The amount of money you spend paying a contractor to perform small repairs, improvements or major construction-related projects could be small compared to potentially greater costs resulting from a dispute with the prime contractor or any of the subcontractors they hire. Stricter laws and regulations offer some protection against unlicensed contractors; however, if you are like many small business owners, you may not know what questions to ask or what resources are available to you to help you screen contractors during the bidding process. To help us understand what we can do to avoid the risks associated with working with contractors, we are happy to be joined once again by attorney Virginia Suveiu, specializing in commercial and contract law and developer of the Legal Risk Management Certificate Program at the University of California, Irvine.
When your subcontractors provide a significant part not only of the work on the project but of the project success, it's completely unreasonable not to provide a commensurate level of management intention and professional subcontract management.
- Virginia Suveiu
So compliance is becoming privatized, and compliance is really going viral.
When I'm talking about flowdown to flowdown, a contractual or code requirement is essentially to impose on third parties representing successive links in the contracting chain such as subcontractors, suppliers, distributors, and sales agents.
I always encourage people to educate themselves as much as possible through industry association meetings, trade organization meetings, whatever your industry is. You then learn what information is out there and then you're able to pick the relevant information, and then you can have a much more educated and richer conversation with your attorney and with the experts that you have there.
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Compliance should no longer be viewed strictly as a cause of speed bump to getting work done. It should be included as the business school as something we need to invest in because without the contract compliance, without understanding how to achieve contract risk management, you will be unable to fully achieve the project successfully.
Jeff: My name is Jeff Allen with my guest Virginia Suveiu, an attorney at large in Orange County. She is a lecturer, she's an adjunct professor at Concordia University. Lectures also too at University of California at Irvine, specializing in contractual law and risk management. This is her second appearance on our program. And Virginia, again, I just want to extend a thanks.
I really do appreciate having you join us with just a slice of your time to explain these really important ideas that you have for us about how to better manage risks involved with contractors and subcontractors, and they really are so many moving parts we know within the law today. It would be nice if we could perhaps have a better understanding of what is required and what the contractors themselves have to be mindful of. Let's start from the point of view of the prime contractor, and this is the company that we would hire initially, but let's talk a little bit about that and the important lessons we need to learn for the prime contractor from their standpoint.
Virginia: Of course. It's always great to see the perspective from the different stakeholders involved. That then allows you to be much more educated in the decisions that you will have to make. And it will also open channels of communication that otherwise may not be so clear. So understanding this perspective from the other stakeholders involved are very important. With regard to the prime contractors, really sort of a midpoint is from their perspective, and publicly for some of them it may not even be so clear, but what they want to see is they do not want to allow the subcontractors to start work until the sub produces some sort of proof of compliance.
Review of documents -- it could include certifications establishing, successful completion of the background checks, the drug screenings, whatever is required by the regulation and whatever the industry and the theme of the contract involves. It could also include certificates establishing completion of all required training as well as certificates of insurance establishing compliance with the subcontract requirements, and that those certificates of insurance are current, and for some reason people overlook the fact that they need to be current.
It's also the acceptance certificates for completion of transition milestones and other projects requiring those deliverables operating level agreements to confirm that they are complete and that the subcontractors are in compliance. Here's a big one, communication. Consistent communication with the prime account team members as well as the subcontractor to ensure the subcontractor is aware of any new or changed policies or requirements.
Another important point of communication is communication with contract managers responsible for administrating the prime contract to ensure there's alignment of the new work orders and subcontract work orders. It's a lot of moving parts as you said before to keep track of.
And just managing the contract compliance responsibly and with consistency requires an actual protocol for handling the incoming demands and the requirements. So it really comes down to how well do you know with whom you're entering the contract with, with whom you're going to be dealing with. And it’s very important question to have answered well, otherwise you could be in for not the greatest surprises.
Jeff: That's true. I don't know that there are too many offices today, or too many companies today that have someone on standby, on staff who are truly experts in this area of risk management and contractual law, and working with contractors prime and sub that are just standing by waiting for a workload.
So I'm reasonably certain that there are individuals out there that one could probably contract with to manage these projects and bring them on perhaps on a short-term or temporary basis to kind of fulfill some of these needs when companies just want to do their business. They've got business to do and their own business to conduct, and the operations as usual without having to go through the sea of work required just to stay on top of everything.
We've talked about the prime contractor. Let's get into the heads and the eyeballs of the subcontractor. Because let's face it, these folks that the contractor hires are brought on to do really in some cases, the lion share of the work that is going to be performed.
Virginia: Certainly. And so when I spoke a moment ago about contractual flowdowns, so essentially just to recap. To flowdown a contractual clause or code requirement essentially is to impose it on your third party. So your subcontractors, your suppliers, it's down the contracting chain. And typically it's done by requiring each link in the chain to incorporate identical or equivalent clauses within its contract within the next link down so to speak.
So with the sub one of the most important considerations when we're talking about from their perspective they will certainly want to request a copy of the prime contract and read it in its entirety. Also they want to assess whether the flowdown applies only to their scope of work, or is it more encompassing.
Also, they'll be thinking about limiting the application of the flowdown to a specific list of provisions to suit their own needs. And they're also going to want to see during also the negotiation phase drafting the flowdowns so that it applies in reciprocal manner when it's appropriate. There are certain areas where they might want to do this.
Another point that subcontractors typically do not give enough attention to is they may agree to a flowdown provision but here's the point. It's not a good idea to do this because you shouldn't agree to a flowdown provision before the prime contract is finalized and available for review. That's why it's always important to request a copy of the prime contract. Also, subcontractors tend to assume certain things. So they should not assume for instance that the protections, that the prime has negotiated for itself in the prime contract will necessarily benefit it as the subcontractor. So I think the biggest lesson here is really to request a copy of the prime contract and see what it actually says, because that kind of gives you the goal posts of where you'll be going.
It's always great to see the perspective from the different stakeholders involved. That then allows you to be much more educated in the decisions that you will have to make. And it will also open channels of communication that otherwise may not be so clear.
Jeff: Virginia we have just a couple of minutes left and we could probably talk about this for another show or two because we've really just kind of scratched the surface for the purpose of this segment and closing things out today. If we could kind of put kind of a sort of ribbon on this particular discussion today. What are just a few key points you could leave with us today with respect to prime and subcontract management, and risk management associated with these.
Virginia: I'm going to give a few key points for further consideration for people to digest. One of them is typically we see there's a lack of awareness or understanding of the risk-related contract provisions. For instance, you have the contract provision of the right to audit. Often the right to audit contract provision limits a purchaser's audit authority any issues related to pricing, and can even limit the right to audit a supplier's production processes.
So the problem is if the purchasing company's management is not clear on such limitations, that management may unwittingly agree to deprive itself of the valuable opportunity for the right to audit. Other examples of a lack of awareness or understanding with regard to risk-related contract provisions include service level agreements, volume rebates, and surcharge provisions.
It really all goes back to understanding what the contract demands of each stakeholder. We also have to really encourage people to change the mentality. Compliance should no longer be viewed strictly as a cause of speed bump to getting work done. It should be included as the business school as something we need to invest in because without the contract compliance, without understanding how to achieve contract risk management, you will be unable to fully achieve the project successfully.
So in all of this, it could include cataloging standard acceptable and unacceptable provisions, as well as triggers for escalated review such as indemnity clauses. There's also prioritization for the referral of issues to subject matter experts as we discussed earlier.
Critical to all of this is clarity, and also what each stakeholder has in his or her authority to do and what is his or her responsibility, and to work altogether toward the ultimate goal of completing the project successfully.
Jeff: And safely by the way Virginia. And I really do appreciate you to taking the time to join us. We enjoyed having you once again on the program. And let's make plans to get together again because this is obviously a very important subject and I know that you have some other things that you'd like to share with us. So Virginia Suveiu, again, thank you for joining us today.
Virginia: Thank you very much for having me.
So it really comes down to how well do you know with whom you're entering the contract with, with whom you're going to be dealing with. And it's very important question to have answered well, otherwise you could be in for not the greatest surprises.
Jeff: Virginia Suveiu, attorney-at-law, specializing in risk management and contractual law has been my guest. I hope you enjoyed it. Tell a friend about Deal Talk if you would. In addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn. The nice thing about morganandwestfield.com is that you can find the entire transcript right there, something you can refer to over and over again, and read as you listen to the show to grasp important key details on each topic that you hear.
“Deal Talk” has been brought to you Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks again for listening. We'll talk to you again soon.
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