The Construction Contractor Advisor

Construction Disputes Attorney & Development Lawyer | Lamson Dugan and Murray Law Firm

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What is the Good Faith Requirement for DBE Contracts?

By Craig Martin on Posted in Disadvantaged Business Enterprises

In a post last week, we discussed an unfortunate situation in which a business owner was convicted of defrauding the disadvantaged business enterprise (DBE) program. Given that DBE participation is a goal, not a requirement, one may ask whether the business owner made a good faith effort to meet the DBE contract goal? And, whether there was ever an intention to meet the DBE contract goal?

In this post I’ll define the good faith requirement and what you can do to show you met it. 

What are the Good Faith Effort Requirements?

The US DOT regulations require that contractors make sincere, intensive and aggressive efforts to meet the DBE contract goal and you must submit a request for good faith effort (GFE) determination.  You can find a copy of the regulation here. 

How do you Show you Made a Good Faith Effort?

You must document every step taken to satisfy the State’s DOT’s specific project’s good faith efforts requirement to meet the contract DBE goal. The DOT’s regulations consider the following actions as evidence of a good faith effort:

  • Timely soliciting through all reasonable and available means (e.g. attendance at pre-bid meetings, advertising and/or written notices) the interest of all certified DBEs who have the capacity to perform the work of the contract.
  • Selecting portions of the work to be performed by DBEs in order to increase the likelihood that the DBE goals will be achieved.
  • Providing interested DBEs with adequate information about the plans, specifications, and requirements of the contract in a timely manner to assist them in responding to a solicitation.
  • Negotiating in good faith with interested DBEs and documenting the basis for rejecting a DBE as unqualified.
  • Assisting interested DBEs in obtaining bonding, lines of credit or insurance.
  • Assisting interested DBEs in obtaining necessary equipment, supplies or materials.

It is important to remember that local authorities will take into account the performance of other bidders in meeting the contract DBE percentages. So, if the successful bidder fails to meet the contract DBE percentages, but other contractors do meet it, the local authority may raise the question of whether the apparent successful bidder could have met the DBE goal.

Of course, documenting the steps your company has taken to fulfill your good faith efforts is extremely important. To that end, it may be of benefit to adopt a DBE participation plan. In a future post, we will discuss the best practices to establish a DBE participation plan.

Ambush Elections? Not yet.

By Craig Martin on Posted in NLRA

On May 14, 2012, the United States District Court for the District of Columbia ruled that the National Labor Relations Board lacked a quorum to adopt the “ambush election” rule. While the current NLRB board may adopt its own “ambush election” rule, the current ambush election rule is now stayed.

As you may recall, back in July, the board had four members when it held hearings about the ambush election rule. In the fall, one of the board member’s term expired, leaving the board with only three members. Last November, the remaining three members considered a resolution intended to allow for an expedited election amendments to the rules. This resolution passed by vote of two to one, with Member Hayes dissenting.

The ambush election rule was finalized in December and members were asked to electronically vote. Only two of the three members of the board voted, both in favor of the ambush election rule. Member Hayes did not vote, either for or against the rule. Interestingly, Member Hayes testified that he did not vote because he did not think any action was necessary on his part. The NLRB then decided that Member Hayes had voted against the proposed rule and concluded that the ambush election rule passed with 2-1 vote.

Once the rule went into effect, the Chamber of Commerce of the United States of America and the Coalition for Democratic Workforce filed suit challenging the rule. While the parties made any number of arguments for and against the rule, the Court only focused on whether member Hayes’ refusal to participate in the vote precluded a quorum. Ultimately, the Court held that Member Hayes’ refusal to participate in the vote meant that the required three person quorum was not met. The Court equated Member Hayes’ lack of a vote akin to not showing up to a meeting in which a vote would be held.

It will be interesting to follow the impact of the Court’s decision. This may provide an opportunity for one member of the three member board to do more than dissent, but prevent action from being taken at all. This ruling may also incentivize the President to appoint additional members to the NLRB.

Biggest DBE Fraud Ever or Best Proof of Major Flaw in the DBE Program

By Craig Martin on Posted in Disadvantaged Business Enterprises, Penalty, public contracts

Last month a business owner was convicted in what is being heralded as the largest Disadvantaged Business Enterprise (DBE) fraud case in history. The scheme lasted over 15 years and involved over $136 million in government contracts. But, is this simply a story of fraud or does it expose a much larger issue — a major flaw in the DBE program?

The case was filed against Joseph Nagle, the president, CEO and part-owner of Schuylkill Products, Inc., alleging that his company defrauded the DBE program by using a small Connecticut highway construction firm as a front to obtain government contracts. To carry out the scheme, Schuylkill’s personnel pretended to be employees of the Connecticut company, using phony business cards, e-mail addresses, and stationery, as well as using magnetic placards and decals bearing the Connecticut company’s logo to cover up Schuylkill’s logos on its vehicles. The FBI’s press release on the case can be found here.

Or, does this case illustrate a larger problem with the DBE program? Prime contractors have long complained that there are very few, if any, qualified DBE contractors capable of performing the work necessary on the job. And, when they ask for assistance from the state agency to discuss who is capable, they are told that the state only certifies DBE status, not whether the DBE is capable of performing the work.

One such contractor wrote a letter to the editor of Pottsville Republican Herald expressing this very concern. You can see his Letter to the Editor here. This prime contractor explained that Schuylkill’s “fraud” was well known in the construction community and by state inspectors. And, while Schuylkill should not have falsified documents, there were simply no DBE in Pennsylvania that could have performed this work. According to this prime contractor, the DBE program forces prime contractors to hire and accept responsibility for less than qualified subcontractors’ performance, costing companies hundreds of thousands of dollars to correct mistakes.

While the purpose behind the DBE program is laudable, it places prime contractors in the difficult situation of having to use subcontractors that may not be qualified for the job. Is the Schuylkill’s case the largest case of DBE fraud or does it highlight problems with the DBE program that should be addressed?

Can you be Liable for Delay Damages Caused by a Substitute Contractor?

By Craig Martin on Posted in Delay Damages

A general contractor may be held liable for delays, even after the general has been terminated.  In a recent Missouri case, an owner terminated a general contractor for cause, and the owner then demanded that the terminated general contractor pay for delay damages caused by the replacement general contractor’s subcontractor. The court ultimately held that delay damages could be recovered even after the general was terminated from the project.

In this case, Weitz Company was hired as the general contractor of a multi-building apartment complex. The project was delayed. Weitz blamed its subcontractors and the owner blamed Weitz. The owner withheld two payments and Weitz stopped work on the project. Less than one month later, the owner terminated Weitz for cause and finished the project without Weitz.

Weitz then sued the owner for unpaid contract balances and the owner responded demanding delay damages and the cost of contract completion. The owner prevailed on all of its claims. Interestingly, the owner was awarded delay damages through completion of the project as a whole, not through the date of Weitz’s termination. In essence, the court allowed the owner to recover delay damages based upon the delayed performance of a substitute contractor.

This court’s ruling is certainly something to think about when you are considering stopping work. If the replacement contractor is delayed, could your company be on the hook for those delay damages? Or, are your delay damages limited to the date you stop work?

Are DBEs performing a “Commercially Useful Function” on Your Project?

By Craig Martin on Posted in Disadvantaged Business Enterprises

A recent press release from the U.S. Attorney in New York drives home the point that in 2012, it is still incredibly important to make sure your company is legitimately utilizing Disadvantaged Business Enterprises (DBE) on your work site. The $7.5 million penalty paid by the two general contractors involved in the joint venture also illustrates the continuing seriousness with which the government is treating the use of DBEs.

The joint venture was constructing a tunnel to connect the Long Island Railroad to Grand Central Station. In their bid, the joint venture contractors listed four DBEs as subcontractors and represented that the DBE portion of the contract price was $22 million.

The joint venture submitted monthly reports outlining its progress toward meeting its $22 million DBE participation goal for the project. After more than two years on the project, the joint venture reported that it had paid about $17 million to DBEs. In reality, it had paid less than $5 million for work performed by DBEs. An audit revealed that three of the DBEs were paid fees to act as pass-throughs while the work was actually being performed by non-BDE subcontractors.

Prime contractors constructing transportation projects must subcontract work to qualified DBEs on projects. Prime contractors know that the DBEs on their projects must perform a “commercially useful function,” meaning that the DBE is responsible for execution of the work of the contact and is carrying out its responsibilities by actually performing, managing, and supervising the work involved.” 49 CFR § 26.55(c).

To perform a commercially useful function, “the DBE must also be responsible, with respect to materials and supplies used on the contract, for negotiating price, determining quality and quantity, ordering the material, and installing (where applicable) and paying for the material itself.” 49 CFR 26.55(c). In sum, the DBE must perform work with its own workers and have an active role in negotiating price and ordering materials used on the project.

The commercially useful function requirement is not new. It has been a requirement for over 30 years. As evidenced by the substantial penalty in this case, the government takes very seriously a contractor’s certification that DBE’s are performing a commercially useful function on a project.

Are you Communicating with Your Bonding Company about Claims?

By Craig Martin on Posted in Bond Claims, construction law, Uncategorized

How well do you communicate with your bonding company when you receive notice of a claim? A recent case out of Indiana highlights the problems that can occur if you do not investigate the claims and timely report back to the bonding company.

In this case, the bonding company was contacted by various subcontractors demanding payment. The bonding company called the contractor to investigate the claim. It took several weeks for the contractor to report back to the bonding company about the amount owed. Ultimately, the contractor did admit to owing some amount to the subcontractors, but claimed that the subcontractors did not comply with state law in submitting their claims.

The bonding company paid various subcontractors and then filed suit demanding that the contractor indemnify the bonding company for the amount it paid to subcontractors. In defense of the lawsuit, the contractor again claimed that the subcontractors did not comply with state statutes in making their bond claims, but did not provide any specifics of how the subcontractors failed to comply with state law.

The court was not persuaded by the contractor’s state law arguments. Instead, the court found that the contractor was obligated to pay because the indemnity agreement, signed by the contractor, provided the bonding company the right in its “sole and absolute discretion to determine whether any claims under the bond shall be paid.” In essence, the court found that it simply did not matter if the subcontractors complied with state law in making their claims.

Perhaps the contractor would have been in a better position if it had shared with the bonding company that subcontractor claims were out of time or failed to comply with various state statutes on bond claims. Communicating with your bonding company is always a good idea, but that is especially true if claims have been made.

Corporate Formalities Really Do Matter

By Craig Martin on Posted in Corporate Formalities

How long has it been since you reviewed your corporate documents? Are you using the proper corporate name or have you inadvertently confused an LLC with Inc.? As discussed below, it really does matter.

A construction company recently found out the hard way that its corporate name really does matter, especially when contracting with the federal government. The construction company was awarded a bid on part of the army construction contract. The second lowest bidder protested the award, asserting that the lowest bidder was not qualified to bid on the project. At first blush, this appeared to be just a disgruntled, losing bidder.

The Comptroller General investigated the situation and made a few discoveries about the company that won the bid:

  • The company converted from a corporation to a limited liability company a year before submitting the bid;
  • The company allowed its previous corporation to be dissolved;
  • The company submitted its bid under the old corporate name; and
  • The new company was not registered to bid on government project;

Because the corporate entity that submitted the bid was no longer in existence and because the new corporate entity, the LLC, was not registered with the government, the new company was not eligible to bid on government projects. So, the Comptroller General reversed the award of the contract.

Of greater concern is whether confusion about the construction company’s corporate status exists in other areas. I wonder whether other contracts are being executed in the name of the new or the old company. I also wonder which entity will be sued if problems arise with a project. And, I wonder which entity is insured, if either. I could certainly see an insurance company claiming it insured the old company, not the new one.

Maintaining your corporate existence may be low on your list of priorities, but the impact can be significant. We recommend that you regularly review your corporate documents to avoid some of the headaches mentioned above.

Amending Construction Liens Can Be Tricky

By Craig Martin on Posted in construction lien

Amending your construction lien is not as easy as you might think.  You cannot simply revise the dollar amount of your claim or the location of the property, if you didn’t have it right the first time. Nebraska statutes require more information in the amended lien. And, if you don’t include it, you run the risk of your lien being declared invalid.

Nebraska § 52-148 authorizes the amendment of construction liens, but requires that the amended lien contain three pieces of information. The amended lien must:

  • identify where the original lien was filed;
  • identify when the original lien was filed; and
  • state in what ways the original lien is being amended.

This subsection begins with the language, “the amendment shall state.” In lawyer speak this means you have to include this information or your lien may be subject to challenge.

To put this into perspective, the construction lien statute provides that a lien must be filed within 120 days and if you fail to do so, the lien will not be effective. In the same way, an amended lien must contain certain information, and if you fail to include this information in the amended lien, the lien may not be effective.

Construction liens often time provide your best opportunity to get paid. Make sure your liens, and amended liens, meet all the requirements of Nebraska statutes.

NLRB POSTING RULE DELAYED, AGAIN

By Craig Martin on Posted in Uncategorized

This week the U.S. Court of Appeals for the D.C. Circuit issued an order preventing the NLRB’s posting rule from going into effect. As you will recall, the rule required employers to post the employee notice poster by April 30, 2012. 

The Court of Appeals’ action was prompted by the U.S. District Court for the District of South Carolina’s recent ruling that held that the NLRB did not have the authority to require employers to post the employee notice. This ruling conflicted with the U.S. District Court for the District of Columbia’s ruling last month that held that the NLRB had the authority to require the posting, but struck down other portions of the rule.

The Court of Appeals concluded that given the uncertainty about enforcement of the NLRB’s rule, the better course was to preserve the status quo and stay the implementation of the NLRB’s rule.

There is no hard date when the Court of Appeals will decide whether the posting rule is enforceable. The Court is expected to hear arguments on this matter in September, 2012, and it is unlikely that any ruling would come down before then.

The Joys of Litigating a Construction Claim

By Craig Martin on Posted in Building Contracts, construction contracts, construction law, Nebraska Construction

The Nebraska Court of Appeals recently decided a construction defect claim that illustrates the frustration that may result with taking a case to trial. After one trial and two appeals, the Court of Appeals sent the case back to the trial court to try the case a second time. And, this was over a $15,000 claim. This is one of those situations where someone is saying, “Only the attorneys got paid.”

In this case, Centurion Stone v. Trombino, Centurion was hired to do stucco and stone work on the exterior of the Trombinos’ home in October, 2007. The total contract price was $61,000. The Trombinos paid Centurion $55,590, but refused to pay the remaining amount owed, which included the contract price plus additional expenses relating to the project, for a total of $10,135.61. Centurion sued the Trombinos, asserting a breach of contract claim. The Trombinos responded, asserting that the work was poorly performed and demanded in excess of $7,000 to repair the poor workmanship.

The case went to trial and the jury returned a verdict in favor of the Trombinos in the amount of $16,000. Centurion appealed the jury’s verdict. The Court of Appeals rejected Centurion’s challenges to the jury’s verdict, but reversed anyway, finding that the jury instructions were contrary to Nebraska law. The Court of Appeals remanded the case to the trial court to try it again.

So, we are now four and one-half years after the contract. The case has been tried to the jury, appealed twice, and now will go the jury a second time. And, either party could appeal that verdict. I don’t know what the parties spent on attorneys in this case, but my guess is that it exceeds the $16,000.

I also wonder if any efforts were made to resolve this case before it went to trial or while it was on appeal. While I’m sure that there were or are some hard feelings on both sides of this dispute, to spend more than four years fighting about $16,000 does not make any sense. Contractors are well served to look hard at the economics of a situation before embarking on long, protracted litigation, regardless of how strongly they feel about their claim. There are situations where you must litigate, but go into litigation knowing that it can be a long, drawn out process, and no one is guaranteed a victory.