The construction industry is full of standard form contracts that guide a relationship between the parties of any agreement. However, even though the contracts are widely in use, they contain some provisions that raise ethical concerns. The paper discusses three such clauses. They are the conditional payment clause, the change order requirements on both public and private construction projects, and the transfer of oversight responsibility from a prime contractor to subcontractors and further to sub-subcontractors. The results from the reviewed literature indicate that conditional payment clauses make it impossible for subcontractors to be paid by contractors in the situations when the owner does not give any money to the contractor. Change order provisions make contractors in public construction projects not receive reimbursement if the change order is being oral. The transfer of oversight responsibility clause makes them liable for the losses incurred due to the acts or omissions of subcontractors and sub-subcontractors during the time the external collaborator has shifted oversight responsibility to them.
Keywords: subcontractor, sub-subcontractor, pay-if-paid, paid-when-paid, change order, oversight responsibility.
Every industry has its set of standardized regulations that it should follow. Some of these rules in the construction sector exist in standard form construction contracts between the parties such as owners, contractors, and subcontractors. However, some of the clauses in these agreements seem to infringe on the issues of ethics. The paper discusses how the conditional payment clause, the change orders on both public and private construction projects, and the clauses on the transfer of oversight responsibility from general contractors to subcontractors and sub-subcontractors raise the issues of ethics. The essay takes the position that even though the three clauses are unethical, there are the solutions such as remedies in state legislations, courts of laws, conditional bond payments, and the strict follow-ups of the agreements that aggrieved parties can use in such situations. Moreover, the revision of the standard form construction contracts will help alleviate the ethical concerns.
Conditional Payment Clause
Conditional payment requirements are one of the most contentious provisions in standard form construction contracts. They exist in the agreements between contractors and subcontractors where the payment of the external collaborators is contingent upon the money given to the contractor by the owner (Foundation of the American Subcontractors Association Inc. (FASA), 2012, p.3). Conditional payment clauses consist of pay-when-paid and paid-if-paid clauses. The first one creates a timing mechanism for the contractor’s payments when paid to a subcontractor. It, therefore, does not create a condition of payment where the external collaborator has to receive funds from the owner in order to give the money to the subcontractor. The pay-if-paid clause, on the other hand, sets some restrictions on the contractor paying the subcontractor. The provision often allows the external collaborator to permanently withhold money from their subcontractors where the owner of the construction project has failed to disburse the contractor (FASA, 2012). A rationale for pay-if-paid clauses is that all participants in the construction process should share the risk of non-payment. Therefore, the owner of the whole activity should ultimately compensate this jeopardy.
However, the rationale does not take into consideration some ethical implications of the clause on innocent subcontractors especially in perspective of the current economic realities. Subcontractors are never the party to the contracts entered between contractors and the owners of construction projects. They, therefore, lack a legal and contractual relationship with the proprietors. As a result, they are unable to have the capacity to calculate their owners’ risk of nonpayment that ends up affecting them (FASA, 2012). Moreover, sometimes there may be some conflicts between the proprietor and the contractor. For example, the owner may refuse to pay the external collaborator because the latter one has somehow mismanaged the construction project. The subcontractor may lack the knowledge of the conflict between these two parties. In such circumstances, this person that is seeking payment will never receive the money from the contractor. It will be going this way. unless the proprietor and the external collaborator resolve the dispute in favor of the latter one.
The contentious and ethical issues raised by the conditional payment clause have resulted in many cases when subcontractors are seeking solutions. Luckily for them, some states have expressed the disfavor for contingent payment provisions in their legislations. The states like Maine, Minnesota, Massachusetts, Maryland, Missouri, Ohio, and Illinois have created the statutes that declared the conditional payment clause as illegal (FASA, 2012, p.12). Other subcontractors have sought for the remedies in courts of law. However, the courts in different jurisdictions interpret the conditional payment clause in various ways. For example, such ones in Washington, D.C., mostly tend to decide in favor of subcontractors. The courts refuse to enforce conditional payment clauses when the reason for the non-payment is a breach by the prime external collaborator of the contract with the proprietor of a construction project (FASA, 2012, p.3). The judicial institutions believe that excusing the general contractor from the duty of paying the subcontractor will be tantamount to allowing the one to benefit from such wrongful acts. The courts in the states such as Alabama, Alaska, and Arizona, on their part, consider conditional payment clauses to be valid. They posit that the provisions create a valid condition precedent excusing a general external collaborator from having any payment obligation to a subcontractor if an owner does not pay the contractor (FASA, 2012. p.2). However, the analysis of by state courts of the conditional payment clause depends entirely on the precision and clarity of the language used in it. The contractual language employed in the clause must be clear to show the following fact. There should be the intent that the subcontractor will receive payment if the owner pays the contractor. If the terms of the condition precedent in the clause are ambiguous, then the courts will view them with disfavor and not enforce them (FASA, 2012, p.2). However, if the language is clear, then, unfortunately, for subcontractors, the courts will enforce the conditional payment clause in the state of Alabama,.
Another way according to which subcontractors can obtain the remedy to the ethical issues raised by the conditional payment clause is as follows. It could be done by ensuring there is a conditional payment bond in their contracts with general contractors. This connection allows a subcontractor to exercise a lien on the property of a general contractor until the latter one pays out the necessary amount of money (Thomas & Flynn, 2011). The states such as California have authorized the use of conditional payment bonds by subcontractors engaging in both private and public construction projects (Thomas & Flynn, 2011, p.108). The rationale for it is to support a subcontractor’s constitutional right to assert the lien for unpaid labor and material used in the construction.
Change Order Requirements
Typically, a construction contract between an owner and a general contractor sets in details the performance obligations of the external collaborator. However, the parties to the agreement sometimes need flexibility in order to adapt everything to any actual construction changes encountered in the field. In such circumstances, change orders are used to implement the shifts encountered. According to Hess and Robinson (2013, p.1) a change order is a written document prepared by either an owner of a construction project or a general contractor. This regulation details the variations to the project that need to be undertaken. The change order documentation is necessary when plans and specifications for the activity have proven to be inconsistent. It may be as well needed when an owner or a design team want to add or delete some items or when the existing conditions have been different than expected (Hess & Robinson, 2013). All changes that have an impact on the contract time and contract price form a part of the change order. These ones include the type and amount of work to be carried out as well as the manner of enforcing the activities. When the owner of the construction project agrees to the change order and signs it, the implication that he has acquiesced to the document as a part of the main contract between him and the general contractor is formed. The modifications in the order do not, therefore, invalidate the agreement. It is a duty of the owner of the construction project to reimburse the contractor for the costs the latter one has incurred in the construction process due to the modifications documented in the change order.
However, the ethical issue with regards to change orders is the following requirement. The general contractor has to be compensated. Theo one must have a written agreement with the owner of the activity as to the change order. At most cases, the proprietors of construction projects refuse to compensate the expenses spent by general contractors that incurred due to the changes that they had approved. The reason is that they have not signed any written change order agreement. Moreover, the standard form contracts of several organizations in the construction industry perpetuate some ethical issues. For example, the Section 8.1 of the ConsensusDocs 200, Agreement and General Conditions Between Owner and Constructor posits the following fact. For the contractor to receive reimbursement for the costs acquired while implementing approved changes, the change order agreement with the owner must be memorialized in writing. Moreover, for the external collaborator to be compensated, the one must submit a written notice for the payment of the approved change order within 30 days of launching the change order (ConsesusDocs, 2013, p.14). If the contractor fails to send a written request to the owner within the specified period, it is considered that he has lost the right to have the reimbursement.
The controversial issue of change order requirements has led contractors to courts to look for the ways out. Judicial institutions usually interpret the issues related to change orders depending on the nature of the construction project. It means that the activity should be either public or private. In the construction project contracts sponsored by the government, courts strictly state as follows. The contractor could only receive reimbursement from the state if the change order agreement was formalized in writing (Hess & Robinson, 2013). Courts never grant an order forcing the government, as an owner of a construction project, to reimburse a contractor for the costs incurred as stipulated in a change order agreement if the contract was made verbally. The contractor that deserves reimbursement stays, therefore, unpaid. To avoid such ethical problems, the external collaborator should ensure a change order agreement between both parties has been done in a written form. As the existence of the written change order is typically a condition to the contractor’s right to receive compensation for the extra work performed, it is imperative that this party is familiar with and follows the mechanisms of the written contract carefully. Another solution to the predicament of the external collaborator would be adding a concealed or unknown clause to the agreement with the owner of the construction project (Hess & Robinson, 2013). The provision will make the proprietor agree to reimburse the contractor for the finances used in the change order in case any unpredictable conditions occur. When it comes to change order agreements on a private construction project, courts interpret the matter in the way being more favorable to external collaborators. Judges consider oral contracts between contractors and owners to be legal and valid (Hess & Robinson, 2013). The charge order agreement, therefore, does not have to be written.
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Transfer of Oversight Responsibility
A construction project usually involves several parties such as an owner, a contractor, subcontractors, and sub-subcontractors. Each of the sides of this activity typically enters into agreements for the performance of the section of their work. Even though every party is entitled to execute their part of the project, it is the duty of the general contractor to guarantee the overall success of the activity. The part of the function includes having the oversight responsibility of the whole construction project (Hess & Robinson, 2013). The duty of the contractor extends to the actions of employees, subcontractors, and sub-subcontractors. However, there are some instances when the general contractor temporarily transfers the oversight responsibility to a subcontractor or a sub-subcontractor. In such cases, the subcontractor or sub-subcontractor can perform the acts that can lead to the losses or damages in the construction project. Ethical issues that arise from such situations include whether the general contractor who has transferred the own duty to the subcontractor and sub-subcontractor should be held accountable to the owner or not. The majority of standard form construction contracts require the external collaborator to indemnify the proprietor for any losses incurred during the construction project when oversight responsibility is passed to subcontractors and sub-subcontractors. According to the Section 10.1 of the ConsensusDocs 200, Agreement and General Conditions Between Owner and Constructor, the general contractor is legally expected to indemnify the owner against damages, losses, and expenses the latter one incurred upon the collaborator transferring oversight responsibility to subcontractors or sub-subcontractors (ConsesusDocs, 2013, p.15). The indemnification will include the extent of losses caused by the acts or omissions of the subcontractor, sub-subcontractor, or anyone directly or indirectly employed by the contractor during the period of transferring the oversight responsibility.
Even in cases when the subcontractor and sub-subcontractor misrepresented facts about oversight responsibility given to them when not transferred, the external collaborator would be still liable to the owner of the construction project for any losses or damages. The same provision, i.e. the Section 10.1 of the ConsensusDocs 200, Agreement and General Conditions Between Owner and Constructor, denies the contractor the duty to defend oneself from liability upon the transfer of oversight responsibility to subcontractors and sub-subcontractors (ConsesusDocs, 2013, p.15). Unfortunately, the general external collaborator is bound by the contract and lacks any legal relief in courts. The prime contractor, therefore, is susceptible to liability every time a construction contract is entered by the one because of one’s duty of oversight responsibility. There are, however, several solutions that the external collaborator can undertake in order to avoid the ethical concern of transfer of oversight responsibility. For example, the one should avoid shifting oversight responsibility to subcontractors and sub-subcontractors. Moreover, upon negotiating the contract with the owner, the general contractor should ensure as follows. There should be the provision in the agreement to state that the contractor has a limited liability in case of transferred oversight responsibility to subcontractors and sub-contractors (Hess & Robinson). In general, the primary remedy that could alleviate the ethical concerns of the standard form contracts could be the revision of these agreements by the bodies and organizations responsible in order to make them fair for all the parties involved in the construction project.
There are the ethical issues related to the standard form construction contract clauses on contingent payments, change orders in both government and private activities, and the transfer of oversight responsibility from the prime contractor to subcontractors and sub-subcontractors. The conditional payment clause places a subcontractor in such a situation when the one only receives payment from a general contractor. It happens in case if the latter one is paid by an owner of the project. It does not matter that the subcontractor is innocent in a dispute involving the proprietor and the general external collaborator. The change order clause in public construction projects prevents the prime contractor from receiving the reimbursement from the government if the change order agreement is verbal. The provision of the transfer of oversight responsibility makes the general external collaborator liable to indemnifying the owner of the activity for any losses. They may arise due to the acts and omissions of subcontractors and sub-subcontractors during the period of the transferred oversight responsibility from the contractor. Fortunately, the aggrieved parties in the contracts can find relief in the state legislations and courts of law. Moreover, the responsible bodies need to revise the standard form construction agreements as well.