Some may argue that describing effective risk management as “the difference between life and death” sounds extreme, but that is a perspective reserved for companies still around to argue. Continue »
Subcontractor default is a problem that is neither understated nor under-reported. Everyone in the industry is familiar with it and the consequences of the likely, yet always surprising, situation when a subcontractor goes into default on a project. Continue »
Clauses providing for the precedence of one contract document over another, in the event of conflicts between them, are common in construction contracts, considering that the contracts incorporate promises found in many different “contract documents” that are drafted from different perspectives for different purposes.
Typical subcontract agreement forms incorporate the written promises found in other documents by explicitly referring to those documents, which normally include the prime contract agreement, plans and specifications, general and special conditions, and other promises made by the prime contractor to the owner. Continue »
A contract is an exchange of promises, some written and others not. The written promises in a construction subcontract might be found in the document the parties actually sign, or in other documents to which the signed document refers. Continue »
Subcontractors that use plans sent via email, or downloaded from a project Website, may be risking responsibility for extra costs if the plans prove to be incomplete. They also may be transmitting confidential information embedded in the electronic records that is not intended for public viewing. Continue »
Subcontractor defaults are seldom expected yet remain a serious risk for general contractors to manage as part of a successful construction project. Generally, they occur when a subcontractor fails to meet its contractual obligations. Financial insolvency is among the leading cause of subcontractor defaults. Other hallmarks cited for defaults include the inexperience of the subcontractor, over-extension on other projects, and lack of effective business systems and practices such as estimating or accounting.
Defaults happen not only during periods of economic decline but also in periods of prosperity. In fact, attention to default risk should be heightened during periods of recovery, during which new inflows of work can exceed the capacity of a contractor’s balance sheet. Continue »
Budgeting, planning and executing a successful construction project is a complex affair. Accurate scheduling of construction project activities in their appropriate sequence ordinarily requires applying a mathematical problem-solving method called critical path method (CPM). The sequential order of tasks that consumes the most time determines the critical path for any complex activity. Delay of any task on the critical path delays all of the tasks that follow. Other tasks that are necessary to the construction project but susceptible to performance within a range of other concurrent tasks ordinarily can be delayed without affecting the critical path, although such tasks can become critical if delayed too much. Continue »
Construction subcontracts have specified types and limits of insurance coverage to ensure that responsible subcontractors are considered for work. Supervisory contractors should review a subcontractor’s insurance certificate before directing the subcontractor to start work. If the contractor waits until after subcontractors have started work to reject insurance coverage as failing to conform to the insurance requirements, it may withhold the subcontractor’s payment based on breach of the insurance requirements. This can create a serious cash flow problem for a subcontractor that has already started work. Continue »
Ssubcontractor default insurance is occasionally proposed by the construction manager or requested by the owner as an alternative to surety bonds. However, as noted by the New York Appellate Division, First Department, the distinction between surety bonds and subcontractor default insurance remains critically important—especially the identity of the “insured” under the policy as compared with the obligee under a performance bond. Continue »
A force majeure is an event beyond the control of the parties to a contract, which prevents or delays the performance of a contract obligation in an unanticipated way. Although force majeure events such as labor strikes, bad weather and materials shortages may complicate a construction subcontractor’s efforts to perform on schedule, courts of law are reluctant to excuse a subcontractor’s failure to perform due to such occurrences. Continue »