When a sub has to sign... or not

Signing Subcontracts on Public Works Jobs: You HAVE to sign… unless you don't.

Generally, subcontractors who submit a bid to a higher-tier contractor (we’ll assume it’s the prime in this case) on a public works job are making a positive affirmation that they are in it for the long haul. In other words, the very act of submitting a bid is basically the same as saying “You getta the contract, I signa the subcontract." (fn 1)

The Subletting and Subcontracting Fair Practices Act (Cal.Pub. Contract Code § 4100 et seq., (fn 2) aka the “Listing Law”) says a number of things. I know, surprise, the law says stuff. But specifically to our purposes, it says that bidders on public works jobs have to list their proposed subs.

So, in our example, you’ve submitted your bid. And then the prime turns around and sends you its “form” subcontract. Which bears as much resemblance to your bid as I do to a supermodel (hint: not much). So what do you do? Do you have to sign the subcontract under the general “signa the contract” rule that we talked about in the first paragraph?

As a general rule, since you “no signa the subcontract,” the prime can request that you be replaced by another sub, and generally the public agency will grant that request, because failure/refusal to sign the subcontract is specifically listed in the Listing Law as a reason for substituting out a sub. If the replacement sub is more expensive than your bid was (and the chances of that are about 110,000% on the yes side), then the prime can turn around and sue you for the difference.

Sound unfair?

Then you’re in the wrong business, bub.

Luckily, however, Cal. Pub. Contract Code § 4107[a][1] provides a possible way out of this situation. It says that the subcontractor can be replaced only if the written subcontract is “based upon the general terms, conditions, plans and specifications for the project involved or the terms of that subcontractor’s written bid…” [emphasis added].

So what’s the upshot? The upshot is, if at all possible, be familiar with the requirements of your scope of work under the prime contract bid documents. That way, if your bid conforms to those requirements, and then the prime tries to get you to sign a contract that has egregiously different terms and threatens to “boota you fanny” off the project if you don’t sign, you will have a much greater chance of either a) calling its bluff and staying on the job or b) suing the crud out of that contractor and recovering your lost profits.

Again, this is all an awareness and preparedness thing (as so much in life is). Know what you’re getting into. Know what the bid docs say (if at all possible). And know that if the prime sends you a subcontract requiring you to carve its name in the moon for all to see as part of your scope of work “or else…” well, you may not have to sign it.

Hope you’ve learned something. If not, it’s notta my fault. Must be a language barrier. Tune in next time, maybe we’ll talk more about substitution issues. Maybe not. I like to keep it mysterious.

(fn 1) I don’t know what that accent is, so please don’t accuse me of racial or ethnic insensitivity. Let’s all just chalk it up to a typo and then everyone’s happy. Except me, because you think I can’t spell. How dare you!

(fn 2) Et seq. means “and the ones following that one.” Why speak in Latin? Because pig-Latin, as we all know, is a ridiculous language, and therefore only used in argument before Congress.

PAY IF PAID (OR, HOW TO MAKE YOUR SHIRT AND LOSE IT TOO)

Today, we’ll talk a bit about common payment conditions and pay-if-paid clauses.

A. Payment Conditions

This is a fairly big deal, in much the same way that breathing is a fairly big deal (if breathing is not a fairly big deal to you, put down the mouse and walk toward the light...).

Most contract agreements have a few little details about payment, requiring that the payee do a lot of things before the payor pays. Common things included are: 1) invoicing for the work, 2) providing conditional and/or unconditional releases, 3) providing certified payroll, 4) providing look-ahead schedules, 5) providing approvals and certifications, 6) providing proof of licensure, 7) providing insurance certificates, 8) providing warranties, 9) providing a complete body scan and a detailed description of every cell in the contractor’s body.

Okay, this last is a bit much. But the point is to highlight the fact that there are a lot of things that may be required before the lower-tier contractor gets its money. And failing to do them will often result in the money getting paid late or not getting paid at all, resulting in having to hire me (or someone like me but less handsome) to get your dough. Better to go through the contract with a highlighter, mark down what you need to do ahead of time, and then see that it gets done throughout the course of the project.

B. Pay-if-paid clauses

The “pay-if-paid” clause is a common clause in many construction agreements which specifies that the lower-tier contractor will not be due any money (meaning he won’t be paid) by the higher-tier contractor unless and until the higher-tier contractor gets paid by the owner (or whoever is above the higher-tier contractor). Or, in diagrammatical terms:

Owner pays
Contractor,
who then (and only then) pays
Subcontractor

If the owner doesn’t pay, then the diagram looks like this:

Owner doesn’t pay
Contractor,
who then refuses to pay
Subcontractor,
who is now looking at 5-10 for
justifiable homicide of Contractor

As I said, this is one of the great hallmarks of construction agreements.

It’s also just about completely unenforceable in California. This clause can almost always be disregarded, because the courts have said it is “against public policy,” so this contract clause will most likely get ignored if it comes before a court, in much the same way that I will be ignored when I ask my son to clean his room. However, be aware of these clauses nonetheless, because if it’s in there, you’re likely to have to deal with it sooner or later. Better to point out that it’s unenforceable from the beginning, and see if you can just get it taken out of the subcontract, rather than having to argue about it later.

STAND UP AND TAKE NOTICE!

Notice is one of those often-overlooked (some times on purpose) areas of the contract. Most contracts require that notice be given whenever a contractor is planning on making a claim for extra money: for work the contractor claims is outside its scope of work and so entitles him to extra money, for delay or acceleration claims, for the prom dress his daughter got ruined when she visited the jobsite, or for anything else. Most contractors, however (or at least most that come through my door) tend to think of these provisions as being “requirements” in the sense that wearing a cat on your head is a “requirement”: it’s nice for those who are into that kind of thing, but not necessarily what the average person has to do each day.

These contractors are in for nasty surprises. Especially with public agencies, which have teams of lawyers who often jump on notice requirements as the first line of defense when they disagree with a claim by a contractor. Notice provisions are often enforced, and so can result in huge losses for a non-complying contractor. And, of course, if the prime contractor doesn’t get money from an owner because notice wasn’t properly given, you can bet there’s a good chance that very same contractor is going to make a claim against its subs and say they didn’t comply with the notice terms, either.

If notice isn’t given according to the terms and requirements of the (sub)contract, there is still a ray of hope for the contractor. First of all, even if there is a formal notice requirement (like some letter that is required to be drafted on a form provided by the public entity), the courts will sometimes find that “constructive notice” was given which fulfills this requirement. Constructive notice can be given through informal letters other than those prescribed by the contract, through certain project documents (like change order requests), or through meeting minutes. There is also a legal argument that the public entity waives the notice requirement when it considers the extra claim, even though the notice requirement has not been met.

However, all these are technical legal arguments. A funny thing about technical legal arguments: they tend to be based on legal information and they tend to be highly technical. Both of these combine to either 1) put a jury to sleep or 2) lose a jury in the Swamps of Confusion and the Mists of Boredom. Whereas the other side (the side arguing lack of notice) just has to put a big blowup of the notice requirement up for the jury, ask the contractor to read it aloud, and then say “Did you do that?”

Juries tend to buy this sort of thing.

Moral: it’s better to just fulfill the contract notice requirements than to present late claims and count on your attorney’s skill and ability to get you out of the inevitable loss of revenue.

Now, this is a short entry in our series. But, like me, “short” doesn’t mean “unimportant.” Sit up straight. Pay attention. Meet your notice requirements. And if you are a sub to a sub to a sub, make sure that flow-down provisions (we’ve talked about those before) don’t require you to meet notice provisions in other people’s contracts.

Take notice. Make notice. Get paid.

READ YOUR CONTRACT! COUNT YOUR CHICKENS, NOT YOUR EGGS!

“Woohoo!”

That’s what the average (sub)contractor thinks upon getting the job, be it a public project or a private one. Or, more likely, he thinks, “All right, let’s get down to brass tacks and build something.” But no matter what the contract is – be it the prime contract on a major state public works job, or the smallest subcontract on a tiny private project – there is one thing that contractors as a group tend not to do:

READ THE CONTRACT.

They go over the specs or other pre-bid information with the precision of a medical laser, carving out scope of work and exceptions to it like my doctor did to that weird mole on my face. And then, having gotten the job, many of said contractors might receive a notice to proceed and then (often quite a bit later), a written contract. And the contract is then gone over with the intensity and sharpness of… a pillow covered in marshmallows. The contract is, far too often, an afterthought in the mind of the contractor.

But that agreement contains numerous features that are now critical to the contractor’s prospects for doing the job correctly and profitably.

Do I have you hooked? Good. Because in the coming issues, of Get a Clue, we’re going to be looking at some of the most important parts of a typical contract… and some of the pitfalls that contractors fall into when reading (or not reading) them. Scope of Work, Contract Documents, Payment Clauses, Notice provisions, Extra Work clauses… all of it is more fun than you can shake a stick at. Or, if not that, at least they are things that you, as a businessperson who wants to stay in business, must pay attention to and understand.

For now, even though we’re not going into specifics (but they will come, my young student… they will come ), listen to this: when you get a job, read the contract before you sign it. Understand everything before you sign it. If you don’t understand something, talk to someone does… before you sign it.

Because after you sign it may be too late.

INCORPORATING YOUR PROPOSALS... A MUST FOR THE SUB

A lot of subs make this mistake.

It goes something like this: you, the subcontractor (or, as I like to call you, “My next client”) want a big job. The job. The one that will rocket you onto The Next Level. And we’re not talking about a video game, here. We’re talking adding another zero or two to the left of the decimal point in your yearly statement.

So what do you do? You get the bid info. You copy the bid set plans and specs. You carefully check what needs to be done against what you can actually do. You furnish a proposal to the Contractor, which you have had your People check and recheck and then recheck their rechecks.
It’s precise.

It’s prudent.

It’s… it’s… profitable.

The Contractor calls back and says, with a smile, “We’d love for you to have this subcontract. We’re drawing up the paperwork for you to sign.” The contractor sends the subcontract. It’s not too long: only about 6000 pages.

All this to add 500 lineal feet of pipe? you think to yourself. But hey! I got “The Job.” I’m going to “The Next Level.” I will “Be Successful.”

And you’re about to do something that will mark you as “A Chump.”

Still thinking about The Next Level (where you will bathe in Perrier and never eat anywhere that has a menu in anything but French), you look over the subcontract. Everything seems in order. You put your name on it. Next Level, here I come!

You start work, the still-smiling Contractor watching your every move because, as he says, “We’re all a team here, ol’ buddy ol’ pal, and I’ve got your back.”

And then suddenly, halfway into the job, you start to get NASTY letters from your buddy, the grinning Contractor, the guy who’s got your back. The guy who is now giving you 48- and 24-hour notices to complete something you explicitly excluded in your proposal.

Something big.

Something expensive.

Something that, if you were to do it, would not only keep you from The Next Level but would probably mean Game Over.

The Contractor is still grinning, but now the grin looks like the smile of a laborer who just found his co-worker’s bag of sunflower seeds lying unattended.

You go through your subcontract. You check it against the proposal.

And it looks like you missed something. One teeny, tiny exclusion that never made it to the signed subcontract. Just a teeny, tiny, eentsy, weentsy thing that will only cost about a bizillion dollars to do.

OH, CRAP! you think (actually, you probably think something else, but my mother reads these articles, so I’m gonna go with “OH CRAP”).

You immediately call me. Because not only am I handsome and dashing , I’m also your lawyer. Unlike the Contractor, I do NOT grin. Lawyers don’t grin. We aren’t interesting enough to grin. Instead, I shake my head in a sad manner, which is wasted because this is a phone call and you can’t see me. So I tell you, “I’m shaking my head, man.”

“Why?”

“Because you’ve signed the subcontract. The subcontract is ultimately the thing that is binding. You are on the hook for this work, including the ‘exclusion’ you didn’t get added into the final subcontract.”

You hire me to get you out of this fix. And I do, because not only am I handsome and dashing, I’m also an incredibly good lawyer. You breathe a sigh of relief.

And then you get my bill, and your sigh of relief turns into a death rattle. Everyone is very sad that you died. Even I, the heartless lawyer, show up to the funeral. Mostly to try and get your spouse to pay the bill.

You getting the picture here?

Moral: ALWAYS get your proposal “incorporated” into the final signed subcontract. A lot of times, the subcontract just doesn’t get all the info you put into your bid proposal. And why should it? The contractor’s desires don’t necessarily mirror your own. He wants you to sign on to ALL of the work for NONE of the money. So if he slips in an extra word here, or omits an exclusion there, it ain’t gonna hurt HIM. Getting your proposal incorporated into the contract will help keep this from happening. It will give you at the very least an argument that you never planned on doing that particular work, and that the Contractor knew it, because he signed the subcontract.

Of course, this won’t always happen. Sometimes the contractor will not be willing to include the words “The proposal is incorporated herein by this reference” under the Scope of Work in the subcontract. Sometimes the contractor is willing, but the owner won’t allow that kind of thing. Sometimes you just plain don’t think you have time to haggle because this job is such a gift from God.

Always haggle. Try to get your proposal incorporated. If you’re not sure how to do that, call me. I’m always here to help, what with being dashing and handsome and all. And asking me (or someone like me but less handsome) for help before the problem is always going to be a lot cheaper than asking me to respond to a crisis.

Protect yourself. Protect your company. Protect your proposal.

Here endeth the lesson.