Why your construction contract is killing cash flow (and how to fix it)
Have you ever encountered a costly problem on a job and been told to keep working before getting a guarantee you’ll be compensated?
Join this live webinar to hear how to stop your contracts from killing cash flow with Irvine, CA construction lawyer Sean Dowsing and surety attorney Michael Carson of Nationwide.
In this discussion find out:
- How to negotiate terms that protect your cash flow
- How to use change orders and claims as remedies
- Why subs and GCs benefit from cash flow transparency
Justin Gitelman (00:04):
Alrighty. We are broadcasting here. Got some people starting to flow in already. So yeah, we’ll just wait a few seconds here to let some more people in and get started. Here we go. All right. Yeah. Okay. Looks like we’ve got enough people in here, so, uh, let’s say let’s just get started. Um, so hi, everybody. Welcome to this webinar on cashflow and why your contract is killing it, how to stop it all that. Goodness. My name is Justin Gittleman. I’m here with Levelset and very excited to have Sean dosing, who is the senior counsel at Manningham casts as well as Michael Carson, director of surety claims at nationwide, uh, to present this topic. Um, so if you want to go to the next slide, I’ll just kind of mention, uh, for those who don’t know what Levelset is, um, we help contractors and suppliers get paid, um, by sending notices and payment paperwork, paperwork, electronically finding accurate job site details. Um, giving alerts for when payment problems rise and a lot more, but we’re not here to talk about Levelset. Um, so I just wanted to welcome everybody in here to this presentation. Um, and I’ll just hand it off to you, Sean and Michael.
Sean Dowsing (01:31):
All right. Good morning everyone. Um, my name’s Sean [inaudible]. I am from Manning and casts and our webinar today is about cashflow and some contract clauses that are going to affect it. So kind of the agenda for the day is we’re going to do a quick introduction of who Mike and I are. Talk a little bit about the importance of cashflow, but really the meat and potatoes of this presentation is going to be a discussion of cashflow affecting clauses in your contract and some risk reduction strategies. So again, my name’s Sean dowsing, I’m an attorney that represents exclusively contractors and subcontractors, uh, work primarily in public and private construction. I’ve got some in-house experience for when I used to work at a underground contractor.
Michael Carson (02:28):
Okay. My name is Michael Carson. I’m uh, currently director of shorty claims that, uh, nationwide mutual insurance company I have experienced in public construction, private construction. I was a former in-house counsel with the construction company. This might be a good time for me to also say that, um, um, the, uh, the views expressed by me today are not necessarily the views of nationwide mutual insurance company and, or my own personal views,
Justin Gitelman (03:03):
Sean, back to you. All right. So hoping to switch over for everybody, but talking about the importance of cashflow. And I think it goes without saying, but cashflow is really important for contractors. If owners pay general contractors, general contractors can pay their subs and suppliers. So it just, it moves through the whole project starting with the owner. So a lot of our discussion today is how to make sure you get paid. But typically I think when Mike and I start seeing issues with companies, whether it’s a shirty takeover, a project or contractors that are in default, it’s almost always at its heart, a cash flow problem. And it’s usually not a cashflow problem just from one job. It’s usually 2, 3, 4 jobs that are having issues that all of a sudden put this company in a difficult position. And we’ve seen a lot of that lately with the pandemic, putting a hold on projects. And then all of a sudden, all the projects starting up at one. So maybe you had four projects that you thought you were going to do over a two year period, and now you’re doing them over a one-year period. So there’s a lot of acceleration. There’s more labor costs. There are increased material costs, which we’re going to have a pretty good deep dive into that, um, over starting to see a lot of it. And it is generally from a confluence of project problems and cash.
Michael Carson (04:37):
And so with that in mind, I’m sure a lot of us are seeing how, as a result of the pandemic, a lot of jobs were pushed from last year to this year, or even I have jobs that were from the fall of 19 and pushed until, you know, recently. And the result is that, um, people are having multiple jobs at the same time. Um, and how are people, you know, the question is how are, how are you going to deal with those situations? Um, you know, where multiple jobs starting at the same time, whether it’s labor materials, et cetera, uh, and again, all of those affect, uh, the cashflow, um,
Justin Gitelman (05:16):
Right. So, so price de-escalation oh, go ahead. Sorry, Mike.
Michael Carson (05:19):
Yeah, no, I was just going to say that from time to time during this presentation, I’ll be introducing just how the surety sort of sees these matters as you know, which might be unique and, uh, things that you haven’t thought about, but, you know, to the extent it’s a public project or a bonded private project, um, you know, and obviously as we’re going through this, if you have questions about, about that, um, if you, uh, you know, please raise your hand, you know, and we can sort of try to answer those questions to the extent we can, or, you know, see that you’ve raised your hand. Um, and, uh, you know, we can address that, uh, those issues. Good,
Justin Gitelman (05:53):
Right? So the first topic, first kind of meat and potatoes topic we want to get into is price escalations. And that has been the talk of the town in construction. It has been the hot topic on just about every webinar conference or article you read price escalations. So what we’re talking about here is when you, as a contractor or subcontractor have bid a project using a certain amount of money for what are various metals fuel PVC, even, uh, more recently labor, but then by the time you actually have to order those materials, or by the time you have to start construction, the price has gone up. So who bears that risk and the chart to the right? And there’s a lot of charts like it. So the chart to the right, and just kind of shows what this price escalation looks like. So that is the price per ton of hot rolled steel.
Justin Gitelman (06:49):
And if you lost pre pandemic in the red circle, it was about 450 to 500 bucks per ton, middle of the pen or not middle, but you know, early in the pandemic in the June, July of 2020, it rises to about 600 per ton. And then all of a sudden, end of 2020 into 2021, it goes up to 1200. So you’re looking at a hundred percent price increase in less than a year. So what is the effect of that on your contract? And if you’re a subcontractor, who’s a sheet metal guy, or maybe you’re an underground contractor installing steel pipe, or a framer framing, a apartment complex, what does that do to your project? It reduces or eliminates your profit and your markup might put you in the red, if, at the say, if there’s enough material and jobs and the worst case scenarios, we see contractors who are in default because they can’t build the project any longer for the price that’s out there.
Justin Gitelman (07:53):
So one of the first things that I think if you have to deal with my group to deal with me, that we’re going to ask if you’re dealing with a price, escalation change order is what caused the delay. When was your contract executed? What caused the delay? You got delayed for a year and all of a sudden you’re 20, 21. Well, maybe that price escalation, isn’t your fault. And we need the owner, the general contractor to pay for that. Now getting them to pay is a different story, but it’s not your issue. And we got to kind of work, work our way through that. So I want to talk a little bit about an example of what this looks like. So imagine you are a sheet metal subcontractor working on roofing and flashing, and you sign your contract with January, 2020. So COVID is around at that point.
Justin Gitelman (08:42):
It’s in China primarily, but it’s, it’s around some of the news. And then all of a sudden COVID hits the U S there are shutdowns, there are project delays, and now your work doesn’t start April, 2021, and you’ve suffered a 100% increase in material costs, wiped out your contract profit. And now you’re financing this project as a contractor or subcontractor. So if you called up Mike or me, the first thing we’re probably going to ask you after the delays is, let’s see your contract. What is, does your contract even talk about price escalation? How would we handle this more often than not contracts? Don’t talk about price escalation. They say something pretty vague, like in the upper, right, where it says contractors are responsible for delivering the work in accordance with the lump sum price. Now, I would bet you a paycheck that if your GC or your owner is read the contract and you come in ask for a change order for a price escalation, they’re going to beat you over the head with this contract clause saying, well, you accepted the risk.
Justin Gitelman (09:54):
It was lump sum. So figure it out, work on disputed, work in botany for a claim writer. The flip side of that could also be, if you have a unit price contract, maybe what they subcontract or a supplier of some kind, uh, maybe somebody hauling dirt. And very often those types of contracts go the other way, where they will have an increase of 5% or 15% or 20% at that time, then the parties have to renegotiate the units. So that kind of goes the other way, but kind of the tip and trick for this is if you were negotiating a contract right now in price, escalation is an issue, and it’s going to be on your mind. It’s on your owner’s mind. It’s on your contractor’s mind. Your GCs mind is trying to come up with a clause in your contract. That’s that’s balanced and the same would go true.
Justin Gitelman (10:49):
If you’re dealing with a change order situation, you’ve got a a hundred percent material price increase. And you’re trying to figure out how to pay this, try and come up with a balanced approach. We’ve found that it’s, it’s been the most successful that way. And it starts with a recognition that somebody is paying for this material pricing, whether that is the owner of the GC or a subcontractor, somebody does pay for it. At the end of the day, somebody pays the Piper. So we’ve proposed and been successful with, and it’s kind of helped cashflow moving on contract. So our subs and clients aren’t done financing entire projects is that the contractors and subcontractors are responsible for pricing increases. Maybe that’s 5%, maybe it’s 10% or 12%. After that point, the owner has to pick up the tab because it’s ultimately their project, but the owner does not have to pay profit and markup on the amounts of over the 10%. That way the owner knows that they can still get their project done. It was a price of fish situation that the got unlucky and the price of steel went up and the price of wood went up, but you’re not paying a 15 or 18 or 22% markup to your contractors. As they procure material. We found that in change order negotiations, that has been a effective tool to keep money flowing towards the contractors and subcontractors. So they’re not financing big material increases,
Michael Carson (12:24):
Which is not there. So I’m sure over the past year, we’ve all heard about these force majeure clauses. Um, and you know, obviously these are important contract clauses. Now, um, I’ve been an attorney for 25 years or so. Never had a force majeure clause issue never, never happened. Most attorneys never had that happen. Never, never thought about them, although they were always included. So big picture, the idea of a force majeure clause is that it’s an act of God, you know? And, um, when do we, when do we deal with those issues, tornadoes, hurricanes, et cetera, but the pandemic, um, has brought this, uh, this issue into the mainstream. And so whether it’s, um, you know, uh, scheduling a weddings guide, ordering parts from China, um, labor costs, you know, the question is what falls under this force majeure. So what you need to do is you need to look at these clauses and think about how do they help you, how do they hurt you?
Michael Carson (13:31):
Uh, how can, how can the owner pay more, uh, as a result of it? Um, now most people are just going to say, well, I have a force majeure clause. Therefore you owe me more money. Um, and again, as Sean was just saying, you need to think about when was it executed, but I think it goes more than that. It, and it’s not just, uh, um, was it foreseeable, uh, at that time, but what was foreseeable, um, um, the pricing, you know, as we all know the pandemic, what was it? March 11th? I was thinking about when the NBA closed down, but, um, you know, what was the date of that? And then when did the price increase hit? So, you know, we look at, um, if on the supply bond, you know, maybe you’re supplying lumber, right? Well that didn’t hit in March, that didn’t hit for many months later.
Michael Carson (14:24):
How about the meat for, if you had a supply bond for me? Well, that didn’t hit in March. That was what in July or August when everybody rushed out and bought as much a steak and, you know, beef as they could. All right. Well, I know that I had to do some work for my HVHC in my house and my contractor was telling me, Hey, you know what? These prices are gonna go up because China shut down. So therefore, um, there was a supply issue in March. Did you consider that? Who knows? Um, now the next part is, what about labor? Well, when did we know that there was a labor cost, a labor shortage? I don’t know, January of this year, February of this year, I’m not talking about superintendents and whether or not, you know, you had a superintendent, but just your, your, your, you know, your daily, um, you know, most inexpensive labor force, when did that happen?
Michael Carson (15:18):
And that’s what you need to think about. Now. I have jobs in Florida where they can’t get PVC. Um, we all know that lumber tripled in price. I mean, what I think at one point a piece of plywood, it was up to 125 bucks up from 30 bucks. Did somebody have envisioned that when they were pricing it, what if you had a contract that you signed in December of 19, it was delayed because of the pandemic started, you know, in February of this year, how does that work now? I think that you can make a good argument for a escalation for that, um, and try to argue it under your force majeure clause. Um, and you know, maybe you’d be successful that way. Um, I don’t know if we want to get into any of the other issues right now, Sean, or, or put them on the back burner.
Justin Gitelman (16:12):
Now we can just have that if someone’s got questions on, um, um, you know, though, we’re going to pop up again later, so we’ll move on to retention. So retention is not often thought about as a cash flow issue, cause it depends at the end of a job. And what retention is at its heart is an owner is holding five to 10% of the total contract price. And they’re holding that money for defects or labor issues. So if there’s a defect after the work is done, but they’ve got some amount of money that they can draw on in case the contractor went bankrupt or can’t finish, or can’t come back and warranty work, they got some amount of money that they can draw on to a fix. It also comes up with labor where if a contractor wasn’t paying their superintendents or their labors or operating engineers or carpenters, and there’s a department of industrial relations issue, that’s when the retention can come in handy.
Justin Gitelman (17:17):
So typically retention is withheld until the end of the project. And it’s the project as a whole. And not just your section, which can be an issue if you’re a subcontractor. So if you’re building an apartment complex and you are the site preparation contract, and you’re grading the area and maybe doing some underground utilities, your retention, 10% of your total contract, which represents a good chunk of your overhead profit markup is going to be withheld until that apartment complex is finished, unless you’ve negotiated your contract otherwise. But, um, that creates the cashflow issue in the sense that you can have this kind of nebulous idea where somebody has 10% of my total contract, but I can’t get to it. I’m illiquid because 10% of my contract is out there. And that’s a good chunk of my profit. So where we see this come up quite a bit is when contractors are in trouble, they’re defaulting on a contract, they can’t staff it and they just need money. They need money to keep a contract going. So one of the first questions that we’ll typically ask is, well, who owes you money? You say that you need 500,000 to finish this project. And I know from Mike’s perspective and from a surety perspective, they want the principal to finish the job. So you need money. One of the first questions we’re going to ask us, well, does anybody owe you retention anywhere else? Can we go chase some of that down?
Michael Carson (18:51):
And so, Sean, let me just catch up for a second. So how do you handle the situation where a sub supplier won’t wait, it’s causing you grief despite the contract terms, right? Because we all know what retention is and we all know that people want the retention. So maybe share with the group, some of the tricks of the trade in these situations.
Justin Gitelman (19:16):
So if you are a subcontractor, you’ve got your own subcontractors, or you’re a GC that you’re withholding retention on and they are just coming after you, they’re there, it’s a thorn in your side, they’re bugging you for their retention and your contract. Doesn’t really talk about it says, Hey, we’re going to withhold retention till the end of the project. You’re in a okay legal position could be 10 years for a few reasons. But one of the things I would really, really encourage somebody to do at that point is start looking up the food chains. So if you’re the, um, the GC maybe approach that owner and say, Hey, can we reduce retention? I’ve really got to get this subcontractor paid. He’s a small business, whatever arguments you can come up, I really want to get them paid. Their retention. Their work has done. We’ve punched, listed them out.
Justin Gitelman (20:02):
We don’t need to hold retention. And more often than not, I would venture to say 75, 80 5% of the time owners will release that portion of retention. You can get them out. It’s just a matter of actually doing and actually approaching them. So when you’re negotiating a contract, if you’re a GC on a private project, let’s say it. Because at that point you can negotiate, retain. It’s not mandatory by any stretch of the imagination, or you’re a subcontractor negotiating. Your retention of the GC, think about retention reduction at certain project milestones. So again, going back to the apartment complex example, if you’re the site preparation contractor, maybe in your subcontract, you want your retention to be mostly released, maybe down to 1% or $10,000, whichever is best. Once you finish the site preparation in the building slab, isn’t that wouldn’t be a good approach, but you want to try and have retention reduced at certain definable project milestone.
Justin Gitelman (21:06):
So that way cashflow is not impacted and it keeps moving through something to watch out for in your contract, which is going to impact your cash flow and how you can get your attention is what’s in quotes there complete. What does that mean? If your contract says you’re going to get retention when the project is complete? Is that your section of the project? Is it when the whole project is complete? And does that mean substantial completion doesn’t mean when attended to move in, is it beneficial occupancy? So define out that term in your contract, try and make sure that you can get paid your retention of certain project milestones. Now, the,
Michael Carson (21:50):
I was just gonna say, there’s always that debate on, you know, substantial completion, final completion, punch list done, done, done. What does that mean? What does money really do? And, um, yeah,
Justin Gitelman (22:06):
Sorry, go ahead. I was going to say, so you wanted to find that out when you’re negotiating your contracts, but I got to cut you off.
Michael Carson (22:14):
Yeah. And so, I mean, and I, and I’m sure we, you know, I mean, I know I have a few projects right now where, you know, the issue is, um, my contractors finished their job of, of work, but it’s a, you know, they were the excavation company and now, you know, we’ve got to wait two years to get their retention released. And so nothing’s ever set in stone, I think, is what Sean was really getting at and everything’s negotiable. Um, and by the way, if you really want your money, maybe you offer a discount and then you get paid.
Justin Gitelman (22:49):
Yep. It’s all about cashflow.
Speaker 3 (22:53):
Justin Gitelman (22:56):
So the last two points, uh, number three and four, um, I saw some clients on here that had jumped into they’re pregnant. Some heart palpitations. We talked about this a little bit. Retention is held for defects and disputes. So an owner can withhold retention even after the project is done, if there’s a good faith dispute. But what we do see is owners using retention as leverage. So they say, Hey, we think you owe us some nominal amount of money for some vague defect that they don’t really describe. And then they start coming back. It’s like, well, we’ll pay you your 275,000 in retention. We’ll pay it quickly. We’ll let the, uh, any defect claims go, just waive your material. Escalation costs, cost claim again, or waive your change condition claim against. So they use it as leverage to get contractors and subcontractors to release other monetary claim.
Justin Gitelman (23:58):
And they just come up with, again, some nebulous idea of there’s a defect out there. So we have to withhold all the retention. So in California, that that is illegal. You can’t do that. You can only withhold 150% of the disputed amount, but again, without getting a judge involved or a mediator involved, it’s hard to convince an owner that what they’re doing is bad faith. So in that sense, if you’re bumping, you know, you’re bumping into that with Hillary, you’re bumping into that with a general contractor, and they’re just not giving you any info about why your attention is not being released or what this so-called dispute is. I started thinking about ratcheting it up a little bit. Maybe your retention claim is going to include interest in attorney’s fees. I’ll say out here in California, the statutes allow for interest in attorney’s fees. So if somebody doesn’t pay retention and they lose, they owe 10% interest and they got to pay all the attorney’s fees. And that’s just the way to kind of ratchet things up a little bit. If you’re dealing with that bad faith owner who isn’t paying your attention when it’s due. And I hope it doesn’t happen for most people, like I said, I saw a couple of clients on here that are probably getting some heart palpitations because they, um, have you ever dealt with this recently or are dealing with it right now?
Justin Gitelman (25:25):
All right. So we’ll move on to dispute resolution clauses and change orders and claims.
Michael Carson (25:32):
Sure. So, and I’m just saying, there’s a question, um, why don’t we, um, Debbie, we will, uh, we will get to that in a minute. Okay. I promise you on that. Um, so let’s talk about change orders, claims and dispute resolution next. Um, so this is where the most money is held up, right? You’re you have a contract you’re asked to do X and all of a sudden there’s a big, uh, change order. And, um, you don’t want to do it. You don’t really care to do it because you’re sort of done with this owner, but you’re going to do it anyway. And, and then what happens? You do the work, and then there’s an argument over whether it’s in scope or out of scope. There’s an argument about whether or not you should be, uh, how much you’re going to get paid, how that’s all going to work out.
Michael Carson (26:24):
Um, and the end result is that, um, you’re waiting and waiting and waiting. Um, and so if your claim gets denied, uh, you know, your change order gets denied. There’s a claim and that claim can usually go through a dispute resolution procedure. And we’ll talk about that in a minute, but you’re waiting for the review and you’re looking at endless meetings and the other side drags their feet. Um, so the most important thing, you know, is obviously document, document, document. That’s what we always talk to our, um, you know, to our bonded principles about, um, um, but this is where the most money is held up. We talk about mediations they’re expensive, but they might be your best investment. Um, you know, um, Sean has taught, you know, has talked to me about, um, early mediations, you know, maybe even just four hours. I know I’m with a former, uh, surety I was with, we used to have, uh, mediators on staff where they would do one hour of mediation for, it was like $250. And the idea was, you know, super cheap, get in, get out, see if you can resolve some issues. Um, I always like to put, you know, while people might not be able to meet mediate today, let’s set a time. Let’s set a date for 30 days from now, at least we have a date and we’re moving forward and maybe we’re talking in the interim.
Justin Gitelman (27:51):
I want to run through an example real quick, kind of why a lot of money can get tied up, needed dispute resolution clauses. And by the way, this is an example from a actual dispute resolution of it that we deal with. Um, so imagine that you’re not, you’re a, a site prep underground contractor you’re as built, were all wrong and you’re building an apartment complex and there’s just unmark utilities everywhere. Mis-marked. So it takes 50% long. And to do the job, you go to your general contract and you say, Hey, I’ve got to submit. They submit a change order for this. Cause it’s way more. The plans were all screwed up. This took a lot longer with a lot more expensive. GC says, Hey, keep working submitted as a claim. So in this particular instance, the GC had 30 days themselves to review the change, or once they denied the change order, then our subcontractor had to submit a claim and the GC had another 30 days to review it before submitting it to the owner.
Justin Gitelman (28:55):
Now, the owner has 30 days to review that claim as well, because now it’s a claim from the GC. And then finally there had to be a manager’s meeting after the owner’s review. And then there was a mediation clause and the mediation clause had to come after the managers or the mediation had to come after the managers meet. So even assuming we can move as fast as we possibly could at this, everything is 30 days of nobody dragged their feet. You’re looking at financing this claim for 120 days. At least it’s probably more likely six months now, four months realistically. Um, Mike’s going to talk a little bit about how to negotiate some contract terms and how to maybe shorten this process up a little bit, but on this. But what I would say is
Speaker 3 (29:44):
Justin Gitelman (29:45):
The best things you can do for yourself is to do a good job on your change or your initial change order, put the work in upfront. And what I mean by that is a change order for change. Conditions should be accompanied by daily reports and the daily reports need to be good. They need to be well-written. They needed the five W’s of the data who what, where, when, why, how they shouldn’t just say installed sewer pipe today, or painted walls today, they need to say, how many square feet of paint you were doing? What floor you were on, what the plans you were working off of, what crew members were there and any describing detail, any issues that happen that day accompanying that daily report needs to be a T and M time and materials to go that says, Hey, this is how many extra hours I had to work, how much extra material I had to use.
Justin Gitelman (30:38):
And here’s how much it costs. Now you need to get your GC, or if you’re the GC and you get the owner to sign that ticket and they can sign it and say, Hey, I just viewed it. I don’t agree with it. I don’t think that this is extra work, but they need to acknowledge that you actually did that work and saying, Hey, it’s a signature for acknowledgement home. So ideally, you’ve got some photos too, that can accompany as package those things up and send those in as a change order. And the reason why, if you’re not going to have a GC or an owner rejecting it saying, Hey, I don’t have enough info. You didn’t give me daily reports. I don’t know what you’re doing. You’re not going to bump into a mediator or a judge saying, you’re asking for 800,000 and you’ve got no daily reports to back this up. What gives do the work upfront work with your superintendents, work with your foreman to make sure that they know how to document the claim when they, uh, when they see that situation popping up?
Speaker 4 (31:42):
My apologies. I think my video went off.
Justin Gitelman (31:45):
Um, oh yeah. You’re frozen on my screen, but I can hear you. Yeah.
Speaker 4 (31:49):
I don’t know what’s going on probably. Well, what would a zoom meeting be without a frozen or kid one? Um, all right. Well, I will try to work through this. All right. So claims, dispute resolution. Um, you gonna go through the slides, Mike, hang on a second. I’m back, you know, I might be back in, I don’t know. I apologize. Um, do you want me to, do you want me to continue on this, on this? Uh, all right. So let me talk, let me talk about this one. My apologies, everybody. All right. So the important thing is to, um, you know, when you’re talking about your claims dispute resolution, you need to look at the review time. So Sean was just talking about, so maybe somehow you are able to shorten it through negotiations from, for two weeks to six weeks or four weeks to two weeks.
Speaker 4 (32:40):
And, and just because the contract says, says, well, it’s four weeks. If you’re entering into a change order that you’re not comfortable with, maybe you can get, maybe you could say, all right, listen, we’ll do this, but I want to, I want to have this, um, the timeframe reduced from four weeks to two weeks. And, you know, and again, because everything is negotiable at that point, maybe they’ll agree again, I’m asking for mediation dates earlier in the process, as I was talking about earlier. Um, if you can submit your claim earlier and, you know, in submit it for payment, maybe then you can get your statutory interest accruing earlier. Um, and again, you know, in California it might be 10%. Um, but you know, I think it actually doesn’t go up to 18% or something in California, Sean, um,
Justin Gitelman (33:27):
It can in certain municipalities and things. Yeah. But for your prompt payments. Right.
Speaker 4 (33:34):
So, you know, so always, always be thinking about that. Um, you know, of course, um, um, you know, establishing rates, um, and, um, considering your bond rights, you know, if somebody just isn’t willing to pay for, you know, for a change order considering leaning the project up, obviously if it’s a bonded project, you won’t be able to do that, but you may have other rights under the bond sometimes, you know, submitting a payment bond. At least it depends on the size of the GC. A larger GC might not care, a smaller GC might. Um, if you follow a payment bond and then remembering who your contract is with. So, you know, as Sean was saying earlier, perhaps, you know, notifying the owner, the developer who might be above the GC, maybe they can help you in, in resolving some of these, some of these issues, um, keep in mind, always your, your contractual obligations to submit a claim.
Speaker 4 (34:29):
Some are limited to three days, some, um, you know, super short timeframes, right. And that’s that, that can always be a problem as well. Um, so always, you know, as you, as you enter into, um, clearer, uh, contract, uh, claims, sorry, contract change, order work, consider what that might mean. Um, so while on the one hand, you want to try to decrease your dispute resolution process. You might want to increase your timeframe in order to make a claim. Um, um, and then if you know, you’re going to, uh, meet a something anyway, um, get in contact with the other side and see if you can get a mediation date set. If they say, no, it’s a good indication that maybe they’re going to drag their feet and, and, and then you need to reconsider your position. I can tell you from a [inaudible] perspective, we want you to finish the project to go and do the change order and, and work through it. Um, you know, it’s, it’s always good to have, you know, in court, clean hands, right? Um, it’s something, you know, your attorneys will always talk about. You want to look the best as you can. And sometimes that’s sucking up a small change order so that you look good in front of a court where you can make the argument, Hey, I disagreed with this completely, but I did it anyway, it for the good of the project and getting it done.
Justin Gitelman (35:57):
Um, yeah. And on the last point of remembering who your contract is with, I think the soul rings true for a lot of the subs in the group that when you, sometimes when subs ask for additional money for change or reasonings from the GCs, the GCs come back and say, well, I’ve got to submit it to the owner. I’m gonna submit it to the owner. You’ve got to wait. I got to submit it as a claim. At some point, you know, if you’re getting strung along too long to submit it, your contract is with that GC, it’s not with owners. So you may have to prosecute the claim against the GC directly if they keep festering in you along too far.
Speaker 4 (36:36):
Right. And that’s a great point because ultimately, Hey, you know what the GC might have to pay up. And it is something that was not in scope with your contract, with the GC, right. But the GC didn’t include it in their bid to the owner. And you know what, that’s not necessarily your
Speaker 3 (36:56):
Justin Gitelman (36:59):
Th the, uh, that’s like the famous scope gap problem, where if you, if you’re an HVAC contract and you say, Hey, install this page, add somebody to make concrete pads for it, left scope gap problem. But it’s not necessarily on you to make pads. We’ll talk a little bit about damages that you can include in your change orders. And this kind of gives some downside risk to, to the GCs and to the owners. Um, Mike, do you want to run through them or do you want me to run through
Speaker 4 (37:29):
Them? Yeah, sure. So, um, um, w Kristen, we’ll talk about, we’ll give you, we’ll talk about that in a minute. All right. Um, so as far as damages to include in your change orders, right? So you need to look at your contract and see if, whether, you know, how they speak as to liquidated damages or consequential damages. Um, most contracts that run to GCs are gonna are gonna waive consequential damages between your claim as to a GC most contracts these days. I mean, I’m definitely seeing a push more towards Consequentials than liquidated damages. Um, you know, and those could be phrased in different ways. You know, they might say a contractor is liable for all damages that might say a contractor is liable for actual damages. Um, and so it’s funny. Most people don’t know what that means. Uh, you know, actual damages, direct damages, consequential damages, special indirect.
Speaker 4 (38:31):
And so you just want to be careful and really know what you’re talking about. If it’s actual damages, that’s everything that’s con that’s just, uh, a pitfall for consequential damages. In my mind, it’s better in many ways to have liquidated damages spelled out then than to have, um, Consequentials, but in your change orders, you could include consequential damages to be extended. Isn’t already waived, you know, via contract. You can have delayed damages. Although, you know, as we know that might not be viable for public works, attorney’s fees, big one is extended general conditions. Um, don’t be a pig though with that, um, you know, reasonable, reasonable, uh, breach of contract interest, lien, interest, credit, interest, increased bond costs. Um, you know, you can, you can include your damages to get people’s interest and attention, but ultimately this becomes a negotiation in many ways. And so, you know, the objective is to try to be reasonable with everything.
Justin Gitelman (39:34):
Yep. And, uh, Kristen, I think that you’re actually, uh, hitting on our next slide here, uh, dealing with pay if paid and paid when paid clauses. So there are, I mean, if you read a AGC standard form contract or a DBIA standard form contract, that there are almost infinite number of clauses that can affect cash flow. So we didn’t make 180 slide presentation on every single way, but here to kind of slim the other big ones that can affect cash. And we’ll kind of fly through them real quick. So we’ll talk first about kind of what Kristen brought up in the chat there, which is pay in paid and pay when paid clause now pay if paid clause going to say general contractor subcontractor, that owner has paid it. If you, if you’re a subcontractor and you see that in your, in your subcontract, you’ve got to try and negotiate that out and for no reason other than control.
Justin Gitelman (40:38):
So if you’ve got a claim, if you’re a sequential, you bumped into extra scope that you need to take care of. You’re now hoping in relying on that general contractor to prosecute the claim can see. You may not know if that owner and that contractor would work together all the time. They may be childhood friends. They may just do a lot of work together. So that general contractor is a little reluctant to come in on your behalf as a subcontractor and try and ask for more money. A lot of states have gotten rid of pay if paid closets. There’s only a handful left that actually truly accepted. Arizona’s one, George’s another we’ve Michigan and Maryland also allow it currently. Um, but it’s, it’s dying. It’s kind of going, going out the window, which leads people into pay when paid closets and people pretty cute with pay when paid clause. It’s about trying to morph them into a pay of pay clause. So typical pay when paid clause will say, contractor will pay subcontractor within a reasonable time. Now, if you see that in your subcontract, that’s a red flag to you. What is a reasonable time in my mind, that’s two to four months after you’ve submitted your invoice to that general contractor. So making sure if you can spell out what a reasonable time in your subcontract now, again, I said, people got really cute with pay when paid causes. Oh, sorry. Go ahead. Yeah, well,
Speaker 4 (42:12):
Sean, I was just going to add, you know, to the extent you make a payment bond claim, and I don’t know how familiar this group is with paying a bond clients, but to the second you make a claim, you know, the surety might not be able to make the same arguments as the contractor. So for instance, on a public project, we can’t really, in most states, we can’t make the argument, it’s pay if paid. Okay. So, um, and so if we can’t make that argument, well, our bonded principal might be able to make that argument. That’s great, but they will, might still have to pay because we can’t make that argument. And if we’re liable, then our bonded principles liable.
Speaker 3 (42:55):
Justin Gitelman (42:57):
Yeah. And you know, going back to that, how some people get a little cute with, um, pay when peg the case, I’m going to talk about your actually came out of the payment and bond claim. Sometimes they’ll see a clause of your conscious pay when paid within a reasonable time, say the parties agree that a reasonable time includes the opportunity for the GC to completely exhausted remedies against the owner. Well, what does that mean? That means they’ve got 3, 4, 5, 6 years to file a lawsuit based on statute of limitations. And then they got to fight through some lawsuit and then there’s appeals. So you may be a subcontractor, but a very small portion of a claim, right? It could be a $15 million claim and you’re looking for 250,000. You can’t get paid because the GC still wrote it in the much larger claim that they’re prosecuting against the, the owner.
Justin Gitelman (43:52):
So you may go 5, 6, 7 years without ever getting paid. Now in California, this is kind of unique to California. It’s recent. A court struck down the exact language. That’s really not what pay one-page would be. It starts, uh, infringing on some bond rights and things, but that language is dead in California. If you see it in, you’re in a different state here, contracting in different states, that’s a red flag. That’s a red flag to you that you needed to try and negotiate that out with, with your general, I’ll move on to number two, because it’s kind of a, it’s a backdoor way that the GCs use, try and get pay it paid back in. So they’ll say, Hey, if there’s a claim, a subcontractor claim, you’re limited to the recovery that we as a GC get from the owner, functionally, that is a pay if paid, if you’ve got a hundred thousand dollars claim and the GC only gets 50,000 from the owner, cause that’s what they negotiate out.
Justin Gitelman (44:52):
Well, you should still get your a hundred thousand just because the GC and we got 50, that’s not your problem. But, um, again, that’s kind of a backdoor way to get pay. If paid you’ll be successful in court. If you challenge it as a pay, if paid clause judges pick up on that pretty quickly, the number three blanket changed condition waiver. So these are gonna come up a couple of different ways. You’ll, you’ll see them take a few different forms. You may see it over in your face, as you will waive all rights to change conditions because you’ve seen the site or maybe something more innocuous. It will say something like plans and specifications are for bidding purposes only. So then when you get out and there’s a different site condition, and there’s an issue your GC or your owner comes back and says, yeah, but the plans and specs were for bidding purposes.
Justin Gitelman (45:45):
Only you knew that come on, that’s not enforced. What’s not forcible in any state. You will most likely win that in coordinates to get a really uneducated judge, um, called the spear in doctrine. If you want to look it up later, but you will win that case. The problem with it is the reason why it’s a cashflow issue is because of while you’re trying to educate this owner and this GC that this clause isn’t enforceable, your financing, this project, it’s not that easy to convince somebody, especially an owner that the contract they’re using is wrong. So that’s how it comes up. So if you see some language like that in a, uh, in a contract with an owner or a GC, again, that’s a red flag that you start having some conversations about what their intent is. And then number four, we’re almost getting to the end here.
Justin Gitelman (46:39):
No damages for delay. I’ll note that where I primarily practice out here in California, that’s not allowed on a public contract Republic, subcontract, but they are generally enforceable. And what it means is if your project gets delayed for six months and you’ve got to leave your equipment on site, or you’ve got some material price escalation, and you can’t go after that, you can’t go after that. GC for the delay damages, all you can do is get extra time. That’s in my opinion, generally a bad thing. Cause very often those clauses go one way where the GC can’t get delay damages from the owner, but the owner’s perfectly fine getting liquidated damages from the GPC. So again, that’s a red flag. Check your state. If you see something like that, uh, check with your state and check your statutes to see if that’s actually find they’ll touch real quickly on force account work and force account work is we talked about it a little bit earlier, but that’s where you’ve got a dispute over the scope of your contract.
Justin Gitelman (47:44):
And somebody’s forcing you to continue working again. Now you’ve got to file a claim, take six months, you’re financing this project. So if you see a clause that says you will work while there’s an ongoing dispute in your contract, trying to negotiate a limitation to it. Um, very often people are okay with having a 25% caps that are read something like contractor or subcontractor shall not be required to work on force account. If the reasonable value of that work is over 25% of total contract. That way you’re not financing some huge sum of money while you’re trying to fight this. Okay. All right. So, okay, go ahead, Mike.
Speaker 4 (48:36):
I’m gonna say, uh, do we have time to go over the hypothetical still? Or I would defer to Justin on that.
Justin Gitelman (48:44):
Yeah, I think there’s timelessness. It’s just going to be a minute. Yeah, we’ll fly through it real quick. Yeah. So this is a, this is a real life example that we recently dealt with, um, kind of ties all of these principles together. So we attended an improvement contractor who was working on a building and there was a flood 10 years ago. And they assumed when they bid the project for the tendon improvement, that the cause of the flood was adequately fixed 10 years ago. Well, it wasn’t, it kept leaking caused a lot of Woodruff. The lo and behold, they get into a claim with the owner telling them, well, you should have known that there could be wood rot and you should’ve known that there was mold. So all of this is on you. You’ve got to work on force account. So our client and spending between new structural engineering, additional wood costs, which was expensive and abatement contractor spend about 250,000 the way this all tied together when he was trying to get his pretension, when the project was done and he’s still fighting, this claim are in court, about 250,000, the owner wouldn’t pay the, they wouldn’t pay the retention back.
Justin Gitelman (49:58):
All they kept saying was we think there could be some defects that were withholding retention in effect. My client was financing this project for 350,000 and combine that with maybe another job going bad somewhere. And that’s when contractors start getting into financial trouble, cashflow becomes an issue. So that’s kind of how these things pop up in real life. Um, we’re always happy to answer your questions about it. Answer any questions you may have about bonding. I think the next five, Justin, this one’s you.
Speaker 3 (50:33):
Justin Gitelman (50:35):
Yeah. Um, so I know we’re going to have some time for questions here. I don’t know if you can hear that thunder here, but, um, before we get to some questions, I know I see some already rolling in. Um, but I wanted to first say thanks to Sean and Michael for this extremely insightful presentation. Um, I know I’ve learned a lot about, um, you know, balance in the payment process for construction. Um, and you know, when it comes to that, uh, you know, that’s split Levelset is in business for, is to, to kind of level that playing field in the construction payment process. Um, and when, when it comes to like contracts and all of these different things that come up across a project that you want an attorney to kind of help you navigate through. Um, I just wanted to mention Levelset legal guard, which is a new service, uh, where we basically match you with a vetted construction attorney for kind of a subscription, a flat subscription price, you know, included some contract review, demand letters, um, mechanics lien review, and like a handful of other things, as well as just kind of developing that relationship where throughout a project, you can, you know, work together to, um, to navigate all of these things that pop up.
Justin Gitelman (51:52):
Um, so if you want to learn any more about that, um, just visit Levelset dot com slash legal guard, and I’ll make sure to follow up with link to that after this, but otherwise I’ll turn it over to Sean and Michael for questions. All right. Well, it looks like Michael, you answered the question about, uh, liquidated damages versus consequential damages. And let’s see if we have any other ones in there with like, my check was pretty, pretty active in
Speaker 4 (52:24):
Answering this. Yeah. So I would just add in, um, if anybody has a specific, um, you know, bonding question, w you know, I would, I would tell you to always talk to your agent and have your agents set you up with a phone call with your underwriter. I think that those can always be very powerful conversations and give you a lot of insight as to what a surety is thinking about. Um, a lot of sureties are set up to review contracts and review bonds, um, and, you know, sort of give you insights, not necessarily from your perspective, but from how a bonding company looks at something.
Justin Gitelman (53:06):
And I think, uh, I’ll add to Kristen’s question about recovering extra contractual scope, even if there’s a pay if paid or pay when paid clause. Um, that’s a pretty fact-specific question. If there’s a pay, if paid and paid when paid clause, you’ve got to look at how the GC is going to prosecute that claim and what their obligations to prosecute that claim against the owner. But those wouldn’t be a specific bar to whether or not you can pursue extra contractual funds. All right. I think those are all our questions. Well, thank you all. Appreciate it. Yeah. Thanks everybody for coming. Thanks again, Sean and Michael, um, and for anyone who was here, um, you know, we’re going to send a recording out if you want to rewatch it, if you weren’t here, uh, I’ll be sending that out tomorrow as well. So thanks again. Thank you. All right. Have a great day, everybody.