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  • New Requirements for Mechanic's Liens in 2011

    As of January 1, 2011, claimants recording mechanic's liens have new requirements to follow in order to have an enforceable mechanic's lien.

    1. Serve Notice of Mechanic's Lien.

    The first requirement is that you have to serve the mechanic's lien and a new form entitled a "Notice of Mechanic's Lien" upon the Owner by registered mail, certified mail, or first class mail with a certificate of mailing. The "Notice of Mechanic's Lien" that must accompany the Mechanic's Lien, reads as follows:

    NOTICE OF MECHANIC’S LIEN
    ATTENTION!

    Upon the recording of the enclosed MECHANIC’S LIEN with the county recorder’s office of the county where the property is located, your property is subject to the filing of a legal action seeking a court-ordered foreclosure sale of the real property on which the lien has been recorded. That legal action must be filed with the court no later than 90 days after the date the mechanic’s lien is recorded.

    The party identified in the mechanic’s lien may have provided labor or materials for improvements to your property and may not have been paid for these items. You are receiving this notice because it is a required step in filing a mechanic’s lien foreclosure action against your property. The foreclosure action will seek a sale of your property in order to pay for unpaid labor, materials, or improvements provided to your property. This may affect your ability to borrow against, refinance, or sell the property until the mechanic’s lien is released.

    BECAUSE THE LIEN AFFECTS YOUR PROPERTY, YOU MAY WISH TO SPEAK WITH YOUR CONTRACTOR IMMEDIATELY, OR CONTACT AN ATTORNEY, OR FOR MORE INFORMATION ON MECHANIC’S LIENS GO TO THE CONTRACTORS’ STATE LICENSE BOARD WEB SITE AT http://www.cslb.ca.gov/

    This notice must be in at least 10 point boldface type. The letters of the last sentence must be in all caps, except for the website address at the end.

    2. Prepare Proof of Service Affidavit

    You also need to prepare a Proof of Service Affidavit completed and signed by the person serving the Notice of Mechanic's Lien. The affidavit needs to show the date, place and manner of service and facts showing that the service was made in accordance with the requirements for service. The affidavit must also show the name and address of the person or persons upon whom a copy of the mechanic's lien and Notice of Mechanic's Lien was served. If the recipient is an entity, like a Corporation, Limited Partnership, General Partnership, Limited Liability Company, or Limited Liability Partnership, then the affidavit should also note the title or capacity in which a particular person was served. Here is what the affidavit should contain:

    I, [name of person serving], declare:

    I served a Notice of Mechanic's Lien in the form specified by California Civil Code section 3084(a)(7) and a true and correct copy of the Mechanic's Lien that is being recorded on the date, place and in the manner of service set forth below:

    Date of Service: [Date of Mailing]

    Place from which Notice Mailed: [Address of Sender]

    Manner of Service: [check one]

    __ Registered Mail

    ___ Certified Mail

    ___ First Class Mail with Certificate of Mailing

    Postage prepaid, addressed to the following address:

    [name and address of Owner or Reputed Owner]

    [If an entity, include title or capacity, i.e., President, or Agent for Service of Process]

    I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed on _______________ at [City affidavit executed], California.

    ___________________________

    [Signature of Person Serving Notice]

    This affidavit needs to accompany the Mechanic's Lien that is being recorded with the County Recorder's Office.

    3. Record a Notice of Pending Action

    As was the case before these changes were made, you need to file a complaint to foreclose on the Mechanic's Lien within 90 days after recording the Mechanic's Lien. After the complaint is filed, you are now required to record a "Notice of Pending Action" with the County Recorder within 20 days from the date of filing the complaint. The process of recording a "Notice of Pending Action" is complicated. If you are trying to do this yourself, it is even more complicated. If you are doing this yourself, you need to have a judge approve the Notice of Pending Action before you file it. Attorneys who record a Notice of Pending Action are not required to do this. You then need to mail the Notice to all owners of the property, and to all parties to whom the Mechanic's Lien is adverse (typically, the contractor you are in contract with and the prime contractor). You need to send this by registered or certified mail. Then, take the Notice to the Recorder's Office in the same County where you recorded the Mechanic's Lien and get it recorded. Then, you need to immediately take the recorded Notice back to the Court clerk in the County where the lawsuit was filed, and file it with the Court, with a proof of service on all parties.

    The requirements for Mechanic's Liens have been substantially revised by the California Legislature. The remaining changes will take place on July 1, 2012.

     

  • Understanding and Dealing with Construction Loans

    What is a Construction Loan?

    A construction loan is money borrowed from a lender to construct a building.  It is different from a normal loan in a few ways.

     

    (1) The lender does not lend all of the money to you at once.  Instead, there is a construction fund from which the lender will pay for the construction based on the progress of construction.

     

    (2)  Part of the loan includes a contingency fund to account for change orders and other unanticipated expenses.

     

    (3) The contingency fund typically includes an interest reserve, that is intended to account for the interest on the loan during the course of construction.

     

    (4) After the construction is finished, the amount of money that has been loaned is then converted into what is called a permanent loan, which is usually for a longer term, and closely resembles the typical homeowner's mortgage.

     

    What are the important points to negotiating a Construction Loan?

     

    (1) Employ a lender who has a lot of experience in providing Construction Loans.

     

    (2) Find out what kind of support the lender will provide during the construction process.  Most lenders will conduct periodic inspections to determine the progress of construction, and will handle progress payment requests from the contractor.

     

    (3) The planned duration of a construction loan is critical.  Always request more time than you think it is going to take.  Construction is a very uncertain process, and is subject to many events that can delay the progress of work.  You can also ask the lender to provide you with agreed upon extensions of the time on the loan.  You need to do this up front.  It is much more difficult and expensive to request an extension of a construction loan beyond the agreed upon time.  For example, extending the term of a construction loan will usually require a new appraisal.  Particularly if market conditions are in decline, this can result in increased loan costs, reduced loan amounts, and even a demand that the borrower contribute more money to the construction project.

     

    What can the Borrower Do to Ensure a Successful Project?

     

    (1) Know your contractor

    The contractor is the keystone to supporting a successful project.  You need an experienced contractor with a record of reliability, financial stability and quality workmanship.

    (a.) Get a list of references and visit with the owners.  Ask how construction went and what they would have done differently.  Ask how much the construction cost varied from the amount originally promised.  Inspect the quality of the construction carefully to see if it meets your expectations.

    (b.) There are also resources online that will help you.  In California, the Contractors State Licensing Board has guides to hiring contractors, and an easy way to search for your contractor's licensing history.  The website is www.clsb.ca.gov.  You can also check the local court records to see if your contractor has been involved in any lawsuits about construction defects or making payments to subcontractors.

     

    (2) Make decisions on what your project is going to be like before construction starts. 

    Most consumers allow a construction project to start with very general design drawings.  They do not consider things like finishes, hardware, appliances, flooring and other items that can greatly affect the total cost of a project.  When it comes time to make these selections, the number of decisions can be overwhelming to most consumers.  It is not unusual for consumers to stop making decisions at some point during a project because there are so many decisions to be made.  This can greatly impact the completion of a project.

     

    (3) Watch out for "allowances" in your construction contract.  

    If you have not told a contractor specifically what type of flooring or appliances you want to use, contractors often put in their bids an "allowance" for the item that will change based on what you ultimately select.  Many times, these allowances are used to make the contract price seem much lower than it actually will be.  The result is that the actual construction price will be much higher than anticipated.

     

    (4) Try to avoid changes in the work

    It is very common for consumers to change their mind in the middle of construction about the location of a wall, expanding a room, or other changes.  Changes during the course of construction are usually very expensive, and can result in unintended consequences.  Moving a wall, for example, may require a structural engineer's approval, and may affect the routing of electrical, plumbing or other items.

     

    (5) Make sure everyone is getting paid on your project. 

    Contractors usually hire subcontractor to perform specialty work, such as electrical, plumbing, and roofing.  They also order a lot of supplies, like lumber, concrete, windows and siding.  All of the people providing services or supplies potentially have the right to record a lien on your home to compel payment.  If a contractor runs into financial problems in the middle of a project, the consumer can be caught having to pay again for work he or she thought was already paid for.  It is a good practice for consumers to keep track of any notices received, and make periodic calls to subcontractors and materials suppliers to find out the status of payment.  Also, there is a process for receiving lien releases that can greatly reduce a consumer's exposure to claims.

     

    (6) Hire an expert to observe construction

    Mistakes in construction are common, and can happen for a variety of reasons.  Correcting a mistake after construction is finished is much more costly than catching it early.  Hiring an experienced contractor to help observe construction can save a tremendous amount of money.  In addition, a contractor who is on your side can help you decide whether a request for additional money from a contractor is reasonable.

     

    (7) Consider obtaining a Performance and Payment Bond

    A performance bond is a promise from a third party surety that the construction project will be completed.  A payment bond is a promise from a surety that the people providing work, labor or service to a project will get paid.  Obtaining a Performance and Payment Bond (they are usually provided for a single premium) protects an owner against the risks presented by a contractor failing to complete construction or making payments to his or her subcontractors.

  • Construction Alert - Contractor Defaults on the Horizon

    It has been a very tough time for contractors over the past few months. Private jobs have dwindled to virtually nothing. Public works jobs are not being flooded with bidders, bringing the price bid down to absurd levels. The lack of work combined with the highly competitive environment is a prescription for contractor defaults. Owners, subcontractors and suppliers should take immediate action to maximize protection. Here are a few tips on what to do.

    1. Maintain Your List of Potential Claimants.

    Whenever you receive a twenty day preliminary lien notice, put it into a single file, and have a list on the front page with the contact information for each potential claimant. This will provide you with a list that you can readily access to ensure that you are receiving lien releases from anyone who may be a potential claimant. This is also a good way to have an easy way to check on subcontractors and material suppliers to make sure they are getting paid.

    2. Obtain timely progress payment releases.

    Obtaining conditional and unconditional releases from all potential claimants who have provided 20 day preliminary lien notices is a good way for owners to manage liability exposure on projects. Here is the right way to do it. When the contractor submits the first progress payment, attached should be conditional lien releases on progress payment in the statutory form that is prescribed by Civil Code section 3262. Check the conditional lien releases against your list of potential claimants in your 20 day preliminary lien notice file. If there are any conditional lien releases that are missing, follow up with the contractor and the subcontractor or material supplier to find out why a lien release has not been supplied. Be sure to keep written notes of your discussions with the contractor and potential claimants. Also check to make sure that the dates listed on the lien release match with the progress payment request. On the following progress payment, you should receive unconditional lien releases from the claimants who sent you conditional lien releases on the prior progress payment request, and conditional lien releases on the current progress payment request. By following this method through the end of the project, owners can contain their liability exposure in the event of a contractor default.

    3. Contact subcontractors directly to verify they are getting paid.

    In these uncertain times, just obtaining lien releases is not enough. Contractor defaults can happen in as little as 60 to 90 days. The usual payment cycle can easily put owners behind in getting lien releases. Owners should make a point of contacting subcontractors ten to fifteen days after making payment to the contractor to ensure that payments are flowing down to the subcontractors. This is particularly a wise step to take when a particular subcontractor or material supplier represents a substantial portion of a particular progress payment.

    4. Stop Notices and Mechanic's Liens Require Immediate Attention.

    Stop Notices place a hold on construction funds that are due or will become due to the contractor. Mechanic's Liens place an actual lien upon the real property receiving the work of improvement. Whenever you receive a stop notice or a mechanic's lien, it should be treated as an emergency situation, requiring immediate action. Upon receipt of a stop notice or mechanic's lien, call the claimant. Get details about how much is claimed to be owed, how long it has been since the last payment was received. The next step is to call the contractor to set up a meeting to discuss the problem. Bring to the meeting all of your records of payments to the contractor, to make sure that there have been no errors on your part. Obtain a specific plan from the contractor as to how the contractor will remedy the payment issue. You may want to consider entering into a joint check agreement with the contractor to provide additional protection. At your meeting with the contractor, obtain a commitment that the contractor will contact the claimant immediately. Follow up with the claimant to make sure that the contractor has made his promised contact. Continue to be involved until there is a recorded release of mechanic's lien or a stop notice release in your hands. Alternatively, if the issue of payment is disputed, have the contractor obtain a mechanic's lien release bond.

    5. Check your bonding.

    Owners should consider being more conservative, and requiring performance and payment bonds on projects that perhaps they would not have considered bonding in the past. The premium paid for these bonds is well worth the diminished risk of a contractor default. A performance and payment bond, however, is only as good as the surety that is backing it. Be sure to check through an independent rating services, such as A.M. Best, the financial stability and size of the surety.

  • 19 of 19: Effective Project Close Out

    XIX. Effective Project Close Out

    A. Determining Substantial Completion

    As the project winds down to a close, particular attention should be paid to establishing and documenting the date of substantial completion. The general rule to be applied is that substantial completion arises when all of the contract work is completed, and the work remaining is work to repair work that is already in place.

    The date of substantial completion should be established as a bright line. There are several reasons for this approach. Substantial completion is usually the date upon which liquidated damages cease to accrue. Strategically, substantial completion should be deemed to have occurred after a determination is made of whether there is sufficient retention to complete all of the punch list work in the event of a contractor default.

    B. Timely and Effective Recordation of Notice of Completion

    Another reason for establishing the date of substantial completion is that the date should be used to ensure timely recordation of the Notice of Completion. A Notice of Completion must be recorded within ten days of completion. Civil Code Section 3093. All of the work must be completed under the contract in order for the Notice of Completion to be considered valid. Lewis v. Hopper (1956) 140 Cal.App.2d 365.

    NEW RULE ON GIVING NOTICE TO CLAIMANTS. Recording a valid Notice of Completion was all that was necessary to shorten the lien recording period from 90 days to 30 days after the date of recordation. Under a new law, the owner is obliged to provide notification to all persons who have provided a 20 Day Preliminary Lien Notice within ten days of recording the Notice of Completion. Notification may be made through registered mail, certified mail, or by U.S. Mail with a certificate of mailing. Failure to provide this notification extends the time for recording a lien to 90 days after the date of recording a notice of completion. See Civil Code section 3259.5.

    C. Developing and Tracking Punch List Items

    Punch lists should be developed with the assistance of the design professionals involved in the project, the owner and the project manager. Punch Lists should be a comprehensive list of all items in need of correction, completion or commissioning. Punch lists should be organized with a numbering system that remains on the list until everything needed to complete or repair the item has been addressed.

    D. Timely Completion of Punch List Items

    It is extremely important that the project manager be the catalyst to get punch list items finished. It is all too frequently the case that contractors move off to other projects after reaching substantial completion, and punch list items sit until the contractor has some free time to address them. Imposing time limits on contractors to complete punch list items in the project contract, and assessing liquidated damages for a failure to complete punch list items is one approach to dealing with this issue.

    E. As Built Drawings, Warranties, Product Literature and Training

    At the conclusion of the project, project management should conduct a comprehensive review of the project specifications, and develop a list of products for which Warranties and Product Literature are required to be provided by the Contractor. If the contract fails to provide for the contractor to supply this information, it is a great service to the owner to go ahead and obtain this information from the manufacturers.

    During the course of the project, the project manager should be monitoring changes to the work by annotating the project drawings. At the completion of the project, this document can prove to be a valuable tool in checking the as builts prepared by the project contractor.

    If training is a part of the contract work, training sessions should be initiated and scheduled as near to substantial completion as possible.

    F. Tracking Lien Releases

    With every progress payment, the project manager should identify those subcontractors, material suppliers and equipment rental companies that have provided 20 Day Preliminary Lien Notices. On public works projects, only subcontractors, material suppliers and equipment rental companies that are not in direct contract with the prime contractor are required to provide these notices. The notices must be hand delivered, or sent by registered or certified mail, return receipt requested.

    With every progress payment request, the contractor should provide the project manager with conditional releases of lien by each subcontractor who performed work during this performance period. A conditional release of lien means that the release is conditioned upon the check provided by the contractor being negotiable.

    In each succeeding progress payment request, the contractor should provide the project manager with unconditional releases of liens as to the prior progress payment, and provide new conditional releases of lien as to the current progress payment. See Civil Code section 3262.

    At the conclusion of the project, it is essential that the project manager obtain unconditional releases of lien from all subcontractors, material suppliers and equipment rental companies before release of retention. Be sure to review the signed originals before disbursing retention, as there is a space for the contractor to identify unresolved claims for additional work.

    The form of the releases should always follow exactly the forms provided by Civil Code section 3262. Forms that provide additional terms may be considered invalid. See Civil Code section 3262 and Public Contract Code section 7100.

    G. Handling the Prompt Payment of Retention

    In the early 1990's the State Legislature passed a flurry of bills addressing prompt payment of retention to contractors. There are presently some sixteen different statutes that govern the time limitations for payment of progress payments and retention. In general, these laws provide that if payment of progress payments is not made within 30 days from the request of the contractor, then the owner may be responsible for payment of interest that is generally 2 percent per month. Final payment generally must be made within 45 days after completion.

    Recent decisions indicate that it is very unwise to withhold retention owed to a contractor. The attorneys fees incurred by the contractor in seeking its right to retention may be sought from the owner. Conversely, the owner may seek attorneys' fees from the contractor if the owner is the prevailing party on the issue of whether money withheld from retention was done in good faith. Taylor v. Van-Catlin Const. (2005) 130 Cal.App.4th 1061, 1070.

    Particularly in those instances where retention is modest, and a dispute is likely to occur, it is very risky for an owner to expose itself to liability for the contractor's attorneys' fees by withholding retention.

  • 18 of 19: Innovative Strategies for the Contractor in Default

    Part 18 of Our Series on Construction Project Management Skills

    XVIII. Innovative Strategies for the Contractor in Default

    A. Arranging Joint Payment Agreements

    Toward the conclusion of the project, it is not uncommon for the Contractor to begin to incur financial issues. A substantial amount of retention is usually being held by the owner that will not be released until the project is completed. The cumulative effect of delays, extra costs, and unexpected events is a strong temptation to avoid distributing funds to subcontractors and use the money for other purposes.

    Project managers should make a practice of regularly contacting subcontractors to ask whether the subcontractor had received payment from the last progress payment request. Upon receipt of any complaint concerning payment or receipt of a stop notice, the project manager should arrange for an immediate meeting with the contractor to go over the documentation demonstrating that all subcontractors and other potential claimants have been paid. The first step that most project managers take when a contractor has failed to pay all subcontractors money that is due is to enter into a joint check agreement. A joint check agreement allows the owner to write checks with the payees being the contractor and the contractor's subcontractor.

    The use of a joint check agreement is an imperfect solution at best. Many contractors are so desperate for money that they will go ahead and endorse the check for themselves and the subcontractor, thereby defeating the purpose of the joint check agreement. The preferred method to handle a joint check agreement is to maintain custody of the check. Contact the contractor and arrange for the contractor to come and endorse the joint check. Then invite the subcontractor to come by and provide the second signature to the check, make a photocopy of the check, and then hand it over to the subcontractor, with an acknowledgement of receipt and a conditional lien release. This is the only way that an owner can ensure that subcontractors are getting paid.

    B. Arranging for Secured Contractor Loans

    When a contractor is approaching a default on a project, every possible method of obtaining money will likely be employed. Multiple change orders of dubious validity will be presented. Progress payment requests will overstate the percentage of completion. There will be requests for at least the partial release of retention.

    Many owners respond to these indirect pleas for cash flow in a harsh manner. Change orders are rejected out of hand. Progress payments are rejected. Reduction in retention requests are tabled. This does not give the contractor many options, and may succeed in the owner's worst nightmare of dealing with a contractor default.

    An innovative means to accomplish the owner's true goal of project completion is to consider providing a loan to the contractor that is secured by the contractor's principals. Many contractors stuck in a desperate question for cash flow will welcome the opportunity to receive additional cash, and will be all too willing to make concessions in order to receive some relief from their cash flow issues.

    The owner's risk in such lending is generally quite low, particularly when the cost impact of a contractor default is taken into account, as well as the ensuing efforts by the contractor to recoup money through the assertion of various claims for additional compensation. In addition, the owner will obtain the personal pledge of the contractor, which will provide additional incentive to the participants not to attempt to walk away from their contractual obligations.

    C. Risks and Benefits of Taking Over Some of the Contractor's Operations

    If a contractor is having trouble, there is usually a strong temptation on the part of the owner to take over some of the operations of the contractor. The owner may elect, for example, to hire some subcontractors directly to get the project finished, may negotiate some of the payment issues directly with the subcontractors, and otherwise take over the position of contractor on the project in an effort to mitigate the impact of a contractor default.

    This is a very risky step for any owner to take. Contracting directly with subcontractors or making direct payments to subcontractors changes the relationship between the owner and the subcontractor. No longer is the owner insulated from subcontractor claims, and may be subject to direct lawsuit from the subcontractor for unpaid work. Contracting with subcontractors may also jeopardize the right to enforce a payment or performance bond against a surety. The effectiveness of project insurance may be greatly hindered through direct contracts with the subcontractor. The period for filing lien and stop notice claims may also be extended by having a direct contract with a subcontractor.

    If there is a need to take over the operations of the contractor in order to complete a project, the preferred method is to do so through notification to the surety of a default, and provide the surety with the option of providing a replacement contractor, or, if there is no bonding, hiring a new contractor to take over the operations of the contract and receive the assignment of the subcontractors' contracts.

    D. Involving the Surety

    The realization that performance and payment bonds are not all what they are purported to be usually first arises when the contractor is declared to be in default, and the surety is called upon to complete the project. Sureties are notoriously slow in responding to claims of default, and usually attempt to get the owner to agree to have the original contractor return to the project.

    The owner is greatly benefited in a contractor default situation to have a well documented basis for contractor default that discourages the surety from pursuing the return of the contractor.

    When and if the surety does become involved, the surety will propose a replacement contractor if the original contractor is not acceptable. Replacement contractors are notorious for providing the absolute minimum required under the contract documents. As part of the negotiations with the surety, consideration should be given to the selection of an alternative completion contractor who is not closely tied to the surety. It may be worth agreeing to pay additional money in order to hire a replacement contractor preferred by the owner.

    Completion work needs to be watched carefully and inspected thoroughly. The owner should anticipate that any work not squarely identified in the contract documents will be the subject of a claim from the surety or replacement contractor.

  • 17 of 19: Addressing Stop Notices, Liens and Contractor Claims

    Part 17 of Our Series on Construction Project Management Skills

    XVII. Addressing Stop Notices, Liens and Contractor Claims

    A. Dealing with the Unbonded Stop Notice on a Private Project

    On both public and private projects, stop notices are used by subcontractors and material suppliers to place a claim upon the construction fund, such as the money that a public entity sets aside for construction, or, on a private project, the amount set aside by the construction lender for the construction.

    A significant difference between stop notices on public and private projects is the issue of bonding. On public projects, bonding is not required. Once a valid stop notice is received, the public entity cannot pay the funds that have been set aside until the stop notice is released. Civil Code section 3186.

    On private projects, however, the construction lender is not obliged to set aside funds due to the contractor upon receipt of a stop notice, unless the claimant has posted a stop notice bond. The cost of stop notice bonds is usually a percentage of the claim amount. Many claimants find the cost of a stop notice bond to be prohibitive, particularly with large claims. If an unbonded stop notice is received by the construction lender, the construction lender has the right to ignore the stop notice entirely.

    The issue for project managers on private projects is whether unbonded stop notices should be ignored. In most cases, the answer is emphatically, "no." A stop notice is a signal to a project manager that at least one of the participants in the project is having trouble getting paid. Project managers should contact the prime contractor immediately upon receipt of any stop notice, and demand to know why it is that a stop notice was received. Progress payment requests should be reviewed to determine whether payment for the claimant's work has already been paid to the contractor.

    The reason why stop notices require project managers immediate attention is that stop notices are one of the early indicators of a contractor going into default.

    B. Amounts Withheld Under Stop Notice

    On receipt of a stop notice, the public entity is required to set aside sufficient funds to address the claim and anticipated litigation costs. Civil Code section 3186 The majority of public entities set aside125% of the amount of the claim. This amount comes from Civil Code section 3196, which references the amount that a stop notice release bond must be.

    Where there are multiple claims and limited funds, the amount retained in stop notice funds are distributed on a pro rata basis to each of the claimants, based on the size of the claim presented. For example, if there is a claim for $150,000, a claim for $100,000, and a claim for $50,000, but only $100,000 left in the construction fund, the $150,000 claimant would receive half of the fund, or $50,000, the $100,000 claimant would receive one third, or $33,333 and the $50,000 claimant would receive one-sixth, or 16,666. See Civil Code section 3190.

    C. Challenges to Stop Notices

    Claimants may sometimes present stop notices that are subject to challenge by the contractor. There is a procedure that a contractor may use to challenge a stop notice in court on an expedited basis. If a contractor elects to use this procedure, the owner will receive notification that papers have been filed with the Court. In response, the has no obligation to do anything other than to set aside funds under the stop notice until the owner receives a Court order, directing the owner whether to maintain the stop notice or release the money. See Civil Code section 3196-3205.

    D. Strategies to Release Project Liens

    When liens or stop notices are recorded against a project, there are several immediate concerns that should be addressed. The receipt of liens or stop notices may be the first indication that a contractor is in financial trouble. In addition, the recordation of a lien may be a basis for the lender to consider the owner to be in default under its loan.

    If the contract contains a "lien free" provision, requiring the Contractor to post a bond, the project manager should immediately send notification to the contractor that a lien has been received, that the contract requires the contractor to post a bond, and that the contractor has so many days to post a bond or be declared in default under the contract. In addition, an immediate meeting to discuss the claim with the contractor is a good idea.

    If the contractor fails or refuses to post a bond, immediate action should be considered. This includes reaching agreement with the contractor for the owner to make direct payments to the claimant, directing the claimant to make a stop notice claim, and directing the claimant to make a claim on the contractor's payment bond.

    If the contract provides the owner with audit rights, the project manager should consider whether now is the time to get to the contractor's financial records to determine whether there should be concern about the contractor's ability to finish the project.

    E. Closing the Deal

    Assuming a resolution has been reached, the terms of the settlement should be put in writing at the time a settlement has been reached. It is essential to avoid additional claims that the settlement terms include a statement ending the introduction of new claims. The following is an example of language that could be used to eliminate any further claims arising before a particular date:

    "This is a settlement of all claims relating to performance of the project through (date), and the Contractor waives all claims for extra work, delay, disruption, and other claims for compensation, and that upon payment of the agreed sum, the Contractor will sign an Unconditional Release of [Final or Progress] Payment in accordance with Civil Code section 3262, and will identify the amount of disputed claims for extra work in such release as ‘zero.'"

    Use similar language in change order documentation to ensure a complete release of all claims. An attorney will likely recommend additional language to address the particulars of a given settlement.

    On public projects, there are additional limitations on the public entity's ability to obtain releases. Public Contract Code section 7100 provides as follows:

    Provisions in public works contracts with public entities which provide that acceptance of a payment otherwise due a contractor is a waiver of all claims against the public entity arising out of the work performed under the contract or which condition the right to payment upon submission of a release by the contractor of all claims against the public entity arising out of performance of the public work are against public policy and null and void. This section shall not prohibit a public entity from placing in a public works contract and enforcing a contract provision which provides that payment of undisputed contract amounts is contingent upon the contractor furnishing the public entity with a release of all claims against the public entity arising by virtue of the public works contract related to those amounts. Disputed contract claims in stated amounts may be specifically excluded by the contractor from the operation of the release.

    Consequently, if a public entity tries to obtain a release from all claims from a contractor arising out of the work performed, the release provided may not be enforceable. Consulting an attorney concerning the appropriate terms for a release is recommended.

  • 16 of 19: Dealing with Project Delays

    Part 16 of Our Series on Construction Project Management Skills

    XVI. Dealing with Project Delays

    A. Acceleration Plans

    When a project has encountered delays, a proactive step to explore is whether certain resources on the project can be accelerated to make up for time lost. Asking a contractor to submit an acceleration plan will generally result in the submission of a change order, regardless of the cause of project delays. Generally, the term "acceleration" to a contractor means adding personnel, working overtime and weekends, all of which lead to greatly increased direct and overhead costs that the contractor will want to pass on to the owner.

    There are many aspects to a project that can be accelerated without the consequence of additional costs. An in person meeting with the contractor to brainstorm can result in some substantial time savings, and can help your relationship with the contractor.

    Here are some different ways to "accelerate" a project:

    - Speed up turnaround time on Requests for Information by having the contractor prioritize time sensitive requests.

    - Work with the Contractor to identify opportunities to save time by resequencing certain work.

    - Consider whether increasing the size of the Contractor's crew, or the number of subcontractor personnel will benefit the project.

    - Consider whether slow payment processing is causing the contractor or its subcontractors' to slow down work. If so, offer to speed up the payment process in exchange for increased crew size.

    - Consider whether there are constraints to the work that can be addressed at a modest additional cost. Agreeing to pay for an additional piece of equipment to allow two crews to work instead of one can be a very canny way to spend a little money to get a substantial improvement in production.

    When an acceleration plan is agreed upon, there should be monitoring to ensure that additional resources are, in fact, resulting in an increased pace of work. Additional care should also be taken to inspect the work during a period of accelerated work to guard against deficient work.

    In providing direction to the contractor, be careful to not inadvertently create a claim for "constructive acceleration" of the work. Constructive acceleration can occur when the result of owner directives forces the contractor to increase personnel or equipment on the project, and the Owner refuses to provide a time extension after timely request from the Contractor. For example, if the owner directed an additional length of roadway to a project, the contractor and owner would likely be able to work out a change order on a unit price basis for so many lineal feet. If the request to increase the roadway length comes just before the rainy season arrives, the contractor may be forced to bring in an additional crew to beat the onset of bad weather, which would not have been as efficient as having just a single crew start a few days earlier on road building.

    Constructive acceleration is one of the claim concepts that often appear in the ambitious contractor's belated claim submission. This is where having time deadlines for claim submission requirements can greatly reduce the temptation of a contractor to submit a questionable claim at the end of a project.

    B. Substitute and Other Available Work

    Circumstances may arise where the work is genuinely delayed. An endangered species or an ancient archeological site may be uncovered. A hazardous waste spill could occur. These conditions can result in circumstances where the contractor's forces are delayed for an indeterminate length of time. This is very costly to a contractor, and ultimately to the owner, because the contractor's planned employment of its resources is stopped. The personnel and equipment devoted to the project are no longer generating income, but the contractor continues to incur the overhead expense of maintaining its office, its administrative personnel, and other expenses during a period that it is not performing productive construction work.

    Project managers can greatly lessen the impact to owners when delays occur by taking a few important steps.

    1. Review the Project Schedule.

    Is there other work available for the contractor. If there is, identify the work that is available to the contractor. If the contractor balks at proceeding, continually note in daily reports and correspondence the availability of other work, and the contractor's refusal to perform the other work that is available.

    2. Consider whether there is new work on another project that could be worked on by the contractor during a period of delay.

    Substitute work can provide the contractor with a means to continue to earn income, and lessens the impact to the owner. Providing substitute work can prove to be a win-win situation for both the contractor and owner, but it must be handled carefully. If such an arrangement is reached, always get the contractor's confirmation that this substitute work is provided as additional compensation to the contractor, that the contractor will be able to devote otherwise delayed resources to the substitute work, and that the contractor agrees that its forces are fully employed during the period of delay. A time extension is usually warranted under these circumstances, so that when the contractor returns to the original project, the contractor has not been penalized for taking the substitute work. Mobilization costs between the ongoing and the substituted work should also be considered.

    Taking these steps will provide protection against one of the most common types of claims by contractors: delay claims seeking home office overhead costs. Home office overhead costs are a common part of most delay claims because they employ a formula, known as the Eichleay formula, that compares the percentage of the income earned from the project to the income earned on other contemporaneous projects, and multiplies this percentage against a daily home office overhead rate. The Eichleay formula is derived from a Board of Contract appeals case [need cite], which placed some important limitations on the use of this formula on delay claims. In order for this formula to be used, there must be a delay of uncertain duration that is entirely the fault of the owner, and there is no other work that the contractor can perform during the period of delay.

    Application of the Eichleay formula to delay claims generally results in gross inflation of claims. The reason is that the Eichleay formula has no connection to the actual impact caused by a delay, and tends to reward the inefficiency of a contractor's overhead operations.

    For example, an efficient contractor who has low overhead and many projects will generally result in a very low daily overhead rate. An inefficient contractor with high overhead and very few projects will generate a much higher daily overhead rate, even if the events causing the delay are identical.

    An effective way to defend against the application of the Eichleay formula is to avoid situations where there is a delay of uncertain duration, where there is no substitute work available to the contractor. This is why project managers should look to document the availability of other work, or offer substitute work in order to discourage such claims.
    Because the Eichleay formula is often abused by ambitious contractors looking for an easy means to inflate claims, project managers should always note when the contractor has work that is available to be performed that is not being pursued at that time. Should the contractor later claim to have been delayed during that period of time when other work was available to the contractor, the contractor will have a much more difficult time demonstrating entitlement to additional compensation.

    C. Project Demobilizations

    There are times when a project delay is crippling to future progress on a project for a period of time that does not justify the maintenance of construction crews and equipment on the project site. Under these circumstances, the project manager should consider whether the contractor should remove its personnel and equipment from the project.

    Discussions with the contractor concerning demobilization should focus upon determining the method by which demobilization costs will be calculated. If an actual cost method is employed, the components of these costs should be identified. If a lump sum price is negotiated, the contractor should provide a complete release of any other claims.

    As with any other type of claim, an important objective of the project manager is to obtain finality with the contractor. The best time to attempt to reach finality with a contractor is before the contractor demobilizes. Another discussion to have with the contractor before demobilizing from the project is to determine what the costs will be to bring the contractor back to the project to complete the work.

  • 15 of 19: Dealing with the Claims Oriented Contractor

    Part 15 of Our Series on Construction Project Management Skills

    XV. Dealing with the Claims Oriented Contractor

    A. Common Claims Manufacturing Techniques

    Claims oriented contractors use similar devices in order to manufacture claims of dubious validity. Contractors count on their ability to distract the owner's representatives, their creation of a unilateral paper record, and a surprise claim to catch project personnel surprised and anxious to resolve claims.

    1. Papering the Project; RFI Loading and Related Techniques

    A common element of claims is the assertion that unanswered RFIs delayed the project. The claims oriented contractor presents a dozen RFIs all at one time, every one marked urgent, and each one delivered right before critical work is to begin. The project manager and staff stay in the trailer, working with design professionals to craft responses, and are not on site to track what is going on.

    A related technique is to send off a constant stream of correspondence. The objective here is again for the project management team to become overwhelmed, and fail to respond to some of the letters. The contractor's correspondence then becomes the only record on a particular issue.

    The paper wars must be fought. If needed, additional personnel should be recruited to ensure that there are rapid responses to correspondence. In addition, the project manager should consider whether to begin documenting the issues that the contractor has failed to address. The only solution to the paper wars is to show the capability to respond to every issue promptly, and raise additional issues in response. Once the contractor learns that this is not an effective method, the contractor will usually back off, but will return to this device when it provide the contractor with an advantage.

    2. Presentation of Cheaper Substitutes as "Or Equal" Products

    In order to shave off a few dollars, but perhaps more to distract project personnel, claims oriented contractors tend to favor an ongoing series of proposed substitutions. In most instances, the proposed substitutions are of inferior products. Each request, however, takes the project management staff hours of research to note product differences.

    3. Characterizing Suggestions as Directives

    A common means by which contractors manufacture claims is to ask the project management staff for suggestions on how to approach a particular problem. In responding to this request, the project manager suggests a method to the contractor. The contractor then sends a letter, confirming the directive of the project manager, and requests additional compensation for the change in the contract. This letter usually arrives on the project manager's desk a day or so after the suggestion has been received, and the work that was the subject of the purported directive is by that time already completed.

    Project managers need to respond swiftly and decisively to any attempt to characterize suggestions as directives. The date of receipt of the notification should be noted, the events and discussions that took place on site should be described in detail, and there should be reference to the procedures used to provide directives to the contractor. The contractor should also be reminded that the only directives provided by the project manager are made in writing and are labeled directives.

    4. Misdirection in the Cause of Delays

    Contractors often use delay claims as a cover to disguise the impact caused by delays that originated with the contractor. The contractor, for example, may have to pull personnel off the project for a week to address a crises on another project. The contractor then claims that the slow progress over the past week is because there has been no response to an outstanding RFI or other request of the contractor.

    Project management needs to keep a constant presence on the jobsite, and be on the lookout for sudden changes in staffing, equipment demobilization, or frequent absences from the jobsite by construction superintendents. At the time that these events arise, it is usually a simple matter to ask where the personnel and equipment are going, or where is the superintendent, and learn of other projects or events that are causing these circumstances. The name of the other projects and the circumstances leading to the personnel shift should be noted in the daily reports.

    5. Much Ado About Nothing

    Another common technique is to deliver a stream of complaints about problems affecting productivity and causing delay impacts at a time when there is normal or reduced activity on the site, but no significant impacts preventing the contractor from proceeding with work.

    In response to this tactic, the project manager should be ready to note in detail the work that is available to the contractor on the project site and the absence of any impacts causing delays or disruption.

    6. Ignoring Claim Submission Requirements

    Claims oriented contractors will often attempt to ignore or provide minimal information in giving notice of claims. Claim notification will rarely provide the details of costs or other impacts. There is usually a statement to the effect that a certain cause has resulted in a delay, and when the contractor determines the costs, the contractor will notify the owner. This notification is often buried in a letter with a litany of other complaints.

    This form of minimal notice poses significant risk to the continued management of claims at the project. If the project manager does not take steps to force the contractor to comply with the contract claims submission process, the contractor will then have the argument that there was a tacit waiver of the claim submission requirements.

    Upon receipt of any document that has the slightest odor of the intent to file a claim, the project manager should respond by reminding the contractor that if it intends to file a claim, it should follow the claim filing requirements of the contract. If the contractor has attempted to characterize a non-complying notice as notification of the claim, the notification should be rejected in writing, with a request to follow the provisions of the contract concerning claim notification.

    7. Providing Grossly Overstated Requests for Additional Compensation

    Another claims manufacturing technique arises when the contractor is requested to provide pricing for the performance of additional work. The contractor presents a price that is many times greater than what the work merits, and begins a back and forth exchange with the project manager concerning the reasonableness of the pricing.

    The true intent emerges later, when the contractor announces that the owner's failure to approve the change order is now delaying the project, and a substantial delay claim is then added to the already inflated cost quotation.

    This is where force account provisions in a contract can be of great benefit to the project manager. Upon receipt of a quotation that appears substantially overstated, the project manager should consider directing to proceed with work on a force account basis, and not be drawn into a dispute concerning the compensation requested by the contractor.

    9. Strained Interpretations of the Contract Documents

    Another common distraction technique is to raise interpretations of the contract documents that justify additional compensation. Generally, these interpretations may be alluded to at some point early in the project, but are not clearly stated until after the work that is the subject of the interpretation has been completed. The contractor then claims that this interpretation had been previously addressed with project management, and that project management had raised no issue with the contractor's interpretation.

    Project managers should be attuned to subtle statements in correspondence or other communications that suggest that an issue concerning the contract, the work, or purported delays exist. The contractor should be repeatedly reminded that if there is an issue concerning the interpretation of the contract, that an RFI should be issued, and if there is a claim that the contractor wishes to assert, the claim notification procedures should be followed.

    When the "gotcha" letter from the contractor finally arrives, the project manager should go through the history of correspondence concerning the repeated notifications to follow the RFI and claim notification process, and note the contractor's repeated failure to comply with those requirements, as well as describe when the work in dispute was completed, if relevant to the discussion.

    B. Traps, Tricks and Ploys

    1. The "Cease Fire" on Letter Writing.

    A surprisingly common ploy by contractors is to lull the project management staff to believe there has been an agreement to stop the letter writing wars. Immediately after a barrage of correspondence, the contractor will contact the project management staff and request that an end be put to all the letter writing. The project manager is all to pleased to accept this offer, and in the spirit of this new found cooperation, does not write the contractor to confirm this understanding.

    Anywhere from a couple days to a few weeks pass, and the contractor unleashes a barrage of correspondence, complaining about the project manager's failure to respond to his last five letters. When the project manager inquires regarding the agreed "cease fire," the contractor denies that any such agreement ever existed, or that the "cease fire" did not apply to issues that were outstanding.

    If this proposal is made by the contractor, the best response is to continue to respond to issues fully and completely, but invite the contractor to conduct his own "cease fire" on submitting correspondence.

    2. Requests to Modify Contract Requirements

    Another common refrain of the claims oriented contractor is the attempt to modify contract requirements. If the project manager declines the proposal, the contractor claims that he is being treated unfairly and that the project manager is being unreasonable. If the project manager does decide to show some lenience to the contractor, the contractor's requested change is usually a springboard to a substantial claim.

    The significant risk when a contractor attempts to change contract requirements is that this will lead to an argument that there were so many changes to the contract, that the contract no longer resembles the agreement originally reached, and that the contractor should be entitled to full compensation under a "total cost" method of damages. A total cost method involves the contractor's submission of a claim for all of the costs incurred in excess of the compensation received. The total cost method is a method of presenting a claim without demonstrating any link between the claim amount and the cause. These type of formula claims are very commonly used by claim oriented contractors, because it avoids having the contractor specify the actual impact of a particular delay.

    Project managers should stick to the contract in dealing with a troublesome contractor. There is no benefit to bending the contract to assist the contractor. Contrary to the contractor's ravings to the contrary, there is nothing "unfair" about requiring the contractor to comply with the requirements of the contract, in the absence of some extreme and unjust hardship.

    3. Personal Insults

    Claims oriented contractors count on getting project managers upset with their antics. Part of the plan to set up unsuspecting project managers is to paint them as hysterical, biased and unreasonable. A good way to do this is to make personal attacks against the project manager's competence. Contractors will often take something that they find out about a project manager, and create stories that are very difficult to refute and personally embarrassing. One contractor claimed that a project manager was drinking on the job, and went into the jobsite trailer to kill himself. On another occasion, a contractor used his knowledge of the project manager's recreational pursuits to claim that the manager was never at the project site in the afternoon, he was always taking off early to go windsurfing.

    The outrageousness of these accusations lend credence to the contractor's position, and undercut the credibility of the only person on site who could contradict the contractor's contentions.

    4. Going Up the Ladder

    There comes a point where the relationship between the contractor and the project manager begins to break down. The project manager has gotten wise to the contractor's claims oriented approach and refuses to participate in any more of the contractor's games.

    The contractor reacts by claiming that the project manager is incompetent or that the contractor is being treated unfairly. The contractor begins sending correspondence to the supervisor of the project manager. The supervisor is surprised to receive communications directly from the contractor detailing various problems with the project management, and begins an inquiry. Now, the project manager starts getting attacked on both flanks. The investigation by his supervisor is personally embarrassing, and there may be concern that the attacks by the contractor may ruin the project manager's career.

    5. The Cascading Stream of Consequences

    Claim oriented contractors employ a variety of techniques to create the illusion that the project has constantly been disrupted as a result of all of these issues, creating a justification for a wildly overstated claim. Correspondence continually repeats the litany of issues that has resulted in protracted delays, which has pushed the contractor into wet weather, which has delayed completion of the project for several months.

    C. Defending Against the Change Order Machine

    1. Keep Project Documentation Consistent

    In dealing with claims oriented contractor, the most important objective is to gather as much data as possible concerning the performance of the contractor and the site conditions. During periods of on again and off again rain, the contractor will often try to get a free time extension by claiming there were rain days on days when the site was suitable for construction activities. The project manager should go to the site and record conditions on a daily basis, noting the work that is available, the number of personnel and equipment in use on the site, and the presence of supervisory personnel for the contractor. Take photographs every day at the project site.

    In addressing project correspondence, the objective is to fully and completely respond to every issue raised by the contractor. When claims are received, the response to claims should not end at a discussion of whether there is entitlement to any compensation. The project manager should go on to address the items being claimed by the contractor.

    The tone of all communications should be professional. Avoid the temptation of employing the contractor's claims manufacturing techniques back upon the contractor.

    2. Stay with the Contract Requirements

    Repeated reference to the contract requirements is generally the safest route in dealing with the claims oriented contractor

  • 14 of 19: Working with Contractors to Complete Projects

    Part 14 of Our Series on Construction Project Management Skills

    XIV. Working with Contractors to Complete Projects

    A. Establishing Principled and Fair Negotiations with Contractors

    Being an effective Project Manager requires the ability to negotiate in a manner that is consistent, fair and complies with the contract. This paper is intended to identify how barriers to settlement are created, how you can break down those barriers, and how to supervise the collection and creation of project data in order to respond effectively to claims. This paper also addresses how to prepare for a negotiation session, how to establish the rules governing the negotiation and negotiation techniques that help reach a reasonable resolution.

    Successful early resolution of claims requires the project manager to be sensitive to barriers that can stop negotiations. Addressing the underlying motivations of the claimant is essential to unlocking these barriers. These motivations often are unrelated to the issues underlying the claim.

    The need to be heard and have one's position recognized with dignity is an essential step. The listening process can identify those matters lying beneath a dispute. Once these issues are identified, directing efforts toward addressing the underlying concerns opens the mind of the parties to cooperative problem solving. By identifying and addressing these issues of significance, these barriers can be broken, allowing meaningful discussions to begin.

    The secret to an effective negotiation is the adoption of a consistent and persuasive narrative. Consistency is achieved through the information control. Persuasion is achieved through presenting themes and issues that resonate and create sympathy. All of this requires preparation, goal setting and attention to the distance that separates agreement.

    1. How Barriers to Resolving a Dispute are Created

    A dispute begins with the assignment of blame. In deconstructing a dispute, the first step is to understand how the assignment of blame took place. Many times, the assignment of blame arises from misplaced anger.

    Take the example of a contractor who, in the middle of building a project, realizes that his bid was too low, and that he is likely to lose money building a project. When the contractor started the project, there was a feeling of optimism and confidence that the project would turn a decent profit.

    When the contractor recognizes that optimism is no longer an appropriate feeling to apply to this project, the contractor searches for other feelings to see which ones match his present predicament. Self-doubt, insecurity and panic are all likely initial feelings. These feelings are not comfortable to hold onto, however, and the contractor will likely engage in some degree of problem assessment to ease these feelings.

    The typical process of problem assessment looks for potential sources of problems and potential means by which the problem may be solved. The owner on a project is readily identified as a potential source and solution to a problem because the owner caused the project to occur, and the owner is a source of money for the contractor.

    Particularly in instances where there is a public bid, one of the feelings many contractors have is that the competitive process caused the contractor to underbid, resulting in a windfall to the owner. These thoughts rapidly turn to how the owner might be found responsible for putting the contractor in this predicament.

    The blame placed on the owner is often tenuous. The contractor's own bid mistakes are blamed on the inadequacies of drawings or specifications. Mistakes by the contractor's crew or late deliveries of materials are blamed on unrealistic or confusing contract requirements. The misplaced assignment of blame against the owner is a common reaction by contractors who feel mistreated.

    The process of creating a claim also creates barriers. Contractors equate the effort to create the claim with entitlement to payment. A competitive desire to win the claim arises. Once the claim is received by the owner, a dismissive rejection can aggravate the feeling of unfairness and frustration at being unable to control the outcome. The contractor looks for others to validate its claim. The contractor speaks to the superintendent, who readily agrees with any scenario that removes blame from construction operations. The contractor discusses the claim with other contractors, who concur based on their own desire to assign blame to owners. By the time the contractor has reached this stage, negotiations generally are left to an exchange of obscenities and the self-righteous pronouncement "see you in court!"

    Sound familiar? By the time the dispute has reached this stage, it is often too late to reach a reasonable outcome though person-to-person negotiation. A lawsuit inevitably follows.

    The legal system can cause substantial changes in the contractor's attitudes, but these changes arise primarily from the high cost of litigation. The monthly receipt of ever-mounting legal bills, with no end in sight creates new anxieties and self-doubts. The blame is usually focused upon the lawyers and the unfairness of the legal process itself. The matter of principle that sounded so good several months ago has transformed into a matter of survival. The owner and contractor are now many thousands of dollars poorer. The project manager and superintendent are blamed for letting this dispute get out of hand. Nobody wins in this situation.

    The legal system has embraced the use of mediation to settle the majority of construction disputes. Mediation is a process where a neutral third party employs various means to bring the parties to a mutual resolution. The tools used by mediators to reach resolution can be just as effective at the early stages of a dispute as they can after litigation has been initiated. Project managers can serve the ultimate goal of getting a project built on time and within budget by identifying and addressing the source of settlement barriers at an early stage.

    B. Breaking Barriers through Listening, Exhaustion and Confirmation.

    A contractor's feelings of resentment toward an owner often arise from a perception that the owner, the bidding process or project management has been unfair. A project manager who is attentive to these attitudes can defuse perceptions of unfairness and foster a better level of communication with the contractor.

    1. Listening to the Contractor's Concerns.

    Listening is a critical part of this process. When you first hear a contractor grumble about unfair treatment, an immediate face-to-face meeting should be held. Optimally, this occurs before the contractor has had the opportunity to put any claims down on paper. The contractor should be given a full opportunity to express concerns without interruption. You should take detailed notes, and allow the contractor to continue uninterrupted.

    The step of listening to concerns can take an extraordinary amount of patience on the part of the project manager. Listen carefully to comments that appear to have nothing to do with the claims, but may give you insight to the underlying issues that are motivating the contractor's discontent. Examples of such underlying issues are: "I had two jobs go south on me last month," "My wife is going to have a baby," "I keep telling the inspector that he is not doing his job right, but he doesn't listen to me." These statements tell you that there are financial pressures or frustration that may be the unstated issues that may be the true motivation behind a claim.

    2. Ensuring Exhaustion of the Contractor's Concerns.

    When the contractor appears to reach the end of the concerns, exhaustion is a critical next step. Ask the contractor "is there anything else that concerns you about the project." Let the contractor continue with the list of concerns until another pause arises. Ask again whether there are any other concerns. At some point, the contractor will acknowledge that he has finished expressing his concerns. At this point, you should to detect a change in body positioning. The contractor may sink back into his chair, breathe out a sigh, and disengage his gaze. These are all signs that the contractor has exhausted his desire to have his concerns heard.

    This is the point of exhaustion. The contractor has been given the opportunity to be heard, and has had the opportunity to say everything that he or she feels has been a source of trouble. This is a critical event, because the pent up feelings of frustration have now had an outlet.

    3. Confirmation of the Contractor's Concerns.

    The next step is just as important. You need to go though the notes of the discussion and identify the concerns in a factual way, without judgments or assessments. The review of issues should give dignity to the contractor's position without acknowledging or accepting responsibility. There should be a request for confirmation that the understanding of the issue is correct A typical confirmation of the contractor's views might sound like this:

    "Ok, your first issue is that you don't feel you should have to pay to get your people back on schedule because it wasn't your fault that the materials were delivered late. Your second issue is that the architect keeps rejecting your working drawings as not being detailed enough, and it is causing you delays. The third issue is that you didn't understand from the contract that you were required to provide temporary fencing. Did I get all of this right?"

    At this point, a significant and positive change in the contractor's attitude should be apparent. The contractor has been heard, all of the issues in his mind have been dealth with, and the project manager has confirmed that he or she has listened to the concerns. The contractor is now at the point where constructive discussion of addressing the issues can begin.

    Once this change in attitude is recognized, the project manager has the opportunity to ask clarifying questions. These questions should not be judgmental, but can raise issues in the contractor's mind that may not have been considered because of the attitudinal barriers that have blocked settlement.

    Here are some examples of non-judgmental questions:

    - Can you show me where you believe the drawings are in conflict?

    - When did you first notice this condition?

    - How have you gone about tracking your costs on this issue?

    Note that the way these questions are worded do not acknowledge that the claim or issue entitles the contractor to compensation.

    Once these questions have been discussed with the contractor, the project manager should ask for whatever documentation the contractor has on the issues, and take them back for further study. Try to avoid an immediate response or an indication of how you feel about the issues, particularly if claims are involved. Allowing time to respond to the contractor's concerns will give the contractor the appearance of careful consideration, which will later be realized in the response to the claim.

    If possible, give the contractor a time frame within which a response can be expected. One of the goals of setting and meeting a deadline is to inspire the confidence of the contractor. If matters prevent you from responding on time, call the contractor before the deadline and tell the contractor you need more time. This shows the contractor that you remember your commitment to the deadline, and is yet another confidence building measure in dealing with a contractor.

    Don't let requesting additional time become a habit. If you repeatedly request moving forward deadlines, the contractor's confidence in having his concerns treated as a priority will diminish.

    This process of listening, exhaustion and confirmation should help create a better dialogue with contractors, and establish you as a reasonable and fair representative of the Owner. Although these steps may or may not resolve the dispute, it will establish a protocol by which the contractor can bring other concerns to your attention at an early stage.

    C. Responding to the Contractor's Concerns in Writing

    Following the meeting with the contractor, you should prepare a written response to the concerns. In preparing a response, consult with project inspectors to confirm the nature and scope of the issue, conduct a site inspection to confirm the condition or extra work, and submit the issue to the project designer for consideration. There may, in certain cases, be a need to consult with an attorney. Once all of the information is collected, draft a letter to the contractor, responding to all of the issues raised.

    The letter should reflect a careful consideration of the issues and reference the parts of the contract that apply to the dispute. In those instances where the claim does not appear to have merit, be sure to include any concerns you have concerning the amount being claimed by the contractor.

    Identification of contract provisions is important. It shows that the Owner continues to intend enforcement of the contract, and avoids a claim of implied waiver.

    1. Implied Waivers and Reservations of Rights

    An implied waiver of the contract provisions can arise when parties adopt a course of conduct that ignores contract requirements. For example, if the contract requires a verified statement from the contractor that a claimed conflict in the drawings was not and could not have been identified prior to bid, but claims involving ambiguities in the contract are accepted without this verified statement, then there is an argument that the parties agreed not to enforce that condition to the presentation of claims.

    Failure to abide strictly to the contract requirements has other ramifications, many of which may not be obvious at the time a claim is received. In the previous example, the waiver of the verification requirement can greatly weaken the Owner's case if there is a later claim under the False Claims Act.

    In those cases where there is a deviance from contract requirements, you should be sure to reserve the right to assert all contract requirements on this or any future claims. Failure to provide a written reservation of rights can lead to a claim of implied waiver.

    Here is an example of a reservation of rights. In this instance, the contractor has delivered some claim data after the deadline set forth in the contract. The project manager elects to consider the additional data, but wishes to reserve all rights to strict conformance with the contract. The project manager sends a letter, stating the following:

    "We are in receipt of your additional time sheets for January 4, 5 and 6, 2003. Although this data was submitted after the deadline set forth in Section 7.1.1.3 of the General Conditions, we will review the information as it has not impacted our review of your claims. Notwithstanding this decision, we reserve the right to strictly enforce all contract provisions with regard to any future claims or claims information submitted."

    D. Delivering the Project Manager's Determination

    Once you have incorporated the relevant contract provisions, reviewed the data submitted by the contractor and the project records, a thorough set of findings should be prepared and presented to the contractor. The goal is to discourage further pursuit of the claim and to present a strong piece of contemporaneous project documentation that can be employed in the event that a claim is ultimately pursued.

    The letter should also note that if the Contractor disputes the determination of the Project Manager, then the Contractor should submit a claim in accordance with the Claim Filing provisions of the Contract.

    Before sending the letter, you should set up a meeting with the contractor. Start the meeting by thanking the contractor for coming, and then proceed with a series of questions about the claim that begin a dialogue. Again, these questions should be worded in a way that do not challenge or confront the contractor, but brings issues forward for discussion. Here are a few examples:

    - Would you look at this note on the drawing and tell me how you considered this information?

    - When I read this specification, it seems to tell me that this was part of the contract work. Do you agree?

    - What did you think the scope of work was for this work when the bid was submitted?

    Based on the state of the resolution of the issues at this point, you may choose to give your tentative decision, show the contractor some of the documentation that influences your decision making, or arrange that the contractor will provide you with additional information on a date certain. Write the date down on your calendar, and call the contractor if no further information has been received.

    Once you have reached a point where you believe all of the issues have been addressed, update your letter with any additional information, have it reviewed by legal counsel, then call the contractor and tell him the letter is coming. If you wish, tell the contractor what decision you have reached. If appropriate, offer the contractor the opportunity to provide additional information on any issues, but set a deadline for receipt of that information.

    At this point, you have accomplished a number of important goals in diffusing the contractor's barriers. You have taken steps to create a favorable impression in the contractor's mind, and attempted to diffuse feelings of unfair treatment. Establishing a position of fairness and consistency also creates goodwill for the project as it proceeds.

    E. Effective Negotiation Techniques and Strategies

    Assuming the discussions did not result in the contractor either dropping its claim or accepting the public entity's valuation of the claim, more formalized negotiations may be considered. There are some basic negotiating protocols that should be established before proceeding with negotiation.

    1. Exchanging Information.

    Exchanging information voluntarily is a good way to continue the cooperative spirit, and it may provide yet another opportunity to discourage a contractor from proceeding with questionable claims. If the premise of the claim is that the contractor did not include certain work in its bid, request that the contractor provide its bid backup.

    Bid backup is the documentation used by the contractor to prepare its bid. Most contractors consider bid backup to be absolutely confidential, and will refuse to provide it. The public entity should insist, noting that if the claim goes into litigation that the bid backup will have to be produced. To alleviate the contractor's concerns, there can be an agreement to confidentiality, so that the bid backup is used only for purposes of claim review, and must be returned at the time of resolving the dispute.

    2. Require Complete Resolution of All Issues

    Contractors with a large number of claims often try to obtain piecemeal settlements in which some but not all of the claims are resolved. Piecemeal settlements present no risk to the contractor and diminishes the negotiating leverage of the public entity. By the time the parties get to their last rounds of negotiations, the contractor has received payment on all of its strong claims. The remaining claims are usually the ones where the parties are very far apart. Here is an example.

    The contractor presents thirty claims. Ten of the claims have merit; the remainder do not. The public entity's primary incentive is to reach a final resolution on the claims. It offers to settle on the ten claims that have merit. The contractor agrees, takes the money, then presses forward with the remaining claims. The contractor has taken the risk out of the negotiations by settling the strong claims. The public entity still has twenty more claims to resolve. The contractor has achieved his goals. The public entity has not.

    One technique to avoid "concessions by attrition" is to insist that negotiations result in a complete resolution of all claims, or there will be no settlement. This allows the public entity to make concessions on some claims, and puts pressure on the contractor to accept the amounts offered, lest the amounts offered be lost. This technique can force a contractor to drop a number of weak claims in order to receive an immediate payoff on the stronger claims.

    Going back to the previous example, the contractor is offered money on the ten strong claims as part of an overall settlement of all claims. The contractor bears the risk of losing this money if he is forced to litigate. The public entity will only be required to pay if its goal is realized. This is a much better balancing of settlement leverage than allowing piecemeal settlements.

    Do not confuse this technique with withholding undisputed progress payments to force settlement of claims. A willful withholding of undisputed payments can lead to a lawsuit seeking interest of two percent per month and attorney's fees. In addition, there may be circumstances where elimination of all of the contractor's strong claims give the public entity an advantage in a lawsuit. Like any negotiation strategy, flexibility to respond to the unique elements of any negotiation is necessary.

    3. Using an Independent Third Party to Negotiate Claims

    Use of an independent mediator to resolve claims can be a very effective way to resolve claims. Mediators are neutral parties used to help reach a settlement. Mediators often employ the tactics of listening, exhaustion and confirmation to add credibility and to move the parties toward resolution. Mediators are generally very effective in resolving claims by providing an intermediary. Mediators can help explore the settlement positions of the parties without either party making a concession. Mediations are also confidential, which promotes a more candid dialogue.

    Mediators are used extensively in construction disputes. If you need the name of an independent mediator, consult with legal counsel. There are many specialized negotiation techniques available in mediation that provide a substantial advantage to parties aware of these techniques. Consulting with legal counsel experienced in mediation in advance of mediation will greatly assist in reaching a positive result.

    4. Negotiating the Claim

    Negotiating a claim involves controlling the flow of information, adopting a consistent approach toward the evaluation of claims and keeping a very close eye on the difference between the two parties' position. In addition, there are approaches to presenting issues that can help motivate concessions.

    a. Adopting a Negotiation Narrative

    People are persuaded by what they believe the issues are that surround the dispute. Good negotiators adopt consistent and believable narratives to frame and explain positions taken. A convincing narrative unfolds like a story. Believable stories strike at issues that resonate with people.

    Take, for example, an elderly lady who has had her life savings taken by a con man. The story creates instant sympathy toward the elderly lady and instant hatred of the con man. The feelings this narrative evokes are difficult to shake. It will be difficult to persuade people that the elderly lady stole the money for her life savings from a bank, or that the con man was in reality a stock broker giving advice. This type of story resonates so strongly that people will often ignore facts that interfere with the issues that resonate.

    Narratives can also force the direction negotiations take. If, for example, one person in the negotiation believes that the other has no money to resolve a dispute, then the negotiations will focus on non-monetary means to resolve a dispute. The ability to employ these issues depends entirely upon the legitimacy that the parties attach to the issue. A party claiming to have no money loses all legitimacy in negotiations if the other party obtains information suggesting the claim is untrue.

    Adopting an unsupportable narrative can lead to undesirable outcomes or a breakdown in negotiations. If, for example, a project manager decides to claim that the project is over budget, and that there is no money left to satisfy the contractor's claims, the project manager may well intend this narrative to cause the contractor to reduce or drop his or her claims. The contractor may, in response, decide that the only way he will see any compensation is to pursue litigation. The narrative causes negotiations to cease.

    Establishing a narrative that resonates can be difficult on a construction project. People generally respond well to narratives that show fairness. A project manager who has acted fairly and reasonably in resolving claims presents the strong implication that he has acted fairly and reasonably in rejecting claims.

    Preferred narratives are those that show fairness, thoroughness and a willingness to reassess issues. Narratives often develop through the history of the dealings between the parties. If the project manager adopts a consistent approach to addressing claims, a narrative develops of reasonable handling that will assist whether the claim is resolved early or though litigation. Convincing narratives are earned, not made.

    b. Information Control

    Control of information is another essential component of negotiation. It is very difficult, if not impossible to communicate a consistent narrative if several people are communicating for one side. Different messages may be sent concerning the willingness of the public entity to resolve the claim, and undercut the negotiator's credibility. This is particularly the case where there are several levels of authority involved. Speaking with one voice adds legitimacy and power to a position.

    The contract documents usually identify the person who receives information. That person should generally act as the source of all communications. This helps ensure consistency in communications and provides a stronger negotiating position.

    Identification of a single source of information does not mean that the negotiator acts alone. Each decision on a negotiation should be vetted and considered by all persons having decision making authority on a claim. Once that decision is reached, however, it is the negotiator who should take responsibility for communicating the decision to the contractor.

    Contractors often take advantage of the structure within public entities to uncover weaknesses in the communication structure. Communications may be routed to higher levels of authority in an effort to circumvent normal channels. The entire project team needs to be aware of such techniques, and should be directed to return the communication with a request that it be sent to the recipient designated in the contract documents. If an attorney becomes involved in a dispute, the attorney normally takes over the responsibility for all future communications concerning the claim.

    There are times where an intentional shift to a new negotiator makes sense. Over the course of the project, there may amass a series of credibility or personality conflicts that undercuts the negotiator's effectiveness. Under those circumstances, there should be a formal reassignment to a new negotiator, and all communications with the contractor should come from that source.

    c. Maintaining Negotiation Distance

    One of the more difficult skills to master is maintaining negotiation distance. Negotiation distance is the amount of separation between two positions. The manner in which there is movement within negotiations is critical to attaining a reasonable negotiating outcome.

    One of the unwritten rules of negotiation distance is that once a party presents a position, that position can never be withdrawn without a substantial reason. If, for example, the contractor submits a claim for $100,000 and the public entity allows only $50,000 for the claim, the public entity cannot later offer to pay less than $50,000. From this point forward, the contractor accepts as true the premise that the minimum he or she will receive through negotiation is $50,000. Similarly, if the contractor indicates a willingness to accept $75,000, any attempt to retreat from that position will be ignored, in the absence of substantial justification. Retreats from previous negotiation positions also substantially undercuts the credibility of the negotiator.

    The substantial justification underlying a retreat from an earlier bargaining position is rarely successful in changing the understood negotiating position. For example, the movement from informal negotiation to litigation does not justify a change in negotiating position, even though the reason for the offer was to avoid the costs of litigation. The discovery of significant information that changes the assessment of a claim can establish a reason to change one's negotiation position. The discovery of a new claim can also affect negotiating position.

    d. Requiring Justification for Changes in Position

    Because changes in negotiating positions should be generally considered irreversible, a great deal of attention needs to be paid to both the amount of movement and the reasons for the movement. One good technique is to change negotiation positions only where new information has been presented that causes a reassessment of the claim. This is particularly effective where there has already been a careful assessment of the claim.

    Using the previous example, if the public entity has performed a careful evaluation of the contractor's claim, and can justify paying only $50,000, further movement may be conditioned upon new information that causes a reassessment of the claim. This places the contractor in the position of having to offer new information to justify any change in position. The public entity can then receive the information and decide whether the information is sufficient to cause a reassessment of the claim. This strategy is a means to avoid the attempt to split the negotiation distance in half to come to a settlement.

    For example, the contractor claims entitlement to $100,000. The public entity's evaluation is that the claim is only worth $50,000. The contractor drops its claim to $87,500 in an effort to bring the public entity up to $67,500, for an ultimate resolution of $75,000.

    Instead, the public entity responds to the demand for $87,500 with a statement that any movement by the public entity can only come where there is adequate justification to support additional payment. The public entity has responded by putting the contractor in a position to present additional contentions to support its position. If the contractor fails to provide any additional information, the public entity has not had to give any ground, yet it can maintain its willingness to negotiate. If the contractor does provide additional justification, the public entity should respond based on an evaluation of the information presented. If, for example, the contractor responds by presenting $10,000 in additional costs, the public entity may respond by noting the tardiness of submission of the information. Reserving its rights to reject the late presentation of the claim (see earlier discussion on reservation of rights), the public entity may then decide that only half of the costs should be recognized.

    The result is that the contractor has changed its position substantially, but has been met with a negotiation obstacle that has merited only a slight change in the public entity's negotiation position. This technique is generally effective only in the early rounds of negotiations. There usually becomes a point in negotiations where the distance is small enough to where maintaining a requirement for justification becomes unsupportable. If, in the example presented above, the contractor dropped to $60,000, this would be a strong sign of a desire to close the deal. Requiring specific documentation to justify further movement at that stage would be contrary to common sense because of the substantial additional costs involved in continuing the dispute.

    e. Using Negotiation Movement to Communicate.

    Another negotiation technique is to show willingness to settle by the amount and nature of the movement. Negotiating teams need to plan in advance in anticipation of multiple rounds of negotiation to preserve settlement leverage. Small moves in position communicate an unwillingness to move from a position, or that the willingness to compromise is reaching an end. Larger moves in position communicate a willingness to negotiate, and a likelihood of further movement.

    There is the anticipation that parties will eventually "meet in the middle." Structuring each movement can help avoid overpaying in negotiation of a claim.

    In structuring the movement, there can be significant concession points, particularly when there are conflicting claims. The relative strengths of the claims need to be separately evaluated. Moving from a demand to receive money to a demand to pay money is a significant concession, and should be used to communicate a substantial change in position, even if the monetary change is small.

    The communication of a "last and final" offer is rarely taken seriously in negotiations. One way to move a contractor off of a "last and final" offer is to get them to admit that if an offer came in for one dollar less than the "last and final" offer that it would be accepted. Once the contractor makes this concession, the point has been made that there is no "last and final" position, and negotiations can then continue. Notwithstanding this, "last and final" positions are signals to the other parties that negotiations are coming to an end.

    There is a certain amount of gamesmanship involved in negotiations. At times, the need to reach a resolution overtakes the reasoned assessment of the value of the claim. If you are negotiating and find yourself going beyond established limits, take steps to slow or stop negotiations from proceeding further. Introducing a need to consult with senior management before proceeding further is a means to put the brakes on negotiating further. If you plan ahead by establishing a strategy and setting a goal, you will rarely be caught in this position.

    Here is an example of how movement through several rounds of negotiations communicates messages to the other party.

    The public entity has a claim against the contractor for $25,000. The contractor has a claim for $100,000. The contractor's negotiation goal is to be paid $50,000. The public entity's goal is to pay $25,000. Both parties begin negotiations by demanding the full amount. The contractor drops its claim to $75,000, hoping to communicate a demand to get rid of the public entity's claim. The public entity does not want to give up so easily on what it believes is a strong claim, so it responds by demanding payment of $15,000.

    The contractor, seeing that its gambit has not been successful, retreats and demands payment of $85,000. The public entity responds by maintaining its position and refusing to move further. The contractor relents, and drops back to $75,000. At this point, the public entity claims that it has thoroughly evaluated the contractor's claim and cannot move further without further justification. The contractor presents some of its arguments to the public entity. After considering the arguments, the public entity drops its payment demand to $5,000. Because the public entity's demand has dropped down to a marginal sum, the public entity has essentially communicated its willingness to pay something to the contractor.

    The contractor, encouraged by this change, matches the University's movement by dropping its claim to $65,000. The University then makes a substantial move, by suggesting that both parties walk away without any money exchanging hands. This is a typical intermediary move before offering to pay money. It communicates a willingness to negotiate, but suggests that further movement will be minor.

    In this instance, the reaction from the contractor is negative. He is getting impatient. The contractor rejects the proposal out of hand and again demands $65,000. This should be expected by the public entity. The public entity needs to move matters forward. The public entity offers $5,000 as token amount to the contractor. The strategy here is to validate the previous proposal to a mutual walk away, and to give an indication that the ultimate settlement will involve some modest payment to the contractor.

    At this point, the contractor recalls its goal was settlement for $50,000. There is insufficient negotiating distance to reach this goal. The contractor presents a "last and final" offer of $45,000. The public entity panics, and decides to make a substantial movement to bring matters to a close, and offers $25,000. The contractor does not want to walk away, but is concerned that he has already given too much up. The contractor's demand drops to $40,000, communicating a desire to meet in the middle at $35,000. The public entity presents its own "last and final" of $35,000. The contractor holds out for $40,000. The public entity realizes it has rushed to close the deal and ends up settling for $37,500; twelve thousand five hundred dollars over its goal.

    In this case, the public entity made a significant error in jumping by $20,000 late in the negotiations. This communicated to the contractor that there was significant additional room to bargain. A better strategy for the public entity would have been to demand information that would cause a change of position, and to have the contractor withdraw its previous communication of a "last and final" offer. Based on whatever the contractor presents as "new information," the public entity can then move a more modest amount, such as $3,000, to signify that it has reached the end of negotiations.

    Watching for the underlying communication of movement is an essential part of negotiating claims, and should be carefully watched.

    F. Resolving Contract Change Orders

    The primary focus concerning any change order is to reach a final resolution of the dispute. This can be a difficult process, since most contractors are reluctant to release all claims relating to a particular issue, and often seek some form of "reservation of rights" to allow further claims to be made. Most project managers are all too willing to allow the contractor to assert these reservations of rights in order to bring the particular subject of the change order to what the project manager considers to be a close.

    That is not what happens, however, with the claims oriented contractor. Signing a change order is viewed as an admission that there was an event that gave rise to additional work or delays associated with the work, and then gives the Contractor the opportunity to present a further claim for impacts.

    Project managers need to resist the temptation to have change orders signed with reservation of rights by the contractor. Change orders should reflect full compensation of all types and kinds relating to the issue raised by the contractor. If possible, a change order should represent full resolution of all issues up to a particular date.

    In order to achieve an effective release, the usual change order forms are usually not sufficient. Consultation with legal counsel is advised when there is a significant change order to get the proper language to ensure a full and complete release of all claims, whether known or unknown.

    Taking this approach will lead to strong protests by the contractor, accusations of unfairness and undue hardship. The response to these accusations should be to note the owner's willingness to resolve the issue, but only if the issue is totally and completely resolved. This correspondence should also note the absence of any continuing impacts upon the contractor's operations, and the ability of the contractor at this point to price out any and all issues relating to impacts. It is not unreasonable for an owner to insist upon a final resolution as a precondition to paying on change orders.

    G. Making Partnering Sessions Effective

    Claims oriented contractors often encourage the use of partnering sessions. From the contractor's standpoint, the more people that the contractor can involve and focus upon the contractor's claims, the more likely that the contractor will receive some compensation, regardless of the merits of the claim itself.

    Partnering sessions are often conducted under agreed rules that the discussions are all "off the record" and do not change the contractual relationships of the parties. The relaxed atmosphere of partnering session often lulls the owner representative into making concessions or observation that the claims oriented contractor can then use outside of the partnering session.

    Despite this, owners should be willing to participate in partnering sessions, even with the worst contractors. Before any partnering session, the owner and project manager should develop a principled and reasonable response to the issues raised by the contractor, so that the facilitator's efforts are focused primarily upon the contractor's unreasonable demands. There should be pains taken to limit the degree of open communication that is provided in these sessions, while giving the impression of openness. Sometimes, project management teams can benefit from getting the advice of a professional negotiator to assist in such techniques are information control and negotiation planning.

  • 13 of 19: Addressing Deficient Work and Materials Issues

    Part 13 of Our Series on Construction Project Management Skills

    XIII. Addressing Deficient Work and Materials Issues

    A. Identifying and Recording Deficiencies

    A common omission in the records of project management is the identification and resolution of deficient work issues. Because many issues involving the quality of work are addressed on site, many project managers see no reason to note the problems in daily reports.

    Recording defective work is important in many respects. Recurring problems can be better identified. Communication to the contractor that the work is of unacceptable quality and the contractor's agreement to fix the deficiency can be employed later if the fix undertaken by the contractor is unsuccessful.

    In most cases, observations of deficient work should be communicated to both the owner and design professionals. It is often the case that a seemingly innocuous deficiency in the work turns out to have devastating impacts later on. In addition, consider whether the repairs made by the contractor will impact any product warranties.

    B. Evaluating Impacts of Deficient Work

    Addressing deficient work takes time, personnel and equipment. For the contractor, correcting deficient work is a complete loss. Contractors may later try to re-characterize the slow progress caused through the repair of deficient work as delays caused by owner impacts, such as late response to RFIs or submittal approval. Measuring the forces and time spent repairing deficient work will demonstrate that the contractor's claim of delay impacts has an alternative explanation.

  • 12 of 19: Project Recordkeeping

    Part 12 of Our Series on Construction Project Management Skills

    XII. Project Recordkeeping

    A. The Right Information to Include in a Daily Report

    Daily reports should keep an accurate accounting of personnel present on the project, the hours worked by each, the nature of the work performed, weather conditions, and significant events or conversations at the project site. If the contract involves performance of bid items, identification of the bid item to the work is a very helpful means to identify performance of contract work. Identification of work locations through stationing is helpful, particularly on utility installations or roadwork. Alternatively, use grid line locations or other form of specifying where the work is taking place. This is very helpful in deterring claims of interference or interruption. If a contractor claims, for example, that surveying work is interfering with its performance, locating the areas of work will help demonstrate whether any interference actually occurred.

    Inspectors preparing the daily reports should also have at hand the current project schedule. Make note of other critical and non-critical work items that are available to the contractor, but not being worked upon. Be sure to document changes in crew size, contractor management or equipment demobilization. These changes can indicate an additional project being taken on by the contractor that may affect his ability to perform to the same degree.

    Daily reports should also address contractor issues, such as safety problems, defective work, poor coordination, late delivery of materials, inefficient deployment of resources and other observations that may highlight aspects of the contractor's performance that may otherwise be lost.

    You should regularly review daily reports to ensure that a thorough record of project events has been created.

    Daily reports are an important repository of the staffing and use of contractor resources on the project. There are several essential areas that should be tracked and checked on a daily basis:

    Number of personnel
    Personnel changes or shifts
    Equipment in Use
    Idle Equipment on Site
    Equipment movements
    Deliveries to the Project Site
    Inspections
    Potholing/USA requests
    Work being performed
    Difficulties encountered by the contractor
    Delivery issues
    Quality control issues
    Impacts to the contractor's schedule
    Documents received or delivered on site
    Discussions with contractor personnel
    Management and supervision observations
    Safety Meetings
    Safety Violations
    Work available but not worked on by contractor.
    Change orders and force account work.

    B. Incorporating Photographs Into Daily Reports

    Photographs are perhaps one of the best means of capturing project events, and illustrating important points. A digital camera should be carried by every project management staff member who is on the project site. Ideally, photographs should be taken on a daily basis. Photographs should show crew size, equipment on site, areas of available work, and problems on the project site, to name just a few. These photographs can actually be dropped into computerized daily reports, providing a vivid record of what occurred on that day.

    C. Handling Project Correspondence

    The basic rule for handling project correspondence is that all issues raised by the contractor in correspondence must be addressed in a thorough and complete manner. References to the contract requirements should be included in correspondence, as well as a full account of events.

    It is important that correspondence continually refer back to the contract requirements, and that the contract requirements be followed as closely as practicable. A recurring theme on many construction projects is the claim that the owner impliedly waived the contract requirements by failing to enforce the provisions of the contract.

    The tone of correspondence should always be professional. No matter how insulting or demeaning correspondence from the contractor may be, sinking to the contractor's level will only further erode the level of discourse, and seriously impact your credibility and objectivity.

    D. Conducting Weekly Meetings

    Weekly meetings with representatives of the contractor and design professional are an excellent way to keep the channels of communication open. The project manager should take responsibility for setting the agenda for the meeting, conducting the meeting, and preparing the minutes of the meeting. It is strongly recommended not to delegate this task to the contractor. Weekly meeting minutes are an important record of the unfolding events at the project, and keeping control over the contents of these minutes is an essential part of keeping control over a project.

    Most project managers adopt the convention of numbering agenda items. The items are left on in ensuing meetings and the status of each items is noted until the matter has been finally resolved.

    E. Certified Payrolls

    Certified payrolls are an essential part of the paper work of a project. The certified payroll has the advantage of identifying the wages, hours and personnel involved. If the provision of certified payrolls is optional, there should be a request at the commencement of the project that certified payrolls be provided.

    Certified payrolls provide a reliable method to track and confirm the employment of personnel on a project. Certified payrolls are more reliable than daily reports in tracking personnel. You should periodically review the reports generated by both its own staff and the contractor's daily reports and compare the reports to the certified payrolls.

    F. Daily Extra Work Reports

    When you first learn of a potential claim, immediately advise inspection staff to monitor closely the work purportedly affected by the claim. Monitoring of claimed extra work should take place without regard to your assessment of claim's validity.

    Precise and accurate measurement of time, personnel and equipment is essential to the future handling of the claim. Impacts upon the performance of critical work should also be identified. Photographs of the affected area, the equipment and the personnel should all be taken. If there are claims that may involve delay, take pictures of the areas of the site that are available for work, but are not being worked.

    It is often the case in litigating a claim that new issues, documents or contentions are raised that gives validity to what was originally considered to be a meritless claim. In this case, if the owner's representatives have not documented the work disputed, the owner is at the mercy of the contractor's record keeping.

    G. Schedules and Schedule Updates

    Before construction begins, obtain a reasonable project schedule from the Contractor. The schedule should be examined for faulty logic or identification of non-critical activities as critical. Preferably, the schedule should contain the anticipated level of staffing.

    Regular schedule updates and maintenance of an "as-built" schedule are essential to dealing with issues of delay, disruption, and imposition of liquidated damages.

    H. Responding to RFI's

    Contractors often use the RFI process to create or justify claims. RFI's should be examined carefully to guard against abuses of the RFI process.

    An RFI that requests "clarification" of whether the contract requires certain work is a signal of a potential claim. The response to the RFI should note carefully the contract requirements and not attempt to impose additional requirements unless it is intended that those additional activities will receive compensation. If a clarification is provided that specifies how the work should be done, an explanation of why there is no additional cost to the contractor should be included. Field personnel should be alerted to monitor the work raised in the RFI.

    Another contractor technique to create claims through RFI's is to submit a large number of RFI's at one time and request an immediate response to all of them. Alternatively, the contractor will repeatedly resubmit an RFI in an effort to extract a response that creates extra work. Any time that there are a large number of outstanding RFIs, the project manager should request that the contractor prioritize the response to the
    RFIs, and indentify any deadlines or critical work that may be impacted.

    An RFI log is an essential part of contract management and should be reviewed regularly to ensure that responses have been provided in a timely manner. Delays in responding to RFIs are a frequent source of delay and disruption claims.