The project schedule and a project’s financial success or failure are inextricably linked. A delayed project can expose prime contractors and their subcontractors to damages suffered by the owner, liquidated and actual, in addition to cost increases from field and home office overhead. Even if the schedule is “recovered,” the effort to right the ship may require so much overtime, crew augmentation, and inefficiency that a potentially profitable job turns into a puddle of red ink. Given these financial risks, some prime contractors draft their subcontracts to push the risk of scheduling problems and resulting delays downstream. Sometimes these scheduling clauses require subcontractors to bear the cost of risks the subcontractor cannot control. Is this a good idea?
This article compares risk allocation in the scheduling provisions of the ConsensusDocs 750 standard form subcontract (2016 revision) with those of two subcontracts written by prime contractors. The three provisions discussed are set out in full at the end of this article. These latter two examples, on balance, shift much more of the risk of project delays to the subcontractor, while at the same time limiting the subcontractor’s participation in the scheduling process. We will then examine what a subcontractor can do when faced with unfavorable risk-shifting provisions. Finally, we will consider whether there are benefits to a more balanced allocation of risk.
Key Schedule Provisions of ConsensusDocs 750
The ConsensusDocs subcontract, paragraph 5.2, couches the duty to complete in accordance with the project schedule as a mutual obligation between subcontractor and the prime contractor. As the schedule changes, the prime has a duty to the subcontractor to communicate any schedule changes to the subcontractor reasonably before the subcontractor is to perform. If the Prime’s schedule changes increase performance time and/or costs, the subcontractor receives additional compensation and time if warranted.
Paragraph 5.3.1 provides that, if the start or progress of the work is delayed without the subcontractor’s fault, the subcontractor’s completion date will be extended, the schedule will be adjusted, and the subcontractor will receive any increased compensation obtained by the prime contractor. Paragraph 5.3.2 requires the subcontractor to pursue claims for which the owner may be liable in accordance with the owner-prime agreement and allows the subcontractor to pursue a pass-through claim in the prime contractor’s name at the subcontractor’s expense. Most significantly for comparison purposes, per paragraph 5.3.3, nothing in Paragraph 5 precludes the subcontractor from recovering delay damages caused by the prime contractor.
The ConsensusDocs subcontractor accepts two types of delay risk: (1) liquidated damages assessed by the owner against the prime to the extent the subcontractor is responsible; and (2) actual (but not consequential) damages suffered by the prime as a result of any failure by the subcontractor to meet the schedule, paragraph 5.5.
This ConsensusDocs approach attempts to balance risk to the parties who can most readily control it. The prime and subcontractor have mutual obligations to meet the schedule; the subcontractor has input into its schedule; the prime controls the ultimate project schedule; and the subcontractor assumes financial risk based on its level of responsibility for schedule performance failure. If delays are not its fault, the subcontractor may recover from the prime, subject to provisions governing owner-caused delay.
Comparison with Prime Contractor Drafted Scheduling Provisions
Many subcontracts allocate these risks quite differently. Example 1, set out below, imposes on the subcontractor full financial risk for project schedule failure when the subcontractor bears any responsibility for delay, paragraph 1.1. The subcontractor’s “cooperation” with the schedule is subject to a definition which gives the prime contractor almost full control over the effort, paragraph 1.2. Finally, the scheduling provision allows the prime contractor very broad discretion to direct the means and methods of the subcontractor’s work almost entirely at the subcontractor’s cost and expense. Although not contained in the scheduling clause itself, this particular subcontract also contains a no-damages-for-delay clause (except to the extent the prime contractor recovers from the owner or third party) and requires that the delay be solely the responsibility of the contractor or other of the prime’s subcontractors. In short, Example 1 severely limits the subcontractor’s ability to recover damages if it is delayed by the prime, and exposes the subcontractor to financial responsibility for harm that it did not even cause in a process it does not control.
Example 2 also prevents the subcontractor from recovering money for delays caused by the prime and limits time extensions to extensions obtained from the owner, article 2(b). The clause also assumes that the cost of providing any scheduling information requested by the prime is included in the subcontract amount. Much of this information traditionally is the province of the prime contractor, paragraph 2(c). Virtually all financial risk of falling behind schedule belongs to the subcontractor. There is no limitation on the types of damages the contractor may recover from the subcontractor in the event of a subcontractor-caused delay, paragraph 2(a).
What’s a Subcontractor to Do?
When faced with more one one-sided provisions such as Provisions 1 and 2 in the Appendix, a subcontractor’s options include:
- Negotiate to achieve a more balanced allocation of risk.
- Include a larger contingency for the schedule risk that is assumed.
- Take the risk.
- Turn down the work.
If the subcontractor elects to assume the risk of a one-sided scheduling provision, it can mitigate its risk to a certain extent through attentive contract administration. First and foremost, it may be in the subcontractor’s best interest to banish the term “delay” from its vocabulary and to view all project issues in terms of changes. Most events that result in delay can be characterized as a change to the original scope of work. In such circumstances, a request for a change order equitably adjusting the contract price, if appropriate, and the project completion date may work better than a simple request for an extension of time. Secondly it is important for the subcontractor to comply strictly with all notice and other requirements and insist that the prime contractor do so as well, particularly with regard to providing formal direction for dealing with problems, including issues causing delay. Such formal direction may also give the subcontractor an opportunity to request relief under the subcontract’s changes provision.
Does the Prime Contractor Truly Benefit?
One-sided provisions can be advantageous, particularly in the short term when faced with a claim or change order request. But these provisions are not necessarily in the prime contractor’s best interest in all cases. Some issues to consider:
- One-sided scheduling provisions may limit the quantity and quality of potential subcontracts (those who can afford to avoid the risk will pass in favor of less risky jobs).
- Fewer potential subcontractors mean less competition, which can result in higher prices.
- Onerous provisions invite contingencies, which raise prices.
- Subcontractors may fail financially under onerous scheduling requirements, which results in defaults, uncertainty, and, potentially, more delay.
- Exercising control over a subcontractor’s planning, manpower, and execution of work may open the prime to claims under other legal theories.
- One-sided scheduling provisions may be difficult to enforce. Judges and arbitrators may find provisions that require a subcontractor to bear risk it cannot control to be fundamentally unfair.
Reasonable risk allocation can increase competition, lower costs, improve team work, and enhance quality. Although sometimes desirable in the short term, one-sided risk allocation often creates a more expensive and troubled project.
ConsensusDocs Form 750 (2011, Revised 2016)
Article 5 Progress Schedule
5.1 TIME IS OF THE ESSENCE Time is of the essence with regard to the obligations of the Subcontract Documents.
5.2 SCHEDULE Subcontractor shall provide Constructor with any scheduling information proposed by Subcontractor for the Subcontract Work. In consultation with Subcontractor, Constructor shall prepare the schedule for performance of the Work (“Progress Schedule”) and shall revise and update such schedule, as necessary, as the Work progresses. The Progress Schedule binds each Party and all subsequent changes and additional details shall be submitted to Subcontractor promptly and reasonably in advance of the required performance. Constructor shall have the right to determine and, if necessary, make reasonable changes to the time, order, and priority in which the various portions of the Work shall be performed and all other matters relative to the Subcontract Work. To the extent such changes increase Subcontractor’s time and costs, Subcontractor may seek equitable adjustment in the Subcontract Amount or Subcontract Time in accordance with the Subcontract Documents.
5.3 DELAYS AND EXTENSIONS OF TIME
5.3.1 OWNER CAUSED DELAY Subject to § 5.3.2, if the commencement or progress of the Subcontract Work is delayed without the fault or responsibility of Subcontractor, the Subcontract Time shall be extended by Subcontract Change Order and the Subcontract Amount equitably adjusted to the extent obtained by Constructor under the Subcontract Documents, and the Progress schedule shall be revised accordingly.
5.3.2 CLAIMS RELATING TO OWNER Subcontractor agrees to initiate all claims for which Owner is or may be liable in the manner and within the time limits provided in the Subcontract Documents for like claims by Constructor upon Owner and in sufficient time for Constructor to initiate such claims against Owner in accordance with the Subcontract Documents. At Subcontractor’s request and expense to the extent agreed upon in writing, Constructor agrees to permit Subcontractor to prosecute a claim in the name of Constructor for the use and benefit of Subcontractor in the manner provided in the Subcontract Documents for like claims by Constructor upon Owner.
5.3.3 CONSTRUCTOR CAUSED DELAY Nothing in this article precludes Subcontractor’s recovery of delay damages caused by Constructor.
5.3.4 CLAIMS RELATING TO CONSTRUCTOR Subcontractor shall give Constructor written notice of all claims not included in § 5.3.2 within fourteen (14) Days of Subcontractor’s knowledge of the facts giving rise to the claim. Thereafter, Subcontractor shall submit written documentation of its claim, including appropriate supporting documentation, within twenty-one (21) Days after giving notice, unless the Parties agree upon a longer period of time. Constructor shall respond in writing denying or approving, in whole or in part, Subcontractor’s claim no later than fourteen (14) Days after receipt of Subcontractor’s documentation of claim. Constructor’s failure to respond shall be deemed a denial of Subcontractor’s claim. All unresolved claims, disputes, and other matters in question between the Parties not relating to claims included in § 5.3.2 shall be resolved as provided for in Article 11.
5.4 LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES
5.4.1 Except for any (a) liquidated, consequential, or other damages that Owner is entitled to recover against Constructor under the prime agreement, and (b) losses covered by insurance required by the Subcontract Documents, the Parties mutually waive all claims against each other for consequential damages, including but not limited to, damages for loss of business, loss of financing, loss of profits not related to this Project, loss of bonding capacity, loss of reputation, or insolvency. Similarly, Subcontractor shall obtain in contracts with its subcontractors mutual waivers of consequential damages that correspond to Subcontractor’s waiver of consequential damages. The provisions of this subsection shall also apply to and survive this Agreement.
5.5 LIQUIDATED DAMAGES
5.5.1 If the Subcontract Documents provide for liquidated damages or other damages for delay beyond the completion date set forth in the Subcontract Documents that are not specifically addressed as a liquidated damage item in this Agreement, and such damages are assessed, Constructor may assess a share of the damages against Subcontractor in proportion to Subcontractor’s share of the responsibility for the damages. However, the amount of such assessment shall not exceed the amount assessed against Constructor. This section shall not limit Subcontractor’s liability to Constructor for Constructor’s actual damages caused by Subcontractor.
Prime Contractor Drafted Scheduling Provisions
1.1 Time is of the essence in the performance of this Subcontract. Subcontractor is aware of the Contract Time (as defined in the Contract Documents) and agrees to take any and all steps necessary to insure that the Work is performed in such time as to permit Contractor to meet its obligations to Owner in accordance with the schedule for the Project to be prepared by Contractor (“the Schedule”). If Subcontractor fails to maintain the progress required by the Schedule and such failure is Subcontractor’s fault, in whole or in part as reasonably determined by Contractor, Subcontractor agrees that the Contractor may direct the Subcontractor, at its sole cost and expense, to take whatever actions are necessary to get the Work back on schedule.
1.2 The Schedule will be developed in a cooperative effort between the Contractor and the Subcontractor as follows: The Project may use the services of a professional scheduling organization or may manage scheduling with Contractor’s management personnel. Subcontractor accepts this concept and agrees to attend and participate in all scheduling activities. These activities are at a minimum: One day of data gathering of Subcontractors’ activities and manpower and one day of logic planning for the Schedule preparation at the beginning of the Project. Subcontractor further agrees to attend half a day work sessions every other week for near term schedule update and commitment. This activity requires preparation as well as attendance.
1.3 Subcontractor agrees at its sole cost and expense: (a) to begin the Work upon Contractor’s order to do so; (b) to cooperate with Contractor and its other subcontractors and the other contractors, if any; (c) to perform the Work in such sequence as Contractor may from time to time direct; (d) when requested, to provide all information required to prepare updates or revisions to the Schedule; (e) to allow other work to proceed in preference to Subcontractor’s Work; and (f) to furnish at all times sufficient and qualified forces and supervision, adequate and conforming materials, equipment, tools and all other things necessary to achieve the progress required by the Schedule. Subcontractor agrees that Contractor has full discretion with regard to preparation of the Schedule and updates or revisions thereto during the course of the Project, and that Subcontractor shall perform, at its own cost and expense, the Work in accordance with the requirements of the Schedule and all revisions or updates thereto. The Contractor shall have the right to approve all manpower levels employed by Subcontractor and to direct that manpower be increased as deemed necessary by Contractor. If the Subcontractor fails to adhere to the manpower levels as determined by Contractor, then Contractor may, at its discretion, supplement the manpower of Subcontractor. The costs related thereto shall be deducted from the Contract Price. If Contractor supplements Subcontractor’s labor, Subcontractor will nevertheless be fully responsible, including all warranty and guarantee requirements, for all Work included in the Subcontract scope.
(a) Subcontractor agrees to commence, pursue diligently and complete the work in such sequence and order and according to such schedules as Contractor shall establish from time to time during the course of the work, and shall perform the work so as not to delay any other trades or contractors, time being of the essence of this Subcontract. Any written dates furnished by the Subcontractor and approved by Contractor and Owner for delivery of materials, samples, shop drawings, etc., shall become a part of this Subcontract. Subcontractor shall furnish information requested by the Contractor in connection with monitoring and updating the Project schedule and shall immediately notify Contractor in writing of any interruption of the work or late delivery which causes or may cause a delay in Subcontractor’s performance. No extension of completion date shall be permitted unless approved in writing by the Contractor and Owner, and Subcontractor shall be responsible for any losses or penalties incurred by Contractor as a result of delays in completing Subcontractor’s work. If Contractor determines that the Subcontractor is behind schedule or will not be able to maintain the schedule, Subcontractor shall submit a remedial plan to recover, shall work overtime, shift work, or work in an altered sequence, if deemed necessary, in the judgment of the Contractor to maintain the progress of the work. Any such overtime, acceleration, shift or altered sequence work required to maintain progress or to complete the work on a timely basis shall be at Subcontractor’s expense and shall not entitle Subcontractor to an extension of time or additional compensation. Contractor may supplement Subcontractor’s forces, at Subcontractor’s expense, if deemed necessary by the Contractor to maintain the Project schedule. Subcontractor shall be liable to the Contractor for any delay or damages, including consequential or liquidated damages, threatened or assessed against the Contractor to the extent caused by the Subcontractor.
(b) To the fullest extent permitted by applicable law, Contractor shall have the right at any time to delay or suspend the work or any part thereof without incurring liability therefor. An extension of time shall be the sole and exclusive remedy of Subcontractor for any delays or suspensions suffered by Subcontractor, but only to the extent that a time extension is obtained from the Owner, and Subcontractor shall have no right to seek or recover from Contractor any damages or losses, whether direct or indirect, arising from or related to any delay or acceleration to overcome delay, and/or any impact or effect of such delays on the Work.
(c) Subcontractor shall cooperate fully with Contractor in providing promptly any information requested by Contractor in connection with preparation of schedules for the Project, including, but not limited to, detailed information concerning the sequence, beginning and ending dates of activities, cost breakdowns related to such activities, and any information requested for Critical Path Method scheduling if used for the Project. The costs of all such activities on the part of Subcontractor are included in the Subcontract Amount.
(d) In the event of any dispute under this Subcontract or as to the work to be performed, Subcontractor shall continue to diligently perform the work as directed by Contractor without interruption, deficiency or delay.