Every profession abides to the set of values usually described in a code of professional ethics and conduct. The construction industry has guidelines on contracts used by parties involved in the process. However, there are clauses in the construction agreements that violate ethics. Most people accept even the objectionable clauses just because they are written in a regulated form construction agreement. It is because these types of contracts have been used for a long time and, thus, they have become credible. Therefore, many people are affected by the unethical provisions in these agreements. The paper addresses three of such provisions, including the conditional payment provisions, change orders on private and public sponsored projects, and shift of oversight accountability from the prime contractor to the subcontractors and sub-subcontractors.
Conditional Payment Clauses
Conditional payment clauses are also called pay-if –paid provisions. This is one of the most contentious construction contract provisions (Brennan, 2008). They are applicable in contractor-subcontractor contracts where the contractor agrees in writing to pay the subcontractor, only if the owner of the construction project has paid him (Brennan, 2008). The agreement places on the subcontractor the duty to abide completely to the provision. The clause seeks to create an obligation on the general contractor to reimburse the subcontractor once the proprietor of the construction project has paid him. Therefore, the subcontractor’s right to receive payment from the contractor depends whether the owner has enough funds. The clause has raised ethical issues as the sub-contractor bears the risk of the owner failing to pay the contractor (Brennan, 2008). However, should this be the case considering that subcontractors lack a direct contractual relationship with the owner? The absence of a contractual relationship makes it impossible for the subcontractors to evaluate the risk of the construction project owner failing to pay. There are also instances when the owner fails to pay the contractor because of conflicts between them, which do not involve the subcontractor (Brennan, 2008). The clause is considered unethical especially in this contemporary era when the economic realities are harsh, and the subcontractors deserve payment for the job they have done. The contentious provision has led to many disputes in courts between the contractors and subcontractors over the same. Courts in different jurisdictions have realized the unethical signification of this clause. Courts in Pennsylvania have interpreted the clause in two ways, depending on the language used (Brennan, 2008, p.101). Some clauses imply time while others imply a condition. A pay-when-paid clause often implies time (Brennan, 2008). An example of such a clause is a payment due from the contractor to the subcontractor should happen within a week of payment from the owner. Courts consider such clause not to imply a condition as it only sets a time restriction on the contractor's payments to the subcontractors. The contractor in such a case will be forced to pay the subcontractor his due payments whether or not the owner pays him (Brennan, 2008). However, any provision that has been expressed in writing in a clear language explaining that the contractor will pay the subcontractor on getting payment from the proprietor is adequate to make the court t pronounce that the condition is valid. The subcontractor will receive payment once the contractor has been paid. Courts in Illinois and Georgia do not differentiate between the two types of clauses (Brennan, 2008, p. 101). Any mild language is sufficient to indicate the intention of the contractors to pay the subcontractors only once the owner of the construction project pays them. These courts consider the conditional payment clause to be valid and absolute. However, subcontractors in the states of New York and California can get support of the courts (Brennan, 2008, p.101). These courts consider the conditional payment clause in construction contracts to be unethical and, therefore, have ruled it as voidable and unenforceable. Apart from courts, another way of dealing with unethical clause is the subcontractor suspending work until the contractor pays him. An example of such a provision is found in section 4.7 of Document A401-2007 on the regulated types of agreements between contractors and subcontractor (American Institute of Architects [AIA], 2007b, p.7). According to the provision, upon seven days of the contractor failing to pay the subcontractor when there is no fault of the subcontractor, the subcontractor shall stop the work until the contractor pays him (AIA, 2007b, p.3). Another way that is considered more efficient in dealing with the unethical conditional payment clause is by using conditional payment bonds. States like Missouri and Maryland have adopted this system (Brennan, 2008, p.101). The subcontractor using this system is allowed to have a bond claim or to exercise a lien on the property of the contractor until the contractor pays him. Another practical solution is through the inclusion of the owner in the agreement between the contractor and subcontractor. A provision can be inserted into the agreement requiring the contractor to pay all of the subcontractor's dues before receiving payment from the owner (Brennan, 2008, p.100). It would help to ensure that the contractor pays the subcontractor and will assist in reducing instances of the application of the conditional payments clause.
Change Order Requirements
Change orders are created because of the necessary alterations to the original capacity of work in a construction scheme brought by amendments in governmental policies and field circumstances among other reasons. A change order is a written document prepared by a contractor detailing the amendments in the planned work in the process of the construction, including the effect of modifications on the time length and the cost of the project (AIA, 2007c, p. 29). The examples of modifications that a general contractor may be required to make are alterations in the period of concluding the construction, the amount of work to be carried out, the type of work and the systems of enforcing the venture (AIA, 2007c). After the owner agrees with the contractor and architect about the change order and signs it, the alterations will be carried out without nullifying the agreement. In submitting the change order to the proprietor of the project, the designer or contractor is to compile all the costs he has incurred in the process of implementing the changes. Once the contractor makes the changes, the owner using the itemized list pays the contractor for the costs incurred due to the modifications. The ethical issues in change orders arise in cases when the owners refuse to reimburse the contractors for the extra expenses that occurred when catering the approved changes in the change order. Most of the time, their excuse is that the contractors did not provide a written request for compensation of the amount used in effecting the change orders. According to section 7.3.7 of the American Institute of Architects Document A201-2007, General Conditions of the Contract for Construction, if the contractor does not make a written request within five days for payment of the costs incurred because of the changes, he waives his right to receive the payment (AIA, 2007a, p.30). What happens then in cases when the change order agreement was made verbally? When such cases go to court for interpretation, courts decide on the issue depending on whether the construction project was public or private. Contractors that deal with the public or governmental projects rarely receive payment if the verbal change order agreements happened. The court will never enforce require the government to reimburse the contractor in this case (Brennan, 2008). An oral change order agreement between the government and the contractor is not enough to suffice the courts enforce the agreements. During the times of harsh economic realities, it is unethical for the owner to deny the contractor payment for approved changes incurred when implementing the construction contract. The government also has sovereign immunity that affects the enforceability of an oral change order agreement, making it impossible for the contractors to receive payment (Brennan, 2008). As the courts provide no solution for a contractor involved in public or government sponsored construction projects, the only solution for the contractor is to apply strictly the requirement that the change order agreement should be in a written form. The situation is different in cases involving private construction projects. Oral change order agreements between the constructor and a private owner are valid and enforceable in courts (Brennan, 2008). If the owner refuses to pay the contractor for extra services or costs incurred because of the change order, then the court will be able to make the owner pay the contractor.
Transfer of Oversight Responsibility
A construction project always engages other parties apart from the proprietor and contractor. These are the subcontractor and the sub-subcontractor. These two parties are autonomous of the proprietor and the contractor and perform segments of the labor as required by their successive construction agreements. However, sometimes there are cases when the contractor who is responsible for overseeing the construction scheme decides to leave either the subcontractor or the sub-subcontractor in charge of the task. The ethical issue that arises in this situation is whether the contractor should be held liable for any acts or omissions performed by the subcontractor or the sub-subcontractor that cause the owner of the construction project to incur losses during the period of the transfer of oversight role. According to section 3.3.1 of the American Institute of Architects Document A201-2007, General Conditions of the Contract for Construction, the general contractor is responsible for oversight responsibility of the construction project (AIA, 2007a, p.18). The contractor is solely accountable for the control of the construction methods, procedures, and for harmonizing all segments of work under the contract. He is mandated by the legally binding contract to be in charge of overseeing the entire construction project. The agreement prevents him from shifting the responsibility of oversight to his workers, subcontractors, sub-subcontractors. Section 3.3.2 makes the contractor responsible to the owner of the construction project for acts of the contractor’s staff, subcontractors and sub-subcontractors (AIA, 2007a, p.18). Whenever, subcontractors and sub-subcontractors perform forbidden functions like being in charge of overseeing the construction project when the contractor is unavailable, the contractor is liable to the owner. The contractor will reimburse the owner for all damages, losses, expenses and costs resulting from the acts of the subcontractors and sub-subcontractors during their exercise of oversight responsibility (AIA, 2007a). It is an ethical issue when the contractor is required by a legally binding contract to pay for the mistakes of both the subcontractor and the sub-subcontractor. Courts of law offer no relief for such a general contractor as the standard construction agreements clearly indicates that he will be liable for the losses the owner of the construction project suffers. However, here are cases when the subcontractors and sub-subcontractors claim to act on behalf of the contractor while performing the oversight function, but carry out tasks that have not been approved by the prime contractor. In these cases, the contractor is still mandated to compensate the proprietor of the construction project for the damages due to these unlawful acts or errors (Brennan, 2008). Even though the acts performed by the subcontractors and sub-subcontractors are unlawful, the fact that the contractor transferred the oversight duty of the construction project to them makes him legally responsible to reimburse the owner. Unfortunately, the contractor cannot get any relief in the courts. Consequently, the contractor undergoes financial losses in refunding the owner of the project. The only available solution for a general contractor is to avoid transferring his oversight responsibility to either the subcontractor or the sub-subcontractor.
Ethics is an important element in the lives of human beings as it guides their conducts. Ethics is also applied in professions and industries in the form of code of conduct. However, the construction industry’s standard form contracts contain certain unethical clauses. An example is the conditional payment clause. The clause ensures that subcontractors are paid only if the owners pay the contractors. The subcontractors end up waiting for a long time for their duly earned payment. Another unethical clause is an oral change order agreements in public construction projects. The clause restricts a contractor in a public construction project from receiving reimbursement from the government as agreed by the two parties in their oral change order agreement. The third ethical issue is the transfer of the duty of oversight from a general contractor to a subcontractor or sub-subcontractor. A general contractor is held liable for losses that the owner incurs because of the subcontractor and sub-subcontractor’s actions. It is time that these clauses are amended to cater ethically for all parties involved in a construction contract.