When a general contractor submits a bid to build a building, the bid is based on a specific time frame. Normally, the GC proposes a specific start and completion date, and based on that time frame, the GC includes a specific amount of money in their bid for General Conditions. General Conditions may include jobsite trailers, fuel, office expenses as well as field and office supervision, among other things that would be considered jobsite overhead.
When a GC bids a 10-month job and estimates $500,000 in general conditions expense the GC is planning to spend $50,000 per month. If the job ends up taking nine months, the GC saves $50,000. If the job ends up taking 12 months the expense to the GC is $100,000.
If the GC determines it was the owner’s fault that the job took 12 months rather than 10, the GC may ask the owner to pay the extra $100,000. If the GC is working for a fair and reasonable owner the owner may agree to pay. If the owner refuses to pay the GC may resort to other tactics.
The GC could file a claim against the owner or take other legal action in an effort to collect the $100,000. Another option is to collect from subcontractors who may have delayed the project.
Subcontractors also bid projects with specific durations in mind. A plastering subcontractor who bids a lump sum of $200,000 does so with the GC’s scheduled start and completion dates. If the schedule indicates the plasterwork will start in January and end in April, the subcontractor based his or her bid on a four-month schedule. If the job were estimated to include $20,000 in overhead and $25,000 in profit over a four-month period it would mean the subcontractor could expect to generate $45,000 in that four-month period.
If the job only takes three months, the subcontractor earned the same amount of money in a shorter period of time, which on an annual percentage basis is a huge bonus. However, if the job takes the plastering contractor six months to complete rather than four months, the subcontractor has taken a substantial loss on an annual percentage basis as well as from an overhead basis.
The question a subcontractor has to consider is whether there is entitlement to additional compensation if the work couldn’t be completed in four months as a result of the actions of others. If the subcontractor finds that it was the owner or GC’s fault, then the subcontractor has to consider if it’s worth pursuing the issue.
The fact of the matter is that subcontractors really do base their bids on duration, as do GC’s. However, most contracts give control of the schedule to the GC and these subcontracts also include language allowing the GC to modify the schedule without compensating the subcontractor.
The New York Supreme Court ruled that subcontractors who do not limit the contract language by actually writing in the duration dates for their work are not entitled to additional compensation for delays or escalations of the schedule, as I understand the ruling.
This ruling significantly changes how subcontractors have to deal with contracts and schedules. Subcontractors can create a proposal that indicates durations. However, if those durations are not made part of the subcontract, the subcontractor will not be entitled. Think of it in terms of how little control you have. If the GC wakes up one morning and figures out he can save $50,000 in general conditions if he gets the job done one month earlier by escalating the schedule; the subcontractors will be contractually required to escalate the schedule without compensation.
As well, if the GC extends the schedule and is compensated by the owner for doing so, the subcontractor is not necessarily entitled to additional compensation unless the subcontractor’s contract includes durations.
I was involved in a project where our work started four months later than scheduled, and the completion date for our work was extended six months past the original date our work was to be completed. The cost impact this created was substantial material increases, additional overhead, and the new schedule conflicted with other projects we had starting. Besides known cost impacts, there was an impact on how we had planned to utilize our field supervision. We couldn’t pull the supervision off of a job in progress that should have been done and replace them with new people unfamiliar with the job.
FairnessSubcontractors who work with GCs who are fair will be more profitable. Since the New York Court ruling, subcontractors will find GCs to be less willing to allow duration dates in subcontracts. The reason they will object is due to the fact that the Court is saying that if the subcontractor limits the schedule language by writing in duration dates, the subcontractor should be entitled to additional compensation!
In other words, the Court ruled in favor of the GC, but having done so, the Court is telling subcontractors, “if subcontractors modify the subcontract by writing in the duration dates, their chances for entitlement are greatly enhanced.”
Most construction attorneys in the U.S. are aware of this court ruling and most are advising their clients on the subject. An attorney for a GC will most likely advise his client not to allow its subcontractors to include duration dates on any given subcontract.
The reason attorneys for GCs will recommend this is because they know that it will be very difficult for them to defend a lawsuit where the subcontractor limited the durations in a subcontract. Why? Because the Court ruled that if a subcontractor does not limit durations in the subcontract they are not entitled. In my opinion this is basically a signal from the Court telling subcontractors they are crazy if they don’t limit the durations.
Worth the RiskWhen a GC bids a project for an owner the proposal always includes overall durations. In other words the GC limits durations with the owner, but GCs don’t want subcontractors to limit their durations in the subcontract.
Subcontractors who don’t see the issue of durations as a serious problem are most likely the same subcontractors who didn’t see the “pay if paid,” contract language as a problem. The rights of subcontractors have been greatly diminished in the last 25 years, and subcontractors as well as subcontractor associations have allowed it. In the last 25 years, the risk for subcontractors has greatly increased and the risk to GCs has greatly decreased.
Subcontractors can continue to give up more of their rights and take on more risks or they can take the advice of the court and include duration dates in their subcontracts.
How To Limit DurationsWhen you receive a subcontract you will find areas in the contract that relate to schedule. Where there is room you can write-in the following: The subcontract price is based upon us starting work January 2008 and completing our work January 2009. Where you write in the language is not nearly as important as making sure you write it in.
Will you or I walk away from a job if the GC refuses to let us write in the durations? I would suggest that before walking away, we work at negotiating acceptable language. Maybe you agree to the words “roughly or approximately” before the actual start and completion date. Maybe the GC will accept the language if you expand the durations somewhat.
Modifying contracts is simply a process of negotiation in order to level the risk between the parties. GCs who refuse to negotiate unreasonable terms and conditions are GCs we should avoid. Avoiding them will impact them!
Remember: Teamwork begins with a fair contract.