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
The issue is that, although the sub finished the majority
of its work about three months ago, the lighting fixtures
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.
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
Call us now to discuss how you can benefit
by using a different approach to managing to your legal