’s not as if your preliminary notice is rendered invalid as being premature in some way.
Speaker 1: (46:29)
Okay, great. Thank you for that. And Tom says I’m a telecom material supplier, and a lot of our products are now being installed on utility poles in the public right of way. What’s your thought on how to secure ourselves with these going forward? 2 million light pole we’ll have this equipment in the next five years?
Speaker 2: (46:55)
Well, again, um, if that pole is, um, public property, you can’t lean it, but you would have payment bond rights and stop payment notice rights. If the utility pole is private property, but it sits on public land. Um, I’m not sure what good lien on a utility pole is necessarily going to do. I mean, it kind of, I guess you can liken it to a little bit like a landlord tenant scenario where you’re, you’re doing some, you know, TCI work. Um, and the owner is posted, what’s called a notice of non-responsibility. And what you may end up at the end of the day is a lean on a leasehold interest, but not on the land itself, which is not nearly as meaningful is having a lien on the land itself. But again, keep in mind that there are options here at, beyond the mechanics lien like a stop payment notice. Um, if it’s owner financed, it can be served directly on the owner. If there is a lender involved in the financing, the, for the stop payment notice to be binding on the lender, it must be accompanied by a bond that you would need to get from a surety. You do not need a bond if the project is owner financed. And then again, there are also these payment bond options. If it is a public work and improvement, they’re mandatory where you can seek recovery.
Speaker 1: (48:20)
Okay. Sounds good. Thanks for that inform formative answer. I’m sure Theresa asks, what is the best practice for documenting change orders?
Speaker 2: (48:33)
Um, if, if I’m assuming that, um, Theresa’s with a company that’s performing the work, um, typically what I would tell you to do is I, I, if I have an owner or if I’m, you’re representing the general contractor, I typically don’t like to see just lumps on change orders. Um, you would want to see a detailed price breakdown of those change orders, breaking out labor hours, uh, hourly rates, um, equipment costs. You need to be putting on the general contractor on notice that you deemed this as a change in scope. You don’t want to do what you believe has changed work. And then come back later with the, you know, surprise. Um, here it is. You need to be sending written, notice that as a change in scope and making sure you’re getting written direction to proceed, nonetheless, and then you want to give that detailed pricing.
Speaker 2: (49:25)
Um, I believe the general, the owner, uh, they’re entitled to it, um, as opposed to lump sum pricing. And then you want to see if you can negotiate a price for that work before it’s performed. Unfortunately, I don’t know, w you know, this industry is just kind of changed so much over the years, nine times out of 10, um, parties don’t agree on a lump sum change order value before that work is performed. Um, so I would tell you the safe Harbor practices, if you don’t have a lump sum change order amount agreed to before the work is being performed, but you’re ordered to perform it in your contract requires that you proceed. Um, you should be keeping time and material tickets, again, recording the actual costs rather than some forward-looking costs and getting those signed off on at the end of each Workday, and maybe using that method, um, to get paid. It depends on what your contract says. It may say that that is the method you will use if you can’t agree on a lump sum change order. But again, that goes back to keeping good daily reports, taking good photographs, all that type of documentation that would any change order request.
Speaker 1: (50:30)
Okay. And last question here from Belen, is there a time limit for when a contractor needs to issue a mechanics lien after issuing a prelim notice?
Speaker 2: (50:43)
No. Uh, it’s not as if it doesn’t run from, um, uh, I’m going to say yes and no, it doesn’t run from when that prelim notice is issued. Um, the timeframe you have to record a mechanics lien runs from when the project is completed, has nothing to do with when you serve your preliminary notice on the general owner, et cetera. So the law says that the parties would have 90 days to record a mechanics lien, unless, you know, if you’re, uh, if you’re a, um, you know, general or a subcontractor, unless there has been a notice of completion recorded, and now we’re getting kind of way beyond this scope. It’s an area I certainly know about, but we’re kind of getting beyond the, um, topic of the webinar. Um, and so I’m trying to be careful how much detail I’m getting into, unless you serve the owner, serves on all the project participants and notice of completion.
Speaker 2: (51:43)
If the owner does that, it shortens those deadlines to 30 days for the subcontractors 60 days for the general contractor, um, to record that lane. So be aware, it does not run from when your individual scope is completed, though. You certainly are free to record a lien at that juncture. The law puts that out or deadlines when running from when the overall project is completed, not when your particular scope of work is completed, but that deadline is not tied to the preliminary notice in any way. There’s no correlation between those two things, other than you need to serve a preliminary notice in order to have a lean, right, unless you have a contract directly with the owner.
Speaker 1: (52:29)
Great. Thank you so much, Mary. And if anyone attending has any further questions, feel free to email Mary and thank you so much again for your time and all the information you shared. It was really invaluable to everyone listening. I know it was helpful so
Speaker 2: (52:46)
Well, thank you very much. Appreciate the opportunity.
Speaker 1: (52:49)
Thank you, everyone take care. And that’s the end of our webinar.