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Subcontractors Aim to Improve Working Relationships

Tue May 22, 2007 - National Edition
Giles Lambertson

In an effort to inject a higher dose of fairness in their day-to-day work, construction subcontractors are teaming up and looking toward their lobbyists for help.

The fact is that general contractors depend every workday upon subcontractors to complete contracted tasks. And many primary and subsidiary building contractors maintain long-standing, respectful and profitable relationships.

Yet it also is true that the constant struggle of many specialty contractors to be paid in a timely way, and otherwise to be treated fairly as junior partners on contracted projects, has left a foul taste in their mouths.

Last fall, the American Subcontractors Association celebrated 40 years of representing its members. A timeline dating from 1966, which was published during the celebration, recounted decades of workplace grievances championed by the association. It laid out ASA’s “rich history of defending subcontractor rights, starting from early in the association’s existence and continuing through the present day.”

For example, three years after its founding, ASA officers were working with federal agencies and peers in the industry on contractual issues. By 1970, the association was lobbying for changes in the Miller Act, which regulates project surety bonds. One year later, ASA representatives testified on the need for prompt pay and an end to bid shopping on federal projects. That year it also established a tentative relationship with Associated General Contractors to discuss change orders.

Jump ahead to 2007 and the association is appealing to Congress on 21st-century issues of interest to its members such as “common-sense immigration reform.” But an overriding central mission of the organization to this day is getting subcontractors paid when jobs are completed and extracting them from contractual snares.

“Slow payment,” said David Mendes, the association’s senior director of communication and education, “is a chronic problem. Almost any specialty trade contractor would have a story to relate about that.”

Mendes went on to observe that “prompt payment was an issue that brought subcontractors together and it continues to be an issue today. It is an issue that is very important to subcontractors.”

Contractual disagreements about payments usually do not make headlines, but they did last fall in Denver, Colo., when several subcontractors drew attention to the issue on the eve of a grand opening. Construction of a modern wing of the Denver Art Museum — an architecturally acclaimed $110 million building addition — used numerous specialty contractors.

As the project developed, however, so did payment difficulties. Two paragraphs in a Sept. 30 Rocky Mountain News article capture the flavor of the resulting dispute:

“Other subcontractors said they’ve received their money but that payments trickled in, saddling their businesses with a financial burden while being forced to wait 90 days or more to collect their paychecks… the general contractor [meanwhile] said he had not heard the subcontractors’ allegations and was skeptical.”

A Changing Industry

More is at issue here than a failure to communicate. The problem runs much deeper than that. It can be traced to fault lines created 40 years ago by a shift in the construction industry, a change in workforce structure that undermined the working relationship of general contractors and specialty contractors.

Richard Usher is a member of the ASA board and a principal partner of Hill & Usher Insurance and Surety. He also is a prominent advocate of subcontractor contract reforms, especially in another area of subcontractor concern: assumed risk of financial responsibility. Reached in his Phoenix, Ariz., office, Usher said that, in his view, the negative workplace situation “developed in the late ’70s and early ’80s. These very significant risk shifts in negligence and insurance were not occurring in the 1960s. They are a recent phenomenon.”

Usher links the change in contract language to the moment large general contractors realized it was more efficient to manage a construction project by contracting out special project tasks than to have specialists on their payroll. Consequently, many self-performing general contractors became project overseers.

He cited the experience of homebuilders in the western United States. For the most part, they were self-performing general contractors a half century ago.

“Today, the industry is completely devoid of builders like that… It is [a] risk-shifting mechanism that causes them to do that,” he said.

This management “mechanism” has, among other things, led to subcontractors becoming contractually liable for the responsibilities of others, including other subcontractors. Usher cited the example of a framing contractor and a stucco contractor working on a project.

“If you are the framer, you don’t get to say who does the stuccoing and if the stucco subcontractor does a lousy job, why should you have to pay a penalty for that?”

Usher said, “If I happen to be an owner and I want a subcontractor to work on a task, I draft the contract to say that the sub will be responsible for paying for any damage that arises from the project. I consider that unfair.”

The perceived unfairness is most often evident, he said, in contracts that require a subcontractor to indemnify another contractor for fiscal loss from defective work and require a sub to help insure the work of another contractor.

“It is appropriate for contractors to have insurance and appropriate for contractors to be responsible for those things that they do wrong,” Usher said. “Where I have a problem is where the contract requires contractors and subs to be responsible for that which they do not control and for which someone else is the cause. We call that risk transfer.”

He said the position of ASA is that contractors should only be held responsible for what truly is their own fault.

“They should not be required to assume responsibility of someone else’s work merely because there is a leverage position in a contract.”

The subcontractors association lobbies nationwide against such transfer of financial responsibility, as well as against pay schedules that it deems unreasonable. It does so state by state, issuing reports each year on state policies and statutes, ranking the states as progressive or unprogressive in their workplace environments.

Other Forces of Reform

Lobbying is not the only recourse for those who object to the situation. Nor are subcontractors the only construction industry representatives working to overcome it. Associated General Contractors has taken the initiative, for example, to develop contract documents that AGC officials hope will clarify the matter and stipulate some solutions.

“We have something very exciting that we are working on,” said Brian M. Perlberg, senior counsel of the association’s contract documents program. What is being crafted is a “consensus contract,” a jointly drafted comprehensive document being pieced together through the collaboration of several industry groups, guided by AGC attorneys.

“The thought is that if we can work together to come up with a standard form agreement, it will make for better relations and smoother transactions,” Perlberg said. Crafting the new standard agreement in various forms has taken two years of negotiations, but its introduction to the industry is anticipated this fall.

Perlberg said he believes some of the disputes arise from the assumption that contracts are inherently biased toward one party or another. “We decided that everybody looks at a contract and has the perception that it is partisan to whatever association drafted it. We tried to find a better way by giving everyone a stake at the document-drafting table. We found consensus is possible — and we thought that would be the hardest thing in the world to achieve.”

The AGC attorney said he believes the negotiated model contracts “are balanced. They are fair to general contractors and to subcontractors — and, quite frankly, AGC represents both. Because the contracts are fair and balanced, they can be endorsed by all the parties.”

Perlberg said he believes the consensus contract addresses prompt payment and risk transfer issues. He specifically cited the new contract’s “clear terms for progress payments. Using these contracts would provide a process where everybody could be happy with payment terms.”

A West Coast general contractor several years ago took an interim step toward improving relations with subcontractors. At that time, XL Construction created on its Web site a “subcontractor center” that declared the following:

“At XL Construction we recognize that we can deliver the maximum service and value to our clients by maintaining high-quality relationships with our subcontractors. Consequently, we make every effort to promote these relationships by conducting business in a fair and honest manner and by creating job site conditions that make our subcontractors efficient.

“XL Construction is committed to paying subcontractors within five business days of receiving payment from our clients…”

More than just a pledge, the Web site is a place for pre-qualification clearance information for subcontractors. Also posted there is the pay schedule for ongoing projects, noting when payment will be received by XL and, subsequently, by subcontractors. Project information and schedules are updated there as well.

“I think it is pretty progressive,” said Jim Murphy, XL’s pre-construction manager. “It is easier on our end and allows subcontractors to have information they need at their fingertips.”

The Milpitas, Calif.-based company specializes in technical projects for biopharmaceutical, healthcare, microelectronics, aerospace, telecommunications and private education clients. Consequently, its subcontractors are, in the words of Murphy, “pretty much the top of their group. So our relationship to our subs is pretty paramount to our business.”

The 15-year-old general contracting firm performed approximately $200 million of work in 2006 and has some 5,000 subcontractors in its database. A hundred or more subcontractors are apt to bid on many of their projects and Murphy said the company tries to attract the best of them.

“ I think we are an open book to our subcontractors and it works very well for us,” he said. “It helps build the necessary trust. Our subcontractors know it is not just lip service.”

The Economic Factor

Another influence that seems to be reducing negative feeling among subcontractors has nothing to do with legislative reforms or judicial rulings, though those are a positive influence, said Stephen Rohrbach, president of F.A. Rohrbach Inc. Concrete Construction and 2006-07 president of ASA. He said economic forces also are having an impact.

“I think we are turning the corner [on the problem], not so much out of the goodness of our customers’ hearts, but out of a need for the industry,” Rohrbach said from his company headquarters in Allentown, Pa. “There is quite a bit of work out there and the subcontractor has the ability to select the project and the customer with whom he wants to work. Those contractors who write a fair contract are getting the bids. In the future, those who don’t and who practice a different set of rules are not going to get bids.

“The general contractor and the owner are recognizing that they need to treat their subs fairly.”

The ASA executive said he wouldn’t characterize the relationship of the subcontractors association and the AGC as “tense,” noting that the two organizations are working together more closely than they have historically. The consensus contract is the latest example of that cooperation.

Nor does Rohrbach see as much tension as before between individual subcontractors and primary contractors. He attributes some of that positive feeling to the new “selective” approach of subcontractors.

“We are working with those who treat us well; those that have some foul language in their contracts, we just stay away from them,” he said. “There is just that much work available. We can be discerning.”

Richard Usher, the ASA board member, has been instrumental in lobbying for insurance reform and in testifying before legislative committees. To date, five states — Montana, New Mexico, Colorado, Oklahoma and Oregon — have adopted reforms that reflect the ASA reform movement.

But Usher, too, sees movement toward reform by general contractors who simply are responding to economic forces. He said some firms’ executives are recognizing that the best subcontractors may not be bidding for a project, preferring to sit out the bidding process rather than work for the companies and assume unnecessary financial risk. Consequently, project bids sometimes are higher and the expertise of the hired subcontractors less than it might otherwise be.

“Frankly, I am not able to convince too many general contractors of this, but I have a few,” Usher said. “If they are willing to be responsible for what they do wrong themselves, then they should get an advantage on bid day. I have some contractors who now recognize this: subcontractors should do a better job of identifying general contractors who do things right.”

Brian Perlberg, the AGC lead attorney on contracts, pleads for understanding about the financial situation at the top of any project.

“The first relationship as regards payment is owner-general contractor. That is the lifeblood of a project.

“The financial ability to pay is a key issue, something the AGC has been strongly consistent on,” Perlberg said. “The general contractor needs to know an owner can pay and can pay promptly. If general contractors don’t receive payment, they soon are going to go of business, if overextended.”

But he too, said he sees a renewed focus on project excellence rather than on pay and risk issues.

“As an industry as a whole, there is too much litigation,” the attorney said. “There are too many claims. I’m getting the sense the industry wants to focus on project results, rather than project claims.”

He said the “buzz word” in the industry is finding ways to “collaborate,” the new “consensus contracts” being just one fruit of the changed mood.

“What everybody really wants are better project results. Everybody wants that. It benefits everybody. And now there is a sense that there is a better way of doing things.” CEG

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