How to terminate a subcontractor correctly and the techniques used to “set up” the subcontractor
I have just been involved in the termination of a subcontractor and have realized that there are several individuals and general contractors that have no idea how to properly terminate a subcontractor.
I am going to relate a story, which puts the termination of a subcontractor in perspective.
I was working as a consultant, and basically on call to the highest bidder. One of my most popular subcontractors called me and wanted me to estimate a local middle school, for a very popular contractor in the local market. This contractor was known for soliciting the lowest values for large scopes of work, from the most unsuspecting subcontractors desperate to win a contract.
I already knew this, and cautioned my client accordingly.
Even after my cautionary comments, my client, due to the difficult marketplace, decided to try to obtain the masonry on this particular middle school, no matter how low they needed to value the work. Although I was totally cognizant of the procedures used by this particular general contractor to abuse subcontractors, I agreed to estimate the masonry portion of the project for this subcontractor. In appreciation for the situation and the acknowledgement that the subcontractor wanted this project, I estimated the masonry for the project as tight and efficiently as I could. Also knowing the general contractor involved, as well as their reputation for historically placing subcontractors in desperate situations, I estimated the project with enough money to complete the scope of work. The number that I developed was slightly under one million dollars. I professionally and accurately presented this value to the subcontractor, with all the bells and whistles required to submit the number to the general contractor.
As is a common occurrence in my profession, I never heard the results, nor did I ever get paid for the estimate. You see, the accepted rationale for paying a professional estimator, is if that estimator actually got the project for their client, and then they would be paid, otherwise, forget it, and get in line with the rest of the accounts payable. So I was not surprised that there was no communication with the subcontractor that I had estimated the job for, I simply caulked it up to experience and kept on estimating.
After several months had passed, my subcontractor called me extremely excited and indicated that he had been awarded this particular project. He had called, not to detail the specifics of the project, but to let me know that he could now pay me for the work. I noted appreciation and questioned the value of the agreed upon contract, for the masonry. My client proudly indicated that they had been awarded the project for $750,000.00. This awarded contract was almost 25% less than my best estimate for the project.
Although I expressed my concern, as well as cautioned my client, on what could occur due to their acceptance of such a low value for the work, I knew from experience, that the thrill of being awarded this project overshadowed any of my misgivings for the general contractor and more importantly the value of the contract. It was obvious to me that there was no acceptable outcome possible for my client, and that, as has happened repeatedly in the past; this general contractor would take full advantage of this opportunity.
The following occurred;
- The subcontractor was presented a very difficult and professionally created project schedule. The schedule did not allow the proper time for each specific line item that my subcontractor was responsible for. This is a typical technique that is used to basically “set up “the subcontractor to fail.
- The subcontractor, anxious to perform work, and present their first requisition for payment, loaded the project with labor, material and equipment. The subcontractor was under the impression, and hope that the more work they accomplished in the first billable month, the more their initial check would be.
- The general contractor on the project, encouraged the subcontractor to perform as much work as possible, and initially congratulated and complimented the subcontractor on the work performed.
- The general contractor encouraged the subcontractor, to work overtime, to get as much of the work completed as possible, noting that the scheduling requirements, which were part of the signed contract, needed to be met.
- The subcontractor, anxious to please the general contractor, as well as create the largest billing possible, pushed labor, material and equipment to the maximum, and accomplished more work than the schedule required, in the first month.
- Anxious to submit their first bill, due to the amount of financing required to perform this first month’s work, the subcontractor submitted an extremely large and somewhat inflated first requisition. The subcontractor assumed, that based upon their performance, as well as the positive reaction from the general contractor during this first month of work, the inflated invoice would be processed on a timely basis.
- The general contractor had “set up “the subcontractor perfectly. Substantial work had been accomplished on the project, no money had been expended by the general contractor, and the subcontractor had submitted a fraudulent first requisition.
- Not reacting to the value of the first requisition, when received, the general contractor continued to encourage the subcontractor to perform work on the project, even further complimenting this subcontractor on the work being done.
- Unaware of the “set up”, the subcontractor pushed forward, borrowing against their bank credit line for payroll as well as creating large balances with suppliers.
- The general contractor allowed the subcontractor to complete work, and when questioned about payment, noted the contract payment terms and the contractual timing. The general contractor insisted that it appeared, all was good with the invoice, but the owner and architect were firmly obligated to follow the payment clause within the contract.
- The general contractor pushed the time limits, to the maximum, the subcontractor is now desperate for money to pay their rapidly expanding accounts payable. The general contractor pays the subcontractor 50% of the first month’s requisition, indicating that the requisition was inflated and the owner and architect only financed 50% of the invoice.
- The subcontractor is now “set up”. The general contractor continues to push the subcontractor to perform work on the project; the subcontractor is limited financially, due to the 50% reduction in their first requisition. If the subcontractor is financially weak, they slow down the progress on the project during the latter half of the second month. If the subcontractor is financially strong, they slow down the work progress a little further along in the project. The important thing for the general contractor is that they push the subcontractor to failure in terms of project schedule and required manpower and material on the project.
- Once the work slowdown takes place, the general contractor starts to issue repeated, consistent notices to increase production on the project based upon the construction schedule. This is the point at which the general contractor will attempt to push as much work out of the subcontractor, before failure, as they are able. The general contractor pushes with compliments and positive attitude towards eventual payment and bonuses.
- As the work performed by the subcontractor decreases on the project, due to lack of finances , the general contractor continues to issue formal notification to the subcontractor. These notifications can be either threatening to terminate the subcontractor from the project, due to their inability to maintain the construction schedule, or supplement the subcontractor with another contractor as designated by the general contractor. This is why it is important that the general contractor is astute enough to include a supplemental manpower clause, in the signed contract, between themselves and the original subcontractor.
- The general contractor will decide, financially, if the termination, or the supplementing of manpower, is more financially profitable for the general contractor.
Due to the basic premise of this webpage (subcontract termination), the subcontractor is terminated from the project. We will devote another webpage within this website, describing the procedures and techniques that will lead to manpower supplementing.
What has now occurred is easily summarized.
The general contractor has succeeded in completing substantial work for a minimal cost. Initially the subcontractor was awarded the project for a very reasonable cost. The general contractor has received the benefit of, in most cases, at least two months of work on the project. The general contractor has only paid the subcontractor 50% of the first month’s requisition.
No further financial payments have been made by the general contractor to the subcontractor.
The general contractor will now hire another contractor to complete the remaining work on the project, and present a lawsuit against the initial subcontractor for the cost of this other required subcontractor. In addition, the general contractor will place a lawsuit on the original subcontractor, for project delay, and all the occurring damages that have resulted due to the slowdown of work, by the original subcontractor who is now being sued.
How to properly terminate a subcontractor;
1.) Assemble all field daily reports, identifying improper work, lack of manpower, lack of response, improper materials, improper equipment, etc. (must have dated field reports that are consistent)
2.) Assemble all emails issued to subcontractor, giving notice that work was inadequate, manpower was inadequate, work was being performed improperly, etc. ( again consistency is vitally important )
3.) Assemble all punch-list submissions to subcontractor; include dates, updates, lack of performance and correction. (hopefully the punch-list was continuously submitted to this sub for correction of work)
4.) Categorize all photos of improper work and inadequate work and materials, the coordination of photos with daily reports and emails is an excellent tool to prove incorrect work as well as improper performance of the contract
5.) Important element in all of these items (No. 1 thru 4) is the timing of the notifications, the indications of improper work. It is important to establish a consistent notification of timing, that is proof of general contractors’ communication to the subcontractor.
6.) Correlate and cross reference subcontractor to emails or other communication from general contractor. This is important to establish the fact that the general contractor was consistently responding to any and all of the subcontractor’s correspondence.
7.) Separate the various contract clauses within the general contractor and subcontractor contract that allows the termination of the contract, as well as the indication of notification, and the obligation of the subcontractor to properly respond in a timely manner.
8.) Create a list of all items, manpower issues, quality issues, lack of work, etc. that has caused the subcontractor to be terminated.
In summary / If a subcontractor is hired, that is knowingly incompetent and incapable of performing the required scope of work within the required project schedule, then the general contractor must understand the obligations of proper notification, communication, field record keeping, photography, etc., that will be necessary to properly and legally, under the contract, terminate this subcontractor.
The general contractor’s supervision on the project should be aware of all inconsistencies performed by the subcontractor on the project. It is mandatory that proper record keeping and contractual notifications be addressed during the tenure of this subcontractor time on the project. Aside from never awarding the job to a subcontractor that is obviously incompetent, the general contractor must be cognizant of the subs inability to perform the scope of work, from the onset of the project, and must carefully document all inconsistencies, as they occur.
It is important to adequately document, ensuring that general contractor is legally positioned to terminate this totally incompetent subcontractor off the site!
I strongly recommend that if a general contractor choses to use this type of incompetent subcontractor, they should make sure that the subcontract is adequately designed to protect them, if and when the subcontractor is terminated. The general contractor should never allow an incompetent subcontractor to get ahead, financially on the project, and field supervision, inclusive of the superintendent as well as the project manager, must DOCUMENT every inconsistency in the work.
This is a technique used by several general contractors to get work performed for little or no cost. It has also resulted in the bankruptcy of many subcontractors.
This unscrupulous technique is briefly summarized as follows:
1.) General contractor should subcontract the work for the lowest possible value; clearly understanding that there is NO way that the proper scope of work can be performed for this low subcontract value.
2.) The contract should be constructed in a manner, with the proper legal language, to ensure that the general contractor is legally supported, when the eventual termination of the contract is implemented. The key to success with this type of tactic is to realize that the goal is to get the subcontractor to perform as much work as possible for as little money as possible.
3.) The contract should include a highly detailed and specific scope of work, inclusive of all of the soft requirements associated with the work, such as the proper preparation of surfaces, the proper following of all product specifications, such as temperature, etc. A very detailed and intense scope of work must be included in the subcontractor’s contract (this is extremely helpful when establishing reason and grounds for termination). If the scope of work is generated in a fashion, that compliance is basically impossible, the reasons for termination will be extremely obvious as well as easily manipulated.
4.) Intensely document the work using daily reports indicating inadequate work, emails continuously notifying the sub that the work is inadequate and photos, photos, photos. It is important to set the subcontractor up, for the eventual termination. The more consistent the documentation, the better it will hold up in a court of law. The creation of specific correspondence that relates to periodic work related inconsistencies, is not as powerful as continual daily reports that identify incorrect work, lack of manpower, etc. over and over again.
5.) Force as much field work from the subcontractor as possible, but continue to document all inconsistencies. Again consistency in documentation is very important!
6.) Do not pay the entire first invoice issued by the sub, however pay something. This is important, use every excuse possible, to not pay the full amount such as the owner didn’t pay; architect approved partial work, etc. etc. The best method is to promise that the second payment or the third will more than make up for the shortage on the initial payments. In this manner, the subcontractor will continue to perform work on the project in expectation of full payment within the next several weeks.
7.) Continue to force the work in the field, continue to promise the money, etc. etc. / the goal is to get the most work out of the subcontractor with the minimal amount of payment. The length of this procedure depends upon the financial strength of the subcontractor as well as their ability to secure loans or string out their suppliers.
8.) Once it is obvious that there is no additional positive work that can be squeezed out of this sub, the subcontractor should be terminated.
9.) The basis of the technique is to force the subcontractor to fail, based upon the contract legal clauses. Lack of payment, unless the subcontractor is very legally astute, is difficult to prove in terms of lack of productivity on the project. The general contractor wants to force the subcontractor into contractual failure, allowing the termination of the subcontractor off the project.
Once the subcontractor has been legally terminated, the general contractor should provide no additional payments, and file a lawsuit for inadequate work, project delay, lack of proper manpower, all resulting in damages to the project and the general contractor. All subsequent work required to complete the scope of work is then back-charged and claimed against the sub, and legally supported by continuous documentation and powerful termination clauses within the signed contract.
In addition, the general contractor is legally supported, if they decide to claim damages for delay, escalation, lost work, and etc. all on the subcontractor.
This is a technique that allows a general contractor to perform a lot of work for little money
By providing this summary, it does not; in any way indicate support for this type of construction management technique.
It is presented in an effort to open unsuspecting subcontractor’s eyes to the unscrupulous methods and techniques that are quite common in the construction industry.
Simply remember, you do not get something for nothing, and it is important as a subcontractor that the value of the work is carefully estimated to ensure that there is enough financial means to complete the full project scope.
Please watch out for the general contractor who simply buys based on price! This could very well be the “set up” that puts you out of business!