In This Issue
What Is SPR Contracting?
Donald W. Gregory, Construction Law Chair
A local law firm which represents many public owners, including school districts, has begun to promote single point responsibility (SPR) contracting as a panacea for public owners. This new delivery system for public project contracting is supposed to provide public owners with greater protection and still meet public bidding requirements, including the requirement of multiple prime contracts.
Under SPR the design professional and construction manager are to "team up" early on and assume single source responsibility for all problems that may arise during design or construction.
In essence, the design professional and construction manager under SPR contracting are to assume all of the risk traditionally assumed by owners. For example, if claims are encountered, those claims are to be satisfied by the design professional and construction manager.
What are the consequences of such a contractual arrangement on the rights of all members of the construction team? Is such an approach practical?
First, one must seriously question the sanity of any design professional or construction manager that wants to assume open ended risk for everything from construction defects to late completion. Even if such an optimistic design professional or construction manager could be found, they would presumably have to mark up their fee an inordinate amount to reflect this increased risk and as a result they would likely not be competitive with respect to the pricing of their services. Further, many commonly used construction contract documents (such as AIA) place meaningful responsibilities upon the design professional to be the "fair and impartial" arbiter of disputes on the project, including claims. While many design professionals do not fully appreciate the significance of these responsibilities as they endeavor to keep the owner (their customer) happy, wouldn't this situation deteriorate even further if the design professional knows that he is going to be out of pocket for any dollar that he might honor on a change order or claim?
In addition, where will public owners be when they look to design professionals and construction managers to cover all of the losses on a troubled project and discover that there is no performance bond or other security to stand behind that obligation? An owner who attempts to shift all of the risk to the design professional and construction manager may well end up with an unsatisfied judgment against an uncollectible entity without a bond or applicable insurance to cover the loss.
In short, SPR contracting, while a creative and novel concept, appears destined to create practical problems for all of the members of the construction team. Therefore, it is hoped that few public owners will enter into these agreements. On projects where SPR is adopted, subcontractors and contractors may want to consider bidding elsewhere or placing an additional contingency in their bid price to account for this additional risk.
Back to top Is Ohio's Forum Selection Law Enforceable?
Ohio adopted a law which, effective on March 22, 2001, mandates that any construction contract clause that requires a party to arbitrate or litigate in another state from where the construction project is located is unenforceable as against public policy. This statute was enacted at the behest of the construction industry in recognition of the non-negotiable and one-sided nature of many contract forms and the perceived unfairness in being forced to incur the high cost to litigate or arbitrate a dispute in a faraway place.
However, a few recent cases out of the 5th and 9th Circuits have held that the Federal Arbitration Act ("FAA") preempts these state laws and renders them unenforceable, offending the public policy behind such forum selection statutes. This issue would appear ultimately headed for the United States Supreme Court.
Unless courts rule otherwise, contractors and subcontractors will not receive the benefit of hard fought forum selection statutes and will have to arbitrate disputes in unfamiliar venues at much greater cost.
Such a result would likely discourage the use of and acceptance of arbitration clauses in certain quarters and encourage an amendment of the FAA to address this issue.
Back to top Broad Eichleay Recovery Against ODOT May Be Limited
A major Central Ohio highway contractor and Ohio's Department of Transportation ("ODOT") have actively litigated the applicability and legal parameters of the Eichleay formula - which is a generally accepted way to compute unreimbursed home office overhead in the event of compensable project delay or suspension. As a result, the applicability of the Eichleay formula to project delay in Ohio was confirmed and a public authority's exposure for these types of delay damages may have been broadened by a decision of the Court of Appeals. Complete General v. ODOT, Case No. 98AP-1619 (May 25, 2000, 10th District).
The Eichleay formula is generally calculated as follows:
The Franklin County Court of Appeals ruled that a contractor may establish a prima facie case for unabsorbed home office overhead when an "extension period" was added to the contract duration due to a government-caused delay during the original contract period and the contractor was on "standby" during the suspension period. The Court stated that it was only necessary for a part of the contractor's work to be on "standby," and not the entire project, for Eichleay to apply. The Court also said that the contractor's normal replacement of work during the bidding process should not constitute replacement work to bar an Eichleay recovery. Finally, the Court minimized the impact of the normal winter ODOT shutdown on the Contractor's recovery by stating that the Eichleay computation should be based upon the length of the extension period, rather than the suspension period. This appellate decision reinforced that Eichleay is alive and well here in Ohio and that this component of damages shall remain a considerable risk for public owners in the event of project suspensions and delays.
This case was appealed by ODOT to the Ohio Supreme Court where a decision was issued on January 16, 2002. The ruling of the Ohio Supreme Court on this important issue stated that an Eichleay formula was an acceptable way of determining unabsorbed home office overhead, but that owners should be given an opportunity to dispute particular items of cost. The Ohio Supreme Court refused to find that the Eichleay formula was the exclusive manner of determining unabsorbed home office overhead. The Ohio Supreme Court in essence modified the use of the Eichleay formula in Ohio by stating that ODOT could challenge individual overhead costs that may not have benefited the project, such as items like entertainment expenses or bad debt disallowable under the Federal Acquisition Regulations ("FARs"). Complete Gen. Constr. Co. v. ODOT (2002), 94 Ohio St.3d 54.
While Eichleay based recoveries for unabsorbed home office overhead will continue to be viable, a contractor will still have to prove: (1) that it was on "standby" during an owner caused delay; and (2) it was unable to take on other work during the "standby" period. Further, owners like ODOT will maintain the ability to challenge certain cost components in an effort to reduce the contractor's recovery.
Back to top How Does Ohio Rate for Corporate Liability?
The U.S. Chamber of Commerce commissioned a survey of 824 senior corporate counsel to determine their view of the judicial system in each state on a variety of subjects ranging from juror fairness to judicial competence. The survey then ranked the states from best (1) to worst (50) on these topics as well as the overall litigation/liability environment. Ohio scored in the "middle of the pack" on virtually every topic, as well as its overall score of 26.
Back to top Firm News
Don Gregory has recently made presentations to the American Subcontractors Assn. (Contract Clauses) in Las Vegas, the Ceilings & Interior Construction Systems Assn. (Risk Management) in Phoenix and the American Bar Association Construction Forum (Retainage) in San Francisco.
Mike Copley recently spoke on Mechanic's Liens for the Ohio CLE Institute in Cincinnati.
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