Using a Notice Provision
Duck or Duct Tape
Johnson & Johnson’s Revolite division made a medical adhesive tape from duck cloth beginning in 1927. A team headed by Revolite during World War II developed a new adhesive tape for the U.S. military, intended to seal ammunition cases against moisture. According to Johnson & Johnson, the idea came from a factory worker and mother of two Navy sailors worried that that ammunition box seals were basically inadequate. Vesta Stoudt wrote a letter to President Roosevelt in 1943 with the idea of sealing ammo boxes with a fabric tape, which she had previously tested at her factory. As a result, the product we all know and love “duct tape” was born, a product so versatile it should be categorized as a tool.
A little known or used tool subcontractors often overlook, may not understand, or are fearful of using to protect their bottom line on a project gone wild is the “notice” provision in nearly all subcontracts. A subcontracts “notice provision” is a provision allowing subcontractors the opportunity to notify their clients that they have been impacted in some way. However, nearly all subcontracts limit the amount of time subcontractors have to give notice. The time limits vary from contract to contract, however, the most common notice requirement is five days from the date the subcontractor became aware of the cost impact.
There are two reasons why “notice” provisions give subcontractors a limited amount of time to submit impact “notices.” The first being, the owner-general contractor needs to know that an impact occurred giving them the opportunity to address or correct the problem. If owners or general contractors are not given notice, their legal defense will be what is known as being “prejudiced,” meaning that since the subcontractor did not give notice, “the owner-general contractor was not given the opportunity to correct the problem.”
The second reason subcontractors have a limited amount of time to give notice of cost impact is to have a mechanism within the contract that closes the door of opportunity, in this case every five days. In other words, day in and day out, throughout the course of a project the requirement to give notice is ticking away like a clock.
A simple example is when an owner or general contractor makes a schedule change that may or may not have a cost impact. Once the schedule change is made, and if a subcontractor finds that the change will result in a cost impact, the subcontractor has, in this case, five days to give a cost impact notice. If notice is not given within the five-day period the subcontractor’s window of opportunity closes.
In my book, 20/20 Change Order Pricing,I developed the acronym SSSM representing, (schedule, sequence, supervision and manpower) in an effort to give subcontractors a point of reference in determining additional costs related to change orders and cost impacts.
How SSSM relates to cost impacts substantially depends upon a project manager’s ability to understand what is currently happening on a job and what will happen in the future. A project manager’s ability to identify cost impacts as a result of the actions or inactions of others is a very important critical thinking skill that must be taught to ensure that managers capture these costs.
The SSSM process is a project filter allowing a project manager to consider impact costs that may be occurring or may occur in the future as a result of changes to the subcontractors original “schedule, sequence, supervision and manpower,” plan. The driver of the SSSM process is the “schedule,” knowing that once a project schedule changes, other changes follow that can have a devastating impact to a subcontractor’s bottom line.
Contractually, owners and general contractors have complete control over the schedule and have the right at any time to modify the schedule and direct subcontractors to comply with any schedule revision made. However, the right to do so does not limit a subcontractor’s right to be compensated for any cost impacts schedule changes may have on subcontractors.
A project manager’s job is to assess every change and determine whether or not the change impacts their originally planned schedule, sequence, supervision and manpower plan. If the project manager finds that it does, it is the manager’s responsibility to give notice within the time limits of the contracts notice provision.
Charge As You Go
When a project manager applies the SSSM filter to any change and determines an actual or potential cost impact, the manager should prepare a cost impact notice immediately. The notice should describe the actual or potential impact the change is having or may have, and should include an estimate of impact costs. For example, the general contractor on a job directs its painting subcontractor to start painting all the living units on a particular floor, but not the bathrooms.
The first thing the painting project manager should consider is whether or not this change impacts its originally planned schedule, sequence, supervision or manpower. If the manager determines the change may or actually does create a cost impact, the manager should prepare a cost impact notice and cost estimate within the time frame noted in the contract “notice” provision.
When a project manager is not sure if a particular change will result in a cost impact, the manager is well within their rights to explain in the cost notice letter that the change “may” result in additional costs to be determined. If the notice provision limits the amount of time the manager has to submit the actual estimate of cost, the manager should prepare to the best of their ability a cost estimate and submit it to the client. If the manager determines the cost to be more or less after the change is completed, the manager can then submit a revised “notice of cost.”
Project managers should always address each “cost impact” as it happens rather than addressing them after the fact to ensure the highest likelihood of payment including but not limited to the right to file lien on a project for costs submitted, but left unpaid. For example, if the painter submitted a cost impact notice within the time frame of the notice provision of the contract in the amount of $50,000 and the client refused to issue a change order for the impact, the painting contractor would have every right to file a lien to protect its financial interest in the submitted change.
In other words, if the painting subcontractor followed the contract notice provision requirements and is not paid, the next step in the process is to settle the issue through the contract “dispute resolution,” process commonly included in most subcontracts. As a result of the painting subcontractor having followed the contract notice provision, and the contract having a “dispute resolution” process the painting subcontractor in this case may file a proper lien, and then follow the dispute resolution process.
Understanding why subcontracts include both a “notice and dispute resolution,” process is very important for the project manager to understand. The simple answer is, “if subcontracts didn’t have these two provisions they would be considered unreasonably unfair,” in this case to the subcontractor. The notice and dispute provisions are two provisions that level the playing field because they provide subcontractors with a legal process in pursuing their claim, including the right to file a lien to secure their financial interest in the claimed amount and legal process in settling the subcontractor’s claim through the dispute resolution process.
An Under Utilized Option
My goal in writing this article is threefold. The first being to inform subcontractors that the notice provision opportunity is available. The second goal is to help subcontractors understand why subcontracts include the notice provision, and lastly, the reasons why subcontractors underutilize this very important opportunity.
There are a multitude of reasons why subcontractors don’t take advantage of the “notice” provision opportunity, including that some subcontractors don’t want to make waves, thinking that using the notice provision may alienate the client.
In an age where there is so much talk about keeping people accountable I find it strange that subcontractors are unwilling to keep their clients accountable for their actions or inactions. If all subcontractors utilized the contract notice provision to keep owners and general contractors accountable for their actions-inactions, owners and general contractors would carefully consider the consequences of their actions/inactions knowing they will be held accountable.
If you are a subcontracting firm or a manager for a subcontracting firm wanting to keep owners and general contractors accountable for their actions or inactions, you should have a good understanding of the “notice” provision in your contract. As well, it’s so important for managers to be taught how to think critically in determining how their client’s actions or inactions impact them.
The SSSM (schedule, sequence, supervision, manpower) filter allows subcontractors to judge a client’s actions or inactions. Meaning, when an owner or general contractor makes a change or does not make a change that should be made, the subcontracting project manager must have the ability to forecast the impact of their client’s actions or inactions.
The manager should then consider whether or not the client’s action or inaction has any impact on the subcontractors originally planned schedule today or in the future. Once the manager determines that the change is having or will have a schedule impact, the manager should then consider whether or not the change would impact their original planned “sequence, supervision or manpower.”
If, for example, the manager finds that its planned sequence has changed or will change or that additional supervision will be required or that manpower will ramp up or down as a result of the client’s actions-inactions the subcontractor is then entitled to submit its costs according to the “notice” provision.
A Step-by-Step Process
- Identify client actions or inactions that are having or may have in the future a negative impact on your originally planned SSSM.
- Determine which category the impact affects. Does it affect one or more of the categories? (Sequence, supervision or manpower.)
- Estimate the cost impact.
- Submit the cost impact according to the “notice” provision requirements.
It’s interesting to note that some impact issues compound over time. In other words, some issues are deceptive because they start out as small issues and grow to be big issues, such as in the case of owner design changes. As the number of design changes increase, project managers think they are covering the cost of these changes in their change order pricing proposals not realizing the cumulative impact an excessive number of owner related design changes have on the overall job.
Here are a few of the most commonly overlooked and misunderstood issues impacting subcontractors originally planned SSSM.
- Excessive amount of change order work
- Excessive number of owner related design changes
- Excessive number of RFI’s
- Schedule deviations
- Preceding trade delays
- Unplanned phasing
Once a project manager realizes that an excessive amount of changes is impacting his or her work the obvious solution is to give “notice” and submit a cost impact. The same is true for each of these commonly overlooked issues. Applying the SSSM filter to determine the impact of an excessive amount of change order work, owner design changes, RFI’s, schedule deviations, delays or unplanned phasing is no different than determining the cost of an incoming change order from the client.
Beware that it is unlikely that any owner or general contractor is going to ask its subcontractors to price cost impacts affecting the subcontractors originally planned schedule, sequence, supervision and manpower plan. In other words, subcontractors are contractually responsible for determining whether or not their client’s actions or inactions give rise to a cost impact.
As you consider using the SSSM filter and the contract notice provision tools to protect your bottom line, consider for a moment the history of “duck tape.” As a result of one person’s idea to solve a problem, “sealing ammo boxes to keep moisture out of the ammunition,” I wonder how many soldiers took action to seal their ammo boxes and I wonder what the consequences were for those who didn’t?
Remember: Teamwork begins with a fair contract.