In This Issue

• State Enacts Design-Build and Seal Law
• Michigan Court Upholds "Pay When Paid" Clause
• OSU Initiates Pilot Job Order Contracting Program
• OSHA Suspends Excavation Standards for Homebuilders
• Free-for-All on Public Bidding

State Enacts Design-Build and Seal Law

Donald W. Gregory
Construction
Law chair

Sub. H.B. 231 has just been passed and will change Ohio law governing design-build work effective November 24, 1995 as follows:

1. All plans for a building permit will require the seal of a registered architect or professional engineer with four minor exceptions:

   1. energy conservation projects under §3781.181;

   2. 1, 2 or 3 family units;

   3. building code exempt projects; and

   4. replacements or modifications where no plans are required.

2. Contractors may provide design-build services and contract directly with owners to offer design services, so long as the services are provided by a licensed architect and engineer.

In view of this development, a design-build contractor need not have the owner contract directly for these design services, so long as the contractor has hired a licensed architect or engineer.

The design liability in this scenario rests solely with the design-build contractor in the first instance. In that regard, the architects and engineers boards are supposed to adopt rules requiring professional liability insurance. As the rules have not yet been enacted, contractors are encouraged to insist upon professional liability insurance from "subcontract engineers and architects" on design-build work, rather than assuming it is in place as many appear to be uninsured for errors and omissions these days.

The bill also changes Ohio law by applying the statutory selection process for design professionals and construction managers to all public entities regardless of contract amount.

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Michigan Court Upholds "Pay When Paid" Clause

In a ruling adverse to subcontractors, the Michigan Court of Appeals has upheld a "pay when paid" provision in a subcontract that made payment by the owner to the contractor a "condition precedent" to payment to the subcontractor. Christman v. Brown, 533 N.W.2d 838 (1995). This means that payment from the contractor to the subcontractor may be postponed indefinitely.

Courts have traditionally looked disfavorably upon contingent payment clauses due to the perceived disparity in bargaining power between contractors and subcontractors and the practical difficulty for subcontractors in obtaining information on the owner's financial condition.

The Michigan Court refused to find, as an Ohio Court has previously, that a "reasonable time" for payment is inferred in such a "pay when paid" clause. Instead the Court ruled that when the contract contained no express language limiting the "pay when paid" condition precedent to a reasonable time, the contractor fulfilled his obligations by trying to collect the money due from the owner.

The presence of the "condition precedent" language in this subcontract appeared to play a large role in the court's decision.

This decision reinforces the need for subcontractors to closely scrutinize contingent payment clauses and the risk associated with them, unless and until the Ohio legislature makes such provisions void and unenforceable.

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OSU Initiates Pilot Job Order Contracting Program

The Ohio State University ("OSU") has become the third university in the country to begin a Job Order Contracting ("JOC") system. JOC is designed to deal with smaller projects, particularly maintenance or repair work, that are historically burdensome to manage through traditional procurement techniques.

JOC uses a list of 60,000 pre-priced construction tasks (the unit price book) that bidding or negotiating contractors then apply an overhead factor to (i.e., 1.18 of unit price). The successful contractor is only guaranteed a small minimum contract value, with work orders beyond the minimum tied to the contractor's performance in the mind of the public owner. Supporters of JOC argue that it is not only quicker and less burdensome to manage but that the contractor has a continuing financial incentive to provide quality work and responsive services. Critics suggest that it can allow cronyism and favoritism to interfere with the contracting process and that it can be misused to direct an inordinate amount of work to local, minority or women owned businesses.

Time will tell as to how well the JOC pilot system at OSU works and is received by local contractors.

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OSHA Suspends Excavation Standards for Homebuilders

OSHA has apparently suspended application of its excavation standard (29 CFR 1926.652) to house foundation and basement excavations. According to an OSHA memorandum to regional administrators, the suspension applies to all house foundation and basement excavations, including those that may be considered "trenches" when formwork, foundations or wells are constructed. Apparently, this suspension does not apply to utility excavations or trenches. Hopefully, this issue will be clarified through a regulation change so that contractors can know exactly where they stand.

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Free-for-All on Public Bidding

The Ohio Supreme Court, in the case of A&B-Abell Elevator Co. v. Elevator Constructors Union, et al., 73 Ohio St. 3d 1 (1995), has ruled that those providing information about bidders to public officials could make both true and false statements under a "qualified privilege" so long as such a person did not know that the statements were false or have serious doubts about the truth of the statements. This means that bidders who are the victim of false or negative comments from competitors, unions or others interested in bidding outcomes will likely have no real legal remedy against those criticizing them, due to the high level of proof required to prevail in such a case.

In view of this decision, there will likely be an increased level of backstabbing and in-fighting among competing bidders on public projects, and others interested in bidding outcomes such as labor unions.

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Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group.

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