March 2009

In This Issue

• The Stimulus - When Will the Cavalry Arrive?
• Obama Issues Executive Order on PLAs
• Much Change at ODOT
• AIA Amends Payment Bond Form
• OSHA Is Still Working On Its New Crane and Derrick Standards
• When Can a Party Who Does Not Breach The Contract Still be Liable?
• Can a Trust Fund Help You Get Paid?
• Ohio Valley ABC Files Prevailing Wage Complaints
• Firm News

The Stimulus - When Will the Cavalry Arrive?

Donald W. Gregory, Construction Law Chair

The construction industry has been on the front lines of the severe economic downturn - with double digit declines in most sectors.  The collapse of the residential market and the deterioration of commercial construction have caused many to shirt their emphasis to public works.  Fierce competition and eroding or evaporating profit margins are the norm.  So it is not surprising that many are turning their attention to the federal stimulus bill to see what is in it for them.

While more questions than answers currently exist, here is a breakdown of the bill with respect to $135 billion in construction funding nationwide:

• Transportation:  $49.3 billion, including $29.5 billion for bridge and highway construction, $6.9 billion for transit programs, $8.8 billion for high-speed rail investment and $1.8 billion for airport improvement grants.
• Energy-efficient and technological improvements:  $29.8 billion, including $11 billion to improve the nation's electrical grid, $7.2 billion to expand broadband availability, and $5 billion for home weatherization assistance programs in the states.
• Building construction and improvements:  $29.6 billion, including $5.6 billion to the General Services Administration to rehab government buildings, $7 billion to the Department of Defense for military housing and facility improvement, and $8 billion for housing programs.
• Environmental and water infrastructure:  $21.4 billion, including $5.6 billion for the Army Corps of Engineers and Bureau of Reclamation, $7.4 billion for clean water programs, and $7.8 billion for environmental cleanup programs.

The stimulus bill expressly states what many in the industry know too well:

"Construction has been the hardest hit industry and occupation in the recession."

The new law is designed to save or create 2 million construction jobs over the next two (2) years. 

While we do not yet know exactly what projects will be funded first, the law obligates states to commit its funds in the coming months so that hopefully "shovel-ready" projects can be bid and commenced in 2009.  Ohio's share of highway infrastructure dollars is $936 million.  States, including Ohio, will have to use the funds quickly under a "use it or lose it" approach.

The winners in the stimulus bill appear to be larger contractors on horizontal construction, as opposed to those specializing in vertical construction.  Yet when larger contractors move on up to the larger infrastructure jobs, this may present bidding opportunities for mid-size contractors on other work vacated by the larger firms.

The stimulus bill requires that all projects use American-made steel, iron and manufactured goods, unless:  (1) doing so would be inconsistent with the public interest; (2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or (3) inclusion of goods produced in the United States will increase the cost of the overall project by more than 25 percent.

More information on the stimulus bill is available at www.recovery.gov.

Back to top

Obama Issues Executive Order on PLAs

The president, on February 6th, signed an executive order authorizing federal agencies on projects whose total cost is $25 million or more to implement Project Labor Agreements (PLAs) binding all contractors and subcontractors on the project.  The executive order reinstates a former Clinton-administration rule and does not mandate PLAs, but simply authorizes them if the contracting agency believes they advance labor standards, efficiency or other matters.

The stimulus bill was silent with respect to PLAs on projects receiving federal stimulus funding.

Much Change at ODOT

Ohio Governor Ted Strickland recently appointed the first woman to head the Ohio Department of Transportation (ODOT) - Jolene Molitoris.  The new director has much experience with rail development and will be charged with authorizing about $1 billion in new ODOT stimulus infrastructure soon.  It remains to be seen whether ODOT under her leadership will return to an emphasis on Dispute Resolution Boards and claims avoidance.

In addition to the changes in leadership and budget, ODOT has made significant changes to its construction manual specification:

Duty To Ask Pre-Bid Questions

• §102.07:  ODOT has further reinforced its "Duty to Notify of Errors in Bid Documents." Under this provision, potential contractors are required to ask pre-bid questions prior to bid opening. Failure to do so "shall constitute a waiver by the Contractor for any claim based upon any apparent or patent ambiguity arising from insufficient data or obvious errors in the Bid Documents." 

Engineer's Acceptance Does Not Preclude Future ODOT Defective Work Claims

• §105.01:  further reinforces that the Engineer's acceptance of work does not constitute a waiver by ODOT of its right to pursue any and all legal remedies for defective work.

No ODOT Waiver Resulting From An Inspector's Action or Inaction

• §105.09 & §105.10: an inspector's action or inaction does not constitute a waiver of ODOT's right to pursue all legal remedies for defective work. Furthermore, ODOT shall have the discretion to dictate the level of inspection for any item of work while the Contractor bears the sole responsibility that its work is in compliance with the contract.

Borrow and Waste Requirements

• §105.16: under its Borrow and Waste Areas requirements, the Contractor is responsible for any damage resulting from the instability, removal, or placement of the borrow and waste areas. Furthermore, the Contractor is responsible that the side slopes of all borrow and waste areas are beyond the "clear zone" and do not reduce the horizontal sight distance.

Additional Ways To Price Extra Work

• §109.05.D: for extra work, ODOT is now contractually permitted to use "state-wide average unit" pricing adjusted for inflation or the average price awarded on three different projects of similar work and quantity.

Final Bond Premium Adjustment

• §109.05.C.7:  allows ODOT to make an adjustment based upon the final bond premium amount for the Contractor. The adjustment is based on the "actual final contract value," which is defined as the whole sum of money, excluding any bond premium adjustment, which is passed from ODOT to the Contractor for the completion for the work. If the actual final contract value is different from the original contract value, the premium shall be adjusted either by a Contractor refund or by an additional payment from ODOT. No final bond adjustment will be made if the actual final contract value differs from the original contract value by less than $40,000.00.

Acceleration, Inefficiency, and Loss of Productivity Provisions

• §109.06 & §109.07: under §109.06, the Engineer may order the Contractor to accelerate. If such acceleration order occurs, the Contractor and ODOT will negotiate the acceleration costs. §109.07 states that "compensable" inefficiency and loss of productivity costs shall be quantified using the measured mile approach.

Multi-Monthly Payments Possible

• §109.09:  permits ODOT to pay estimates twice each month if the Engineer concludes the amount of work performed is sufficient. 

AIA Amends Payment Bond Form

Recent state and federal court decisions have interpreted Section 6 of the AIA A-312 (1984) Payment Bond form.  Those decisions have held that sureties that do not send an answer to the claimant within 45 days have waived the right to subsequently dispute claims.  As a result, several national surety companies have refused to issue payment bonds without significant modifications to the language of A-312 (1984).

In reaction to these cases and the referral of some bonding companies to utilize the AIA A-312 (1984) bond form, AIA has agreed to modify the form in the following respects:

1. Bonding companies will have 60 (rather than 45) days to respond to the claim;
2. When bonding companies fail to do so, they will not be waiving their defenses; but,
3. In that event, the bonding companies may be liable for the claimant's legal fees should the claimant prevail.

OSHA Is Still Working On Its New Crane and Derrick Standards

After a series of highly publicized crane accidents, OSHA is getting closer to implementing new and improved safety rules.

Last fall, OSHA issued proposed standards and the response was so overwhelming that OSHA extended the deadline until late January 2009 for the public to file its comments. Now, OSHA has scheduled informal hearings starting on March 17, 2009, to further discuss the proposed standards.

One of the more significant requirements OSHA proposes is that crane operators must be certified by an accredited testing agency or by an audited employer-run program. Furthermore, signal persons will also be subject to training and certification requirements.

While it is unknown what certification requirements will actually be implemented, OSHA and the National Commission for the Certification of Crane Operators ("NCCCO") currently have in place a Voluntary Agreement that might provide contractors a head start with respect to future compliance requirements. Under the Voluntary Agreement, a contractor's self-imposed requirement to use only certified crane operators by the NCCCO is an indication of the contractor's commitment to an "effective safety and health program."

When Can a Party Who Does Not Breach The Contract Still be Liable?

According to the Wyoming Supreme Court, when a City breached the implied duty of good faith and fair dealing, even though the City did not breach the express AIA contract terms.  City of Gilette v. Hladky Construction, Inc., 2008 WL 488 9653 (Wyo. Nov. 14, 2008).

The City was found liable for $1.125 million in delay damages when it refused to allow an uncertified manufacturer to deliver pre-cast panels.

Many states incorporate an implied duty of good faith and fair dealing in every construction contract.  In those jurisdictions, parties must be careful not only to satisfy the literal meaning of the contract words, but also to act in good faith.

Can a Trust Fund Help You Get Paid?

Some states are known as "trust fund" states because they contain statutes requiring a contractor to pay funds downstream once project funds are received or face personal liability or other sanctions.  Sometimes those providing labor or material are successful in securing "trust fund" contract language requiring the customer to hold funds "in trust" for the benefit of the sub or supplier until paid.

In these difficult economic times with tightening credit, subcontractors and suppliers may want to consider utilizing trust fund contract language when they have leverage to do so.  This would greatly increase their chances for payment.

A recent case from Wisconsin dealt with whether a contractor, facing a shortfall in project funds, could pay one subcontractor in full or had to pay all subs proportionately.  The Wisconsin Supreme Court ruled that the trust fund statute was violated because, when faced with a deficiency, the contractor was obligated to pay all subs their proportionate share.  State v. Keyes, 2008 WI 54, 750 N.W. 2d 30 (2008).

Ohio Valley ABC Files Prevailing Wage Complaints

The issue of prevailing wage compliance has taken on greater importance as some open shop contractors have lost out on bids when their prevailing wage violations exceed the number permitted by "Quality Contractor Standards" adopted by many Ohio political subdivisions.  Traditionally, many prevailing wage citations were directed toward open shop contractors by interested parties, including those associated with organized labor.

In an interesting twist, the Ohio Valley chapter of ABC has filed a number of prevailing wage enforcement actions against union contractors for alleged prevailing wage violations.  Whether this organization has standing to do so, and whether the underlying complaints have merit, remains to be seen.

Regardless of how the courts handle this issue, it serves to emphasize the increasing importance of prevailing wage compliance by union and open shop contractors alike.

Firm News

Congratulations to Mike Madigan on being named a "Rising Star" by Law & Politics magazine.  Madigan conducted a presentation on "Delay Claims" to the Ohio Prosecuting Attorneys Association on December 5, 2008, while Don Gregory spoke on "Competitive Bidding Disputes." Madigan also presented at NBI's "Construction Law Fundamentals: Managing Project Risk" on January 12, 2009.

Eric Travers was the moderator of a Lorman seminar in January on "The Fundamentals of Construction Contracts: Understanding the Issues in Ohio."  He presented sections on Basic Contract Fundamentals, Unfair and Illegal Clauses, Hot Subcontracting Issues, Contract Collections: Pursuing and Defending Mechanic's Lien Claims and Dispute Resolution Options.  Travers also presented an NBI Seminar on "Construction Law Fundamentals:  Managing Project Risk," and spoke on Assessing and Mitigating Damages.

Don Gregory presented "Green Building" to the American Subcontractors Association in Nashville on March 5, 2009, and is working on a Green Building Addenda for ConsensusDOCS.  Gregory will present ConsensusDOCS to CISCA at its national meeting in Nashville later this month.