Lamson, Dugan and Murray, LLP, Attorneys at Law

Demanding A Reduction in Retainage

Posted in Nebraska Prompt Pay Act

One of the attendees of the Goldleaf Surety presentation asked a great question about reducing retention under the Nebraska Construction Prompt Pay Act, Nebraska Revised Statutes, 45-1201-45-1211.  He wanted to know whether there was any way to reduce and recover retainage during the project.  The short answer is retainage should be reduced half way through the project, but there is no right to recover retainge for work performed during the first half of the project.

Retainage in Nebraska

Under section 45-1204 of the Prompt Pay Act, a contractor may withhold up to 10% retainage.  A contract that allows for greater retainage is not enforceable.

Reduced Retainage

Once the project is 50% complete, retainage should be reduced to 5%.  But, the reduced retainage only applies to additional progress payments.  There is nothing in the Prompt Pay Act that requires the upstream contractor to pay retainage withheld since the beginning of the project.

Reasons Not to Reduce Retainage

A reduction in retainage is not automatic.  In order to get the reduced retainage, the downstream contractor must demonstrate to the upstream contractor:

  • that the work completed to date has been done in accordance with the contract;
  • that the downstream contractor has provided assurances of continued performance; and
  • the downstream contractor has the financial ability to complete the work.

Take Away: Retainage should be reduced to 5% after the project is 50% complete.  But, the upstream contractor may hold on to the entire retainage withheld during the first 50% of the job until the job is complete.

Improper Classification Under Davis Bacon Can Be Costly

Posted in Davis Bacon Act

The Department of Labor announced late last year that it had recovered nearly $2 million Craig Martin, Construction Attorney Lamson Dugan & Murray LLPin back wages and fringe benefits from a subcontractor that provided constructions services at the federally funded Crescent Dunes Solar Energy Project in the Nevada desert. This was not a failure to pay Davis Bacon wages, but a failure to properly classify laborers on the project. The DOL determined that the laborers should have been paid as skilled trade steelworkers, not general laborers.  As the subcontractor found out, this proved very costly.

The subcontractor submitted its bid, classifying its laborers as general laborers and designating their wage at $30.00. The laborers were to assemble billboard sized mirrors on the project. There is some indication that the Department of Energy agreed with the classification, even though the Department of Labor has the final say on classifications. The Department of Labor’s investigation revealed that the laborers routinely performed duties in skilled trades, such as ironworking, electrical work, painting or bridge crane operation. Based on these activities, the Department of Labor concluded that the laborers should have been paid $60.00 per hour plus fringe benefits.

Some might ask why the subcontractor couldn’t rely on the Department of Energy’s approval of the wages. Aside from the Department of Labor having the final say on these matters, perhaps the subcontractor or general contractor should have sought guidance from the Department of Labor on this issue. The Department of Labor’s Frequently Asked Questions section addresses this very issue. The general contractor could have submitted a Request for Wage Determination, Form 308, before the bids were opened. After bids were opened, the contractor should have requested a wage determination. In situations where the contract wage determination does not contain a class of workers needed to complete the construction:

a contractor shall submit to the contracting officer a request for the addition of the needed classification(s) of laborers or mechanics not listed in the wage determination, together with proposed wage rates and fringe benefits conformable to the wage determination.

Take Away: The subcontractor was forced to pay nearly twice the wages it budgeted on this project. Proactive measures with the Department of Labor could have clarified the wages laborers should be paid on this project and may have allowed the subcontractor to increase its bid to cover the additional cost.

 

Submitting Claims on Government Projects Can Be Tricky

Posted in Government Contracting

The Federal Circuit Court of Appeals opinion in K-Con Building Systems, Inc. v. United iStock_000002341708MediumStates illustrates the difficulties a contractor may face when pursuing a claim before a Contracting Officer. After nearly 10 years of litigation, the court found that the contractor’s claim to the Contracting Officer did not contain enough detail to allow the claim to proceed. That’s a lot of time and resources wasted on a claim that was dead from the start.

K-Con was awarded a $582,000 job to design and build a Coast Guard support building in Michigan. K-Con was unable to complete the project by the finish date and the Coast Guard assessed liquidated damages of $109,554. K-Con contested the assessment of liquidated damages by submitting a one paragraph letter asserting that it was not the sole cause of the alleged delays; that the government was at fault for the delay; and the liquidated damages were an impermissible penalty. The Contracting Officer ultimately denied K-Con’s claim and K-Con appealed to the Court of Claims.

K-Con must have understood that even if it won its appeal in the Court of Claims, it would not be able to recover additional compensation to which K-Con thought it was due. So, K-Con filed another claim before the Contracting Officer to recoup money owed for extra work. The Contracting Office denied K-Con’s claim and K-Con then added these claims to its Court of Claims action.

The parties continued to litigate all issues for three more years. Then, in 2013, the government raised a jurisdictional argument—that K-Con had not raised all issues pending before the court in its first claim to the Contracting Officer and thus the Court of Claims did not have jurisdiction to hear K-Con’s claim for additional compensation. The Court of Claims agreed and dismissed K-Con’s claim for additional compensation. The Court of Claims then ruled against K-Con on the remaining claim that liquidated damages should not be imposed.

K-Con appealed the Court of Claims decision, but lost again. So, after nearly 10 years of litigation, K-Con lost all of its claims and had to pay liquidated damages to the Coast Guard.

Take Away: Government contracting claims can prove difficult and if you don’t do it right, you may lose your right to make the claim.  Make sure you review and understand the requirements of the FAR regulations before submitting your claim.

 

Pay-if-Paid Clauses, Nasty, but Enforceable

Posted in Construction Contracts

Feeling the pinch of a recession?I am preparing for a presentation this week on Troublesome Contract Clauses to the Construction Specifications Institute (“CSI”), Nebraska Chapter. One of the clauses we will be discussing is the dreaded Pay-if-Paid clause, a particularly nasty provision that places the risk of owner’s solvency squarely on the subcontractor’s shoulders.  While pay-if-paid clauses can create tremendous problems for subcontractors, they are enforceable.

Pay-if-Paid clauses eliminate the obligation to pay the subcontractor until the general contractor is paid by the owner.  Pay-if-paid clauses usually contain something akin to the following phrases:

  • payment to subcontractors are “expressly and unequivocally contingent upon receipt of payment from the Owner for the Subcontract Work.”
  • the subcontractor “expressly acknowledges that it relies on payment under the Subcontract on the creditworthiness of Owner, not that of the General Contractor.”
  • the owner’s acceptance of the work and payment to the General Contractor are “conditions precedent to any obligation of the General Contractor to pay the subcontractor.”

If you see these clauses in your subcontract, you should either investigate the owner’s ability to complete and pay for the job or negotiate alternative language in the subcontract. One alternative to the pay-if-paid clause would be to allow for an assignment from the general contractor to the subcontractor the general contractor’s claims against the owner for payment.  Another alternative would be to limit the duration of the pay-if-paid clause to a certain number of days after the subcontractor’s pay application.  Finally, a subcontractor could demand that is must retain its lien and bond claim rights in the event of non-payment.

I understand that negotiating changes to a general contractor’s contract is often times difficult, but practical approaches to pay-if-paid clauses, which would allow a subcontractor to make demand upon the owner, may prove fruitful.

Can General Contractors Make Subcontractors Pay for OSHA Violations?

Posted in OSHA

OSHA has long held the opinion that general contractors may be held liable for subcontractor’s OSHA violations and the Eighth Circuit Court of Appeals, overseeing the Midwest, has agreed since 2009. To combat this risk, general contractors would be well served to incorporate targeted indemnity provisions into their subcontracts that require subcontractors to pay for all claims and costs associated with subcontractor caused OSHA violations.

Craig Martin, Construction Attorney Lamson Dugan & Murray, LLP

OSHA’s Multi-Employer Policy

OSHA’s Multi-Employer Policy, a/k/a OSHA Instruction CPL 02-00-124, allows OSHA to cite multiple employers at a single worksite for creating a hazard, or for failing to prevent or correct a hazard, even if their own workers are not exposed to the hazard. A ‘‘controlling’’ or ‘‘correcting’’ employer is liable for hazards that it did not take ‘‘reasonable care’’ to detect and prevent.

The case that brought this issue to a head in the Midwest is Solis v. Summit Contractors, Inc. which involved Summit Contractors oversight of a college dormitory construction project in Arkansas. Summit had only four employees on the job and utilized subcontractors for the vast majority of the work on the project. OSHA stopped by for an inspection and noticed a subcontractor’s workers on defective scaffolding who were not wearing fall protection. OSHA issued Summit a citation for this safety violation as the “controlling employer.” The case wound its way through the court system, with the Eighth Circuit Court of Appeals holding that OSHA was permitted to rely on the multi-employer worksite doctrine to cite general contractors for the safety violations of its subcontractors.

The Takeaway for General Contractors

General contractors facing increased risk of being cited for their subcontractor’s misconduct can take a few steps to minimize their liability. General contractors may incorporate indemnity clauses specifically tailored to address situations in which a general contractor is cited for a subcontractor’s OSHA non-compliance. Here is a sample clause:

Subcontractor shall defend, indemnify and hold harmless General Contractor from and against all claims, penalties, fines, losses, judgments, liabilities, settlements, costs and expenses, including but not limited to attorney’s fees, arising out of, relating to, or incurred in connection with the breach or violation of any occupational safety and health administration (“OSHA”) laws, rules, or regulations by Subcontractor, any of Subcontractor’s subcontractors, anyone directly or indirectly employed by them or anyone for whose acts any of them may be liable.

Incorporating an indemnity provision that targets OSHA violations should assist general contractors in recovering any penalties assessed by OSHA against the general contractor for a subcontractor’s safety violations.

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLP

How Long is Your Construction Warranty?

Posted in Nebraska Construction

The Nebraska Court of Appeals threw a wrench into the calculation of your warranty iStock_000017987518XSmallearlier this year in Adams v. Manchester Park, LLC and Southfork Homes, Inc. In that case, the court found that the statute of limitations for a warranty claim started running after the homebuilder’s warranty expired. So, the four year breach of warranty statute of limitations did not begin until after the one year homebuilder warranty expired.

In this case, the homeowner purchased a home from Southfork in September, 2007. The purchase agreement provided for a one-year New Home Limited Warranty which covered material defects in workmanship and materials. The homeowner noticed cracks in the drywall and problems with windows within 6 months of the purchase. The builder told the homeowner to keep track of all the problems and they would be fixed at the yearend walk through.

The homebuilder brought in contractors at the yearend walk through and cosmetically fixed the problems. Afterwards, the homeowner continued to experience settling problems with the house, but the builder refused to fix the problems.

In September, 2011, slightly more than four years after closing on the house, the homeowner sued the builder, alleging breach of express and implied warranties. The builder moved to dismiss, arguing that the four year statute of limitations for bringing a breach of warranty claim had run because the lawsuit was not brought within four years of the house being completed. The trial court agreed and dismissed the case.

On appeal, the court of appeals found that the four year statute of limitations had not run. With very little analysis or explanation, the court of appeals concluded:

[after] the expiration of the 1–year limited warranty . . . the statute of limitations pursuant to § 25–223 commenced for an action based on an “alleged breach of warranty on improvements to real property or based on any alleged deficiency in the design, planning, supervision, or observation of construction, or construction of an improvement to real property” between [the builder] and the [homeowner].

So, the homeowner had, in essence, five years to file it claim—the one year homebuilder warranty plus the four year statute of limitations.

This is certainly an interesting development for Nebraska builders. The homebuilder in this case had asked the Nebraska Supreme Court to look at this issue, but as of the date of posting this blog, the court has not indicated whether it would take the case. While we wait for this matter to work it’s way through the courts, builders are well advised to consider that their express warranty may be adding years to the time by which property owners must sue for poor workmanship.

 

Preserving Your Construction Claim

Posted in Construction Claims

A recent article in the Construction Executive discussed the importance of preserving yourCraig Martin, Construction attorney Lamson Dugan & Murray, LLP claim, both in terms of timeliness of submitting your claim and making sure that you aren’t waiving portions of your claim when executing releases. These are all excellent points and bear some follow-up.

Timing Your Claim

I often review construction contracts that contain deadlines by which claims must be submitted. It may seem counter intuitive to think that you need to submit a claim when you are discussing the basis for the claim with an upstream contractor or the owner. But, there are more cases than I care to count where a contractor’s claim has been denied because the claim was not timely submitted.

Tool Box Tip: A good practice is to summarize the claim deadlines on a contract checklist so that you have the deadlines easily at hand when you are considering a claim.

Preserving Your Claim

When it comes to resolving disputes on a project, contractors are often asked to sign contract modifications or releases. While the purpose for the modification or release may be narrow, the release or modification may contain broad waivers of rights. As noted in the CE article, even governmental entities are not above using broad waivers, leaving it to the contractor to find the broad language and limit it. Contractors may also be asked to waive lien rights when receiving a partial payment that are much broader than the payment being made.

Tool Box Tip: Make sure that when you are being asked to waive rights, you read all the fine print and speak up if you notice that the rights being waived are broader than those sought to be resolved.

 

Beware of Statutory Limits on Change Orders

Posted in Public Contracts

While change orders are always part of construction projects, it’s important to know Craig Martin, Lamson Dugan & Murray, Construction Attorneywhether a public agency is limited on how much it can increase the scope of the work through change orders. A contractor in Virginia found out the hard way that the state agency did not have the authority to increase the scope of the project and thus the contractor could not collect for the extra work.

In Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, the contractor was hired by the housing authority to prepare a site for construction. The project did not go well and both sides blamed the other for delays and increased costs. After being removed from the project, the contractor sued the housing authority for, among other things, breach of contract. The jury awarded the contractor a total of $915,000 for the housing authority’s failure to pay for extra work and improper removal.

The trial court reduced the verdict to $215,000 based on a Virginia statute that restricts the amount by which a public contract may be increased through change orders. In essence, the court concluded that even if the housing authority demanded that the contractor perform extra work, the contractor cannot recover because the housing authority failed to obtain permission from the state to increase the contract amount.

This case illustrates a real problem for contractors on public projects in states that have statutory cap statutes. The contract may require the contractor to continue with the work pending negotiation/approval of the change order. And, even when both parties agree to the change order, the public entity may not have obtained the necessary approvals to implement the change order. In those situations, the contractor may not be able to recover the cost of the extra work.

Take Away: Contractors have to be aware of state laws that limit the amount by which a contract may be increased. If the state statute limits the increase to a certain percentage, the contractor must make sure that the agency obtains the proper permission to increase the scope of the contract before undertaking the additional work.

 

Top 10 Lessons Learned from a Construction Attorney

Posted in Best Practices

iStock_000038546718LargeI have had the pleasure of working with Cordell Parvin, who in his earlier career was a preeminent construction attorney, and now coaches attorneys.  Cordell has shared countless construction guides and presentations with me over the years, for which I am extremely grateful.  Below is Cordell’s Lesson’s Learned list, that is as true today as when he drafted it years ago.

  1. Contracts and owners are not all alike. Some are fairer than others. Some create greater risks of making the budget if we encounter changes, delays and impacts. We should appreciate the risks before bidding and not underestimate indirect costs of staff to deal with these situations.
  2. It is important to have a thorough understanding of the Contract Administration requirements of complex contracts. Identifying specifically what must be done when changes, delays and differing site conditions are encountered is one way to establish the understanding.
  3. If a project ever ends up in court, every letter, note, e-mail and memo is evidence and will be taken out of context by the opposing lawyer. Recording every mistake, miscalculation, problem or lesson learned during construction of the project will come back to haunt you.
  4. The owner’s project management and upper management may make promises or representations their lawyers will later not let them keep.
  5. It is easy to grossly underestimate or forget about the time and cost “impacts” on original contract work caused by design defects and changes made by the owner to correct them. Failing to include these costs in change orders makes it far more difficult to recover the costs later.
  6. When preparing a complex claim or request for equitable adjustment, it is important to have a clear understanding of legal entitlement, the main themes and what will cause the owner to make a fair settlement. Otherwise, a great deal of time and wasted effort will be expended.
  7. Many owners on difficult projects do not think as contractors do. Therefore, it is difficult to negotiate with them as we would with another contractor. Time may mean nothing to them; the cost of litigation may mean little to them; the fairness or logic of a situation may mean less. Because contractors are asking for additional money from owners, owners may have more leverage. They may wear contractors down and use liquidated damages or other set-offs to reduce the amount of a fair settlement.
  8. If the owner is reasonable, it is important to make best efforts at a fair settlement of a claim before filing a lawsuit. At the same time, it is unlikely a settlement will be reached if we appear too anxious or if we negotiate against ourselves. If the owner is unwilling to be reasonable, there is no choice other than filing suit or demanding arbitration. The sooner that action is taken, the sooner the matter will be settled or otherwise resolved because the pressure of trial will promote resolution. Once the lawsuit is filed, be prepared for it to be terribly expensive and to lose some control of the schedule and resolution.
  9. Jurors see the claim/case far differently than we do. Similar to a television western from the 50s, they will seek to determine who are the good guys and who are the bad guys. Once determined, they will tend to ignore anything inconsistent with their earlier formed opinion. Presentation to jurors is different than the presentation to the owner. It must be made in terms the jurors understand. A detailed description of the project will only serve to confuse them.
  10. As much as we would prefer to never actually try the case/claim in court, owners fear the trial even more. Most claims that are litigated are settled on the courthouse steps just before trial.

Pursuing construction claims can be difficult, but keeping these lessons in mind from the beginning of the project can make the journey more successful, and avoid that feeling that you are beating your head against the wall.

Improvements to AIA Contracts?

Posted in AIA Contracts, Uncategorized

Joel Sciascia, general counsel for the construction management company Pavarini McGovern, made some insightful comments in the Viewpoint section of the latest Engineering News Record magazine. He argues that architects should not be the initial decision maker (“IDM”) under AIA contracts. Instead of using the architect, Mr. Sciascia suggests the use of an independent dispute-resolution board.

In 2007, the AIA introduced a new concept into the A-201 documents through which the owner and contractor had the option of naming an independent third party to resolve disputes, instead of automatically allowing the architect to resolve disputes. But, if the parties did not select any specific independent decision maker, the architect would be considered the default initial decision maker.

Mr. Sciascia suggests that the AIA A-201 should be updatedto provide for a dispute resolution board that does not include the architect to decide the dispute. Mr. Sciascia contends that this would make the architect available as a witness for either party or the IDM, to assist with resolving the dispute.

Another point made by Mr. Sciascia is that the IDM must be required to make a decision. Under the current language, the IDM may make no decision. If the IDM refused to make a decision, I think all parties would agree that the entire exercise was a waste of time.

Finally, Mr. Sciascia suggests that the A-201 must require the parties to split the costs of the IDM. Given the potential cost of getting an architect, engineer, or attorney up to speed on a project could be expensive, it certainly makes sense to require the parties to split those costs.

Mr. Sciascia brings some common sense dispute resolution concepts to the table in his article. Only time will tell whether the AIA will think these common sense concepts should be added to the next version of the A-201.