Getting paid for changes before construction is over Part 3

SAN DIEGO — In my last two articles, I was discussing the problem an electrical subcontractor was having in getting its change orders signed (and paid for) due to a design change to increase in the power needs for the
building. This increased the rating of the main switchgear from 3,000 amps to 5,000 amps. The changes caused delays to the subcontractor during the submittal stage and during the equipment manufacturing process.

The subcontractor incurred extra costs for the increase in labor, a volatile copper wire market, additional rental on its jobsite trailer, as well as other increased general conditions. Even though the subcontractor has been properly paid to-date on the original value of its subcontract, it has had to foot the bill for the increased costs by having to pay its suppliers for the more expensive materials. So far, the subcontractor has not received anything in writing as to whether its change order requests were accepted by the owner and now the sub is being told by the general that the owner “prefers” to wait to the very end of the project to process all the change orders.

The issue is that, although the sub finished the majority of its work about three months ago, the lighting fixtures it
is providing have not yet been released for manufacturing because other changes in the project have delayed the
finish work. Thus, it will probably be another six to nine months before the sub is let in to finish it work, and this means the sub will have to carry the extra costs for the changes for that much longer if the owner want to wait until the end to process the change orders.

The subcontract was the AIA A401- 1997 Standard Form of Agreement Between Contractor and Subcontractor, with the AIA A201-1997 General Conditions of the Contract for Construction governing the prime contract and the subcontract. These form contracts are widely used in the industry, and even some “custom” written contracts use the language found in these forms as a base. Even if a contract is truly custom, it will most likely have procedures for claims and change orders that should be adhered to strictly.

Based on the facts provided by the electrical subcontractor, I concluded that, despite the change orders not being signed before the changed work was performed, there is ample documentation to support the argument that the work was ordered by the contractor in writing under A401, and was also ordered by the owner under A201, section 7.3 as a construction change directive. And, because the subcontractor submitted written change orders, it has probably sufficiently complied with the “claims” notice procedures required under the AIA form contracts.

In part 1 of this series of article, I advised that at this point it would be wise to meet with the owner and general contractor to confirm that it is really the owner who is holding up the change order approvals and payments. If the owner will not meet, then still have the meeting with the principals of the general contractor to get a clear indication of any problems with the change orders. If there are no disputes with the changes, then confirm that in writing. If there is a dispute as to the value of the changes, then force the general contractor to explain what amount is in dispute and what amount it agrees is owed.

This is very important because California prompt payment statutes allow an owner or a general contractor to hold back 150 percent of the disputed amount. Any amount held over that will subject them to a 2 percent per month penalty, as well as attorney fees, should you have to sue to get paid.

Also, under A401section 4.7.1, the subcontractor, with proper notice to the general, can stop its work until payment of the amount owed has been paid. If notifying the general about these prompt payment penalties and a stop work notice does not get their attention, I would not hesitate serving a “stop notice” for the amount you are owed.

For a private works projects, the stop notice must be bonded to force the construction lender to hold back the funds, but the construction lender is allowed to hold back the funds even if the stop notice is not bonded. Also, the owner must hold back the funds from the general contractor even if the stop notice is not bonded. Some subcontractors are trigger happy and record mechanic’s liens if they are not paid.

But, in this case, a lien would be premature, and therefore invalid, because a subcontractor cannot record its lien until it has ceased furnishing its labor, services, materials and equipment to the project. Also, the subcontractor can demand mediation as it is required under the AIA contracts. There is no need to wait until the project is completed to make such as demand, especially when large sums of money are owed.

The same goes for getting this issue into arbitration if mediation does not resolve it. Binding arbitration is required under the 1997 AIA scheme of contracts, and this could be a quicker way to get a ruling, which can be turned into a judgment, than trying to file a lawsuit. Except for recording a mechanic’s lien, there should be nothing stopping the subcontractor to start enforcing its right to payment on the changes now — despite the fact that its work and the project are not completed.

If you have a construction question, submit it to: info@construction-laws. com.

General disclaimer The information in this article is based upon California law and is for general information only. Any information or analysis presented here is intended solely to inform and educate the reader on general issues.
Nothing presented or referenced to, regarding facts, documents, or applicable laws, constitutes legal advice. Before acting or relying on any information, including any information presented here, consult with a qualified attorney for your specific situation. Source Code: 20080711tca

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