Pricing change orders bedevils even the largest contractors. Since change order work is often an unexpected necessity, just the need for a change order creates immediate friction between the owner, the prime contractor, and any subcontractors and suppliers. The reasons for this are many:
All of these headaches, and there are many more, cannot always be avoided, but the headache can be minimized if the change order pricing is fair and reasonable. Of course, everyone’s definition of fair and reasonable varies, depending on their position.
The recent edition of “The Contractor’s Compass“, the American Subcontractor’s Association’s monthly magazine, provides an in depth discussion of ways to price change orders. According to “Pricing Change Orders Like a Pro,” its no surprise to most of us that change order or claims include the following: Labor, Equipment, Materials, Indirect costs, Overhead, Profit, and Bond. More specifically, the article says that in pricing a change order, make sure you don’t overloook any of these categories, along with suggested overall cost percentages (which may vary by region or project):
Unloading of materials •
Sorting of materials •
Carrying materials to right location •
Distribution of materials •
Engineering [estimate or actual] •
Supervision (25 percent for foreman 12.5 percent for general foreman) •
The article also gives helpful notes on items that are often overlooked when pricing:
Equipment: “Make sure you have corresponding labor to operate equipment. Rates—Use Bluebook, Caltrans, Corps of Engineers, or whatever is specified.”
Materials: if actual, provide invoices.
Indirect Costs: “These are suggestions to add to your change order: • Small tools—7 percent of labor [negotiate to 4 percent to 5 percent]. • Consumable—7 percent of labor [negotiate to 4 percent to 5 percent]. • Safety maintenance—2 percent of labor. • OSHA tool box meetings—1.25 percent of labor [½ hour / 40 hours]. • As-built fees—1 percent of labor. • Added warranty—2 percent of labor. • Degree of difficulty—5 percent to 10 percent of labor. • Coordination with other trades— Forman supervision in hours. • Change order preparation—hours and rate.
Overhead: Use actual or whatever is specified.
Profit: Ask 12 percent—settle for 10 percent, or whatever is specified. Federal contract—method of computing
Bond: Actual bond costs whatever is specified”
All great things to keep in mind when pricing a change order. The article also gives more specific information regarding what should compose a change order and how to formulate it. Read the whole article here.
Form contracts are used throughout the construction industry. These standard contract forms provide predictability and consistency in the construction industry. While standard construction contract forms are meant to be modified to fit the specific project and terms for which they are used, most of the standard terms are generally left untouched during negotiations. The most popular, and oldest, of these standard construction contract forms is the American Institute of Architects AIA forms. However, building criticism that the AIA forms favor owners and architects lead to the formation of the ConsesusDocs, which were a result of the work of contractor and subcontractor organizations.
The ConsensusDocs, drafted and reviewed under the supervision of about 40 construction associations – mostly general and subcontractor associations – have spent significant time observing new methods and technology involved in design-build, as well as pitfalls and holes in construction management at-risk projects. Taking the information gathered, as well as feedback from the various associations, ConsensusDocs revised its design-build and construction management at-risk standard documents. These new documents attempt to provide revisions that take into account the concerns of owners, contractors, designers, and subcontractors.
The updated ConsensusDocs are:
• ConsensusDocs 410 Owner & Design-Builder Agreement (Cost of Work Plus Fee with GMP)
• ConsensusDocs 415 Owner & Design-Builder Agreement (Lump Sum)
• ConsensusDocs 420 Design-Builder & Design Professional Agreement
• ConsensusDocs 450 Design-Builder & Subcontractor Agreement
• ConsensusDocs 460 Design-Builder & Subcontract Agreement (Cost Plus with GMP)
• ConsensusDocs 500 Owner & Construction Manager Agreement (GMP with Preconstruction Services Option)
Construction, the backbone of the American economy, has been developing different techniques at a rapid pace over the last 100 years. Aside from the amazing strides made in the types of buildings being constructed, the construction industry has pushed itself to innovate in every facet.
The constant change being seen in the construction industry is also affecting government. While commercial ventures have been adept at changing, government has been slower. With the advent and the embrace of Public-Private Partnerships (P3) in the construction of traditionally government infrastructure, such as bridges, airports and roads, new agreements have been formed to try to deal with the laws relating to government projects.
In the past, governments were often required to publicly bid projects, with plans in hand, budgets ready with funds allocated, and the project itself usually required surety performance and payment bonds. P3 projects were never anticipated, and the law often does not cover P3 projects. This left a hole in the laws of many states, especially when it came to protecting subcontractors in the event of non-payment.
Kansas has taken steps to resolve one of the holes in their public construction laws, by enacting SB 55, Public construction contracts and performance and payment bonds. Recently, after the bill was passed by the Kansas Legislature, Governor Sam Brownback (R) approved the bill. The new bill will require a payment and performance bond from any prime contractor with a contract exceeding $100,000.00 on any P3 project. The purpose of the payment bond is for the “protection of claimants supplying labor or materials to the contractor or subcontractors in the performance of the work.” This will allow subcontractors and suppliers to make a notice of claim on payment bonds when they are not paid for the work they perform. The bill permits the claimants to seek attorneys fees and costs.
The official summary of Kansas SB 55 is as follows:
Bonding Necessary in Public-Private Partnership (P3) Agreements;
SB 55 SB 55 revises the Kansas Fairness in Public Construction Contract Act by requiring a contractor involved in a public-private partnership (P3) agreement with a public entity to furnish the following bonds:
● A performance bond, which is equal to the full contract amount; and
● A payment bond, which is equal to the full contract amount for the protection of claimants supplying labor or materials to the contractor or subcontractors in the performance of work.
The bill applies to P3 contracts valued at more than $100,000. The bonds must allow for the recovery of attorney fees and related expenses.
The terms “public-private agreement,” “private contribution,” and “public benefit” are defined in the bill.
“The box next to the first choice — arbitration — was marked with an ‘X.’ The boxes next to choice two — litigation — and choice three — “other” — were left unchecked.” According to the District Court, “Even under Atalese standard, the selection of arbitration over litigation clearly explains in a simple way that the parties’ disputes must be resolved in arbitration instead of litigation.”
The Third Circuit Court of Appeals on March 30, 2017 issued an opinion that two New Jersey construction suppliers who had filed liens violated the bankruptcy automatic stay. The construction liens, in typical fashion, had been filed by the material suppliers against the owners of the two developments where the prime contractor had installed the materials. The owners had not fully paid the prime contractor for the work on the projects and the contractor, in turn, did not pay the suppliers for their materials. Several weeks after the prime contractor filed for Chapter 11 Bankruptcy, the two suppliers of construction materials filed liens on the properties owned by the developers. The prime contractor filed a motion in bankruptcy court to discharge the liens.
The bankrupt entity (the prime contractor) argued that the bankruptcy’s automatic stay prevented the material suppliers from filing their liens. The court accepted the prime contractor’s argument that the liens were, in fact and in part, filed against the prime contractor’s property inasmuch as the liens could assist them in collecting against the prime contractor’s accounts receivable that was arguably due from the developers. In so holding, the court rejected the supplier’s argument that a filed lien is solely attached to the property interest of the developers/owners.
Rather, the court accepted the argument that the lien could be satisfied by payment of an asset of the bankrupt’s estate to the lien holder (i.e. paying off the lien and deducting the monies due the prime contractor) and, therefore, the lien is essentially against the property of the bankruptcy estate.
The uniqueness of this case (Linear Electric Co., Inc. v. Cooper Supply Co. and Samson Electric Supply, Third Circuit Court of Appeals, March 30, 2017) appears to be related to New Jersey’s Construction Lien Law. Specifically, the court focused upon New Jersey’s “Lien Fund,” which in general, states that an owner discharges a lien by paying into a lien fund from which claimants recover what they are owed. No lien fund can exist if at the time of service of a copy of the lien, the owner has fully paid the prime contractor for the work performed or services, materials, or equipment provided. Further, a claimant’s claim is limited to the “unpaid portion of the contract price of claimant’s contract for the work, services, materials or equipment provided.”
Applying the debtor’s logic, under New Jersey Law, if the lienors were fully paid, the amount that the prime contractor would be owed from the owners would be reduced accordingly. The Third Circuit concluded that this fact directly impacted the prime contractor’s “accounts receivable” which is clearly an “asset” of the debtor under the Federal Bankruptcy Laws.
In the end, the court, following numerous cases involving bankruptcy and lien filings, concluded that if the lienors, under these facts and under New Jersey Law, were allowed to receive full payment by virtue of the liens, the prime contractor would conceivably receive less as a result. In that situation, there would be less money for the bankrupt entity to put into a plan of repayment and, therefore, other creditors of the bankrupt entity would suffer. Thus, the lien filings improperly circumvented the federal bankruptcy laws.
In practical terms, it is interesting to note that the Third Circuit Court of Appeals did not address the well-accepted exception to the bankruptcy code’s automatic stay (Section 362(b)(3)), that permits an exception for mechanic’s liens. Further, the decision will significantly impact the construction industry in New Jersey inasmuch as many suppliers and lower-tier trade contractors rely upon the filing of a lien to protect their entitlement to get paid especially in the event of a bankruptcy filing by upper-tier general prime contractors. Without lien protection, often regarded under bankruptcy law as having some priority, the suppliers of construction materials would become unsecured creditors, forcing them to accept less money on their claim as is common with unsecured creditors.
In new Montana Construction Lien caselaw, the Montana Supreme Court provided clarity on when a construction lien can be foreclosed upon, and when a contractor is entitled to attorneys fees under Montana’s Construction Lien Law.
One of the questions before the court was whether a contractor was entitled to an award of attorney’s fees and the right to foreclose upon its construction lien under § 71-3-521, et seq., MCA.
At the trial level, the court found that the homeowner “had failed to meet the burden of proof relating to their counterclaims…” for defective work. The District Court also found that the construction lien was valid, and properly filed. Despite this, the District Court found that the contractor was not entitled to foreclose on the construction lien because the homeowner found the stone work to be unsatisfactory. As a result, the contractor could not foreclose on the construction lien, and was not entitled to the statutory attorneys fees.
The contractor appealed, arguing that the District Court erred because under § 71-3-535(4), MCA, the standard is not whether a homeowner is “satisfied” with the work, but whether the work was completed or substantially completed. The Montana Supreme Court reviewed the case and the Construction lien Law. In Montana, construction liens are meant to protect those who increase the value of a property through their labor or materials. Montana, somewhat different from other states, requires that in order to file a lien the lien claimant must “substantially furnish services or materials pursuant to a real estate improvement contract prior to filing the lien notice. Section 71-3-535(4), MCA. Lienable materials are those that are supplied “with the intent that they be used in the course of construction of or incorporated into the improvement[;]” and that are actually “incorporated in the improvement or consumed as normal wastage in construction operations[.]” Section 71-3-524, MCA. Montana’s lien statutes do not authorize liens for the total amount of a construction contract, but rather for the amount of contractual services and materials left unpaid, subject to § 71-3-524, MCA.
As for attorneys fees, under § 71-3-124(1), MCA, a district court “shall allow as costs the money paid and attorney fees incurred for filing and recording the lien and reasonable attorney fees in the district and supreme courts. The costs and attorney fees must be allowed to each claimant whose lien is established[.]” According to the Supreme Court, “A district court is not empowered with discretion to determine whether a party with an established lien is entitled to attorney’s fees—the language of the statute is mandatory. A district court errs if it fails to award attorney’s fees to a party with an established lien,” and Section 71-3-124, MCA does not require the award of attorney’s fees to be reduced if the judgment is for an amount less than what was claimed in the lien.
The Supreme Court, after reviewing the statutes and prior case law, found that the District Court erred in its ruling. In so finding, the Supreme Court found “…the equitable principles underlying the lien statutes would be undermined if owners could avoid foreclosure of a construction lien by simply expressing their dissatisfaction with a contractor’s work performed. The rule instead…is that work completed or substantially completed, in addition to lienable materials, establishes the lien.” With that, the court ruled that the contractor was entitled not only to foreclosure of its lien, but also to the entirety of the attorneys fees claimed:
“A district court “shall allow as costs the money paid and attorney fees incurred for filing and recording the and reasonable attorney fees in the district and supreme courts. The costs and attorney fees must be allowed to each claimant whose is established[.]” , ¶ 30, 363 Mont. 208, 271 P.3d 48 , 2011 MT 325 (quoting § 71-3-124(1), MCA). A district court is not empowered with discretion to determine whether a party with an established is entitled to attorney’s fees—the language of the statute is mandatory. A district court errs if it fails to award attorney’s fees to a party with an established . , ¶ 30. Section 71-3-124, MCA, does not require the award of attorney’s fees to be reduced if the judgment is for an amount less than what was claimed in the .“
The entire case can be found at Vintage Constr., Inc. v. Feighner, 2017 MT 109.
Several changes are pending with the Nevada Materialman’s and Mechanic’s Lien Law. The changes appear to be headed for confirmation by the end of the legislative session. The proposed amendments to the current lien law are outlined below. The changes severely increase the liability of contractors, while removing or watering down notice provisions of those seeking to impose the liability. Contractors also are subjected to longer periods of uncertainty in that the statute of limitations in some cases is being doubled from 1 year to 2 years.
These changes, while they bring Nevada in line with the laws of many other states, follow a trend of placing enormous liability on contractors for acts of their subcontractors. The changes, at the same time they increase contractor liability, eliminate or water down the notice requirements previously imposed to ensure the contractor knows of potential liability. As always, look for these changes increasing a contractor’s liability to result in higher construction costs and higher insurance premiums.
In 2015, the Nevada State Legislature passed Senate Bill No. 223, which deal with issues relating to the imposition of vicarious liability on general contractors, foreclosure of construction liens and collecting debt on unpaid workers’ wages or benefits. However, The United States District Court for the District of Nevada in Board of Trustees of the Glazing Health and Welfare Trust v. Chambers, 168 F.Supp.3d 1320 (D. Nev. 2016), found that the bill was preempted by the Employee Retirement Income Security Act of 1974 (ERISA) The new bill attempts to resolve this conflict.
Currently, employees of prime contractors have one (1) year from the date they should have received pay or benefits to sue or start a legal action for the outstanding pay. The proposed law extends this time period to 2 years, and changes the terminology from “prime contractor” to “original contractor”.
The law as it is currently phrased states that a “laborer” is included in the definition of “lien claimant” and this would include an express trust fund for the payment of unpaid wages and benefits, with specific exceptions limiting what are not considered fringe benefits. (NRS 108.2214) The bill under consideration deletes these provisions, and states that any potential claimant under the new bill is a lien claimant.
Notification requirements are found throughout the Nevada lien law. As it relates to health and welfare funds, these notifications are being removed and replaced with a new notification requirement, and sets forth new penalties for potential claimants.
While the current law imposes liability on contractors for unpaid labor by its subcontractors, this liability has limits (i.e. contractors are not liable for unpaid health or welfare or other benefit plans). (NRS 608.150) The proposed revisions would eliminate the exceptions, and make the contractor generally liable for the indebtedness for labor that is incurred by a subcontractor or other contractor.
Administrators of a Taft-Hartley trust currently must provide notice of a delinquency when a benefit payment that is owed to the trust is not received. (NRS 338.700) Section 8 of this bill fully repeals this provision of law.
A new decision issued by the Supreme Court of New York County casts new doubt on the efficacy of obtaining sworn partial and final lien waivers. Lien waivers have become a staple of the construction industry. Most contracts now require that, in order to receive payment, a subcontractor, supplier or contractor must submit a lien waiver that, in most cases, certifies everyone working for them has been paid, and will be paid from the amounts being received in exchange for the lien waiver.
The purpose of the lien waivers is to ensure that no liens will be filed on a construction project by either the contractor providing the lien waiver, or any of its subcontractors or suppliers. Lien waivers originally simply provided this information, and if it was not accurate, would result in a breach of contract action if mechanic’s liens were later filed by subcontractors or suppliers. The American Institute of Architects provides a form lien waiver, AIA Document G706. The G706 is not a sworn statement, but merely provides the owner with the information requested regarding payments to subcontractors and suppliers.
However, after some time (and many frustrated owners who saw liens being filed on their properties by subcontractors and suppliers who were not getting paid, despite the lien waivers being submitted by contractors), sworn statements accompanying the lien waiver became popular. The AIA even provides form Document G706A, which is the Contractor’s Affidavit of Release of Liens, supporting the G706 by providing a sworn statement stating that all releases and lien waivers have been received from subcontractors and suppliers.
But fraud claims are also difficult to assert, and even more difficult to prove. Courts tend to try to find other ways of dealing with fraud claims, rather than the fraud route. Instead, courts across the country have taken fraud claims and found other, more straightforward, ways of dealing with them.
Recently, the New York City Courts were presented with a case of an incorrect series of lien waivers submitted by a contractor, and the question of whether the sworn statements subjected the contractor to fraud claims. In theory, sworn statements are obtained with the main goal of subjecting a person to fraud claims in the event the statements are not true. But, in keeping with recent trends in New York law, the court declined to allow private contractual obligations to impose fraud implications.
The case, Solar Elec. Sys., Inc. v. Skanska USA Bldg., Inc., 2017 NY Slip Op 30962(U) (Sup. Ct.), dealt with the issue of whether Defendant Skanska USA Bldg., Inc. could assert a claim against Plaintiff, Solar Elec. Sys., Inc., and its President, for fraud and misrepresentation. The underlying project at issue was for the renovation of a school building at Beacon High School, located in New York, New York. The New York City School Construction Authority was the owner of the Beacon High School Project.
The basis of Skanska’s fraud claim concerned certified lien waivers. Skanska alleged that, in exchange for payment from Skanska, Solar submitted sworn statements representing that Solar had paid its subcontractors and suppliers. However, two of Solar’s subcontractors and suppliers later filed liens on the project. The fact that liens had been filed by those working for Solar brought Skanska to believe that the sworn statements in the lien waivers were untrue, and amounted to a fraudulent misrepresentation. Further aggravating the situation was that Solar refused to take steps to have the liens removed, or indemnify Skanska.
Solar responded to the accusations by filing a motion to dismiss the fraud claims, asserting there was no cause of action for fraud because the lien waivers arose out of contractual obligations. Solar further alleged that Skanska owed it significant amounts of money for work performed. Importantly, Solar argued that the lien waiver statements and the refusal to indemnify Skanska against the liens were all purely contractual obligations, and that Skanska’s sole remedy was to assert a breach of contract claim.
The court agreed, stating: “Here, it is without question that the underlying substance of both the breach of contract claim and the fraud claim is entirely of the same origination. Defendants allege in their Third Counterclaim that due to Solar’s breaches of the subcontract, Skanska overpaid and was subject to project liens which were not indemnified by Solar. These obligations of Solar arise from the agreement between the parties. Borducci had no separate or independent duty to the defendants, and the alleged false statements are tied directly to the harm caused by the breach of contract. Additionally, defendants claim the exact same compensatory damages in both of the counterclaims, arising out of Solar failing to pay its subcontractors and suppliers. There is no alleged independent basis outside of the contract between the parties that would give rise to a cognizable fraud claim as the alleged justifiable reliance and inducement springs directly from the contract itself….Plaintiff’s purported fraud damages are actually contract damages. Plaintiff seeks to be placed in the same position that it would have been in had…” Solar performed under the contract.
The case is not unusual in New York courts, and puts, front and center, the question of why owners and other construction project participants insist on having sworn or certified statements when it comes to lien waivers, payroll, or other documents. It may be that they simply want to make the contractor or subcontractor complete the lien waivers more carefully, or think twice before submitting an incorrect lien waiver. Financing requirements may also have something to do with this phenomenon. Or it could be that owners simply feel better when they receive a certified document. The courts, however, at least in New York, have found no difference between certified and un-certified lien waivers.