NJIT Subcontractors and Legal Relation Karim Touma

 

 

NJIT

Fall 2017

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EM632

Legal
Aspects in Construction

Subcontractors
and Legal Relation

Karim Touma

 

Subcontractors
and Legal Relation

This paper is addressed to my
management team in the company. Please be advised that I will be covering one
of our major concerns at the company, as I will be writing about the legal
aspects of dealing with the subcontractors and analyze
all the legal laws and state my personal
and point of view applied on the issues and the concerns we have with our
current and even future subcontractors. I will be talking about general laws
and outlines we have to submit to dealing with the Subcontractors and will
apply them too when applicable to our projects of Civil and Architecture work
in the company. I am choosing a bullet point and subtitles format so it would
help us in the company in future wise to use this paper as a reference whenever
we are dealing with the subcontractors; as I see this manner will help us a lot
refer to all general laws and rule of thumbs whenever we want to educate ourselves. I am going to put between your hands
legal aspects on how to deal with subcontractors in legal agreements, payments,
management, roles & duties, disputes and terminations.

Historical Background:

Subcontracting has been around since time immemorial, but became an
increasingly popular practice in the American construction field in the 1950s
and by time has established itself as an integral part of the industry’s production
process. It is particularly popular in the building sector where subcontractors
perform around 90 per cent of all construction work (Mansfield 1988).

The main reasons behind the development of subcontracting are
numerous and are attributed not only to the needs and to social climate of
Western counties. Within the 1950s and the 1960s the construction field
operated in full documentation. The projects were procured using traditional
delivery method, with contracts awarded through competitive tendering. The main
contractor was the master builder, since the contractor performed
most of the work with his direct employed tradesmen and apprentices.  Solely high-specialized areas of work, such
as electrical and mechanical work were assigned to subcontractors.

Significant changes happened back then; one of them was shifting
towards subcontracting. This industry emerged mainly because:

Projects became more complex and required services of specialized
workers

It provided an opportunity to individuals to set up and run their
private business

Contractors’ capacity as employers were eroded by periodic economic
downturns, high interest rates, growing industrial disputation and high
inflation

One more reason for this shift towards subcontracting is that it have
been seen by trades persons as providing an opportunity to set up their
personal specialized businesses. Moreover, this offered tax benefits.

      Nowadays there is
diversity in subcontracting, ranging from the one-man-show to large and highly
sophisticated corporations. That is because general contractors prefer to
operate in a more risk-immune environment of construction project
management.  

Legal Agreements:

      The key to the
relationship between the general contractor and its subcontractors in any
construction project lies in the steps taken before the project starts. Having
a well-written, comprehensive subcontractor agreement is the most important
step in the preparation process is. The subcontract should be specific enough
that it clarify and give the final word on potential areas of differences or
disputes. There are several critical areas that every subcontract must address to help to avoiding litigation. Anyway, there are no guarantees
on avoiding disagreements. Contractors must carefully tailor each individual
agreement for the individual project at issue.

There are three directions and types of agreements with
subcontractors.

Broad Form Hold Harmless Agreement

This type insures the subcontractor assumes all related liability
for its own negligence, accidents, general contractor negligence, and the
combined negligence of both the contractor and subcontractor.

This agreement form is not recommended due to its broad terms
and many jurisdictions prohibit this form of hold harmless agreement. The
subcontractor must finance its own liability with an additional insurance policy
in some cases in order to validate this type of agreement.

Intermediate Form Type

The
subcontractor assumes all liability for accidents and negligence under this form of agreement.

The
subcontractor is responsible for his related actions only and won’t be held
accountable for accidents or negligence done by the general contractor’s. This  the most common
used types of hold harmless agreement,
because it is not dependent on whether it was subcontractor’s fault or not; it is
only dependent on who was acting in a negligent way or who was executing the
accident. If both parties were negligent, the subcontractor will be liable for
his actions and omissions and will be held responsible for his actions.

Hold Harmless Agreement Limited-Form

The
subcontractor will be held accountable only for the accident or
negligence, but on a limited form in a hold harmless limited-form agreement. They
will assume liability only for the proportional
part of what was his responsibility. This agreement will limit the liability of
the subcontractor to his responsibility only and will include others,
under their respective hold harmless agreements for their corresponding part of
the negligence or accident.

            One of the most
famous prepared agreement here in the USA, which I recommend for you to take as a general agreement and then modify if our
need in the company required is the A401-2017. This agreement has been moditfied and developed throw-out the years by
the most trust worthy entities in this
profession from Architects, lawyers and contractors
in the AIA (American Institute of Architects).

Payments

“Standard
Subcontract Agreement” was formed by Subcontract mislabeled commonly in
use usually contain language stating that payments won’t be made to the owner gives
the subcontractor his payment. The language itself is clear the subcontractor isn’t
paid if the contractor doesn’t get paid.

It is usual for owners to fall behind in paying fully their
contractors. Nonpayment can result from the owner going broke, from a dispute
over work of the contractor, or as a result of the owner’s not paying the
balance because an unjustified refusal.

Many courts
have ruled what is different from what the language of the subcontract
provisions can be interpreted to require that the subcontractor won’t be paid
unless the contractor is.

Instead, those
courts have ruled that the clause would afford the contractor a reasonable time
to make reasonable efforts to collect money from the owner. If the contractor
fails he must pay his subcontractor. The reason behind this rule is that the contracts
between subcontractor and the contractor and the contractor to pay for the
subcontractor’s work. The risk of non-payment is thus borne by the contractor
rather than his subcontractor.

What rule can
be adopted in states, like Colorado, which do
not have ruling cases on this issue is uncertain.
The courts of those states can choose to follow the majority rule discussed earlier
or adopt the minority rule that states that the subcontractor is not entitled
to payment unless the contractor is paid because
that was stated in the contract.

Subcontractors
should pay careful attention to the payment language of their subcontracts because
of the uncertainty in the law of many states and the possible delaying affect upon payment to the subcontractor (even
should those courts adopt the majority rule). They should avoid any language
including making payment to subcontractors contingent upon the owner’s payment
to the GC.

Management

If we administer
properly and this is the main reason for this paper, subcontract management can
increase profitably and can promotes consistency in managing subcontracts
across functions, mitigates risk to the organization and contract. A critical
component of subcontract management is defining expectations across procurement
and program management personnel.
Management of subcontracts is identified through a subcontract lifecycle. To aid
compliance we have to understand specific tasks in managing the subcontract, as
well as requirements and assignment of responsibilities during each lifecycle
phase. We have to know the specific tasks and responsibility within the
organization to succeed.

“Review the
following phases and corresponding tasks:

Pre-award phase

Identify
capability versus capacity and the costs and the costs and benefits
Define
technical, performance and/or deliverable requirements
Identify
pricing and funding considerations
Identify
subcontract types based on the type of work
Identify
potential vendors

Award phase

Perform
the technical and price reasonableness evaluation as part of the proposal
analysis
Identify
past performance/reputation considerations
Evaluate
representations and certifications
Validate debarment status
Document
award

Post-award

Maintain
subcontract files from both procurement and program management
perspectives
Ensure
compliance with the subcontracts administrative requirements
Review and
approve/rejecting subcontract deliverables
Obtain,
review, and act upon subcontractor status reports
Project
cost analysis and reporting include:
Obtain and
report subcontractor costs at the proper levels
Incorporate
subcontractor costs into program level on a timely basis
Identify
how subcontractor utilization is impacting performance, funding and
contract levels

Contract Closeout

Verify
completion and acceptance of SOW and all deliverables
Manage
government furnished property
Obtain
waivers and releases
Finalize
indirect rates” (Baker, 2015)

 

 

Roles &
Responsibilities

Subcontractors work
for general contractors, who give them parts of an existing contract to
complete. The general contractor has an agreement with the employer to perform the
job. The general contractor divide the project and delegates work as he sees to
the subcontractors. In addition, subcontractors can have direct contracts with peer
subcontractors to perform work under the contract.

Rights

The contract govern
the rights of the Subcontractor. The terms of the agreement signed by the
general contractor and employer bound them. The subcontractor is responsible
for seeing the completion of the portion of the contract according to the
agreement. A subcontractor is entitled to sue for damages if he feels that the
contractor or employer has violated the contract. Any unpaid wages and expenses
can allow the subcontractor to file a mechanic’s lien against the property. A safe
and healthy environment is also one of the main rights for a subcontractor.

Obligations and Duties

Subcontractors are
obligated to comply with the terms stated in the contract. The customer and contractor
the hold them accountable for work performed by them. Minimal time off and punctuality
is essential. Frequent communication between the general contractor, customer and
the subcontractor helps to avoid predicted problems down the road. They should
be flexible by willing to adjust to policy or procedure changes. They must stay
within a predetermined budget and complete projects by their due dates. High
quality work is very critical because it reflects on them and on the general
contractor.

 

Disputes

Plans and scope of work /specifications:
The most significant areas of dispute on a construction project is sisputes
over the scope of work, represented by the plans or specifications (as modified
or amended). Typically occurring between the general contractor/subcontractor and
the owner, design professionals and contractors usually interpret the documents
differently, particularly if the description of the work in the
plans/specifications is ambiguous or unclear. In addition, when the specifications
are contradictory to the plans. There is an implied warranty ideally on the
part of the owner that the specifications/plans/ are specifications correct,
adequate, accurate, and buildable. The owner attempts to shift that
responsibility to the contractor when there are exculpatory clauses in the
contract. The battle is often between the enforcement of the exculpatory clause
implied the warranty.

Shop drawings and
submittals: Disputes arising over shop drawings and other submittals are a
corollary to disputes arising from the specifications/plans. Either in the
timeliness of the subcontractor/contractor submitting shop submittals and drawings
or in the design professionals responding back in a timely manner are primary
among these delays.

Construction defects: The owner can identify work that is
not in compatible with the specifications/plans during the course of
construction. A dispute arises if the subcontractor/contractor does not agree
with the owner’s assessment of that defective construction. Both the general
contract and subcontracts typically allow the owner and general contractor,
respectively, to order the replacement and removal or repair of the disputed
defective work. If we assume that the contractor/subcontractor complies, this
will have a claim against the owner at the end of the project if the
contractor/subcontractor had conformed to the specifications and plans.

When some divisions
of construction fails, most construction disputes arise after project completion.
Furthermore, liability insurance comes in the scene because there are
allegations of negligence. A lot of construction litigation has to do with
construction defect disputes.

Termination

Termination is
the ultimate dispute, by the owner or by the contractor. Contracts provisions typically
allow the owner to terminate the contractor
if the following happened by the contractor:

·        
Fails to supply properly skilled workers or proper materials

·        
Fails to make payments to subcontractors

·        
Disregards laws, statutes, ordinances, codes, rules, and
regulations

·        
Substantially breaches the contract documents.

Whether provided
in the contract or not the contractor can terminate if the owner is in material
breach of any of its contractual obligations, the most obvious of which is failure to pay.

            Overall, in order for our company to maximize our efficiency and increase
our revenue, we have to pay a huge attention to the details and small decisions
while dealing with subcontractors. As this for our company represents a huge amount
of our daily relationships with outer entities. By educating ourselves about
different aspects when dealing with subcontractors, we can also avoid many issues
that can affect all our projects and our network of relationships too, which is
very critical to us and in our industry. I tried to gather as much as I can legal
information in different aspects as I can also analyze it to apply it more to
our use and projects to keep it relative to us in the company. As much as I can
was trying to keep this as a basic legal reference for us when dealing
subcontractors unless it became very complicated which will push us to the next
step with consulting our lawyers.

References

Thomas E. Uher,
Philip Davenport. (2002). Fundamentals of Building Contract Management

 

Wolf Slatkin
& Madison P.C. (2017). When Does a Subcontractor Get Paid? http://www.wolfslatkin.com/Construction-Law-Briefs/When-Does-a-Subcontractor-Get-Paid.shtml

 

Juan Rodriguez.
(2017). 3 Types of Hold Harmless Agreement and When to Use Them

https://www.thebalance.com/types-of-hold-harmless-agreement-and-when-to-use-844792

 

Baker Tilly
Virchow Krause. (2015). Effective subcontract management throughout the
contract lifecycle

http://www.bakertilly.com/insights/effective-subcontract-management-throughout-the-contract-lifecycle