Breaking Bad: Top Signs That The Subcontractor Is In Trouble

Posted by Jennifer M. Horn on March 09, 2012

It goes without saying that subcontractor management is a tricky businPA- Pay if paid.jpgess for those who select and contract with subcontractors in these interesting economic times. The earlier a general contractor can recognize the warning signs of a subcontractor’s financial troubles, the better. Early diagnosis of a subcontractor’s potential financial troubles can give a general contractor a chance to better protect itself from claims by unpaid vendors, sub-subcontractors and other entities. The following are some, but not all, of the warning signs that your subcontractor may be headed towards serious financial trouble:

  • Falling Behind Schedule – The subcontractor fails to complete scheduled activities and/or satisfy project milestones in a timely manner;
  • Late Deliveries - Material is delivered to the project site late and/or the wrong material is delivered to the project site;
  • Inquiries from Suppliers and Vendors Regarding Payment – Suppliers, Vendors, Sub-sub contractors and/or other entities contracting with the subcontractor begin to complain about late payment or non-payment;
  • Inadequate Manpower – The subcontractor fails to adequately man the project as it anticipated at the time the subcontractor bid the work;
  • Failure To Document – The subcontractor fails to submit required documentation in a timely manner, such as daily reports;
  • Equipment – Equipment the general contractor expects to see at the project site is absent or, if it appears at the project site, fails to function properly;
  • Excessive Claims – The subcontractor begins to submit an excessive number of claims and/or notices of potential claims; and
  • Asks for advance payment - The subcontractor requests advance payment and/or expresses concern about the flow of payment.

The presence of one or several of these factors on a particular project site may indicate that a subcontractor is headed for financial trouble. In this event, a savvy general contractor who has the right provisions in its contract can employ certain policies and procedures at the jobsite to minimize or protect itself from claims by vendors, suppliers and/or other sub-sub contractor entities. For instance, the general contractor may be able to pay by “joint check” (i.e. checks that name the subcontractor as well as the sub-subcontractor or supplier for whose work or materials are at issue). Also, the general contractor might be able to mandate that releases of all claims to date be executed before making any payment. Finally, the general contractor might, if necessary, call on the payment and performance bonds provided by the subcontractor. In order to utilize these strategies, however, critical contract provisions that address each of these issues must have been made part of the parties’ contract. In the coming months, we will examine the force and effect of specific contract provisions.

 

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Indiana Power Plant Demonstrates the Consequences of a Poorly Managed Project

Posted by Christopher P. Soper, LEED® AP on March 10, 2011

In 2006, Duke Energy Corp. (Duke) estimated that it would cost $1.6 billion to build a massive 630-megawatt power plant in Edwardsport, Indiana (the Project). From 2006 to the present, the price for constructing the Project has grown to $2.9 billion. As a result of the price increase, Duke has made numerous requests for additional funds, which, if granted, would be passed onto consumers in the form of future rate increases.
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What is Currently Happening with the Project

Consumer and environmental groups have opposed the plant since its inception, claiming that “it’s unnecessary, uses unproven technology, and is too expensive”. In January 2011, several of these groups, including, Citizens Action Coalition of Indiana, the Sierra Club, Save the Valley and Valley Watch filed a complaint, with the Indiana Regulatory Commission which asks the Commission to “investigate whether Duke mismanaged the project, committed fraud or concealed vital facts.” If the Commission finds that Duke mismanaged the project, then Duke would be expected to bear a large portion of the cost overruns.

The complaint shed light on some of the causes for this steep price increase and included as an exhibit a letter dated October 5, 2010, from Bechtel Corp., (Bechtel) Duke’s engineering contractor. The note raised a number of concerns related to Duke’s management of the project. Specifically, Bechtel claimed that Duke breached the parties’ contract by:

  • Demobilizing Bechtel’s workers and severely limiting oversight of Bechtel’s support and engineering services.
  • Stopping monthly project reports and monthly review meetings.
  • Consolidating certain engineering functions.
  • Taking personnel action against Bechtel management’s recommendation.
  • Reducing documentation of certain work.

Lessons Learned

Assuming Bechtel’s accusations are true, Duke’s management of the Project provides an example of how not to handle a project that faces significant cost increases, especially one involving a high dollar value contract that directly affects the public. Duke’s most glaring error was decreasing documentation and stopping monthly project reports and review meetings as costs on the Project increased. This left little or no record of the events transpiring on the Project which led to the cost increases. Such conduct immediately raises a red flag. Contemporaneously documenting events that have cost impacts is the best way for a contractor to establish that they are not liable for the cost increases. Duke’s actions to reduce documentation as the Project progressed, suggests that it decreased its documentation for a reason – i.e., it was responsible for cost impacts and did not want a record in the event a dispute arose as to who should bear the costs. On the other hand, if Duke is not responsible for the cost impacts, it has an uphill battle of proving its case without proper documentation. Either of these scenarios will be difficult for Duke.

Contractors should learn from the mistakes made by Duke and ensure that all cost impacts on construction projects are thoroughly documented. By staying mindful of the need to document, contractors will increase the likelihood of getting paid for work performed and avoid liability for the acts of others.