By Stephen Nellis Friday, March 30th, 2012

Santa Barbara-based Melchiori Construction Co. and the University of California appear to be headed for a showdown over a project at UC Santa Barbara that was originally awarded at $6.5 million.

The UC Regents Office says the Ocean Science Education Building at Lagoon and UCEN roads should have been completed by Aug. 15. The system’s legal offices in Oakland say Melchiori owed  $288,000 in “liquidated damages” as of Jan. 6, at a rate of $2,000 for each day late. It has warned Melchiori that it could be terminated from the project.

Melchiori has responded that it has until at least April 21 to complete the project and claims it is owed more than $230,000.

In a Feb. 29 letter obtained by the Business Times, Stephen Morrell, an attorney with the Regent Office of General Counsel, issued a termination warning to Melchiori. “Please be advised that the University intends to terminate Melchiori for cause if it does not see substantial progress on the project within the next 30 days,” Morrell wrote.

In a letter back to Morrell, Melchiori’s attorney Kristine Mollenkopf wrote that the “threat of termination is wholly without merit” and that it is not in default. She claimed the university forced changes on the project but refused to grant the contractor extra time to make them. The contractor asserts the time for changes — at least 250 days, by its count — pushes the completion date to at least April 21. The contractor claims the university owes it at least $239,500 for the delays.

“They’re demanding that Melchiori make changes, but they’re refusing to admit that it changes the schedule,” Mollenkopf said in an interview.

In a Feb. 29 letter to Melchiori, Morrell, the UC system attorney, said the university denied Melchiori’s time extension requests because the contractor “failed to provide adequate documentation.”

At press time, it was unclear what action the university would take and how the matter would be resolved.
Construction on the Ocean Sciences building broke ground in 2010. Subcontractors and suppliers have filed numerous claims called stop notices for allegedly unpaid work.

In a public works project, the government pays only the general contractor. It is the general contractor’s responsibility to pay its subcontractors. A subcontractor can file a stop notice with the government to allege that it has not been paid by the general contractor. The government is then required to withhold the payment, plus a premium, as an incentive for the general contractor to resolve the dispute with its subcontractor. If the general contractor puts up a bond for the disputed amount, the government can release the funds while the dispute remains active.

As of Feb. 9, subcontractors and suppliers had filed at least $511,400 in stop notices against Melchiori, according to a letter from Mollenkopf. Melchiori says it has properly put up bonds for stop orders on work that it has been paid for.

In the meantime, Melchiori and the university reached a deal on paying subcontractors. Under the original contract, Melchiori couldn’t receive payment from the university for the work until the subcontractor that did the work signed a release saying the subcontractor wouldn’t sue over the payment. Melchiori was repeatedly unable to obtain those releases, according to the university’s letters. Melchiori claims it couldn’t get the releases because subcontractors would not agree to the university’s revised — and often lowered — completion and payment estimates.

The university removed that release requirement. In exchange, Melchiori agreed to accept joint checks. Those are checks that cannot be cashed without the consent of more than one party. For example, the university could issue checks to Melchiori that couldn’t be cashed without a signature from one of its subcontractors. Mollenkopf said no joint checks have been issued yet.

At the heart of the dispute is the paperwork that Melchiori must submit to university officials in order to get paid. The Ocean Sciences building is a fixed-price contract. The percentage of work completed each month determines Melchiori’s pay for that month. Melchiori submits its estimates to UCSB officials on site, who must review and approve them before a payment application is sent to the UC system.

In its letters, Melchiori claims that the UCSB officials overseeing work at the site have requested “voluminous back-up documentation and invoicing to support each subcontractor’s billing” and numerous changes to its completion estimates. The demands and changes created what Melchiori called a “paperwork logjam.”

Morrell, the UC System attorney, strongly disagreed with those assertions. In his Feb. 29 letter, he wrote that the estimates are “essentially a monthly bill; if it is incorrect or incomplete, an owner is under no obligation to accept it; an owner is entitled to have it adjusted before accepting it.”

[EDITOR’S NOTE: Comments on this story have been closed, as of 11:35 a.m. on April 4, 2012. If you would like to comment for the record, submit a letter to the editor or a complaint, please contact Business Times Editor Henry Dubroff at (805) 560-6950 ext. 222 or [email protected].]