Rancho Mesa's Surety Relationship Executive Anne Wright interviews Luke Thompson of Thompson Law & Consultation on contract provisions to review for successful projects.

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www.ThompsonLawAndConsultation.com

Director: Alyssa Burley

Host: Anne Wright

Guest: Luke Thompson

Editor/Producer: Megan Lockhart

Music: "Home" by JHS Pedals, “A Brand New Start” by TrackTribe

Transcript

[Introduction Music]

Anne Wright: Welcome to StudioOne™. This is Anne Wright, Surety Producer with Rancho Mesa Insurance. And today I have with me Luke Thompson, who is the proprietor of Thompson Law and Consultation. And we're going to talk a little bit about some contract provisions that might help you be more successful on your project. So welcome, Luke. Thanks for joining us.

Luke Thompson: Thank you for having me. I appreciate it.

AW: Can you give us a little background on how you got to do what you do? I know we met several years ago. You were working for one of my electrical clients, specifically, and so we were introduced then. And then you went off and started Thompson Law.

LT: Right. Yeah, I am San Diego native, born and raised in East County. Pretty much my whole life, went to USD for law school. After law school, I went and worked for a local electrical contractor who's still a good buddy of mine, one of my best clients. But I left after five years there, I believe it was, and went and started my own practice. So, I have experience as a project manager as well, obviously as an attorney.

AW: Well rounded.

LT: I hope so for what I do.

AW: I don't know many people in the surety world that have construction background, but if you do it certainly adds an extra enhancement to what you do so...

LT: Yeah, it definitely helps with the review of change orders, contracts, those kinds of things. I know the language. I've been on many job sites. I understand the ebb and flow of the construction industry, so it helps.

AW: Day to day trials and successes.

LT: Right. Absolutely.

AW: Well, talking about contracts, you know, nobody wants to have to be tied to a contract. But in this business, you do. So, you can make a choice to read them and understand them or blindly sign them and then plead ignorance, which probably doesn't get too far in a court of law.

LT: It does not.

AW: But, since you're bound to the contract once you sign it, we wanted to offer a couple of things here that might help some of our clients and contractors listening with some things that they can pay attention to that, again, might help them be more successful and profitable. One thing that I want to mention is if you're a subcontractor particularly, I always try to recommend that a subcontractor gets a copy of the prime contract with the owner.

LT: Sure.

AW: Because there's slowdown provisions that sometimes it's- there's almost innuendo by reference in the contracts, but they're not always sure exactly what they're tied to. So, do you see any pushback from general contractors when a subcontractor wants to ask for that?

LT: Yeah, almost always. Which is somewhat surprising. I think it's better for the GC to have all their cards on the table with respect to the prime contract. I think on public works, sometimes they're a little irritated because usually it's in the bid documents and so, there's- should be awareness for most subcontractors of what's going on, but not always. And it's certainly a reasonable request. And in the electronic world it's a click of a button, so it's not usually too hard to share. I think some on private projects are concerned about, you know, some pricing and things like that that they may not want disclosed. Or there are various provisions sometimes that subcontract- they're not eager for their subcontractors to be aware of. But again, these things are usually just landmines in future. It's much easier to avoid this sort of problems when everybody's on the same page.

AW: Right. And if you do need to get a copy of the subcontract, the time to ask for it is up front. Because if like you said, you're in a conflict situation, then there's going to be more pushback to get it later.

LT: Right, yeah, and the insurance companies, sureties, everybody wants to know that you have all the documents for the contract before you're signing something. So, it's in your best interest to at least have it. But of course, having it is not enough. You generally need to read it and have an understanding, and that's the hard part. I definitely understand that. These are very long documents.

AW: Yeah, they are. And again, it's legalese, so.

LT: Right.

AW: Well, let's talk about a few things that may be in those contracts and what contractors again, whether you're prime or a sub, can do about it. I know one thing that comes up quite a bit is delays these days, and there's lots of reasons for delays. And if you're tied to a specific schedule and then there may be liquidated damages if you're delayed. What is- first of all, look at what does a contract say about delays. Right?

LT: Right.

AW: And then how can the contractor mitigate those…?

LT: Well, when it comes to delays, what I've seen over the last really five years mainly is a big transition from some brief language regarding delays to much more specific language regarding delays, particularly regarding the GC’s liability. And most of the time all of the liability for- in terms of costs- are put on the subcontractor. And so, it's really important for subcontractors in particular to read these clauses. And the GCs are doing it obviously because the owner also does the same. They put the liability on the GC, they're not performing, and that's the big difference. The GCs often are self-performing or they're responsible for the schedule. And so it's really important that the subcontractor understand the risks associated with some of these things because when it comes to delays, it's not always perfectly clear who is actually responsible. And I would say it's the single biggest cause for disputes that can't get resolved in sort of an amiable way. You know, a lot of things are pretty clear cut, but delays rarely are. And so, it's a pretty critical piece of the contract for subcontractors to be aware of.

AW: Okay. And liquidated damages is that per day fee that the cost that they usually include there or they'll refer to it, and if it's not specific and you are a sub, you should find out what that is. But there's other types of damages to- consequential damages- can you speak to that?

LT: Sure. I frequently recommend that both parties, whether I'm representing a GC or a subcontractor, delete the consequential damages with respect to one another. Obviously, you know, if your GC can't waive the consequence of damages altogether, if the owner comes after you, you're going to have to go looking for payment from somebody else who might be responsible. But, these are terms that tend to drag out litigation and in most cases arbitration, actually, and make it very, very expensive to sort of defend and advance your claims with respect to consequence or damages. It's a lot of attorney work to be honest with experts and all that's required to prove these things. So, I think that's a good cost saving measure for both parties if they can kind of come to terms with that. Some- depending on the project, it isn't always the best move. It takes an attorney typically who has an understanding of the project as a whole to really make that recommendation. Obviously, this isn't legal advice. I don't know anybody's case or anything, but anyway, the consequential damages can be an issue. I think, as well as consequential damages, there's liquidated damage provision that largely deals with the owner’s damages with respect to the GC’s performance, and then the GC will delegate out whatever the liquidated damages proportionate responsibility they think might be in play there. There could be some dispute there, but a lot of times there are other delays to the GC that aren't captured in the liquidated damages. They have extended overhead for their supervisor, you know, their superintendent, you know, context boxes and all the different accouterments for a construction project. And they're going to try to go and recapture those costs if you've been delaying the project. So, not being aware of that or the assumption that the liquidated damages just sort of covers it all is not wise.

AW: Well, we hear all the time, you know, some people get a request in and they'll say, “Well, there aren't any liquidated damages,” and we're all like, “You better double check.” And, you know, there's probably something buried in there. And then the response will come back, “Well we've never been assessed liquidated damages on all the jobs we've ever done all these years we've been in business. So we're not worried about it.” But claims do happen for liquidated damages, correct?

LT: Right. I mean, most of the provisions in the contract are irrelevant when everything's performed well. People generally pay, there's not a lot of dispute over the pay in scope. Typically, actually, it's because contractors review their scope very carefully. They are sure to make sure the dollar figures are in order as well. And so, that's fine. But when things go wrong, this is when all these provisions become incredibly critical and these are what drive your attorney's fees costs through the roof is trying to defend these obligations and duties and deal with them. It can be extraordinarily expensive. And just an upfront review will help you make better decisions when you're faced with conflict and in a lot of time avoid them altogether.

AW: Okay. All right.

LT: Yeah.

AW: Thanks. Yeah. And, that is the ongoing theme through throughout our interview will be, you know, have an attorney review your contract before you start the job, before you sign the contract. We always say that it's cheaper to review than to defend.

LT: Yeah.

AW: So, you know, I know it's, you know, sometimes, you know, you build some sort of expense into your job cost to just have that done and could save you a ton of money on the back end and headache.

LT: Yeah, and there really are quite a few wonderful attorneys here in San Diego, I work with them all the time, who are more than happy to help with this. It's not just me.

AW: Right.

LT: And it's unfortunate. It really can solve a lot of problems, especially if you're moving from, you know, sort of your normal wheelhouse into a larger pool or you're going, say, from private to public works, it's super important that you have an attorney help you navigate the changes that are involved there. It's a lot.

AW: Yeah. It may cause you to cost your job differently.

LT: Yeah, it almost certainly will.

AW: Right, right.

AW: Okay. Well, thank you. And again, I- we get questions, you know, from time to time, too, and I just have to say sorry, I don't have that JD behind my name, so…

LT: Yeah,

AW: I'll give you some names of attorneys, so.

LT: Yeah.

AW: And then mobilization is something that comes up too, you know, it's really important, you know, to get a job kicked off. But are contracts typically clear on what you can build for and when, when it comes to mobilization?

LT: Well, most public works contracts are. Private jobs, it's hit and miss depending on the size. You know, I think most project managers understand the art and science behind overbilling. It can get you in a lot of trouble if you're way too far out in front of your skis, so to speak. But also being behind can be a real problem, too, right? So it changes the leverage of the game a lot. And when it comes to mobilization, it's really kind of the starting point and a really great example for this principle in that a lot of contractors just are not aware of everything that went into getting on site. They are in the sense they understand the principle. They're really excellent at it. They know how to get a job started right. I'm always amazed at how they can get 20 guys on a job site in a week and make it happen. It's remarkable.

AW: Yeah.

LT: But there's enormous cost to that and it isn't always fully appreciated. And the public work side, it's often limited to 5% which and you know if you're a concrete sub or some of these other subs that's a ridiculous number. And so it's really, really important that you understand what's allowed and that you can provide some pushback on that mobilization. It's not uncommon, even on a public works project, to be able to petition the GC and the GC go to the owner and have an adjustment on that basis with some justification. And that's a great move. Obviously, you don't want to oversell it. Your mobilization is not going to be 50%. But-

AW: Yeah.

LT: -But there's sometimes good cost to bump that number up to what would be normal for most contracts.

AW: You can make the case.

LT: Yeah.

AW: You can make the case if you can make the case

LT: Right. It's the art of negotiation and it's really the core principle behind this is that when you receive the contract, it's not just awaiting your signature. You know, there's some work to be done on that front, both in the review and in the negotiation, and it can really make a big difference for cash flow, for leverage, for change orders, all those kinds of things. It's pretty critical.

AW: And speaking of change orders, it's kind of on that same theme as far as negotiation, one of the questions that comes up is, you know, what can you reasonably expect to include for overhead and profit on change orders? I know on federal government jobs that can be, I think, a little more specific than on some other owner’s contracts.

LT: Yeah, yeah. I find with federal, I really like working with federal government, in most cases they're they just the fire regulations and in general contracting officers in that realm really know what they're doing and you can make persuasive arguments and they'll listen. On most public works at the state and local level here in California, it's pretty rare to have anything other than 15% as sort of the max for overhead and profit on any change order. And that's usually carefully defined. Sometimes, I've seen it as low as ten, which is really unfortunate. I don’t know too many contractors whose over head is less than 10% so…

AW: Yeah, less than ten.

LT: They're just not making money on change orders. And when it comes to private works, it's usually at the discretion of the owner and it's often- each change order is negotiated, which is ideal for most subcontractors. I think that's generally what you want to push for. But, I do see a lot of contracts drafted with specific 15%. It's turning into the industry norm, which is unfortunate because I don't know too many contractors who are operating at, like I said, less than 10%, so 5% profit on that is rough, if they're getting that. And so this is an area where a lot of contractors are losing money and they don't always think they are. And then when I do an analysis on something that they're doing, a detailed analysis on these things, I can show, you’re actually losing a considerable amount of money on this.

AW: Yeah, and we see some of that when we're asking for the work in progress reports and you know what their costs versus billings-

LT: Right.

AW: -Remaining profit to be earned.

LT: Yeah.

AW: I think. But best practice with any change order processes is to document, document, document, from day one.

LT: Right I, document, document, and another really great, important well- a great tool for contractors in pushing for their change orders is a thorough understanding of their actual overhead costs. I've been in meetings as the PM and as an attorney where I was able to persuade even a public agency to up the overhead based on the documentation that clearly showed that the contractor could not do the change order for the amount demanded. Because they show them the material invoices, all the equipment, invoices, the labor hours as defined by, you know, obviously CPR. So, all of that was, there really was no other margin. And so to be able to demonstrate that and get an approval for additional fees, it was remarkable to that particular contractor. But you will find that most of these agencies, most of these people are pretty reasonable, but it takes the building of relationships and those kinds of things just knowing that you can.

AW: Right, yeah. Okay. Material cost escalations and lead times have been serious issues-

LT: Yes

AW: -before COVID, but certainly, COVID only sort of lit that fire even more. So, what do you look for in the contract to see whether cost escalations are even allowed? And if not, what can you do?

LT: Well, there's a lot of contracts that specifically address this issue, and some of them are extraordinarily fair. They say, look, if you provide, essentially, if you provide notice and you have good reason why this material costs, they'll reconsider it. Federal government, again, super reasonable most of the time on these kinds of issues. But a lot of times the contract is drafted such that these things are excluded. But I would still say more contracts than most, more often times than not, excuse me, they don't have any provision regarding this. And so when you're in that situation, the expectation of the owner is typically that the costs that you bid, you presumably got a hard cost from your vendor and you're going to hold them to it. But as every subcontractor knows, the vendor always has in their quote, “good for 30 days.”

AW: Right. Got the upper hand.

LT: Yeah, they always have that. They've always hedged that bet. And so, it's super important for contractors to put the owner on notice right away as soon as they see these potential cost increases. And then this is one of those areas where it's hard to win. In a litigation or arbitration, you're probably not going to want to get there. It's almost certainly going to delay the project. And so, it's really important to build those relationships and advance the best arguments you can. I often help contractors just draft confident letters that are persuasive and demonstrate what's going on. And this is again, comes back to the delay issues and why it's so important to know your contract well, because if the GC is scheduled things in ways that created this problem, there's going to need to be a conversation. The GC may be partly responsible, so it takes a real effort and a commitment to work through these negotiations.

AW: Yeah, and on the subject of letting them know early, I have heard from public owners who've said that, you know, they might have money in the budget contingencies if they know early-

LT: Yes

AW: -they could cover it. But when everybody just holds off until the end-

LT: Yeah.

AW: -then it's just a, you know, food fight to see what's left, what kind of scraps are on the table and what they can do.

LT: Exactly right, and having to go to the board to request additional funds for construction is not the place you want.

AW: Right.

LT: It's just going to push it back so far and they're almost always going to deny it. So the earlier, the better.

AW: Okay. And the last thing we can talk about here is sequencing and the scope of your work. When there's changes, when other trades are interfering with your work, you know, how do you see people maneuvering around that and what can you do to make that go a little smoother?

LT: Well, this is probably the weakest area for every contractor. Everybody is trying to go along to get along, trying to work together, coordinate, be reasonable. You can't send a notice every time you're pushed off a day, right? I mean, I get that, I've been there, done the project management, sent the notices and annoyed my prime contractor many times. And it's not always the best technique. I understand that for sure. But every project manager, every subcontractor and frankly, every GC needs to be really proactive about understanding significant delays to the project and the notice provisions that are required there. And when things get changed up and you haven't sent notice, you're pretty much bought off on the change.

AW: Okay.

LT: And so, it's super important that you send the notice that's required, that you follow up, and that you're watching your durations. Right? That's what ultimately matters is the critical path, the durations, those kinds of things. And GCs know that language really well, better than subs. And so when you send notices regarding that, they will definitely be cued in to what's going on. And a lot of times it's another subcontractor’s responsible and you’d surprised at the sort of, you know, it's nothing nefarious but this sort of back door deal that you can work with that subcontractor regarding equipment and other things that may prove to your advantage and just help you save costs. It doesn't always have to be a legal letter that goes off to recapture those things. Be creative. There are favors owed, so to speak, and can help get jobs done. But if you don't really know your schedule and you don't know your durations and you're just going when they call and then showing up when they demand you, you're going to lose money.

AW: Got it. Okay. Well, tried and true advice here, because you’ve seen it all.

LT: I hope so.

AW: In the world of surety, you know, we ask for the contracts. The underwriters want to see the contracts. They’ll review the contracts. Some charities are better at reviewing with some more detail. But, you know, we're not the legal department.

LT: Right.

AW: So, you know, we do really appreciate it when our clients talk to you ahead of time. And we know that they're setting themselves up for the best job possible. So.

LT: Right. Yeah. And I often tell my clients, you know, if you're surety agent isn't responding and isn't talking to you, I don't know what you're paying for. It is one of the more valuable tools in your, or pieces of information- resources really, that you can have. You're not going to Google what you know,

AW: Right, right.

LT: It's not going to happen and the same for me-

AW: It’s learning over and over through the years.

LT: Right. And so, I often advise my contractors, have a good relationship with your surety agent. They will help prevent so much that you just never saw and it's fantastic. So, yeah.

AW: Well, we have the same goals. So.

LT: Yeah.

AW: Well, I want to thank you again for coming in and sharing this valuable information. And if anybody wants to reach you, how can they get a hold of you, Luke?

LT: Well, there's my website. You can just Google Thompson Law and Consultation and then my phone number, everything's on that website. So.

AW: Because you do more than just law, your consultation covers a broader scope of.

LT: Yes, I try hard to have a similar goal to most sureties in that, trying to prevent problems rather than solve them as much as I possibly can. And I think my clients trust me because of that. You find me very proactive on that front. I still enjoy arguing for change order, so, I can be pretty useful in that respect.

[Outro Music]

AW: All right. Well, great. Well, thanks again for coming in. I can be reached at awright@ranchomesa.com. Or call my phone 619-218-4249 with any questions or a referral to Luke and we'll hope to see you again soon.

LT: Thank you so much for having me and I appreciate it very much.

Alyssa Burley: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne™. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.