“ Revenue is vanity, profit is sanity, but cash is king .” - Unknown (popularized by Volvo CEO Pehr G. Gyllenhammar)   Getting paid promptly can be the difference between a “successful” project and a project that zaps your cash flow. What steps can you take to ensure prompt payment to protect your cash flow?   First, insist on terms in your contract that require payment in a timely manner based on clear procedures for payment applications.  Some important terms you should include are: A guarantee that you will be paid the value of any work that isn't in dispute. Example: “In the event of a disagreement related to the percentage of completion of work performed or the value or time extension for extra or changed work, Contractor [ Subcontractor ] shall be paid all amounts not subject to a good faith dispute pending resolution.”   Prompt notice to you for reasons why any amount will be withheld. Example written for Owner – Contractor Contracts [ or Contractor – Subcontractor Subcontracts ]: “Owner [ Contractor ] shall not withhold any payment in whole or in part from Contractor [ Subcontractor ] unless Owner [ Contractor ]  provided written notice to Contractor [ Subcontractor ] of Owner’s [ Contractor’s ] intent to withhold such payment, with the reasons therefore, within ten (10) days of Contractor’s [ Subcontractor’s ] submission of its invoice or applicable for payment.”   As a subcontractor, the maximum time you must wait if the owner doesn’t pay the contractor and it’s not your fault. Example: “Notwithstanding the foregoing or any provision to the contrary, in the event payment is delayed to Contractor, payment to Subcontractor shall be made no later than 90 days after Subcontractor submits its billing to Contractor, except to the extent Contractor is not receiving payment due to Subcontractor’s failure to comply with the terms of the Subcontract.”   Another key provision to negotiate is one that gives you the power to suspend your work if you are not getting paid.  This is important because if you don’t have this provision in the contract, you risk being in breach of your contract if you decide to walk off the project because are not getting paid. Wait – what? How can not getting paid turn into you being in breach?   Just because your payment is late, it may not be considered by a court to be such a significant breach to justify the extreme repercussion of you suspending your work.  It all depends on the value of the contract, how much is owed, and how late the payment is.  There is no set rule for figuring this out.    For example, if your subcontract is worth $1,200,000, and about halfway through the project, the Contractor is 30 days late on a progress payment worth $50,000, but you have already been paid $700,000 to-date, what you are currently owed may or may not be a significant enough amount of money to justify your walking off the project.  But, if you have an express contract term that allows you to stop work if your payment is late, then you can suspend your work without having to analyze the risk of whether or not that late payment would be considered a significant (or “material”) breach justifying the right to stop work.   An example of a good provision to include is as follows: “Should Contractor fail to make payment per the times set forth herein, Subcontractor may suspend work after a 30-day written notice to Contractor until such amounts are paid.”   Once the project is underway, make sure you understand which “lien” right may get you paid the fastest.  Most everyone has heard of a mechanic’s lien, and there is no denying that a mechanics lien is a powerful tool for getting paid. But, procedurally, it’s often not very useful or appropriate for  expediting timely payments during the course of construction.  Unless a property owner needs to clear title to its property for refinancing or selling, the mechanics’ lien procedure may not help you get paid promptly or inexpensively. Here’s why:   As a contractor you can’t record a mechanic’s lien until your work is completed or has ceased.  So, you can’t use a mechanic’s lien to enforce progress payments while you are still actively providing work under your contract.    You must give proper notice of the lien and then record the lien with the county recorder’s office in the county in which the project is located. While this is not a huge cost, the process can be cumbersome. Next, and this is often misunderstood, you must file a lawsuit in Superior Court to perfect (or foreclose) your lien within 90 days of recording your lien otherwise the lien is null and void.    So, relying only on your mechanics’ lien rights may not get you paid promptly, could get expensive (attorney fees and court costs), and cannot even be pursued while you are still performing work on the project.    On the other hand, California is one of the few states that allow a subcontractor (or supplier) who hasn’t been paid to serve a Stop Payment Notice at any time during the course of construction  – you don’t have to wait until your work is completed. And, the earlier the better if the contractor is playing games with your payments. Presuming you followed the proper preliminary notice requirements as applicable, all that is required of you is to send a letter that you should title “Stop Payment Notice” via certified mail to the owner and contractor (and lender if any) that includes a general description of work to be provided, and an estimate of the total amount in value of the work to be provided, and the amount being claimed, which may only include the amount currently due for work provided through the date of the notice.   Serving a proper Stop Payment Notice requires the owner to hold back the amount of your claim until you release it. Stopping the flow of money to the general contractor is usually a sure-fire way to get the payment issue elevated quickly to the level needed to get it resolved!   As a good businessperson, you always want to make sure the project is profitable for you, but more importantly, do everything you can to ensure your cash flow remains strong. Don’t let the owner’s (or your customer’s) cash flow problems become your cash flow problems!

Did you know… that for your Subcontract the term “Contract Documents” includes many more documents than the agreement you sign? The vast majority of Subcontracts include all “Contract Documents” as part of your agreement. It is important make sure that the definition of “Contract Documents” in your Subcontract is specific to you. It should also be different than what the phrase means in the Prime Contract. Most all Subcontracts define the term “Contract Documents” to mean the entire Prime Contract, plus the Subcontract itself. A typical Subcontract section that defines “Contract Documents” may read like the following: §1.1       Contract Documents include this Subcontract, plus all exhibits and documents referenced herein, the prime contract agreement entered into between Contractor and Owner plus all documents referenced or incorporated therein including all General Conditions, Supplementary and other Conditions (“Prime Contract”), Project Manual, Drawings, Plans, Specifications, Soil Report, Addenda issued prior to execution of this Subcontract, and modifications, changes and directives of the Owner issued after the execution of this Subcontract. If a conflict occurs among the Contract Documents, then the provision or provisions which afford Contractor and Owner the greatest protection and/or the largest quantity or highest quality of materials and/or services shall control. This is pretty typical language, so how can it come back to bite you? The first major concern relates to your scope of work. This language means that you are agreeing to provide the subcontract work in conformance with the Contract Documents, which includes ALL plans, drawings and specifications instead of just the ones that you relied on when bidding the project. This could expand your intended scope of work. Especially when there is an exhibit included with the Subcontract that lists all the plans, drawings, and specifications included in the Contract Documents. One way to clarify your scope of work is to replace the exhibit that lists out all the drawings and specifications with an exhibit that lists only the plans and specs that describe the work you intend to provide. Make sure this list clarifies that these are the only  plans and specs you are complying with in performing your work and avoid phrases like: “Subcontractor shall perform its Work in compliance with the Contract Document, including but not limited to  the following drawings and specifications.” Another edit you’d want to make is to clarify in the paragraph that the Contract Documents include only the plans, drawings and specs shown in the exhibit, or if an exhibit is not going to be used, you must clarify which plans and specs apply to your work by adding the plan sheets and spec section right in into the definition, like what is shown below. The next major concern is that you are agreeing that changes, etc. issued after you sign the Subcontract automatically become part of the Contract Documents, which means they automatically become your responsibility. One fix for this is to add that these later changes only become part of your definition of Contact Documents if it is addressed in a written change order to your Subcontract. The final major concern that we are addressing today is that sentence that imposes the most stringent provision on the subcontractor if there is a conflict among the Contract Documents, which would include conflicts between the Subcontract and the Prime Contract. This means that the terms you painstakingly negotiated in your subcontract can be overruled by terms in the prime contract that you may assume did not apply to you or, worse, you didn’t even know existed. There are couple ways to soften this. The first is to simply state that the Subcontract controls in case of a conflict. The second is to have the Prime Contact control, except for certain provisions where you want to make sure the Subcontract prevails, such as insurance, indemnity, scope, permits, delay damages, etc.   Let’s look at what these types of edits ( in red font ) would look like in our sample subcontract section: §1.1       Contract Documents include this Subcontract, plus all exhibits and documents referenced herein, the prime contract agreement entered into between Contractor and Owner plus all documents referenced or incorporated therein including all General Conditions, Supplementary and other Conditions (“Prime Contract”), Project Manual, Drawings, Plans, and Specifications as listed herein [OR "as listed in Exhibit A"] , Soil Report, Addenda issued prior to execution of this Subcontract, and modifications, changes and directives of the Owner issued after the execution of this Subcontract that are reflected in fully executed change orders to this Subcontract . If a conflict occurs among the Contract Documents, then this Subcontract shall control [OR "the Prime Contract shall control, except the Subcontract shall control conflicts in provisions related to payment, insurance, indemnity, scope, permits, delay damages, and changes"] . So that’s how simple it is to make sure the definition of Contract Documents in your Subcontract really pertains to your scope of work and the provisions you took time to negotiate.

Dateline SAN DIEGO, California, November 28 – As the family and friends waddled out to the back porch after the traditional American Thanksgiving gorge-fest, they huddled around the outdoor fire-pit to sip Irish coffee and imbibe in other after-dinner treats.  Feeling particularly full, the lethargic group’s consensus was that they had just engaged in one of the 7 Deadly Sins – that being “gluttony”, which was certain to be followed by another Deadly Sin, that being “sloth,” because the thought of getting up to clean the kitchen was a bit overwhelming.  But the family could not remember all the other Deadly Sins, which was probably due to the sedative effect the turkey’s tryptophan was having on their brains. The next day, one of the group members (that being me) wondered what the other Deadly Sins were.  After Googling it I realized that, for the most part, the Construction Industry would do right by avoiding these Sins. So, with a touch of creative license, here are the 7 Deadly Sins as applied to the Construction Industry.  Engaging in these Sins as a contractor will likely lead to problematic projects, or even worse, financial ruin. Pride traditionally means the excessive belief in one's own abilities that interferes with the individual's recognition of the grace of God.  As applied to the construction industry, having too much Pride makes someone believe they are always right, or their methods are always the better way to do things.  A person with this mentality often dismisses others’ ideas for job-site problem solving, which undermines the creative team approach to problem-solving.  It also can lead to not asking for help when one should, for example, getting someone else’s opinion on how to handle confusing plans. Envy  is the desire for others' traits, status, abilities, or situation.  If a contractor is always envying others, it leads to a shattering of the contractor’s confidence, having the opposite effect as Pride.  With this mentality, a contractor may let the perceived intellect, education or company size of someone else on the project team intimidate him or her.  This leads to the contractors letting themselves be walked all over, such as not fighting for valid change orders, or not demanding that they be paid on time.  And, at the end of the day, the contractor who is caught up in the sin of Envy is left wondering why they can’t seem to get ahead despite how hard they work.   Anger  traditionally is described as being manifested in the individual who spurns love and opts instead for fury.   Someone who embraces Anger lets their emotions spin out of control when minor disagreements come up on a project.  They always think that when someone makes a mistake, that person is out to get them, and they will never forgive that person for the mistake. Anger is so prevalent in that person, that it is almost impossible to have a reasonable discussion with them, or reach a compromise, when something goes wrong on a project.  If someone simultaneously lets the sin of Anger and the sin of Pride take over, watch out!  When a project dispute comes up, this combination is almost always rewarded with a one-way ticket to litigation. Gluttony  is an inordinate desire to consume more than that which one requires, while Greed is the unchecked desire for material wealth or gain.  As related to construction, these two sins can lead to the same fallout.  First, these Sins lead to a contractor wanting to secure more and more projects.  This is often too easy to do in a good economy, so contractors forge ahead bidding and accepting project after project without the ability to staff them properly with the required skilled workforce.  This leads to project delays and the erosion of the contractor-customer relationship.   Plus, this also can lead to payrolls that seem to grow exponentially over a short period of time and a significant increase in material purchases.  These financial obligations usually must be paid before the payment trickles down from the owner to the prime contractor and then to the subcontractors.  When this happens, contractors can find themselves taking money from one project to pay for another, or even worse, opting for ways to finance their immediate payroll and material purchases with expensive debt options such as factoring their accounts receivable or drawing down unsecured lines of credit.  In the end, contactors who make decisions based on Gluttony or Greed often find themselves in such a financial bind that bankruptcy is their only salvation. Sloth  is the avoidance of work.  In today’s world, we think of it as laziness.  This Deadly Sin wreaks havoc for many when engaged in by a prime contractor’s project manager.  First, the Sloth PM procrastinates on getting subcontracts out to the subcontractors, which causes a frenzy of activity as everyone tries to negotiate and get the subcontracts signed before the project starts, or at least by the time the first payment is due.  Second, the Sloth PM can’t be bothered to submit change orders in a timely fashion, which results in delayed payments for work performed.  This can eventually lead to stop payment notices, claims, and liens being filed by subcontractors, which creates a significant amount of bad blood between the owner and the prime contractor and between the prime contractor and its subs.  Finally, the Sloth PM keeps horrible records and does not bother to organize and keep current the logs for submittals, RFI’s and change orders. Lack of project document organization usually spells disaster if a dispute ever arises on a project – especially with disputes related to project delays. Lust  is an inordinate craving for the pleasures of the body.  This leads quickly and directly to an employment law nightmare – enough said. As you fly into the New Year, think seriously about whether or not you are letting any of these Sins creep into your decision making or conduct.  And, if they have crept in, think seriously about taking the opposite action in order to run your business, as well as your life, in a financially healthier, and more productive and enjoyable way.

For most contractors, every construction project begins with signing the contract and ends with getting final payment. A lot will happen between these two events, and to make the project as successful as possible, the savvy contractor will need to be very proactive, even getting involved well before signing the contract. The "contract" most often includes  a number of different documents and are usually collectively referred to as the "contract documents".  They are not just the plans and specifications along with the agreement you sign, they can include anything else that may be designated as part of the "contract documents" in your agreement is signed, and almost always includes the prime contract for a subcontractor.  Also, it is very important to know that your proposal or bid, and any exclusions or clarifications you included with it, will not become part of any contract unless they are specifically included and identified as part of the contract documents. Think of the contract documents as the roadmap for the project, where every aspect of the work is addressed, including how to resolve problems. The contract spells out your rights and responsibilities, as well as your risk and your rewards. 1. Do Your Homework Keep in mind that if the Owner or Prime Contractor really wants you to do the work, and they know and trust you, they may be more willing to negotiate with you on some of the terms. This is where getting involved early will really help you.  Even if they don't know you, and you are a subcontractor, know what the prime contract and other contract documents require, and be sure that you aren't asked to take on any more risk than the Prime Contractor.  Getting some of the more oppressive terms revised is usually reserved for risk managers, senior executives, or the company attorney. The goal is to make sure the contract is a "fair" contract. If you can avoid falling into the "take-it-or-leave-it" trap, it will be to your advantage. But in reality, there really isn't a truly "fair" contract for both sides, because invariably one side has an advantage over the other. And if negotiations are out of the question, you need to be able to identify your risks, and then manage those risks. Once the contract is signed, the easy part of is over and the real work begins because you’re legally committed to performing exactly what the contract documents require.  At that point, are you leaving the project's success in the hands of the project managers and superintendents? If so, that’s perfectly okay …… if they understand the contract documents thoroughly. If they don’t, then it could be a disaster waiting to happen. Many people claiming to be conversant in construction contracts may think they know the terms and conditions but often they really don't understand them. In addition, many project managers don't even look at the contract until something is going wrong on a project.  The heat of the moment is not the time to try to figure out what the contract requires you to do, nor is it the time to let a new project manager take a crash course in construction contracts.  So, then what do you do? 2. Really Know the Contract This is easier said than done.  After winning the job, and before the project even gets started, make sure that all project management personnel thoroughly understand the contract documents. If they are not up to speed, get them training!  Expecting your project managers to get on-the-job training for contracts management is not a smart move.  When you consider that, for many projects, they’re going to be responsible for managing millions of dollars, you can start to see the value in the well-used cliché "knowledge is power". The contract spells out exactly what you are expected to do to protect your rights. If your PM doesn't know, or forgets a key requirement, it could cost you. 3.  Manage the Contract You should be able to pick out all the important clauses that need your special attention within a contract. These aren't "killer clauses" unless you drop the ball, and many of these clauses are used on a daily basis.  But some contract provisions are invoked only when an event happens. Do you know what that event may be, or do you even know how to identify that event in order to comply with the contract?   Bottom line is – don’t manage your contract on autopilot. You must understand the terms, or otherwise risk missing critical deadlines and the opportunity to maintain your anticipated profit margins!

The single most common, and often most expensive, problem for contractors encountered on any construction project involves delays.  Delays are not really the problem, they are just the measured effect of the problem. And, some delays, in and of themselves, may not seem to be an issue, but individual task delays can impact productivity and create a domino effect on the critical path.  When the magnitude of these seemingly insignificant delays compound, so do the related costs.  The end result is that delays eat up project profits and expose the contractor and subcontractors to significant risk. Sometimes, it may seem like short delays here and there do not impact the project cost, so you may not want to take the effort to keep track and provide notice of the delay.  But, the reality is that minutes turn into hours and lost hours cost real money. For example, take a crew of 4 workers with one 15 minute delay caused by a chatty owner’s representative - this equates to one labor-hour of lost productivity.  Thus, that 15 minute delay probably just cost you at least $150 in lost labor costs – multiply that by 5 days a week, and you’re looking at $750 per week, $3,000 a month, and so on.  For larger crews and longer-terms projects, you could be sucking tens of thousands out of your profit margin in labor costs, not to mention not being able to explain why the project schedule float has been eaten up, resulting in more tasks being on the critical path. Contracting for Delays. Don’t expect your contract to help you prevent delays, or, in some cases, even provide adequate compensation if you are delayed.  Contract terms, even when favorable to you, cannot immunize your project from delays.  Worse yet are contract terms that try to limit the contractor’s or subcontractor's ability to recover its costs when events that cause the delay have nothing to do with the fault of the contractor or subcontract have done. Contract terms often address delays in four main categories: 1.      Force Majeure Events: These are events that are not caused by the owner or any contractor and are generally unanticipated.  For these types of delays, owners like to share this risk with the contractors.  This means that the contractor may get an extension of time, but no extra compensation for the delay.  Though historically called “acts of God”, each contract can define what it considers a force majeure event.  Commonly, this definition can include extreme weather that is unusual for the area, acts of war, world-wide raw material shortages, strikes, embargos, and other events or conditions that would not be anticipated by the parties when they are signing the contract. Especially given recent historic events such as the government shutdown sin response to Covid, contracts and subcontractors will want to include things that may not traditionally be considered force majeure events such as shortage of materials by a contractor’s supplier, local labor problems involving a contractor’s own labor force, or even transportation interruptions. The broader the force majeure definition, the better for the contractor or subcontractor.  When negotiating a contract, a contractor or subcontractor would do well by adding to the list of force majeure events wording such as “or any other event or occurrence not within the reasonable control of Contractor [or Subcontractor]", which will effectively broadened the definition in your contract with just a few words. 2.      Owner-Caused Delays: A contractor would expect that if the owner causes a delay, then the contractor would get not only an extension of time, but also payment for extra time-based costs like for rental equipment, job-site trailers, temp fencing and toilettes, and extended job-site overhead costs.  But, many contracts now contain no-damages-for-delay clauses that prohibit the contractor’s recovery for these types of time-based costs.  For longer projects, it is critical that contractors know whether or not their contract contains such a clause so that they can approach the issue reasonably during the contract negotiations. 3.      Contractor-Caused Delays. It usually goes without saying that the prime contractor will be liable for delays caused by it or its subcontractors and suppliers on every tier.  But, a contractor can get itself on better footing if it negotiates what remedies there are for contractor-caused delays. Contractors want to avoid a contract that allows the owner to send a “48 hour notice” demanding that more labor be added to the project just because a certain task or trade may be getting behind.  Often contracts require a contractor to work overtime or otherwise accelerate its work if it falls behind – all at the expense of the contractor. But, what if the task or trade is not on the critical path?  In that case, a contractor or subcontractor would want the opportunity to present a reasonable recovery plan instead of just throwing more laborers on the project.  This opportunity can be negotiated in a contract or subcontract by focusing delay concerns on work that, if delayed, would affect the critical path of the project schedule. 4.      Concurrent Delays. Concurrent delays are when there are two or more events causing a delay during the same period of time.  A contractor must be very careful with contract wording that would result in it not being granted even a time extension for delays caused concurrently by the contractor and the owner or a force majeure event. Contractors also want to be careful with contract wording related to the ability of the owner to still assess delay damages, including liquidated damages, against the contractor even for concurrent delays.  Both prime contractors and subcontractors will want to make sure that the wording in their contracts is clear that concurrent delays will result in time extensions and delay damages that are, at the very least, equitably proportioned among the various causes of a concurrent delay. Be aware that contracts use other wording for the above types of delays, such as “excusable”, “non-excusable”, “compensable”, and “non-compensable.”  Whatever the actual terminology used in the contract, you need to understand exactly how your contract handles delays.  This is because you can bet that, once there are delays, the lawyers come out in droves to analyze the contract to determine who will be responsible for the failure to complete the project on time and who has to pay the resulting delay damages.

Though they may seem as farfetched as Santa Clause, there really are some laws that are designed to help contractors.  Some are better known, like mechanic’s lien laws, but some are tucked away as if waiting to be discovered by some fortunate contractor who happens upon them. This post will explore some of those not-often-talked-about-laws in California. Some Public Projects Protective Statutes Let’s start with a couple of hidden gems in the California Public Contract Code.  Most contractors are familiar with terms of a contract that state things such as: “By submitting a bid, Contractor warrants and represents that it has inspected the site and is familiar with the site conditions and has reviewed all drawings, specifications, and all other Contract Documents and represents that there are no site conditions or errors in the Contract Documents that would result in additional cost above Contractor’s bid price or increase Contractor’s time for performance.” This type of provision makes it seem as if the contractor is going to be responsible for guaranteeing the owner that the drawings and specification are complete and correct. But, California Public Contract Code (“PCC”), Section 1104 does not allow this on non-design-build projects.  Specifically, the PCC states: “No local public entity, charter city, or charter county shall require a bidder to assume responsibility for the completeness and accuracy of architectural or engineering plans and specifications on public works projects, except on clearly designated design build projects. Nothing in this section shall be construed to prohibit a local public entity, charter city, or charter county from requiring a bidder to review architectural or engineering plans and specifications prior to submission of a bid, and report any errors and omissions noted by the contractor to the architect or owner. The review by the contractor shall be confined to the contractor’s capacity as a contractor, and not as a licensed design professional.” What this means is that, though a contractor may be required to review the drawings and specifications and advise the owner if the contractor finds errors, the contractor can’t be held liable for the errors of deficiencies in the design documents provided by the owner.  This also means that, even if the contractor fails to recognize errors in the drawings and specifications, the contractor can’t be held liable if the errors may have been detected by a licensed engineer or architect, but not necessarily by a contractor.    The battle now becomes proving that an error in the drawings or specifications would not have been reasonably detected by a contractor. There is another PCC section that helps ensure that a prime contractor doesn’t substitute out a listed subcontractor for a project unless for legitimate purposes.  This statute was designed curtail bid-shopping by the prime contractor after the project bids.  The statute is Public Contract Code, section 4107, and one of the provisions in this section guards against the prime contractor forcing bad terms down a listed subcontractor’s throat. Some prime contractors threaten to substitute out the subcontractor when the subcontractor refuses to enter into a contract that differs from the subcontractor’s bid price or differs from the “general terms, conditions, plans, and specifications for the project involved or the terms of that subcontractor’s written bid.”   In order to take the best advantage of this law, subcontractors should put together a strong set of terms to include with their proposals to prime contractors. Some Private Project Protective Statutes For private projects, there are a couple of statutes that protect the prime contractor’s right to payment beyond the prompt-payment statutes that impose monetary penalties when the owner unlawfully holds payment. One of the code sections allows a prime contractor on a private project to require security from the project owner to ensure payment to the contractor.  Civil Code, Section 8700 et seq. allows a contractor on most commercial private projects, with a contract price greater than $5,000,000, to require that the owner of the project, if it is the owner of the property, to provide a bond or irrevocable letter of credit, or to deposit money in an escrow account, in the amount of at least 15% of the contract price.   The security would be available to the contractor in the event owner defaults on payment.   If the owner does not provide a bond, letter of credit, or escrow account within 10 days after contractor provides a written demand to the owner, the contractor may suspend work until the owner provides the security. Another set of statutes allow a contractor to stop work due to an owner not making timely payments.   Civil Code, Section 8830 et seq. allows a contractor to serve and post a “stop work notice” on the project under the following conditions: 1.       Payment by the owner is 35 days or more late to the contractor when the contractor has performed satisfactorily; 2.       The contractor posts a notice on the jobsite and at the  main office of the site (if there is one) of its intent to give a stop work notice five (5) days before giving the owner the stop work notice; and 3.       At the same time the contractor gives the stop work notice to the owner, the contractor needs to give a copy of the stop work notice to all subcontractors that are in direct contact with the contractor. If the contractor is not paid within 10 days after notice is given, all work on the project can stop so that the contractor and subcontractors don’t continue to spend their own money to keep the project going if the owner isn’t going to pay, or play, fair. As with all laws, there are some caveats that contractors need to understand in order to use these laws to their best advantage.  But, the good news is that, if you take time to find and understand these laws, as a contractor you will have more choices in your bag of tricks to succeed.

California has long-standing prompt payment laws that require owners to pay contractors promptly and for contractors to pay subcontractors promptly.   Under the various prompt payment laws, an owner has a specified period of time to make payments to a prime contractor and a prime contractor has a specified amount of time to make a payment to a subcontractor after the prime contractor receives payment from an owner.  Failure to abide by these laws was supposed to impose stiff penalties on a violator and also provide an the claimant an award of its attorney fees against the violator.  However the laws also state that an owner or prime contractor will not be found in violation for holding back from a payment 150% of an amount that is subject to a good faith dispute.   While this may seem straight forward, applying the concept has taken two paths through our court systems. Many years ago, one a California Court of Appeals had to decide a case (called Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc.) where a prime contractor had been paid its retention from a public entity owner, but did not then pay the retention that was owed to its subcontractor. Under the Public Contract Code, a prime contractor must pay a subcontractor’s retention “within seven days from the time that all or any portion of the retention proceeds are received by the [prime] contractor… .”  However, the Public Contract Code (and other prompt payment statutes) has an exception that allows the prime contractor to withhold retention from a subcontractor if a “bona fide” dispute exists between the subcontractor and the prime contractor, up to “150 percent of the estimated value of the disputed amount.” In the Martin Brothers case, the subcontractor had made a claim for unpaid change orders, but there was no dispute as to the value of the retention that was owed to the subcontractor. The appellate court in the Martin Brothers case decided against subcontractors finding that that a good faith dispute about any payment could be used as a reason for the prime contractor to not pay the subcontractor its retention even when the amount of retention itself is not in dispute. As example of the result of this would be as follows: In a project where the owner has released retention to the prime contractor, and the subcontractor and prime contractor both agree that the subcontractor is owed $100,000 in retention, the prime contractor could legally hold back the all of the subcontractor’s retention if the subcontractor had made a claim for extras for $70,000 that the prime contractor does not agree with.  This is because the court in the Martin Brothers case ruled that the prime contractor could hold back up to 150% of the amount in dispute for extras against the undisputed amount owed for retention.  Thus, not only would the subcontractor have to finance $70,000 in extras until that dispute is resolved, but also, the subcontractor would be out another $100,000 of undisputed retention, for a total of $170,000, just because the subcontractor made a claim for the extras.  This is clearly an unjust result. Six years after the ruling in the Martin Brothers case, a different California Court of Appeals disagreed with that ruling.  In a case called East West Bank v. Rio School District, the Court of Appeals ruled that, under the prompt payment laws, a payment could only be withheld if the good faith dispute exited as to that specific payment.  Thus, where the dispute concerns work unrelated to the payment that is owed, or involves disputed change orders, then those disputes cannot be used as a basis for not paying the undisputed payment. The two opposite rulings of the Courts of Appeal prompted the California Supreme Court to review the issue of the “150% bona fide dispute” exception to the prompt payment laws.  In May of 2018, in a case known as United Riggers & Erectors v. Coast Iron & Steel Co., the Supreme Court framed the issue as follows: “What we must decide is whether this exception allows withhold when there is any dispute between the parties, or only when there is a dispute directly relevant to the specific payment that would otherwise be due.” After reviewing the history of what the Legislature recognized as “industry-wide problems” related to slow payment, and the Legislature’s wording related to bone fide disputes, the Supreme Court ruled that payment can be withheld only when the dispute is directly relevant to the payment being held.  Specifically the Supreme Court listed the following as times when a prime contractor may delay payment up to 150% of the value of the dispute: 1.       When the sufficiency of the subcontractor’s construction-related performance is the subject of a good faith dispute; 2.       When liens or other demands from third parties expose the prime contractor to potential double payment, or 3.       When payment would result in the subcontractor receiving more than the minimum amount both sides agree is due. What a prime contractor cannot do is hold retention just because a dispute has arisen over whether the subcontractor is owed amounts over and above the retention that is owed.  Also, the Supreme Court has made it clear that the payor (whether it be an owner or a contractor) “must be able to present a good faith argument for why all or part of the withheld monies themselves are no longer due.” This means that owners and contractors should not be allowed to play games with payments – they must promptly make the payment that is due if there is no good faith dispute directly affecting that particular payment.

You’ve probably heard the term “Critical Path” many times.  But, but what does is it really mean and how critical is it? The standard Nearly all courts recognize what is known as the Critical Path Method (“CPM”) as the most readily accepted method of measuring project delays. CPM is the benchmark that is universally accepted in construction delay claims litigation. It is extremely important for anyone involved in construction to understand how CPM is used for proving delay claims.  If you don’t know how a delay is measured, you may find it difficult proving you were really damaged by a delay. Or worse yet, you may find it difficult defending yourself against an unsubstantiated delay claim. A quick history Commonly known by its initials “CPM”, it is a method of estimating how long a project will take to complete.  A critical path is determined by taking the all the key tasks in sequence of which task has to be completed before and after each other task, and then determining which series of tasks  up the longest time necessary to complete the entire project. The procedures are the same for small projects or large projects, but larger projects will benefit from the use of project management software, since the software can handle hundreds of tasks and variables with ease. The basics Here is a quick primer on what it takes to create a CPM schedule. CPM is focused both on time and sequencing.  First, determine the tasks needed to complete a project.  Then, put each task in the sequence it needs to be performed and assign each task the duration required to complete it.  Tasks that are dependent on other tasks to be completed will be the types of tasks that end up on the critical path.   You need to know the following information in order to create any sort of CPM schedule: Specific activities:  These are unique tasks that have a distinct length of time for completion. In construction, these are usually straightforward and fairly easy to identify by trade. Milestones:  These are events that identify the beginning or end of a task or set of tasks.  They are often important interim goals achieved before completion of the entire project. Sequence:  Getting from bare earth to a finished building requires the proper sequence of construction tasks.  Some sequences are obvious, and others are not, for example it is clear that earthwork must come before roofing.  But, it may not be so obvious whether or not finish plumbing would come before or after roofing, or whether or not it can be done in its own independent timeframe so long as it is done by the time the rest of the project is completed. Dependent Tasks: Careful analysis is often needed to determine the cause and effect relationships between tasks.  Tasks that depend on the completion of another task must be identified. Time Estimate:  The time required for each activity is needed.  An experienced estimator can shoot from the hip and use past experience as their guide, but often input from each trade subcontractor is needed to get realistic estimates of time for their work. The path to completion With the above information available, a project schedule diagram can be created.  Laid out graphically, all the tasks are displayed together to visualize the entire project from beginning to end, with some running simultaneously, some depending on the completion of a prior task, and some having their own path independent of other tasks. The critical path would be the longest duration of dependent tasks that must be done in sequence in order to get from the beginning to the end of the project.  There may be tasks that can be performed at any time after achieving a certain milestone but have no specific start date, only a required completion date. The difference between the time allocated to perform the task and the actual duration of the task is commonly known as float or slack time.  The tasks on the critical path have no float time because if they are delayed, then the entire project completion would be delayed.  Also, a task that does have float, may end up on the critical path if it is delayed past the float time.   If you are a subcontractor and your work is on the critical path and you are unable to complete your work by the time allocated on the project schedule, you will most likely be charged with delay damages, which often are in the form of liquidated damages. The real world Once a project is planned out and a critical path defined, there is no guarantee that the course of the project will actually follow the plan. A few examples of why this can happen are: Estimates:  One of the simple reasons for a schedule deviation is that everything is based on estimates.  The schedule is only as good as the quality of the estimates, and for the most part, the people who created the estimates are not the people who actually perform the work. Changed conditions:  If the actual conditions are different from those expected at the time the estimates were determined, the estimates may not be realistic. Change orders:  Almost without exception, projects will have change orders.  What needs to be considered very carefully is whether or not the change orders affect just a specific task schedule or the critical path. Making CPM work for you Keep in mind though, just because there may be change orders, changed conditions, sloppy estimating or anything else that causes a delay, if the delays do not affect any of the critical path tasks, the project as a whole, is not delayed.  Also, applying additional resources to activities that are not on the critical path may allow them to be completed early, but it won’t benefit the overall project end date. And, if your work is not on the critical path at the beginning of the project, it may end up on the critical path if you cannot perform it during your allocated time on the project schedule. The bottom line is that you need to be able to analyze whether your work is on the critical path.  If it is, and it is delayed, you’ll be the one blamed for a delay in the completion of the entire project – and that’s pretty critical!