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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.

Magic Words to Stop the Worst DBE and MWBE Abuse (Part 2)

In our last article we identified the issue—a terrible problem plaguing DBE and MWBE subcontractors—wasting their time, draining their resources and crushing their expectations. We heard from a lot of you in response and appreciate your feedback and encouragement in addressing this problem that no one in the industry seems to want to talk about. That problem is, the practice of prime contractors soliciting proposals from you, including them in their bid, and then, after the prime contract is awarded to them, forgetting that you exist.

What makes this bad practice all the more galling is that they’re using and enjoying the benefit of your DBE and MWBE certification to make their bids look more attractive to procurement officers under pressure to meet DBE and MWBE contracting goals. (State agencies receiving federal money often get audited to check if the DBE and MWBE goals they claim to have met are backed up by proof of dollars actually paid to DBEs and MWBEs.)

So prime contractors are using you to help them win bids and then kicking you to the curb upon award. Sound familiar? You’re committed to them, but they’re not committed to you. The law would require you to honor your proposal and enter a subcontract upon award. But they can legally cast you aside. How is this legal? It’s complicated. But don’t let that get you depressed.

Rather than bore you with a long-drawn explanation of the prevailing contract law that might inform but not really help, we’re going to give you some language that you can insert in your subcontract proposals that might, emphasis on the might, bind the prime contractor to honor his commitment and enter a subcontract with you upon award. (Magic words don’t work all the time, right?)

The idea is based on the legal concept called “promissory estoppel.” If the prime contractor has led you to believe that he would enter a subcontract with you upon contract award—assured you in some way that you would get the subcontract—and you relied (perhaps to your detriment) on that assurance (perhaps a promise), and acted on your belief by committing time and resources to the cause with the expectation that the subcontract would be yours—if all this were the case, then you may have a shot at making the prime contractor live up to his commitment. It is this idea that the following language puts in writing:

“Subcontractor has devoted time, money, and resources toward preparing this bid in exchange for Customer’s express agreement that the parties shall have a binding contract consistent with the terms of this bid proposal and Customer unconditionally and irrevocably accepts this bid proposal if it (A) in any way uses or relies on the bid proposal or information therein to prepare “Customer’s bid” for the project at issue and Customer is awarded a contract for the work; or (B) divulges the bid or any information therein to others competing with Subcontractor for the work.”

This isn’t our language. It was developed and proposed by the American Subcontractor’s Association in 2013 to combat bid shopping, and probably largely ignored or forgotten because, generally speaking, the problem we’re talking about is not as huge a problem for non-MWBE and non-DBE subcontractors as it is for you. They’re being hired on the basis of price, efficiency and quality of work, and not because of the bidding preference an MWBE or DBE certification provides.

But that’s beside the point. The point is, this language has new value now because it can be used by you—all the hopeful and hardworking DBEs and MWBEs out there—to protect yourselves from wasting time and resources and from disappointment. It has value for those of you operating in a public contract bidding system, which, by establishing minority and women contacting goals and trying to level the playing field for DBEs and MWBEs, has created a perverse incentive for prime contractors to solicit subcontracting proposals simply for the purpose of winning the bid, while never intending to actually hire you.

More on this to come…

The Worst Abuse of MWBEs and DBEs (and it’s legal!)—Part 1

It happens all the time. The prime contractor of your dreams asks you, yes, you, your small subcontracting company, to give them a proposal, which they will then include as part of their bid for a major public works contract. So, excitedly, you spend hour upon hour, as a team of one (maybe two), pouring over the plans and specifications, doing take-offs and getting quotes for materials, to arrive at the subcontract price, knowing that the prime contractor is probably talking to other subcontractors just like you — bid shopping, as it’s called. Well, maybe the other subcontractors aren’t exactly like you, it may be hard to find other certified MWBEs and DBEs that do this type of work.

“You are the most competitive and we want to use you. You’re hired” the prime contractor calls and says, finally. “Plus, I like you. We’ll include your proposal in our bid package and hope for the best, fingers crossed.”

The hopeful subcontractor waits and waits, and waits and waits, until she gets busy with other work and forgets about the bid, then eventually she assumes that this prime contractor of her dreams lost the bid, even with the strength of her certified MWBE or DBE status and the ability that that gives the prime contractor to meet participation goals and thus make his bid even more attractive to procurement officers.

Then, about a year later, she picks up the newspaper and splashed across the front page is a photo of the prime contractor cutting a ribbon in celebration of the completion of the big bridge project. The very bridge project for which you were supposed to be a subcontractor. His big cheesy grin infuriates you. But isn’t your subcontract proposal a binding contract between you and the prime? Don’t you have contractual rights and remedies? Legal recourse? Can you sue that SOB?

The answer to these questions, generally, in a situation like this, is “no.” A prime contractor has no legal obligation to honor a subcontracting proposal even after he included that proposal in his bid. This holds true even if the prime tells the subcontractor that she’s hired (as in our example above), because usually prime contractors specify in writing that they will not be bound by oral promises until a subcontract is signed. On the other hand, the subcontractor, in her proposal, usually presents, as she must, all of the essential terms of a valid contract that would be binding on her, namely, the price, scope of work, and time of performance. And the prime contractor will say that he relied upon those terms.

But it gets even worse. If the reverse were true—if the prime contractor in our example above had called upon our subcontractor to perform in accordance with her proposal, and she said,

“eh, well, thank but no thanks, you never sent me a written subcontract to sign and it’s been a long time since I heard from you and I’ve had other, bigger opportunities pop up and I just don’t have the resources available right now to devote to this.”

If she had said something like that, guess what? Courts wouldn’t let the subcontractor off the hook. She would be forced to honor her bid and perform, or risk being sued for breach of contract. Courts see the subcontractor’s bid as a promise binding on the subcontractor. But not vice-a-versa. The prime contractor is not bound to a subcontract with the subcontractor or otherwise legally obligated to use her as a subcontractor even though her proposal was part of the prime’s bid.

The injustice! Totally unfair, unjust, right?

It’s worth repeating: the subcontractor’s bid proposal is binding on the subcontractor once the prime contractor accepts the proposal and includes it in his bid for award of the prime contract. But it doesn’t work both ways. A subcontractor’s proposal binds the subcontractor but not the prime contractor. How is this possible? How is that legal? The reasons are based on highly technical aspects of contract law that frankly don’t make a lot of sense.

Now, what makes matters even worse for MWBEs and DBEs, is that prime contractors get an additional and very valuable benefit by including your subcontract proposal, because it makes their bid more attractive to procurement officers who are desperate to satisfy participation goals. So, prime contractors have a huge incentive to solicit subcontracting proposals from MWBEs and DBEs that perhaps they have no intention for ultimately hiring and using.

If you’re a subcontractor, don’t despair. Possible solutions to this predicament, which represents a terrible injustice, will be addressed in our next article.

Let’s Bravely Face What Really Scares Contractors

The night is long for contractors who can’t sleep. Project problems and money worries are the monsters under their bed. But their biggest fear, the thing that keeps them up most, is not what they know—it’s what they don’t know. It’s the unknowns—risks and liabilities they don’t see coming until it’s too late—like a car you don’t see until it’s running you over. These unknown and potentially catastrophic risks lurking in the shadows of every project are what really worry contractors, because they can’t be controlled.

In this article we drag unknown risks and liabilities into the light and let you examine them. Because it’s not a question of “if,” but rather, “when” they will threaten you. Contractors who’ve been in business for long enough have encountered many of the risks we’re identifying today. They learned the hard way. And if their company survived, it is now stronger because of the experience. Because now they will be able to see a potential disaster coming in time to avoid it.

In our last article we described a common contract provision used by contractors to limit their liability on the project—a cap on liability. But there are some liabilities that smart owners would never agree to cap. And such risks and liabilities are often expressly excluded from such a cap. That is, the contract identifies the liability by name—like personal injury—and says that the liability cap does not apply to that kind of event. But remember that everything is negotiable, so as part of the negotiations regarding the amount of the cap (which our readers will recall from the last article should be the contract amount) you may also wish to discuss exactly what liabilities are included and excluded from the cap. First, your failure to perform the contract, for whatever reason, should always be included as one of the events to which the liability cap applies. But let’s consider some others.

Third Party Indemnification

This is very often excluded from liability caps. But what is it? These are lawsuits against you by people or entities that aren’t a party to your contract with the project owner. So, for example, a personal injury lawsuit brought against you by someone who was allegedly injured by your work. Maybe a pedestrian falls into one of your excavation trenches and is crushed. Another example—maybe an adjacent property owner sues you for damage to his property and alleges that a sinkhole was caused by your work. Another example—maybe a subcontractor on the project sues you for fraud. The project owner could potentially be dragged into any and all of these lawsuits, and since his liability to the third party isn’t capped, the owner would want to make sure that your liability to him isn’t capped either.

Warranty of Title

We’re not talking about workmanship or the quality and conformity of materials. We’re talking about liens. If you don’t pay your subcontractors or suppliers, they could file mechanic’s liens. The liens attach to the owner’s property and thus injure it. Liens diminish the value of the owner’s property, make it difficult for the owner to obtain or continue financing, and make it virtually impossible to sell. So owners obviously would want to be able to sue you for the full amount of the liability you allegedly created by failing to pay subcontractors and suppliers.

Environmental Hazards

This one works both ways. Contractors don’t want to cap owner’s liability for preexisting conditions like hazardous materials discovered onsite once work gets underway. And likewise, the owner would never agree to limit or cap the liability of a contractor who improperly uses or releases hazardous materials onsite.

Gross Negligence or Willful Misconduct

Usually liability for mere negligence that is, acting in a way that is unreasonable under the circumstances, is often included as part of the cap. But gross negligence or willful misconduct—doing wrong on purpose maliciously or with what the law calls a “conscious disregard,” for the consequences, should of course be excluded from the cap, as liability for such extreme conduct is generally severe. This would include liability for fraud as well—which in many states can’t be capped by law.

Don’t forget about using sub-caps, as a possible negotiating tool. These caps are often referred to in contracts as “liquidated damages.” For example, you may wish to quantify the damages for certain events in give them their own caps. Take delays, for instance—“10% of contract price for delay liquidated damages, but 15% of the contract price for delay liquidated damages.”

And finally, here is something you may not know but should look for it in the contract. Owner’s, like you, buy insurance to protect themselves from some of the risks and liabilities and losses, and their contracts usually say that that coverage doesn’t reduce the cap on your liability to them. The reason, they say, is that they bought the insurance at their expense and you shouldn’t be able to benefit from it, and also because it was purchased to protect them, the owner, and not intended to alleviate your liability.

Stop Lawsuits Against Contractors and Cut Losses in Two Easy Steps (Step One)

Our contractor is excited. A big time government authority awarded her a multi-million dollar contract. But all she can think about is the money she will make—the economics—cutting costs, maximizing profit, efficiency, speed, quality and safety.

She knows that something could go wrong that will derail performance and eat her profits. She knows that bad circumstances outside of her control on this project might create a disaster that will put her company and perhaps even her into bankruptcy. That is a risk she’s willing to take. It’s a risk that all successful contractors are willing to take.

What our contractor doesn’t know, however, is how to use the law—particularly the provisions, terms and conditions of the contract—to limit that risk. And that is what we’re talking about here today. Contractors can use the written language of their contracts to protect themselves against all kinds of common disasters, crises and pitfalls that befall them from time to time.

We’re going to show you provisions that contractors sometimes use to shield themselves from claims and lawsuits and from getting impaled on additional costs and liabilities when things go bad.

STEP 1

The first thing to consider is a liability cap, sometimes referred to in a contract as a “limitation of liability.”

A typical provision may be drafted as follows:

“In no event shall the maximum aggregate liability of Contractor in respect of all claims arising out of or in connection with this Agreement or otherwise exceed [stated percentage] of the Contract Price regardless of whether any such liability may be based on contract, guarantee, indemnity, warranty, tort, including negligence or gross negligence, strict liability, or otherwise.”

“The maximum aggregate liability of each Party (other than the payment by Owner of the Contract Price) in respect of all claims arising out of or in connection with this Agreement, whether based in contract (including breach, warranty or indemnity) or tort (including fault, negligence or strict liability), or otherwise shall not exceed [stated percentage] of the Contract Price.”

Provisions like this should be in BOLD typeface, so that the other party can’t say weren’t aware of it. Of course if you sign a contract courts will presume you have read it. But if you’ve been involved in litigation before, you know that every little bit helps when you’re trying to enforce the terms of a contract.

Similar provisions limiting liability for consequential, incidental, punitive or special damages could also be used to make sure the downside is bottomless if something goes terribly wrong.

Why is contract language like this important? Because the other parties involved, the owners, the engineers, other contractors, are trying all the time to shift the risk of loss to you. Lenders want contractors, not the owner, to assume much of the risk of the project. Taking on some risk is what contracting is all about. But smart contractors make sure that they are assuming only those risks that are appropriate under the circumstances.

So let’s talk a little more about the liability cap. What should the amount of the cap be? It could be as high as the contract price, but try to negotiate for a lower one. Contractors usually do. Getting cap anywhere between 30 to 50% of the contract price is a win. Here are some things to take into consideration when negotiating a liability cap. How risky is the project? Is this an unusual project involving untested or new technology or means and methods developed specifically for this work? If so, you should be less willing to put the whole contract price at risk. Did you draft the plans and specifications? Or did the owner and his architects and engineers or some other third party. If you didn’t, if you’re relying on someone else’s design, then the risk of running into an unforeseen problem is greater, and you should try to get a cap that puts less than the whole contract price on the line. Consider the size of project in negotiating the cap as well. On big jobs, with many contractors and component parts, it’s unlikely that your default will damage the owner in amounts equal to your contract price. Do you have a great history of prior performance? Use that to get a more protective cap. Is your company one of only a few that can perform this kind of contract? Use that to get a bigger cap on your ultimate liabilities.

Can’t wait to send you Step 2 of this valuable article, valuable because the old adage is true: an ounce of prevention is worth a pound of cure.