Most subcontractors provide specific labor or materials in a certain market and often find themselves in the position of working for the same group of higher-tier subcontractors or general contractors. That can make the construction market feel quite small and heightens the value of relationships with those higher-tiered subcontractors because those relationships have a direct effect on the bottom line.
The truth is, pursuing a claim against a higher tiered subcontractor while continuing to do business with them in the future is not easy. And while there is no “one size fits all” solution to successfully making this happen, consider these tips.
- Communicate in advance of the problem. It’s usually easy to spot problems before they happen. Communicate with the higher-tiered subcontractor in advance to problem-solve. An uncomfortable conversation today is usually cheaper and less harmful to a relationship than litigation. Most higher-tiered subcontractors are familiar with and may be understanding of the dilemma. Clearly and professionally communicate the pending issue, confirm the need for a resolution and suggest solutions. This puts the higher-tiered subcontractor or GC on notice of the problem before a claim has to be initiated (which makes them feel like they have received adequate notice of the problem) and gives them an opportunity to resolve it before it becomes more serious.
- Ensure the claim is procedurally proper. Be aware of and follow any contract claim procedures. This is critical because without it, the lower-tiered subcontractor making the claim could inadvertently forego the claim(s). This is especially important when pursuing (or considering pursuing) a claim against a higher-tiered subcontractor while maintaining a relationship. Procedural arguments that the claim was not timely or was not properly submitted may weaken the claim and potentially weaken the relationship. This may give the higher-tiered subcontractor an argument not to pay, or it could also decrease or eliminate the value of the claim in front of a finder of fact (arbitrator, judge or jury). In short, when in the position of pursuing a claim against a higher-tiered subcontractor (and potentially risking any goodwill in that relationship), it’s best to make sure it’s a procedurally and substantively good claim. Otherwise, a lower-tiered subcontractor may risk goodwill and relationship for a weaker potential return.
- Confirm the substance of the claim. It is not uncommon for claims to be dealt with at the project level. However, having a system in place that ensures that claims with a certain subcontractor or claims that reach a certain level be discussed internally at a higher level could be helpful to maintaining a relationship with a higher-tiered subcontractor when pursuing a claim. This ensures that claims are vetted and “right-sized” before they are submitted to the higher-tiered subcontractor. And while no party wants to accept liability for a claim, the relationship is usually easier to maintain if the claim appears to be honest, accurate and well documented.
- Be straightforward and keep working to resolve the issue. Be straightforward about the fact that contract claim procedures will be followed. And even after initiating claim procedures, keep working to resolve the issue. Relationships with higher-tiered subcontractors are likely to remain more amicable the more quickly any potential claim is resolved. The farther the ball is kicked down the curb (up to and including litigation), the more difficult it can be to remain on good terms with that subcontractor. These conversations can often lead to constructive conversations such as:
- resolving an undisputed portion of the claim;
- agreeing to team together to submit a pass-through claim, or
- finding a creative business solution to resolve the issue (such as agreeing to work together on another project, etc.).
