DOCUMENTATION AND ACCOUNTING RECORDS FOR CONTRACTORS
IN THE WAKE OF MIKE M. JOHNSON V. COUNTY OF SPOKANE

Don’t think you’re too small, too big or too sophisticated to be impacted by the recent Washington State Supreme Court decision in the Mike M. Johnson v. County of Spokane (Johnson) case. Seen as precedential by the leading construction law firms in Washington, the Johnson case will almost certainly impact every contractor (generals and subs), architect, engineer and property owner. We urge every contractor and property owner to become familiar with the implications of the Johnson case and take necessary steps to avoid new traps that Johnson may have created.

Generally, in construction projects prior to the Johnson case, the property owner’s awareness and direction of certain changes allowed the contractor to seek reasonable compensation for the work performed even if the contractor did not follow change procedures. The prevailing theory was that the property owner should not be enriched at the expense of the contractor simply because the contractor may not have followed every single contract requirement exactly for submitting a claim for changes. The Johnson case has reversed this process so that if a written waiver is not obtained, the contractor will likely need to comply with the specific claim provisions in the contract in order to be compensated for the changes. For example, if the contract requires written notice within ten days of the contractor’s knowledge of a changed condition, then the contractor will need to provide written notice of the change to the property owner within the required ten days or potentially forfeit rights to compensation. Of course, every contract varies.

This change in law as we know it will result in more dreaded paperwork being necessary in construction projects. To preserve your rights should claims arise, you will want to factor additional time and paperwork in your bid for new projects. Of course, the relationship between the contractor, architect and property owner will be of great importance when determining how the Johnson case will impact a project. When no prior relationship exists, the issues addressed in this article are even more important.

Reading and understanding all the change/claim provisions of the construction contract is imperative for contractors and subcontractors. You may wish to prepare flow charts of the claim procedures (detailing the document and time requirements) of each contract, then discuss and share it with all key personnel on a project. Changes can be tracked through the flow chart to make sure all contract specifications are met. All documents should be read and clarification requested where necessary. Also, subcontractors need to be aware of the claim requirements because the requirements apply to the subs as well. Frequently, time lapses while subcontractors notify the general contractor of a potential claim. If that time exceeds the contract requirements, the general contractor may be time-barred against making a claim against the property owner.

An important item to consider when writing change/claim requirements is whether the contract specifies the time the architect or engineer has to respond to Change Order Requests (COR). There will always be a fine line to walk for contractors to keep work moving on a project while also dealing with any plan problems, change orders, or changed conditions. Ensuring that all parties understand and agree to response time frames will allow a project to move more smoothly.

Job logs and dated pictures are going to be critical in helping determine the first date that the contractor and property owner are aware of any change condition. This notice is typically what starts the clock ticking under the contract. Thorough documentation for work performed, quantity of personnel on site, subcontractors (including quantity of personnel) on site, weather conditions, etc., will be used to prove a claim.

Accurate Job Cost records are imperative in proving any claim. Historically, courts have frowned upon Modified Total Cost Claims, which contractors prefer for their simplicity of calculation, because these claims are imprecise. Therefore, we recommend that the contractor present a claim in which all the direct costs associated with a change are captured in a systematic method so as to provide all the detail with little effort and add on job site overhead, home office overhead and profit to arrive at the total claim. Unfortunately, this is not as simple as it sounds. Subcontractor, materials and equipment invoices do not usually arrive at the home office quickly for input into the Job Cost system. Specifically identifying the amount of time spent by each employee on a changed condition as opposed to base bid work can sometimes be difficult and fuzzy to distinguish. Thus, contemporaneous documents that help clarify what was happening at the exact time and date of the change will assist you in resolving the claim even long after the fact.

In most claim disputes, tracing the original bid to the budget and then to the actual costs will occur. Good records will easily detail how the bid was transformed into a budget. Further, your on-site time recorder must understand how the budget was created so that they can accurately code time, materials, equipment and subcontractors to the appropriate cost codes, thereby creating reliable Job Cost Reports. Management will be able to use these reports to track a project. Conversely, however, if time or expenses are not properly cost coded, items may be shown as under- or over-budget. If your company relies on the unit rates and prices from historical projects to determine how you should bid the next project, you will be bidding with inaccurate information and creating even more problems for yourself down the line.

Most contractors have a gut feeling about a project. If your gut feeling says there will be a lot of changes, anticipate the need for extra support staff to ensure you comply with the contract requirements.

In summary, now more than ever, it is imperative for contractors to be aware of and comply with the change/claim requirements of their contracts. Reading a contract is not enough when bidding a project; you must understand the entire contract, including the general and special conditions. Contractors should not hesitate to request clarification of contract provisions. If you are not absolutely certain, you may be best served by consulting an attorney versed in construction law. Consulting an attorney at the front-end may save thousands of dollars in attorney costs when attempting to pursue a claim–or even more if at the end of the day you are unable to collect on your contract due to the new requirements created under the Johnson case law. The contracting environment in Washington has just changed dramatically: you have no choice but to change with it.

Patrick DeLangis, CPA, CFFA
Director of Litigation & Forensic Accounting Services

Chris Newman, CPA, CMA
Construction & Real Estate Group Leader