Is Notice Required Before Filing a Construction Lien? Washington Law

It’s difficult to stress how beneficial filing a lien can be for your company when attempting to collect on a non-paying project. However, this begs the very important, and sometimes difficult to answer question: Are you legally entitled to lien?

In virtually every state, including Washington, the lien statutes are drafted with a certain balance. On the one hand, the statutes were created to grant those involved with the construction of a project a privilege on the properties they build or improve. On the other hand, however, the statutes have mechanisms within to protect the property owners from being liened improperly, or otherwise without notice.

Unfortunately, the notice requirements are oftentimes confusing and technical. It is important, however, that your organization understand these requirements. If you lien a project without following these notice procedures, you will have filed an improper lien, and this could subject you to owing the property owner damages, penalties and/or attorneys fees.

The notice requirements in Washington are actually quite clear – the general rule is simply that everyone is required to provide notice to the owner (and/or contractor) except for those who are specifically excluded.

This post breaks the notice requirements into two categories. Category one is the catch-all, and regards all types of projects that do not fall into category two. Category two regards construction projects for the improvement of an existing owner-occupied residential property.

Category One – The “Catch All”
Category one projects are all of those projects that do not fit within category two. This, therefore, includes every commercial project, and virtually every new residential project.

Washington statutes provide that written notice of a right to claim a lien must be given to the owner or reputed owner in every circumstances except:

1) Persons or companies who contract directly with the owner or owner’s agent;

2) Laborers for any claim that is based solely on labor; and

3) Subcontractors who have contracted with the prime contractor

To properly deliver notice, the notice must be in writing and must be given to the owner either through certified or registered mail and/or personally delivered.

For the sake of clean record-keeping, it’s a good practice to send the notice via certified mail with return receipt requested, and to keep record of the certified mail number. If you send the notice via hand delivery, you will want to get signed acknowledgment of receipt to later prove that the notice was sent.

Category Two – Improvements to Existing Owner-Occupied Single Family Residence

Category two projects are very limited in scope. They include only improvements to existing owner-occupied single family residences.

The following are examples of Category Two projects:

  • Improvement of kitchen to existing structure on a single family residence that is owned by the person occupying the home;
  • Adding a new room or new addition to existing structure on a single family residence that is owned by the person occupying the home.

The following are examples of projects that are not Category Two projects:

  • Improvement of kitchen to an existing structure on a single family residence that is occupied by a tenant, and not the owner of the property;
  • New construction of owner-occupied residence.

When a project can be classified as a “Category Two” project, notice is required from the following parties:

1) Persons who do not contract directly with the owner-occupier, or their agent.

Therefore, if you are a handyman and you contracted directly with the owner, you would have the right to file a lien without providing the owner with a notice of lien rights. However, if you are a subcontractor hired by a handyman to do electrical work in a category two project, you would be required to provide notice of lien rights.

Summary
The goal of the Washington statute’s notice requirements is to protect the owner from being liened by a contractor who is not authorized to perform work on the property and/or by a contractor with no direct link to the owner.

When a contractor is hired by the owner directly, there is no need for that contractor to notify them that work is being performed at their property; the owner should know this as a result of the contract.

When not hired directly by the owner, however, to satisfy the purposes of the statute the contractor is usually required to provide notice to the owner that work is being performed. There are a few exceptions, as above-noted.

What is Notice?

All of this talk about notice begs an important question: what is notice?

Washington statutes are very clear about what constitutes notice and what does not – the statutes even provide the public with a preferred form for notice.

The notice from the applicable Washington statutes have been converted to a PDF and properly formatted, and is made available to you on this blog post. You can:

Click Here for PDF of Washington Notice.

What Happens If I Don’t Provide Notice?
In Washington, notice is a prerequisite to filing a construction lien. Therefore, if you do not file notice, you will not be able to file a valid lien.

It is good practice to send notice of lien rights before work on a construction project begins. This will ensure that you lien rights are protected as to all work performed on the project. However, even if you have not delivered notice at the beginning of the project, you may still have the ability to lien the project to a certain degree.

Regarding Category one projects, a lien can be filed only as to the work, services, materials, etc. performed and/or delivered sixty (60) days before the notice is delivered.

For example, if you started work on January 1st, and delivered notice of lien on August 1st, you could only file a lien on the construction project for work performed in June, July, August and beyond. You would have lost the right to file a lien against the property for work performed between January 1st and June.

While this is the general rule for Category one projects (60 days before notice delivered), there is an exception. In the case of new construction of a single family residence, the lien can be filed only as to the work, services, materials, etc. performed and/or delivered ten (10) days before the notice is delivered. As you can see, this is a significant exception.

Regarding Category two projects, the lien may be satisfied only from amounts not yet paid to the prime contractor by the owner at the time the notice is received. Again, this is a significant exception.

Conclusion
The notice requirements in Washington are important, but also simple. The statutes even provide the public with an acceptable form of notice. Compliance with the statute is only a matter of procedure for your company.

If you are in the business of working on projects where notice is required, its as
simple as dropping a form letter into the mail to preserve your lien rights. Even if you’re not typically required to provide notice, nevertheless you might want to consider sending it as it won’t harm any of your lien rights to over-notify the owner.

How to Get Paid Promptly — Generally Speaking

Efficient payment is critical in construction. Without timely, dependable payments to those who are actually doing the work and providing the materials, construction projects of any size become vulnerable.

Non-payment or slow payment can cause abandonment of the job, sub-standard work, and decreased productivity — as well as an increase in claims and liens. Reputations in the community can also be tainted by slow and unreliable payment procedures, resulting in harm which can take years to repair.

Still, slow payment and non-payment remains one of the biggest risks facing a contractor. Owners withhold payment for many reasons: they are dissatisfied with the work; they want to push a project that is behind schedule; or they may just be strapped for cash. Regardless of who is at fault, payment controversies can destroy a project.

Prompt Payment Acts – When They Apply & How They Help

Every state in the union has passed legislation that is similar in character to federal law requiring the prompt payment of government receivables. Prompt Payment Acts cover a variety of industries, but they are particularly important when construction is involved.

In any work performed for a governmental entity, payment of the invoices will be covered by the Prompt Pay law regardless of whether or not a contract exists to support the work. Invoices submitted to the government legally must be paid within a relatively short period of time or interest will be assessed, which the governmental entity will be required to pay, as well. The time limits vary from state to state and may or may not mirror the federal time limit of 30 days.

These statutes also set requirements for the invoices that are presented: if the invoice does not conform to the statutory requirements, then it will not be honored. The Acts will not force a timely payment on an improper invoice. Therefore, the preparation of applications for payment becomes very important in governmental work and many companies use automated software designed especially for this task.

Automated Payment Systems

A simple web search reveals a cornucopia of software packages available for the construction payment process. Pricing and product features run the gamut. However, good quality automation need not be expensive: QuickBooks offers a highly regarded system for under $200 which should be well within range for most subcontractors and craftsmen.

What if it’s Not a Government Project?

Projects that do not involve a public entity usually will not be covered by prompt pay legislation. However, those statutes can be used as a guide on how fast payments should be made, as well as how detailed payment applications should be. More importantly, however, will be the basic written contracts that the parties have signed: what the contract language relates — or fails to address — will control the project’s payment process.

For example, in Louisiana, payment is not legally due in private contracts until the project is completed — unless the contract language provides otherwise. (For more information here, see Wolfe Law’s May 2007 article on Pay When Paid clauses, link shown below.)

Without a written contract, state law will control. Which state’s law? The state where the construction is located controls. Thus, the importance of a strong contract in the construction payment process cannot be underestimated.

Securing Payment and Performance: Bonds Versus Liens

There are various methods of securing payment and performance of a construction contract that are recognized across the industry, in every state. These usually involve bonds or liens.

Owner’s Security

One common method that owners use to insure that there will be performance under the contract is a performance bond. Here, a bonding company (“surety”) issues a bond which documents that the bonding company is guaranteeing payment of a set amount (“face value”) to the owner should the contractor fail to finish the job. The surety agrees to pay this sum to the owner if the contractor fails to perform all the required services and deliver all the required materials and equipment. Usually, the bonding company reserves the right to take action before paying on the bond, such as having the general contractor remedy any outstanding claims, or hiring another contractor to finish the work.

Contractors’ Security

Mechanics’ liens are used by contractors to secure payment. These are writings filed with the public real property records pertaining to the property involved in the construction, giving public notice of the contractor’s priority interest.

Overall, there are two forms of mechanics’ liens: general and particular. General mechanic’s liens allow the owner’s property to be held, and sometimes sold, to pay the unpaid amount that is due and owing to the contractor. Particular liens are those filed by contractors claiming a right to retain certain, identified property because of money or labor they have invested in that specific property. A security system company, for example, may have a particular mechanics’ lien on all alarms and related equipment.

Contractors can create liens in a variety of ways. Mechanic’s liens can be created by an express contract, in a standardized document that the parties sign. These liens can also be created under the law by “implied contract,” which usually occurs as part of a particular usage of trade or from the dealings between the parties. When goods are delivered to a subcontractor that he needs in order to complete his part of the project, for example, that subcontractor has a legal right to hold those goods until he gets paid for his work.

Payment Under The Contract

Today, most construction projects will see the use of one of two American Association of Architects (“AIA”) contracts: either AIA Form 201 (most popular) or AIA Form 200. However, these forms both have problems when issues of slow payment or non-payment arise if they are signed without revision. For example, while AIA Form 200 does include language regarding the creation of a lien in the event of non-payment, it fails to include any specific time period for making payments to subcontractors. Similarly, AIA Form 201 does not prevent the commingling of funds, and fails to address possible delays in disbursements.

Both of these popular forms of written construction contracts have been criticized for their inadequacies in dealing with payment controversies. In response to this, in part, 2007 saw the introduction of an industry alternative to the AIA contract forms, the Associated Owners & Developers Standard Form of Contract Between Owner & Contractor (“AOD Form”).

The AOD Form simplifies matters by requiring owners to pay general contractors within an agreed-upon time (e.g., 30 days) and requiring general contractors to hold monies due to their subcontractors and suppliers in trust, paying them within 7 days from the time that they receive payment.

The AIA has responded to the criticisms of the AOD by upgrading its own set of construction contract forms. Experienced contractors as well as owners using either set of forms, however, are careful to work with experienced construction attorneys to insert clear contractual provisions at the outset.

No contract form (AIA or AOD) should be signed without first obtaining the advice of legal counsel. Experienced construction attorneys may see holes in the forms that fail to address payment issues, as well as other concerns, that are particular to the project. Particular contractual provisions, or clauses, may be needed that the attorney will know are appropriate.

Clauses which owners should consider
regarding payment include those addressing:

description of the work; contractor’s cost of the work plus fee; separate contractors; subcontractors and subcontracts; applications for payment; retainage; conditions for final payment; insurance; warranties; changes; no damages for delays; defaults and remedies to default; right to terminate without cause; alternative dispute resolution; concealed conditions; and unknown conditions.

Clauses which general contractors should consider regarding payment include those addressing:

incomplete or deficient plans and specifications; architect’s right to withhold funds; changes in taxation; architect’s approval or disapproval of payments, or final payment; warranty; concealed conditions; weather delays; separate contractors; change orders; schedule of values; stored materials; substantial completion inspections; retainage; and right to terminate for convenience.

Subcontractors: Contingent Payment Clauses and Liquidating Agreements

To buffer themselves against a slow-paying or non-paying owner, general contractors have developed several methods of sharing this burden with their subcontractors and suppliers. Two of the most common are contingent payment clauses and liquidating agreements.

Contingent payment (“pay when paid” or “pay if paid”) clauses are inserted into agreements by the general contractor, making the sub-contractor or supplier wait along with the general contractor for the owner to make payment. These provisions are not legally recognized in all states. (For their use in Louisiana, see the May 2007 Wolfe Law Article on Pay When Paid Clauses.)

Liquidating (“pass through”) agreements are contracts entered into between a general contractor and a subcontractor, where the subcontractor agrees to be paid only when, and if, the general contractor is paid by the owner. The agreements may not, however, provide for the subcontractor to have any remedy against the general contractor should the owner decline to ever make payment. Accordingly, pass through agreements are not recognized as valid contracts in every state.

Suppliers: The Joint Check Rule

Joint checks are commonly issued to pay both a subcontractor and a supplier at the same time. Since these are often accompanied with a number of legal issues (endorsement, allocation of proceeds, etc.), many states have enacted a “joint check rule” which requires any supplier endorsing a joint check to collect its proceeds from that check or be legally barred from later asserting a lien or bond claim on that amount.

State law bases this rule upon a variety of doctrines (release, waiver, estoppel), but all share the perspective that a joint check is intended to protect the issuer from the supplier’s claim, as well as protecting the supplier by ensuring payment, and the owner from any lien.

Tools developed by the construction industry, as well as protections created in the law, to deal with the issues of payment during the construction process are numerous, and they are constantly evolving. While standardization across the county has removed many of the payment pitfalls, the best protections for smooth payment remains strong, written contracts entered into by all the construction participants.

For more information:

Federal Prompt Payment Act
39 USC 3901 et seq
http://caselaw.lp.findlaw.com/casecode/uscodes/31/subtitles/iii/chapters/39/toc.html

Louisiana Prompt Payment Act
La. Rev. Stat. Section 38:2191; 9:2784
http://www.legis.state.la.us/

Washington Prompt Payment Act
RCW Sections 39.04.250; 39.76.010-39.76.040
http://apps.leg.wa.gov/RCW/default.aspx

QuickBooks Construction Application for Payment Solution
http://marketplace.intuit.com/AppID-859-Reviews.aspx

Wolfe Law Article: Payment Provisions and “Pay When Paid” Clauses
http://www.wolfelaw.com/main/news/index.php?atype

Is Notice Required Before Filing a Construction Lien? Louisiana Law

It’s difficult to stress how beneficial filing a lien can be for your company when attempting to collect on a non-paying project. However, this begs the very important, and sometimes difficult to answer question: Are you legally entitled to lien?

In Louisiana, the lien statutes are drafted with a certain balance. On the one hand, the statutes were created to grant those involved with the construction of a project a privilege on the properties they build or improve. On the other hand, however, the statutes have mechanisms within to protect the property owners from being liened improperly, or otherwise without notice.

Unfortunately, the notice requirements are oftentimes confusing and technical. It is important, however, that your organization understand the notice requirements of the Private Works Act.

If you lien a project without following these notice procedures, you will have filed an improper lien. Filing an improper lien subjects you to owing the property owner damages and attorneys fees.

Contracting with the Owner / Resident
Notice is required whenever you are working on a residential project, and you contract directly with the owner of the property, who also lives in the residence.

The type of notice required is called the “Notice of Lien Rights.” A copy of an example of this notice is available by clicking here.

This notice, again, is required when the following elements are present:

1) Work is being done on a residence;
2) You contracted directly with the owner of the residence. In other words, you are not subcontractor on the project;
3) The owner lives in the residence.

The Notice of Lien Rights to be sent to owners in residential projects is very important, because the law requires that it be provided before work begins, and not as a condition to your construction contract.

Lessor of Equipment or Other Movables

If you are leasing equipment or other movable items to any party in a construction project, you are required to deliver a copy of the lease agreement to those who are not parties to that agreement within 10 days of the equipment’s delivery.

For example, if you lease equipment to a subcontractor, you are not required to deliver an additional copy of the lease to the subcontractor within 10 days of delivery because they will – presumably – already have a copy of the lease. However, you would be required to send a copy of the lease to the general contractor and the owner.

This puts those other parties on notice that you have leased equipment/movables to someone for the work at the jobsite, and if such notice is sent, you will have preserved your right to file a lien in the case of non-payment.

Seller of Movables / Materials / Equipment / Etc.

Whenever you sell supplies, or any type of movable property, you are entitled to file a lien on the property where those supplies are incorporated (if they are used in construction of the improvement).

If the materials sold are incorporated into a commercial project, there are no notice requirements.

If the materials sold are incorporated into a residential project, and you would be liening a residence, LA RS 9:4802(G)(2)-(3) requires that you deliver a notice of nonpayment to the owner of the property at least ten (10) days before filing the lien. The notice must:

  • Be served by certified mail, return receipt requested;
  • Contain the name and address of the seller of movables (you);
  • Contain the general description of materials / movables provided;
  • Contain a description sufficient to identify the immovable property against which the lien may be placed;
  • Contain a written statement of the seller’s rights (your rights) for the total amount owed, plus interest and recording fees

If you sold the materials/movables to a subcontractor on the project, the notice must be sent certified, return receipt mail to both the owner and the general contractor.

Conclusion
This blog post discusses the most important and prominent notice requirements within the Louisiana Private Works Act. If you are looking to lien a non-paying construction project, you should familiarize yourself with the Private Works Act and consult with an attorney to ensure that you meeting all the requirements to filing.

Links:

Why Lien?

Dear Contractor/Subcontractor/Supplier:

There are some customers or prime contractors who will not pay you after a significant amount of work, labor, services and materials have been invested into performing a job. The founder of Zlien’s father and grandfather were both general contractors in New Orleans, LA, so we know your frustration.

The best way to collect on these non-paying accounts is to begin collecting quickly and thereby motiving the debtor to resolve your claim.

Mechanic’s liens – the documents created and filed by Zlien – are inexpensive and hard-hitting. These filings put restrictions on the job-site property, they entangle the owner with your dispute, they can freeze public funding, and more.

You may be pressured to hold-off on filing your lien and beginning the process of collecting on your account receivable. Homeowners may attempt to postpone payment by promising future funding, and many general contractors – perhaps pointing to a “pay when paid” clause – may promise payment once it gets paid on the job.

These “hold ups” on payment – even when legitimate or well-reasoned – will not suspend the short and strict time period you have to file your lien. If you wait too long, you may lose your right to file a lien – and that means you lose the ability to inexpensively take this important step in collecting on an account receivable and in preserving your rights against all parties funding the project.

Filing a lien will stake your claim. If you were hired by the Owner, it will restrict the owner’s ability to abandon, sell or otherwise transfer the property. If you were hired by the Contractor, a filed lien gives you the right to not only seek payment from the Contractor, but also from the Owner, thereby increasing your chances of getting paid.

Not only is the founder of Zlien the son and grandson of general contractors, but he is also a successful construction attorney licensed to practice law in both Louisiana and Washington. Scott Wolfe, Jr. was named as a Top 50 New Orleans Attorney in 2006 and 2007.

Zlien makes filing a mechanic’s lien fast and easy, and we have the experience and knowledge to help you get paid on a non-paying construction job.

Bidding Errors and Change Orders – Avoiding a Nightmare: Part Two

Bidding Errors and Change Orders – Avoiding a Nightmare: Part Two

Every construction project will undergo change during its evolution from conception to completion. Without respect for this inevitability, disputes understandably arise between owners, architects, and contractors. Fights over who is responsible for project changes, as well as who bears the burden of any increased expenditure of time or money, can effectively stop a project. The filing of lawsuits may follow — something everyone is better off avoiding if at all possible.

Over time, the construction industry has seen the evolution of several methods for avoiding litigation and encouraging a smooth change process. < — more — >

At the Beginning of the Project

1. Build Good Communication at the Get-Go

Stopping the problems before they start is the optimal solution. Owners, architects, and contractors that view themselves as a team will overcome project hurdles much better than those who view the work as another project on their hands.

During the bidding process, working together to form and build professional relationships and establishing an ease of communication between Owner, Architect, and Contractor needs to begin. There should be mutual respect for what each party brings to the table: all are necessary for the construction project to get done. Everyone starts out wanting a smooth process and a good result.

2. Take Time With Your Contract Documents

Don’t trust the talk, get good working documents in place. Once you’ve signed, you’re committed.

  • Review the bid documents, the plans and the specifications, and the contracts. Even in a time crunch, nothing is more important in the long run than a thorough understanding and agreement on the fairness and clarity of the contract documents. The expense of a lawyer now is much cheaper than a trial attorney later.
  • Bid accurately.
  • Don’t sign a contract until you are comfortable with its language. You’ll be held to this document later — or you’ll have to negotiate around parts that you don’t like, that become unworkable, or that simply don’t exist, and that can get expensive and burdensome.
  • Check the other project contracts for consistency. Do the general contractor and sub-contractor agreements jive? Does the owner’s duties in his contract with the architect dovetail with his responsibilities in his agreement with the contractor?
  • Check the scheduling. Is it realistic — for the Owner? The Architect? The Contractor? The subs?
  • Check for delay damage clauses: who is bearing the burden of construction delays?
  • Where quantity may vary, think about incorporating unit prices for items of work into the contract documents.
  • Discuss how the project will be administered on a daily basis, and make sure that process is efficient and that it is described in the contract documents.
  • Make sure that the contract includes a clear discussion of how Requests for Information are to be processed, as well as Change Orders. Who will sign the change orders? Should change orders less than or equal to a certain amount be treated differently than those involving larger sums? Will oral change orders be respected?
  • Change Order forms should require exact descriptions of the requested change; the time impact of the change; the money impact of the change; signatures for those impacted by the change; and a specific time for approval (a deadline).
  • Know which state law controls the documents. Know what your duties and responsibilities are under that state law.
  • Consider adding alternative dispute resolution options in the contract documents in advance of any disputes. Will you agree to a binding mediation? Will you agree in advance on a mediator? What about arbitration?

During Construction

1. Keeping Good Communication

Once the contracts are signed, work begins. Keeping up the relationships between Owner, Architect, and Contractor can be difficult, but it’s extremely important for a smooth job. Yes, this can be exasperating: owners can be ignorant of construction realities; architects can be immovable on design; and contractors can be insistent in their demands.

However, once that feeling of cooperation is gone, it’s almost impossible to get back. And projects that are working at loggerheads are vulnerable to conflicts that can suddenly explode into arbitrations and trials.

2. Procedures For Minimizing Conflict

Knowing that there will come a time when Owners, Architects, and Contractors are going to disagree, how can you keep the lid on and the work smoothly moving forward?

  • Discuss the change order process and the request for information process in advance, so everyone knows what’s expected and to expect to see Change Orders and RFIs during the construction process.
  • Make sure your field and office people understand the construction management process for the job.
  • Set up your internal procedures to catch problems as fast as you can. The faster you know about a problem, the faster you can solve it.
  • Make sure those involved in the Change Order process know how it works. Where’s the form? Who signs? When do you need one?
  • Implement a process of daily reporting. This helps to identity things that may cause problems in the future, and it helps keep up good communication between everyone involved. You’re a team, not adversaries.
  • Remember to consider the other guy: Owners should consider the perspectives of Architects and Contractors; Architects should reflect on Contractors and Owners viewpoints; and Contractors should understand the concerns of Owners and Architects. For example, an owner wanting to change the doors and windows might do better to consider the architect and contractor before unilaterally requesting the change. Having the other players in mind when writing an RFI or requesting a Change Order can be a big help in keeping the change process as painless as possible.

When Construction Conflicts Do Occur

No matter how cooperative and congenial everyone may be, circumstances may arise when serious conflicts cannot be avoided. Perhaps a serious bidding error has resulted in extremely high and unexpected costs. Maybe there’s been an unexpectedly heavy rainy season, and construction delays must be borne by someone. Then again, maybe there’s a fight on the site because of an impasse: is the problem because of a design flaw or because a sub installed something wrong?

Even now, there are things which can help to avoid a project melt-down. Before emotions escalate, each party should do the following:

  • Review the contract documents carefully. Is there any language that applies to this situation?
  • Organize all the documents that pertain to the situation. Put them in chronological order.
  • Gather information from your people on the situation. There may be important facts that haven’t been put on paper, despite your protocols.
  • Check with your attorney. Your lawyer should be experienced in construction law, which keeps your costs down. Perhaps a quick phone call or a short office visit can answer your questions on legal issues like what the governmental codes provide for the situation, what the state law holds, and what the contract documents mandate. Don’t procrastinate on seeking legal advice.
  • Reserve your rights if you want to proceed while resolving the dispute. Do this in writing. Get legal counsel here, waiver and estoppel are legal doctrines that can impact this situation to your detriment.
  • Checking with your lawyer should not be a last resort. Knowing your legal position
    is part of gathering all the facts to hopefully help in resolving the conflict.

After these steps have been undertaken, each party should be forthright in what the contract documents provide. If the contract states that the Owner bears the construction delay, then the Owner should bear it. If there’s disagreement on what the contracts provide, then an agreement to disagree in order to finish the project usually makes sense. Attorneys should be involved here to make sure rights are not waived by this process, however.

Why Everyone Should Want to Avoid Litigation

A cold reality that should throw a damper on the most inflamed construction conflict is the possibility of litigation. Should the conflict escalate into a formal dispute:

  • Owners, Architects, Engineers, Surveyors, Suppliers, Sureties, Contractors, and Subcontractors can all be involved in the lawsuit;
  • The legal process is slow: the process of getting to trial can take 1-2 years, and appeals can add years before a final determination is reached;
  • Results can be unpredictable;
  • Time can fade witness memories and documents can be unclear; and
  • The realities of litigation can be devastating to those involved, not only to the ultimate loser in any trial but also to those businesses who cannot weather the impact, direct and indirect, of a long term and protracted litigation process.

The Bottom Line

Make sure that you keep communication as open as possible: a conflict was predicted at the get-go, and now that it’s here, it can still be resolved before it grows into a formal dispute. Good communication and good contract documents can keep the biggest construction projects on a smooth course to completion with the minimum of crisis.

The Bidding Process 1 – The Subcontractor’s Perspective

Today, general contractors face less and less time within which to form and submit their proposals. Today’s negotiations are often by cell phone; CAD drawings are sent as online attachments; deadlines and details are sent by e-mail. Preparing a proposal for an owner was always complicated; these days, it can be chaotic.

Subcontractors, accordingly, must act with even greater speed to get their bids to the contractor. It’s commonplace for subcontractor and supplier bids to reach the general contractor’s offices minutes under the wire: the general contractor furiously chooses between bids, and finalizes a proposal just in the nick of time.

And in the midst of all this scrambling, risk is being analyzed, assessed, and undertaken. The construction business is all about risk: profit is made in correctly assessing the risks of unknown future complications against estimated time and money expenditures. Figure your risk right, and you make money. Calculate risk wrong, and you can go bankrupt.

When is the bid a contract?

Submitting a bid does not create a legally-binding contract. It merely creates an “offer” under the law — which must be “accepted” by the contractor and accompanied by his promise of payment (“consideration”) before any contract is formed. (–more–)

Before the offer’s acceptance, the bid can be freely withdrawn by the subcontractor — even if the general contractor relied upon the numbers in that offer to form his proposal, or overall bid. Of course, until the bid has been accepted and accompanied by a promise of payment, the contractor is free to choose a competitor — he’s not contractually bound by the bid, either.

What if there are errors in the bid?

Subcontractors sometimes submit bids that are wrong. Perhaps there are time errors, and the bid conflicts with previous commitments. The numbers may be inaccurate: anything from math errors to sudden changes in supply costs can impact the precision of a bid.

If these errors are substantial enough, the subcontractor may have no choice but to advise the general contractor that the bid is withdrawn. If this occurs prior to acceptance, then no contract has been formed. Even if the general contractor relied on the bid, the subcontractor is contractually in the clear.

However, if there has been acceptance and a contract has been formed, then the subcontractor will technically be breaching a legal agreement. Here, legal negotiations should occur to extricate the subcontractor as quickly and as smoothly as possible from the unworkable situation.

What about Bid Shopping?

After the project has been landed, the winning general contractor will begin to corral his crew. It is at this point that the subcontractor faces the possibility of a general contractor asking that his price be lowered, or face losing the job to a competing subcontractor who offers to do the work for a lower price.

Why do this? Maybe the general contractor lowballed his offer just to get the job, and is trying to create a profit after he’s got the deal. Maybe he just wants to get as much money as he can. Maybe a better offer hit his desk minutes after the deadline, and it’s a better choice for the project. Maybe the alternative sub is his brother-in-law. There can be many reasons for this to happen.

This is known as “bid shopping.” It is frowned upon within the industry as being unethical, and it has been held to be illegal under both state and federal law. It also occurs all the time, nationwide, and has been a standard practice in the industry for many years.

In bid shopping, the subcontractor is forced to lower his price or lose the job. There can be a third option: to seek legal redress.

Federal Law

As early as 1938, Congress was trying to deal with bid shopping in federal projects. A congressional law was passed to require subcontractors to be identified in “bid lists” by general contractors; however, President Franklin Roosevelt vetoed the legislation because of the untenable amount of agency supervision needed to make sure the law was followed.

Today, Congress is still trying to curtail bid shopping in public contracts. The Construction Quality Assurance Act of 2007 is a bill currently pending before Congress. On October 25, 2007, it was referred to the House Subcommittee Government Management, Organization & Procurement for further review. However, as of October 30th, WashingtonWatch reported that 67% were against the law’s enactment, and only 33% were for it. Prior versions of this legislation dating back seven years have failed to make it into law.

State Law

Many states have passed laws forbidding bid shopping in public contracts. Washington State, for example, has passed legislation (Wash.Stat. 39.30.060) which includes the following language:

Washington

Substitution of a listed subcontractor in furtherance of bid shopping or bid peddling before or after the award of the prime contract is prohibited and the originally listed subcontractor is entitled to recover monetary damages from the prime contract bidder who executed a contract with the public entity and the substituted subcontractor but not from the public entity inviting the bid. It is the original subcontractor’s burden to prove by a preponderance of the evidence that bid shopping or bid peddling occurred.

Louisiana

Louisiana has passed legislation to curtail bid shopping, as well. However, Louisiana law codifies what many other states have made available to subcontractors through their common law. This is the application of the equitable doctrine of “promissory estoppel” to the situation to prevent the general contractor from being unduly enriched at the subcontractor’s expense by the bid shopping practice.

The Louisiana statute (La.Civ.Code art.1967) provides:

A party may be obligated by a promise when he knew or should have known that the promise would induce the other party to rely on it to his detriment and the other party was reasonable in so relying. Recovery may be limited to the expenses incurred or the damages suffered as a result of the promisee’s reliance on the promise. Reliance on a gratuitous promise made without required formalities is not reasonable.

Other States

In other states, while there may not be actual statutes forbidding bid shopping in private and public contracts, their courts have fashioned a remedy through the promissory estoppel doctrine as well as basic contract law.

Industry Realities

Legal avenues do exist for subcontractors to fight against bid shopping. However, the realities of the marketplace discourage their use. Construction involves a close-knit community: subcontractors build a reputation in the area that must be maintained, and challenging a general contractor does not make for good future relations with other contractors, general or sub. No one wants to work with a troublemaker.

Furthermore, in many communities, there are relatively few general contractors. Many general, or prime, contractors specialize in a certain type of project (hospitals, schools, etc.) and are national enterprises. Subcontractors working in these specialty areas cannot afford to offend these powerhouses with threats of litigation.

Still, hiring a lawyer to assess the situation and analyze the legal possibilities can be well worth the subcontractor’s time, especially if the bid shopping threatens the loss of a major project. A law firm specializing in construction matters may be able to find a creative compromise that provides the subcontractor relief in the short term without risking his long term success.

For more information:

Washington Watch
http://www.washingtonwatch.com/bills/show/110_HR_3854.html

The Construction Quality Assurance Act of 2007 (read the entirety of the proposed legislation here):
http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3854

Percy J. Matherne Contractor, Inc. v. Grinnell Fire Protection Systems,915 F.Supp. 818, 824-25 (M.D. La. 1995) (applying La.Civ.Code art. 1967 to subcontractor bidding situation).