April 2012

Even on modestly sized projects changes are inevitable and a project is rarely constructed exactly as originally designed. The reasons for changes in the work are as numerous as the stars in the sky. However, one certainty is that entitlement to additional compensation for changes is a frequent battle ground for construction disputes.

Several areas of the contract will address changes. Of particular importance is how a contractor perfects a claim for compensation for a change. Pity the contractor that has performed work clearly outside the scope of his contract only to see his claim be lost because he failed to perfect his claim under the contract. Your lawyer cannot argue a claim for compensation because of a change if the claim was not perfected. Therefore, it is imperative that a contractor know how a change claim is perfected.

A contract should state the “who, when, and how” of change claims:

  •  Who is authorized to direct changes?
  •  When is the deadline for submitting claims for changes?
  •  How must those claims be submitted?

 Who is authorized to direct change orders?

The contract should state who is authorized to direct changes in the work. In First General Construction Corp., Inc. v. Kasco Construction Co., Inc., the Federal District Court for the Eastern District of Pennsylvania held that verbal directives to perform additional work from a person not authorized to approve extra work are insufficient to support a claim for additional compensation related to that work. In First General, the Court granted summary judgment in favor of the defendant on a subcontractor’s claim that it was entitled to compensation for additional work directed at the behest of defendant’s project superintendent. The Court held that the only person from defendant that was authorized to direct such work was the project manager and the directive in question came from the project superintendent.

Therefore, the contract should be clear as to which persons are authorized to direct the work. Contractors should follow directives only from those authorized persons and when the directive comes from a non-authorized person should confirm the directive from the person that is authorized.

When is the deadline for submitting claims?

Contracts will typically require written notification on claims for compensation to be submitted within a certain time period. The time period can range from between 7 to 21 days after a contractor is aware of an event giving rise to a claim. Failure to provide notice within the prescribed time period may result in a claim being barred. Therefore, contractors should be wary of any such notice provisions and deadlines for making claims for changes.

How must the claims be submitted?

Knowing how claims are submitted is just as important as knowing when they must be made. Typically, the contract will require claims to be made “in writing.” Contractors should take care to learn what the written notice must include in order to validate the claim. Moreover, to whom is the claim being made? Is it to the architect, the construction manager, the owner, or some combination of them?

Of course there are exceptions to these rules, but why make claims for entitlement more difficult to prove; especially, when the burden of proof in demonstrating the exception applies is on the party claiming the exception.

 

Recently, I am become interested integrated project delivery (“IPD”) as a project delivery method for construction.  For those of you familiar with IPD, the concept truly involves a mind shift.  A true IPD project is a radical departure from the traditional project delivery methods we all are familiar with.  The reasons that IPD is a dramatic departure are many.  However, what I view as the most dramatic, especially as a construction attorney, is the concept that the parties agree to waive most traditional construction claims against each other.

Yes, that means the owner, architect, and contractor (and perhaps key subcontractors) agree not to bring litigation for delay claims, inefficiency claims, change order claims, or any claims for consequential damages.   You might ask how the parties would resolve disputes that are sure to arise on a complex construction projects?  Through collaboration and mediation.

Sound impossible.  Well consider that the entire concept of IPD is predicated on a collaborative approach to delivering the project with a stated goal of preventing traditional construction claims from occurring.  Moreover, imagine if the parties approached this collaborative environment knowing that they would not sue each other.  Furthermore, imagine if you knew that the only way claims could be resolved would be through mutual agreement rather than litigation.  If this one simple not to sue concept were put in place on a project you are currently working  on would it benefit the project or make matters worse?

A “litigation free” zone creates an environment were the parties are not defensive and are free to provide ideas on how to solve a problem without fear that it may be used against them in future litigation.  The parties are not “creating a record” the moment a dispute arises.  While this may be a radical concept for the construction industry, our military has been using a similar concept for years.  Military combat teams from all branches routinely use a concept known as “red teaming.”  Basically, after a mission the participants review the mission and discuss how they could have made it go better.  The discussion occurs without regard to rank. In fact, rank patches are sometimes left at the door.  Moreover, no one is permitted to defend criticism of one’s actions by another member of the squad.    Therefore, you create an environment where even a low ranking soldier can give critical input on the mission without fear of retribution by someone with higher rank.  What results is a dynamic environment which create future successful missions. After the meeting is over patches go back on and rank formalities resume.

IPD is not something that is going to happen in the far off future.  IPD is here now.  In fact, whenever Congress gets around to passing a long term highway bill IPD – or at least IPD concepts – will be part of that bill.

Does this mean that construction litigators are now dinosaurs and should begin brushing up on other practice areas?  No, of course there will still be disputes that require legal advice on an IPD project.  It is just that the method of resolving those disputes is likely to change.

On March 27, 2012, the Pennsylvania House of Representatives passed HB 1602, a bill that makes major changes to Pennsylvania’s mechanics lien law and if passed by the Senate and signed into law will impact any contractor working in Pennsylvania.  All contractors should be aware that HB 1602 weakens a contractor’s most effective weapon against non-payment, the mechanics lien.

1.  No Right to Lien a Residential Project.

HB 1602 amends Section 301 of the Mechanics Lien Law, 49 P.S. Section 1301, adding a sub-part (b), which states that a subcontractor shall no longer have the right to lien a residential project when the owner has paid the general contractor in full.  While other States, like New Jersey, have different rules for filing mechanics liens against residential property, I am not aware of any State that prohibits the filing of a mechanics lien against a residential property outright, as HB 1602 does.

HB 1602 would effect small contractors the most and it would take away a cost effective and efficient means for ensuring payment.  The amounts owed on most residential projects are small.  However, these small amounts have a huge impact on a small construction firm’s cash flow.  Moreover, most small construction firms do not have the resources to devote to litigation for such small amounts, especially when litigation costs can easily exceed the amount owed and collection from a general contractor is often doubtful.

2.  Notice of Commencement

The other major change to the Mechanics Lien law that HB 1602 makes concerns the prerequisites to filing a mechanics lien.   Under HB 1602,  an owner can require a subcontractor to provide a “notice of furnishing” to the owner within twenty days of its first day of work in order to preserve its mechanics lien rights.  A subcontractor is required to provide the owner with a notice of furnishing when the owner has filed a notice of commencement in the “State Construction Notices Directory” maintained by the Department of Labor and Industry.

An owner files a Notice of Commencement by filing it with the Department of Labor and Industry and it must include:

  • the name and address of the general contractor, name and location of the project,
  • legal description of the property upon which the improvements are being made,
  • name, address, and email address of the legal record owner of the property,
  • name, address, and email address of the person other than the owner at whose direction the improvements are being made (I would imagine this means a tenant), and
  • name, address, and email address of the surety if performance and payment bonds are posted (this makes no sense because if a payment bond is posted then subcontractors probably have no lien rights anyway.

Additionally, the owner must post a copy of this notice conspicuously at the project site before any “physical work” commences and ensure that the posting remains posted during the duration of the project.

For the subcontractor’s part, when a Notice of Furnishing is required it must state:

  • a general description of the subcontractor’s work;
  • name and address of the subcontractor; and
  • name and address of the person with whom the subcontractor contracted.

Basically, all of the same information that a subcontractor is already required to give when it files it formal notice of intention to file a mechanics lien under Section 501.  Moreover, HB 1602 dictates the format of the Notice of Furnishing.

This Legislation is a disaster and fails my test for supporting legislation:

(a) is there a compelling reason for changing current policy?, and (b) does it makes sense?

The answer to both questions is NO and I am not sure who this bill is intended to benefit.  It is entirely unclear what problems with the current lien law this bill would solve.  I do not see it benefiting owners who must not only pay a fee to file a Notice of Commencement but also assure that the Notice is posted and maintained.  Additionally, it clearly makes it more difficult for subcontractors to file a mechanics lien, which I am not sure why we want a policy against that.

Hopefully, the Senate comes to its senses and defeats this Bill.  We will be sure to keep you posted.