September 2008

In This Issue

• Supreme Court Declines Appeal in Landmark “No Damage for Delay” Case
• How an Owner, Contractors and Subcontractors Can Work Together to Build a Large School Early and Under Budget
• Claim Against Architect Fails Without Privity
• Does Ohio's Prevailing Wage Law Apply to Off-Site Fabrication? Stay Tuned.
• Firm News

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Supreme Court Declines Appeal in Landmark “No Damage for Delay” Case

Donald W. Gregory, Construction Law Chair

On September 10, 2008, the Ohio Supreme Court declined to hear the appeal of OPERS in the case of Cleveland Construction v. OPERS.

This means that the Court of Appeals decision stands, which allows contractors to recover on acceleration and delay claims, even when the contractor has not sought a time extension.  The Court of Appeals broadly interpreted Ohio’s Fairness in Construction Contracting Act, which makes all “no damage for delay” provisions unenforceable, and found that the Act provided relief even when the contractor’s damages are limited to acceleration or loss of efficiency.

This case minimizes the impact of the Dugan & Meyers case, which was decided under a contract entered into before the effective date of the Fairness in Construction Contracting Act.  A likely impact of this decision will be to encourage claims when a project does not go according to plan and owners will be less able to defend them on procedural grounds.

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How an Owner, Contractors and Subcontractors Can Work Together to Build a Large School Early and Under Budget

School administrators have often been frustrated by cost overruns and delays on much needed capital improvement projects in recent years.  Yet many of those same administrators and their counsel continue to employ the same techniques and methodologies that have failed in the past.  Our firm had the opportunity to serve as counsel on what was probably the largest individual school project in Ohio history, the Penta Career Center in Northwest Ohio, and to employ unique strategies designed to avoid the “same old problems.”  We were aided by an experienced and savvy superintendent and his committed staff, and were not encumbered by many state regulations, as the District had the good fortune to be able to build the project from their own funds.

Rather than pit the project players against one another in an adversarial fashion, the district wanted to work cooperatively with all members of the construction team in the best interests of the project.

As a result of these creative strategies, and the hard work of all concerned, this $90 million new construction project was completed without any claims or disputes well within budget and an entire school year early.  Such a successful end result warrants discussion of the strategies utilized to effectuate this unusual and satisfying result:

1. Equitable Documents: Traditionally, owners have employed one-sided contract documents that are bid upon by prime contractors who impose even more one-sided subcontracts on their subcontractors, and so forth, all the way down the “construction food chain.”  Inequitable documents often unfairly shift the risk and encourage adversarial relationships, including excessive letter writing and “finger-pointing” early on in the project when all parties should be working together as a team to effectuate the desired result.  On this project, we employed instead equitable contract documents that were protective of the District’s interests, but also treated the rest of the construction team fairly.  We also insisted that the contractor utilize a fair subcontract (the old AIA A401-1997) with its subcontractors.  As a result, we achieved better cooperation from the construction team, and presumably received better pricing on bid day.
2. Quick Pay: On many public works, payment is delayed several months to the contractor, who then delays payment to the subcontractors, who are paying their employees every Friday and their suppliers every thirty (30) days.  This “forced financing” of the project by the construction team often leads to adversarial relationships, poor performance, and the costs of the “forced financing” are often included in the price on bid day, which ultimately increases the overall project cost to the taxpayers.  School districts that have employed “quick pay” often get better performing contractors interested in the project and better pricing on bid day.  That appears to have been the experience with respect to this project as well where good contractors were low bidders and no payment problems were encountered during the course of the entire project.  The District paid its prime contractors five (5) days from receipt of the approved draw by electronic transfer of funds and insisted that the prime contractor pay their subcontractors promptly as well.
3. Line Item Release of Retainage: Contractors and subcontractors often include the cost of “financing the project” in their bid prices, particularly when the retainage rates are higher than their profit and retainage is expected to be withheld for a significant period of time.  Early finishing trades often have their retainage held for a couple of years while a large project is being finished by other trades.  It does not help the owner get the punchlist done if the contractor or subcontractor who finished early has been off the site for an extended period of time and still does not have his retainage.  Therefore, we included a provision that allowed for line item release of retainage so that early finishing trades could finish all of their work (including those annoying punchlist items) and get their full payment (which certainly had been earned once their work was 100% satisfactorily complete).  Once again, this reduced overall project costs and encouraged earlier completion and timely resolution of punchlist items.
4. Prevailing Wages: As this project was being constructed in a highly-unionized area  and the District had traditionally enjoyed a fine relationship with trade contractors in the area who regularly employ many of their graduates, the District elected to make this a prevailing wage project.  As a result of being a prevailing wage project, union contractors actively participated in the project and experienced tradesmen were the norm, not the exception.  As a result, there was greater labor cooperation and “esprit dé corps” often lacking on school projects in Ohio.
5. No A/E or C/M Markup on Changes: Districts are often frustrated to find their design professionals or construction managers profiting from their own mistakes.  For example, if an error or omission leads to a change order, and the construction cost of the project increases, the designer frequently receives additional compensation because their fee is based on a percentage of construction costs.  This perceived inequity caused us to make sure that there would be no markup on changes for the designer or the construction manager, and perhaps encouraged their close scrutiny of change orders for appropriateness.
6. Early Site Package: A late or wet spring has slowed progress or delayed companies of many a school construction project over the years.  With this in mind, the District put out for bid an early site package, which allowed the site work to be done in dry fall conditions before winter.  This ensured prompt work on the pad the following winter and spring when the balance of trade contractors began work.  This “jumpstart” to the project was very helpful to the overall project schedule.
7. Quick Finish: As a result of the strategies employed above, the project was put in a position where it could finish early if we had the “buy-in” and cooperation of all the trade contractors.  We then secured their approval to an early completion of the project, which would allow them to end their general condition costs earlier than otherwise.  For no additional compensation from the District, the contractors agreed to finish early and achieved completion of the school in time to open an entire school year early.  This had great and tangible benefits to the District and its students, yet was achieved for the original budget sum.

The lessons learned from this exciting and successful project can perhaps help other school districts, and other public owners, find creative ways to “do more for less” during these difficult economic times.  Employing creative and unique strategies to secure fairness and cooperation seems far preferable to simply “doing more of the same” and complaining about the inevitable frustrating results.

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Claim Against Architect Fails Without Privity

In the case of Spring Creek Condominium Ass’n v. Colony Development Corp., No. 07AP-671, 2008 WL 802729 (Ohio App. 10th Dist. March 27, 2008), an architect hired by a developer to design a condominium project was later sued by the condominium association and individual condominium owners.

The Franklin County Court of Appeals ruled that the architect could only be liable to the developer who hired him, and had no duty to the condominium or subsequent purchasers.  As a result, the architect prevailed and avoided liability.

This case reinforces the difficulty of taking legal action for economic loss against a party with whom you do not have a direct contract.

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Does Ohio's Prevailing Wage Law Apply to Off-Site Fabrication?  Stay Tuned.

In a case that could have significant implications on construction in Ohio, the Supreme Court of Ohio recently accepted jurisdiction in a case that presents two critical questions:

1. To what extent does Ohio's Prevailing Wage Law apply to off-site fabrication?
2. To what extent does a union have standing to bring a prevailing wage complaint over the entire project when the union has received authorization from only select employees?

The case is Sheet Metal Workers' Internatl. Assn., Local Union 33 v. Gene's Refrigeration, Heating & Air Conditioning, Inc and arose from the Ninth District Court of Appeals in Medina County. In Gene's Refrigeration, the Court of Appeals ruled that Ohio's Prevailing Wage Law applies to off-site fabrication labor for material "to be used" on a project subject to prevailing wage. Furthermore, the Court of Appeals granted the union standing to file a prevailing wage complaint with respect to the entire project and for violations for all of the contractor’s employees based upon the authorization of a single employee.

Not surprisingly, the case has attracted the attention of various trade organizations, based upon the numerous amicus briefs filed. The roster of those arguing in favor of at least a partial reversal with respect to the off-site fabrication issue includes the Associated General Contractors, Associated Builders & Contractors, and the Ohio Contractors Association.

Going forward, a decision will probably not be rendered for at least a year as the oral argument has not been scheduled yet. In the meantime, if you are doing off-site fabrication work for a prevailing wage job, you will want to keep this case in mind.

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Firm News

• Don Gregory conducted two (2) national webinars in August for AGC and its partners on the New ConsensusDOCS. 
• Don Gregory will also be speaking on the ConsensusDOCS at the AWCI meeting in Hawaii in October. 
• Kegler Brown’s construction attorneys will be conducting a monthly Construction Risk Management Institute Breakfast Briefing at our offices in downtown Columbus on the following dates:
  1. October 8: Mechanic’s Liens
  2. November 5: Contract Clauses
  3. December 10: Competitive Bidding
  4. January 7: Change Orders
  5. February 4: Delay Claims
• The firm will also be co-hosting with HRH a Green Building Seminar on November 13, 2008.  For information on either event, or to register, please contact Jeff Dennis at (614) 462-5430 or via e-mail.
• Kegler Brown’s Construction Area was again listed as one of the “Top Ten” firms in Ohio for construction by Chambers USA.  Don Gregory received individual recognition and was described as “practical and forceful” in providing the full range of services to his clients. 
• Don Gregory was recognized as one of only eight (8) lawyers in the entire state of Ohio by The International Who’s Who of Business Lawyers for expertise in Construction Law.  He was also selected for inclusion in 2009 Ohio Super Lawyers, a publication put forth by Law & Politics magazine.

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