I spend a significant amount of my time counseling general contractors and subcontractors through construction projects that have problems—most frequently, delays, cost overruns, and collection problems. The following are five of the most common mistakes I see Project Managers make. By avoiding them, Project Managers can help minimize the financial consequences to their companies associated with those problems.
1. Project Managers don’t read their contracts at the beginning of the project. This is perhaps the most common mistake, and it has the most significant consequences. Before a contractor can exercise contractual rights, it must know what those rights are and how to trigger them, which cannot be known without reading the contract beforehand. I often jokingly tell contractors that they should read their contracts “slowly, and with feeling,” but at a minimum, they should read their contracts with anticipation, asking themselves various “what…if” questions as they read, such as: “What rights do I have if my schedule is compressed? What do I do if my subcontractor isn’t properly staffing the project?” Asking these types of questions can help focus reading through page after page of legalese.
2. Project Managers don’t timely give notice. Of all of the consequences of a failure to read the contracts at the beginning of the project, this is perhaps the most common. A typical example: many subcontracts contain clauses that require that the subcontractor give the general contractor timely notice of delay, and in the absence of such notice, the subcontractor loses its right to make claims for time and/or money based on that delay. Such clauses—called “traps”—are generally enforceable, and there is little that a subcontractor can do after the fact to resurrect a claim that is lost because of a failure to give timely notice.
3. Project Managers sign lien waivers without protecting their existing claims for extras/delays. With each payment application, a contractor is commonly required to submit a lien waiver in which the contractor (a) attests that, for the time period covered by the application, the contractor is owed only the amount shown on the pay application, and (b) releases all other claims for compensation for work performed during that time period. If a contractor has a claim that it wishes to preserve arising out of the time period covered by a payment application, the contractor should note that claim as an exception on the lien waiver(s) for that payment application. Otherwise, the contractor risks waiving that claim.
4. Project Managers perform extra work without signed change orders. Subcontracts frequently state that the subcontractor is not entitled to payment for work outside the original scope without a signed change order for the extra work. Often, in the middle of projects they are hustling to complete on schedule, subcontractors rely on oral promises by the general contractors that a change order will be issued, only to be surprised later when (a) the change order is not signed and (b) they read the contract, which states that a signed change order is necessary to be paid for extra work. Such clauses are frequently enforced by courts.
I have clients who have longstanding relationships with general contractors and subcontractors for whom this is never an issue because those relationships—built on trust—are paramount for all parties. However, with respect to performing extra work without a signed change order, and with apologies to the late, great Yogi Berra, “It ain’t an issue until it’s an issue.” Subcontractors need to protect themselves to prevent this from becoming an issue.
5. Project Managers miss deadlines for filing mechanic’s liens or payment bond claims. I have filed scores of mechanic’s liens and payment bond claims for my clients, in amounts ranging from a few thousand dollars to in excess of $10 million, and I have yet to encounter a client who is excited about taking that step. But mechanic’s liens (for private projects) and payment bond claims (for public projects) are important remedies for subcontractors to preserve, because they serve two purposes: (a) they provide another source of payment (other than the general contractor) and (b) they involve interested third parties (the owner, in case of a mechanic’s lien, and a surety, in the case of a payment bond claim) who may be able to assist resolving the dispute.
In Indiana, on non-residential private projects, contractors have ninety (90) days from their last date of work onsite to record a mechanic’s lien. (Different rules apply for work on residential projects.) On Indiana public projects, the deadlines for filing a payment bond claim differ depending on who the owner is, but generally speaking, those deadlines are tied to the subcontractor’s last date of work onsite. In addition, to preserve the payment bond claim, the subcontractor must timely file a lawsuit in court on the payment bond claim, the deadline for which depends (again) on who the owner is, and is generally tied to the date of the owner’s final acceptance of the project.
Author Kevin Tharp’s diverse business and litigation practice focuses on the construction industry. Kevin counsels owners, general contractors and subcontractors, and represents them in disputes involving claims for payment, delay, and design and construction defects, as well as mechanic’s liens. Kevin also counsels clients in the selection and formation of business entities, mergers and acquisitions, business selection planning, and general contractual matters.
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