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Sexism in the Certification Process (Part 3)

Sometimes there’s a major problem with the way government agencies decide which businesses can be certified as a WBE or DBE.

The rule of law in New York and elsewhere says that women who own businesses certified in a certain trade must have the technical expertise to perform the work of that trade. If a woman is the majority owner of a company that erects heavy steel, for example, then she must know how to do it in order to be certified as a WBE for work under that class code. But can she have the knowledge and experience, evidenced by an engineering degree, for example, to merely supervise the work? Or does she actually have to be able to operate a crane, weld and rivet. What if she is really good at business, and runs the company from top to bottom everyday, but wants to hire or partner with people who have the skills to perform fine carpentry work? Can she get the WBE certified for carpentry? Under the current law, or at least the way courts and certification officers are interpreting the law, the answer is, probably not.

Although it’s the law and must be followed, that doesn’t mean that we must follow it blindly. We must think critically about the law, and perhaps, if we think that the law is wrong in certain respects, if it produces injustice, we are obliged to try to change the law, for ourselves and for those affected who will come after us.

The interpretation of the regulations (which appear further below) prevent women, who happen to be entrepreneurs and good at business-related functions, like accounting, management and marketing, from hiring or partnering with those who have the specialized knowledge and skill sets necessary to provide the services or engineer the products sold by those companies. The regulations also prevent WBEs from operating in multiple and diverse industries unless the owner(s) had the technical ability to competently perform the services or make the products sold in each of those industries.

In short, the government’s reading of the regulation stifles innovation, restricts collaboration, and limits growth.

This must not have been the intended effect of these regulations. If it were, they would harm not help women and minority entrepreneurs seeking to do business in New York and other jurisdictions that have similar regulations.

We recognize and appreciate the countervailing rationale that supports the government’s more restrictive reading of the subject regulations. But the scenario in which a certification-eligible woman or minority acts merely as a front in order for de facto owners who are really in control to obtain a preference in the procurement of government contracts, is very different from the common scenario in which a woman owner with business acumen and management skills has partnered with someone who has technical knowledge and expertise, but perhaps little interest in running the business.

Under New York Executive Law §310(15), “a ‘women-owned business enterprise’ shall mean a business enterprise, including a sole proprietorship, partnership, limited liability company or corporation that is: (a) at least fifty-one percent owned by one or more United States citizens or permanent resident aliens who are women; (b) an enterprise in which the ownership interest of such women is real, substantial and continuing; (c) an enterprise in which such women ownership has and exercises the authority to control independently the day-to-day business decisions of the enterprise; (d) an enterprise authorized to do business in this state and independently owned and operated; (e) an enterprise owned by an individual or individuals, whose ownership, control and operation are relied upon for certification…” See, New York Executive Law § 310 (15).

In Northeastern Stud Welding Corp. v. Webster, a New York appeals court found that evidence was sufficient to support a determination that the corporation did not qualify as a woman-owned business enterprise. Although corporation’s sole shareholder and president was a woman, evidence indicated that control of corporation’s operations was shared between shareholder, her husband and a male employee, that shareholder had no training or expertise in corporation’s stud welding business, and that husband supervised all field operations and trained field workers. See, Northeastern Stud Welding Corp v Webster, 211 AD2d 889 (3rdDept 1995); citing, N.Y. Comp. Codes R. & Regs title 9, § 544.2(b)(1)(i, ii), (c)(3).

However, it could be argued that the statute in question, New York Executive Law §310(15), does not impose such an onerous requirement as the one that was upheld in the Stud Welding case. It could be argues that the standard is not that the woman-owned interest must have “training or expertise” in the business’s trade, in the above, a “stud welding business,” nor that the woman-owned interest must supervise field operations or train field workers.

The standard under the statute is that the enterprise be “(a) at least fifty-one percent owned by one or more United States citizens or permanent resident aliens who are women; (b) an enterprise in which the ownership interest of such women is real, substantial and continuing; (c) an enterprise in which such women ownership has and exercises the authority to control independently the day-to-day business decisions of the enterprise; (d) an enterprise authorized to do business in this state and independently owned and operated; (e) an enterprise owned by an individual or individuals, whose ownership, control and operation are relied upon for certification…” See, New York Executive Law §310(15).

The standard is further set out in the Department of Economic Development regulations as follows:  “Determinations as to whether minority group members or women control the business enterprise will be made according to the following criteria:(1) Decisions pertaining to the operations of the business enterprise must be made by minority group members or women claiming ownership of that business enterprise. The following will be considered in this regard:(i) Minority group members or women must have adequate managerial experience or technical competence in the business enterprise seeking certification.(ii) Minority group members or women must demonstrate the working knowledge and ability needed to operate the business enterprise.(iii) Minority group members or women must show that they devote time on an ongoing basis to the daily operation of the business enterprise.(2) Articles of incorporation, corporate bylaws, partnership agreements and other agreements including, but not limited to, loan agreements, lease agreements, supply agreements, credit agreements or other agreements must permit minority group members or women who claim ownership of the business enterprise to make those decisions without restrictions.(3) Minority group members or women must demonstrate control of negotiations, signature authority for payroll, leases, letters of credit, insurance bonds, banking services and contracts, and other business transactions through production of relevant documents.” See, 5 NYCRR 144.2.

Even given the explanation of the rule set out in 5 NYCRR §144.2(b)(1) often offered by the government, that the woman owner seeking certification show “managerial experience or technical competence” and “demonstrate the working knowledge and ability needed to operate the business,” it could and should be argued, for the reasons discussed above, that a woman owner seeking certification need only show managerial experience and does not need to show technical expertise, although she must also demonstrate a working knowledge and ability needed to operate the business.

The Difference Between “Delay” and “Disruption” in Construction Contract Claims and Why That Matters

Due to the complexity of construction, combined with changes often inherent as a result of the very nature of construction, a contractor’s actual performance can deviate significantly from its originally planned method, manner, sequence, and duration of work. A deviation can impact both the schedule performance period and the overall cost of the project.

Delay vs. Disruption

One recognized entitlement theory that a contractor can utilize for recovering damages caused by an impact is “Delay and Disruption.” Even though it is a common practice to generically refer to delay claims and disruptions as being synonymous, they are in fact very different, especially in terms of damages. For example, a contractor may experience a disruption to its planned method, manner, and sequence of work, but still complete the project on time without any total delay, through acceleration or other mitigative efforts.

While “delay and disruption” issues are usually easily identified, the effects of these types of issues are very complex and often difficult to quantify. When determining if a delay and/or disruption has occurred, it is necessary to distinguish the technical difference between a delay and a disruption. These are distinctions of considerable significance.

Delays are specific, singular events of conditions that result in the project completion and/or work actively starting or completing later than originally planned.  Disruptions include the effects of individual or multiple delays, as well as interruptions to the planned method, manner, sequence, and duration of work activities directly and/or indirectly associated with the impacting event. Disruptions usually affect labor productivity and can cause significant cost overrun variances in labor budgets. Disruptions are often contributing causes to a project delay when the delay-related impacts ripple throughout the project to both the work activities directly changed and the unchanged work not directly affected.

In the federal government contracts context, “the U.S. Court of Claims and the various boards of contract appeals have recognized a general right to recover for the cumulative effect of a multitude of owner-directed changes that, when taken collectively, can be greater than the sum of the effects of the individual change orders.” R. M. Jones, Lost Productivity: Claims for the Cumulative Impact of Multiple Change Orders, 31 Pub. Cont. L.J. 1-2 (2001). Whereas a change order may directly change the work being performed in a specific area, recovery under a cumulative impact claim rests on the acknowledgment that a change order “may also affect the other areas of the work that are not addressed by the change order.” Id. at 2. Thus, unlike the direct impact claim, which can be recognized when a change order is issued, the cumulative impact claim represents a claim for lost productivity on unchanged work that contractors claim is not foreseeable at the time the change order is issued. Specifically, unchanged work refers to the contract work not covered by a specific change order. Id. at 7. Cf., Roberts Constr. Co., 81-1 BCA ¶ 15,104 at p. 2 (holding that change orders did not bar equitable adjustment and stating that “[i]t is unrealistic to expect a construction contractor always to be in a position to price forward a required change arising during the course of performance with full awareness of the impact the changes will have on the project.”) (copy submitted as Exhibit B hereto).

“Cumulative impact claims are fact-intensive and require the contractor to substantiate its claims that its work was delayed or was performed in an inefficient, unproductive, or more costly manner as a result of the individual changes to the Contract.” Jackson Constr. Co. v. United States, 62 Fed. Cl. 84, 104 (2004) (citations omitted). The costs associated with a cumulative impact claim have been described as:  “. . . costs associated with impact on distant work, and are not readily foreseeable or, if foreseeable, as not [sic] readily computable as direct impact costs. The source of such costs is the sheer number and scope of the changes to the contract. The result is an unanticipated loss of efficiency and productivity which increases the contractor’s performance costs and usually extends his stay on the job.”  David J. Tierney, Jr., Inc., 88-2 BCA ¶ 20,806 at p. 59 (awarding cumulative impact damages).

Quantifying the Effects

Once events have caused a delay and/or disruption, the next and most complicated tasks are to quantify the effects that the resultant impacts have on the contracted performance period and determine the costs associated with the delay and/or disruptions. Quantifying the direct costs for delayed work can be a relatively simple task, but secondary disruption impacts caused by the “ripple” effect” require more sophisticated techniques. Costs can be segregated into two categories, delay costs and disruption costs.

Delay Costs include, but are not limited to:

  • Extended project management support
  • Extended engineering staff
  • Extended administrative support
  • Extended project and home office overhead, and general conditions costs
  • Idle tools and equipment, and
  • Direct costs of the change work directly affected by the delay

In addition to the aforementioned delay costs, Disruption Costs include, but are not limited to:

  • Efficiency decreased due to re-sequencing work or additional work activities in progress at a given time
  • Performance extended into a period of adverse weather
  • Dilution of supervision due to additional work activities to be manages
  • Overcrowding of trades, and
  • Acceleration– premium time/increases in manpower

Maximize Your Recovery

To maximize the recovery of the costs associated with delay and disruption, contractors must illustrate how the planned method, manner, sequence, and duration of work were affected/changed. Methods for measuring impacts associated with delays are different than those for disruptions. Delays can often be adequately illustrated using a Critical Path Method (CPM) schedule. Disruptions usually affect productivity rates and labor costs and proof of impacts are best measured by CPM schedule analyses, trending analyses, labor productivity data, and “clean period” (“measured mile”) analyses. In both cases, it is essential that the contractor have a CPM schedule developed prior to mobilizing to the project site or beginning work, and to status the schedule as the project progresses. If a delay does occur, it can be incorporated into the CPM schedule network using a “Time Impact Analysis” to illustrate the net effect of the delay on individual work activities and the contract performance period.

With the ever-present, day-to-day directed and constructive changes that occur on a construction project, and the burden of proof resting with the contractor, it is advisable for contractors to take a proactive approach to protecting their rights and their company from possible financial impact caused by delay/disruption.

 

Sexism in the WBE Certification Process – Part 2

Regulations lay traps for unsuspecting women seeking certification as a DBE or WBE.

The traps even ensnare women seeking re-certification years after operating successfully as a WBE and relying on the certification as the cornerstone of their business plan.

Take Jane Doe, for instance, she and her husband John (or father or male business partner as the case may be) got their business WBE-certified ten years ago. A nice gentleman from the Government came and knocked on Jane’s office door, interviewed her, asked questions about her business—the work she did, her market, her education and work experience and her plan for the future of her business. This gentleman reviewed a pile of Jane’s documents. Apparently the interview went well and he found the documents in good order, because a few months later Jane received a letter congratulating her on the new certification.

Immediately Jane dove into government contract work and out-bid her competitors, first as a subcontractor and then as a prime. She was mentored and gained valuable knowledge and skills. She hired more employees and her business grew.

Nobody ever told Jane about the trap lurking under every application for re-certification, one that would pull the rug out from under Jane and jeopardize everything that she had worked so hard to build and achieve.

Don’t learn about this trap the hard way—by having your certification revoked for failing to comply with regulations no one seemed to care about when you’re WBE certification was initially granted.

Be ready. Regulatory officers will knock on your door again, ask you questions aimed at determining who really controls your business—again—review your active contracts, finances and organizational documents—again—and if they don’t like what they read, see and hear, even if everything had been disclosed to them years ago, they’ll find you at fault and try to revoke—we’ll talk more about that process in a later article.

One of the most important questions they may ask is this:

“Is your capital contribution in proportion to your ownership or equity interest?”

You don’t know?

Better read this article and learn more. Because virtually every one of the businesses in the decisions linked below who lost their certifications, lost it because their capital contribution—of money, equipment, other property and expertise was out of proportion to their ownership percentage.

Jane owns 51% of Doe Corp but can’t prove that she contributed a commensurate percentage of the start-up capital. And she never quantified her expertise. Think she has a problem? Yes, she does.

Jane argues that the company didn’t need a lot of startup capital, and what she has contributed in uncompensated labor and expertise since those difficult early days eclipses what her partner put in. But Jane’s records are sparse. No time sheets, no acknowledgment in the corporate documents of the expertise she brings to the table. And to make matters worse, her partner took out a $20,000 loan in his name to get the business going.

The eligibility criteria specifically require a business seeking certification to demonstrate that the contribution of the woman owner is “proportionate to [her] equity interest in the business enterprise, as demonstrated by, but not limited to, contributions of money, property, equipment or expertise”

The “capital contribution test” in 5 NYCRR §144.2(a)(1) requires the applicant to demonstrate that the woman owner(s)’s contribution of “money, property, equipment or expertise” is proportionate to her equity interest. The purpose of this test is to guard against the installation of minority or women owners as majority shareholders in a business enterprise for the purpose of certification of the business as an MWBE.

A woman-owner must be able to demonstrate that she made a contribution in proportion to her equity interest, as required by §144.2(a)(1).

With respect to contributions of expertise, a woman-owner shouldn’t state vaguely that it’s “valuable.” She needs to quantify it, empirically. Unfortunately, Jane falls short in this regard.

She’s not alone. Every month more WBE and MWBE contractors fall victim to this trap, which could have been avoided with proper planning.

The numerous administrative decisions that revoke certifications for businesses like Jane’s can be viewed at: https://esd.ny.gov/doing-business-ny/mwbe/mwbe-certification-appeal-hearings.

Simply reading a couple of these decisions could teach WBE-applicants so much about the how to avoid the pitfalls that could lead to denial of their application or revocation of their certification, even years later, especially how to avoid this one particularly nasty trap that seems to trip-up the most experienced business people.

Don’t Leave Money on the Table – Request an Equitable Adjustment

Through various clauses, the government establishes its right to make changes in the contract statement of work or period of performance. In exchange for this right, the contractor receives compensating rights to equitable adjustments in contract price and/or schedule. The contractor exercises this right through the preparation and submission of a “request for equitable adjustment” (REA).

When a contractor performs work beyond that required by the contract without a formal change order, and such work was informally ordered by the government or is caused by government fault, a constructive change has occurred, thereby entitling the contractor to an equitable adjustment.  American Line builders, Inc. v. United States, 26 Cl. Ct. 1155, 1179 (1992).  As such, the contractor can submit a REA requesting to recover the additional costs and time to perform this work.  A contractor is entitled to an equitable adjustment when required by the government to perform work not called for in the contract and when performance generated additional expense. Design and Production, Inc. v. United States, 18 Cl. Ct. 168, 196 (1989) (holding that contractor was entitled to an equitable adjustment for performing extra work),citing, United States v. Turner Constr. Co., 819 F.2d 283, 286 (1987) (affirming entitlement to equitable adjustment).  A government contractor is entitled to an equitable adjustment to contract price upon showing the reasonableness of costs claimed and a causal connection between such costs and the event giving rise to the claim.  Delco Electronics Corp. v. United States, 17 Cl. Ct. 302, 320 (1989) (awarding equitable adjustment).  Thus, “the contractor should establish a logical connection between the costs and the event upon which the equitable adjustment claim is based.”  Id. at 320.

These principles are embodied in the “Changes” clause in the Federal Acquisition Regulations (“FAR”), which was expressly incorporated by reference into the ID/IQ Contract between FEI and the Government at Section I, p.69.  This FAR “Changes” provision states in relevant part as follows:

If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing . . .

FAR, § 52.243-4(d), Changes.

A party cannot change the contract at will by requiring or dropping out fundamentally identified contract requirements and/or standards and then not pay for added effort, if added effort was required as a result of the changes.  See Taylor & Partners, Inc, VABCA 4898, 97-1 BCA ¶ 28,970; Fanning, Phillips & Molnar, VABCA 3856, et al., 96-1 BCA ¶ 28,214; modified on reconsideration, 96-2 BCA ¶ 28,427.

“[A] design contract, like any contract [ ] has limits and includes provisions which define scope and set out requirements which are not expected to change.  To determine if a design change is compensable, “the timing of such a [design] change and the level of effort required of the designer [in order to] determine the extent, if any, to which the A/E may be entitled to an equitable adjustment.”  Taylor & Partners, Inc., VABCA 4898, 97-1 BCA ¶ 28,970, at 144,267 (quoting Fanning, Phillips & Molnar, VABCA 3856, 96-1 BCA CBCA 5410 13 ¶ 28,214, at 140,833-834, modified on reconsideration, VABCA 3856R, 96-2 BCA ¶ 28,427).  For example, in a similar case to the one at hand, the BCPeabody case, the court held:

Significant changes to the equipment BCPeabody expected to use on the project and inaccuracies in the VA’s as-built HVAC plans, both identified late in the design process, caused BCPeabody to rework the design in a significant way. The timing and extent of these design changes entitle BCPeabody to an equitable adjustment in the amount of $32,000 for additional A/E services. BCPeabody is also entitled to ten percent for overhead and profit for the first $20,000 awarded and seven-and-one-half percent for overhead and profit for the next $30,000 awarded, for a total of $2900 for overhead and profit. 48 CFR 852.236- 88(b)(5) (2008) (VAAR 852.236-88(b)(5)). The total amount awarded is $34,900.

BCPeabody Construction Serv. Inc. v. Dep’t of Veterans Affairs, CBCA 5410 (March 26, 2018)

Recognizing REA situations is the responsibility of all contractor personnel. Everyone involved in contract performance needs to be able to recognize deviations from the contractual statement of work, terms of the contract, and the period of contract performance. Only by knowing what is required by the contract can REA situations be identified, therefore communication, training, and awareness are critical.

Advantages of the REA Process Utilizing the REA process can provide several significant advantages to the contractor, including the following benefits.

Improvement of Profit– The biggest advantage to utilizing the REA is receiving what is rightfully yours. We all want to be responsive suppliers, but we must be compensated for changes in the contract that increase cost or change the period of performance. Contractors are not obligated to absorb these costs in their profits.

Increase in Competitiveness– Utilizing the REA can be a subtle way to increase your competitiveness. Pricing only what the proposal specifications request and not including those items not requested may mean the difference between winning and not winning the award. Let the changes process, on a noncompetitive basis, correct for request for proposal deficiencies.

Avoid the Perception of Program Mismanagement– Utilizing the REA can help avoid the perception of mismanagement when delays and overrun situations occur. Documented and negotiated changes in the contract price and/or schedule place the responsibilities for cost overruns and untimely performance on the buyer, not the contractor.

REA Requirements REA situations apply to all contract types— firm-fixed-price, cost reimbursement, time and materials, labor hour, and even General Services Administration multiple-award contracts. Any performance situation where requirements are not considered in the negotiation process and determination of the price could create the need for an REA. Bottom Line –To receive an equitable adjustment, a contractor must be able to establish the following:

+ The need for an adjustment (HARM),

+ The connection of these circumstances to the contract (ENTITLEMENT), and

+ The reasonableness of the amount of adjustment requested (QUANTUM).

 

Sexism in the WBE / DBE Certification Process (Part 1)

The regrettable presumption that someone’s daughter, or wife, doesn’t have what it takes to operate a construction company, was started not by misogynistic certification officers, it started with a few contractors’ deceptive practices.

Here the cliche is true—a few bad apples—men who wanted more contracts and convinced close female family members to pose as owners so they could get them—spoiled it for everybody else. (Human nature I guess.) They roped in wives and daughters and nieces who knew little about the business and had little interest to learn, and some of these companies, it is rumored, made many millions of dollars as a result.

So now virtually every time a woman applies for certification as a WBE or DBE, there is an inherent suspicion that someone else is pulling her strings, putting her up to it, gaming the system, getting a leg up—that is—illegally gaining a preference in the competitive bidding of public contracts, or deceptively marketing themselves as a subcontractor with the powerful capacity of providing coveted DBE credits toward goals.

This is especially true when the company does work that has cultural connotations that are masculine. 

“The macho work of masons and steel erectors could never be done by woman.” The misogynists may think to themselves. Their illogical way of thinking, I guess, sounds something like this: “if she can’t push a wheelbarrow full of concrete or carry cinder blocks up a scaffold, then she can’t understand and supervise the technical aspects of that work.” What a bunch of BS if I ever heard it. 

This is the first article of a series in which we’re going to review not just the basic prerequisites to certification, we’re going to discuss what the standards mean. That way, you can be ready when the questions start.

When a regulatory officer of a large city, state or federal agency starts to investigate whether you are really who you say you are, really the owner, not just in name but in fact, really in control, really have the knowledge, skills and experience to run the company—you will be ready. You will already know what the rules are and how they apply to you. You will have done your homework and complied with the regulations, not just on paper, but in reality. 

This first problem most applicants for MWBE or DBE certification encounter is… the requirement that the person’s capital contribution is in proportion to her ownership interest. This technical legal / accounting jargon is confusing. Many applicants don’t understand it and are rejected or have their certifications revoked because they violate this requirement, which can be found in one form or another in most state and federal regulations governing the certification process. Indeed a brief review of the administrative agency decisions denying or revoking certifications reveals that almost all are based on the applicant firm’s failure to meet this basic requirement. So what is its all about? What’s the idea? 

The easiest way to understand this requirement is by understanding the illegal situation it is trying to prevent. Let’s say, for example, a woman (or minority) owns 90% of the firm (on paper), but someone else, the 10% owner, perhaps a husband or a father or a non-minority, male “partner,” put in all the start up capital, the equipment, the money, maybe the building in which the company’s offices are located. This isn’t permissible, because it’s pretty obvious that such circumstances point to the woman being only the nominal owner. And even if the legal documents of the company put her in control (on paper), the reality is it’s hard to exercise independent control over a business that someone else has funded. So, in order to ensure that owners are really driving the bus, so to speak, this regulation requires them to put their own assets at risk. 

Speaking of risk, it’s also important that the woman or minority owner’s share of the profits and losses is in proportion to her ownership interest. For example, if the owner is a 90% owner, but only shares 50% of profits and losses, then the share of the MWBE owner is not proportionate to their ownership interest.

More to come on this…

 

Subcontractor’s Claims on Federal Contracts

Direct subcontractor claims are not authorized by the Contract Disputes Act (CDA) because there is no “privity” of contract between the government and the subcontractor. Specifically, there is no direct relationship between the parties. [See United States v. Johnson Controls Inc., 713F.2d 1541 (Fed. Cir. 1983).]  A subcontractor can make a claim against the government only if it is authorized or “sponsored” by the prime contractor. (See Batteast Construction Co., ASBCA No. 30452, 89-3 BCA : 21,933.) A prime contractor can sponsor a subcontractor’s appeal only if the prime contractor may be liable to the subcontractor for the amounts claimed. If the subcontractor releases the prime contractor from liability, the prime contractor cannot pursue an appeal of behalf of the subcontractor. [Severin v. United States, 99 Ct. Cl. 435, 442-43 (1943).

Protect Subcontractors from Bad Project Owners with these Words

It can’t be done, they say. You’re a subcontractor on a project with an owner that has screwed up everything from day one, and you want to sue the owner directly for damages because of project mismanagement so bad it should be criminal, but it can’t be done, they tell you. Filing a mechanic’s lien won’t work. The time to do that has expired. So have your payment bond rights.

You can’t sue the owner because you don’t have a contract with him, they say. You can sue the prime, they say. But she didn’t do anything wrong.

They say there’s this legal concept called “privity of contract” that stands like a brick wall one hundred feet tall between you and your claims against the owner. You can sue the prime contractor because your subcontract is with the prime. You are in “privity” with the prime contractor. (Have you heard this before?)

But this prime contractor suffered severe losses as well because of the owner’s terrible ways. The prime is innocent, and you have a longstanding and profitable relationship with this prime and she has a good reputation. This prime contractor is old school. She takes care of her subs. This project got so bad, though, because of the owner, it became a situation in which every contractor (sub and prime) had to fend for himself or herself.

You have no legal recourse against the owner, they say. Or do you?

There is subcontract language—a provision that your friendly prime contractor might agree-to, that could be your saving grace—that could propel you over that tall wall of privity.

You’re a specialty contractor—you erect steel or excavate underwater and that gives you bargaining power. You can ask to have this provision inserted into your subcontract. The provision allows you, as subcontractor, to recover directly from an owner.

Read on and find a sample of these magic words and a brief explanation of how the provision works. Also, check out the sidebar article to see how the law treats this issue in federal contracts.

The provision is called a “liquidating agreement,” and here is some sample language.

But first—disclaimer: use at your own risk or consult a knowledgeable attorney – different courts have arrived at different conclusions on whether these provisions are enforceable.

“Contractor shall have no liability to Subcontractor in respect of acts, errors, omissions or defaults on the part of Owner or its representatives or in respect of acts, errors, omissions or defaults on the part of Contractor in any way attributable to or arising out of such acts, errors, omissions or defaults of Owner or its representatives (including, without limitation, wrongful termination of the Contract), save insofar as Contractor shall recover from Owner compensation or damages in respect of such acts, errors, omissions or defaults and such compensation or damages shall include a sum in respect of any amounts claimed by Subcontractor and notified to Contractor prior to submission of its claim to Owner, and Contractor will in such event include the amount of such claim in its claim against Owner. Payment of such sum by Contractor to Subcontractor shall be in full and final settlement of any liability of Contractor to Subcontractor in respect to Subcontractor’s claim or of the circumstances giving rise thereto. Contractor undertakes to use its best endeavors to pursue any claim against Owner arising out of any such acts, errors, omissions or defaults, and Subcontractor undertakes to pay to Contractor a proportion of the costs incurred by Contractor in pursuing any such claim equal to the proportion which Subcontractor’s claim bears to the total of Contractor’s claim.”

That’s a mouthful, eh?

The prime contractor is promising to reimburse you for damages due to the owner’s actions, but only if, when, and to the extent that the prime contractor receives payment from the owner for the subcontractor’s damages. The prime functions as a pass-through, that is, money recovered from the owner passes through the prime directly to you the subcontractor.

The prime must acknowledge her liability to you the sub for losses caused by the owner, which then obligates the prime to prosecute the subs claim against the owner and pass any money recovered back to the sub.

Primes usually have to “take all reasonable steps so that the [subcontractor’s] right to an eventual recovery, if any, from the [owner] will be protected.”  If not, the prime could be liable to the sub for breach of the liquidating agreement.

Guess what? If a liquidating agreement isn’t in writing, The New York City Comptroller’s Office won’t pay a subcontractor’s claim.

 

 

 

 

 

Basics of Terminations for Convenience

The government has the contractual right to terminate a contract, in whole or in part, either for default or for convenience if the contracting officer (CO) determines that a termination of an existing contractual arrangement is in the best interest of the government. In return for this right to terminate a contract for convenience, the government will usually pay the contractor the price of completed items (delivered and accepted or not yet delivered), its allowable cost and reasonable profit relating to the terminated portion of the contract, and settlement costs incurred by the contractor as a result of the termination.

Terminations for convenience are covered by myriad Federal Acquisition Regulation (FAR) clauses, but even when specifically deleted by the contracting parties, a termination for convenience clause is read into contracts as a matter of law. This is known as the Christian Doctrine. Terminations, either for convenience or default, are for the convenience of the government, not the contractor. They are not limited to situations where the subject supplies or services are no longer needed. Some factors that can trigger a termination include:

  • Inadequate funding,
  • A deteriorating government/contractor relationship,
  • Cost overruns, or
  • The contractor’s failure to agree to contract restructuring.

The government has broad rights associated with the termination of a contract for convenience, and it is virtually impossible for a contractor to successfully challenge the termination.

When confronted with contract termination, the contractor must immediately stop work on the terminated portion of the contract, terminate all open subcontracts, and protect and preserve any property of the government until disposal directions are received. Unless authorized in writing by the terminating CO (TCO), any work performed after receipt of the notification of contract termination is performed at the contractor’s risk. Charge numbers should be established to document any costs incurred as a result of, and after receipt of the termination notice. Subcontracts are the responsibility of the prime contractor, who serves as the TCO in place of the government’s assigned TCO. Subcontractors have no termination rights against the government.

The preparation, submission, and prompt resolution of a termination settlement proposal made to the cognizant TCO requires a dedication of time and a particular expertise not generally available within most organizations. To remain competitive, particularly in today’s downsizing environment, companies have taken to outsourcing the majority of these efforts. These costs, whether generated internally or externally, prior to the time that a claim arises under the Contract Disputes Act, are allowable. The types of costs generally included in this category include: accounting, legal, clerical effort, and similar costs reasonably necessary for the preparation and presentation, including supporting data, of proposals to the TCO.  FAR 31.205-33(d).

This is Why Your Union Audit Feels Like a Body Cavity Search

The audit notice always comes without warning or reason. You haven’t had any problems with the workers. They’ve (almost) always been great. No one has filed a grievance. The union men and women like working for you and you appreciate their skill. It’s not about them. Still, all of your wages, prevailing and otherwise have always been paid, and paid on time, and none of your fringe benefit pension fund contributions are delinquent. What gives?

Remember that trust agreement that was referenced in the collective bargaining agreement? No? Oh wait. You didn’t read the CBA. When you asked to see it, the Union sent you a couple pages with signature lines at the end. You signed it and sent it back, thinking that that was the agreement. It wasn’t. That was the signature page. You signed it and sent it back and entered into a relationship that requires that same level of commitment and is as difficult to terminate as a marriage, with breakups that are as financially devastating as a divorce. (This is overstatement for effect, but you get the idea).

Even if you had asked to see the entire CBA, you may not have been much better off. They’re usually unnecessarily long and disorganized, and filled with enough legalese to render the whole document absolutely incoherent, requiring a team of lawyers to untangle the provisions. And worse, even if you had pawed through the whole thing, you may have found that the CBA doesn’t cover whole “agreement.” Other documents and schedules and exhibits referenced in the CBA sometimes are not attached/included. Sometimes you have to specifically ask for those too. Important documents like the one that controls your liability under the audit we’re talking about—that is, the trust agreement.

We’re not suggesting that unions are intentionally trying to deceive employers. Many employers have great relationships with unions. It’s not the union’s job to explain to you your rights and obligations as a union employer. Employers should know what they’re getting into, that’s all.

Which brings us back to the union audit and that trust agreement. The audit notice says that the union wants to review your books and records covering a six-year period—the whole time that you’ve been a union employer. As audits go, that’s quite a long period of time. The auditors are also going to look at payroll and related personnel records for ALL of your employees, union and nonunion, to check employee classifications. Even those employees who the employer claims are not plan participants.

Here’s a list of what the union might ask to see:

Annual Tax Returns, Employer’s IRS Form 940

Employer’s Quarterly Returns, IRS Form 941

Employer’s State Payroll Tax Returns

Individual Employee Records

Weekly Payroll Books

Certified Payroll Timesheets

Cash Disbursement Journal

General Ledger Employees W-2’s and W-3

Copies of payroll reports to all benefit funds

Bank Statements

Copies of canceled checks

Weekly Payroll Remittance Reports

All this document review is with an eye to see if you owe additional fringe benefit fund contributions. And if you do, plan on receiving a whopping bill, including whatever penalties and interest they can assess, as provided for in that trust agreement you never read.

So how is this possible? How can union fringe benefit funds exert so much power and control over your business? You would think that employers had some kind of privacy right against such an intrusion.

Believe it or not, in 1985 one employer took this argument all the way up the United States Supreme Court, and lost. The case started in Michigan. A company named Central Transport was the employer. And the court ruled that by the power of ERISA laws (legislation that covers employee benefit / pension funds) and the trust agreement you signed when you also signed the CBA, unions, particularly their fringe benefit funds, can give employers the rubber glove treatment.

That is, the records of not-concededly-covered employees are deemed “pertinent records” because their examination is a “proper” means of verifying that the employer has accurately determined the class of covered employees. The plans have a substantial interest in verifying the employer’s determination of participant status, because an employer’s failure to report all those who perform bargaining unit work may prevent the plans from notifying participants and beneficiaries of their entitlements and obligations under the plans and may create unfunded liabilities chargeable against the plans.

And there it is—the reason why union auditors can dig so deep into your records.

Sometimes it’s good to understand what you’re up against.

 

A Lifeline for Contractors Abused by NY Government

It’s getting near the end of the project from Hell.

“This government contract is going to be my last,” you tell yourself.

Just about everything went wrong, the Government engineers and contracting officers were unresponsive, rarely available, and when they did communicate with you, they were totally unreasonable, real jerks.

Then to make matters worse, one guy from the Government made it his purpose in life to make things difficult for you, to make sure, it seemed, that you didn’t complete the job. He wanted you to fail, quit, or breach. He would interfere with your project managers, undermine you at job meetings and refuse to cooperate with you regarding minor accommodations, like finding a place onsite to store materials. Plus your union gave you trouble. Suppliers made deliveries late. There were design errors, work sequencing issues, subcontractor incompetence. The list goes on…

But you persevered. You racked up all kinds of additional costs that ate up your profit margin. You completed the job—at a loss. You met your commitment to the Government and fully performed your contract obligation to build a road, erect a convention center, wire IT infrastructure, develop software, or whatever, but you did it at a horrible cost—in money, in other opportunities, in reputation. So you want to sue the pants off of these SOBs.

Now the Government wants to close out the contract and watch you take it on the chin. But first, of course, they drag you over the coals and make completing the punch-list such a miserable experience, all you can think about is being done, getting your men and women and equipment out of there, off the jobsite, and onto more profitable work. And while you’re thinking all this, when you literally can’t wait any longer to be done, the Government offers you “final payment.”

As you look at the check and the paperwork that goes with it, a thought creeps into the back your mind—a conversation you may have had with a lawyer-friend, or a contractor who has been around the block.

You think, “If I accept final payment, am I losing my right to claim additional money for the extra work and delay costs that have buried me on this job? Am I losing my right to sue? After the disaster this job has been, I need this money to stay afloat. Should I take it? Do I accept final payment?”

In the common law, which is made from the decisions in prior court cases, there’s a rule called “accord and satisfaction.” That law says, basically, when you have a dispute with someone who owes you money, and that someone partially pays this debt to you, and you accept the partial payment, deposit the check, that someone can argue that you accepted his partial payment in full satisfaction of the greater debt he owed. Sometimes a savvy debtor will even write “payment in full” discretely somewhere on the check to drive the point home and lock in this defense against further payments.

There are some legal tricks a creditor can employ to avoid this pitfall, like writing “under protest with full reservation of rights,” on the back of the check prior to depositing it.

But remember, this is a big Government contract with all sorts of close out paperwork that you must sign as a condition to receiving final payment—paperwork that attempts, perhaps, to absolve the Government from any responsibility for your damages. Little tricks of the legal trade like those mentioned above, performed in the context of routine bank transactions, may not be much help.

If you’re in New York, here’s the law that WILL help.

“No provision contained in a construction contract awarded by any state department or agency shall bar the commencement of an action for breach of contract on the sole ground of the contractor’s acceptance of final payment under such contract provided that a detailed and verified statement of claim is served upon the public body concerned not later than forty days after the mailing of such final payment. The statement shall specify the items upon which the claim will be based and any such claim shall be limited to such items. Any provision of subdivision four, section ten of the court of claims actto the contrary notwithstanding, an action founded upon such statement of claim shall be filed within six months after the mailing of the final payment. No payment to the contractor shall limit or qualify any defense, claim or counterclaim otherwise available to the public body relating to the contract involved.”

Get it? The law allows you as contractor to accept final payment from the Government without losing your right to sue, SO LONG AS, you file the required Statement of claim. You will lose your rights under this law just as easily as you got them if you forget to provide the detailed and verified Statement of claim NOT LATER THAN FORTY DAYS after the mailing of final payment. We cannot over-emphasize the importance of providing this Statement on time. Failure in this regard would mean death to your lawsuit—a fatal blow. Game over.