Legal and Regulatory

2020 Executive Insights: Construction Law

Industry experts share experiences and offer best practices in construction law.
June 11, 2020
Topics
Legal and Regulatory

What legal work should a contractor expect before, during and after a project?

Aman S. Kahlon
Director, Chair of Construction Services Group
Bradley Arant Boult Cummings LLP

Before: Once awarded a project, a contractor should expect legal work for prime contract and subcontract drafting and negotiations. For some projects, contractors may also encounter early permitting or environmental issues that require legal consultation.

During: During a project, contractors should expect legal work to arise with respect to change order disputes, acceleration requests, subcontractor defaults, early terminations for convenience or default, and a number of other project administration issues. The contractor should look first to its contracts and/or subcontracts to attempt to resolve these issues.
Additionally, contractors may confront issues related to changes in applicable laws or regulations that can affect progress or costs and create legal work. During and after a project, there is also a potential for third-party claims to arise from accidents on the jobsite that cause injury to persons or property.

After: After a project, legal issues may arise on any unresolved disputes including unpaid change order costs, unresolved delay claims, liquidated damages claims, etc. Bond and lien claims are often an integral piece of post-project disputes. Additionally, contractors can expect warranty issues or other defective work claims once a project becomes operational.

Chip Bachara
Managing Partner
Bachara Construction Law Group

I would encourage any contractor to think of their construction lawyer as a colleague who can reduce risks and improve their bottom line. It may seem costly upfront, but advice from a trusted construction lawyer almost always pays for itself by reducing exposure to risks that are rarely considered when entering into a contract, or to liability that is shifted to the contractor in many standard form contracts.

Initially, a construction lawyer can help negotiate the terms of the contract to ensure that contractors are not taking on unnecessary risks or creating unworkable requirements that can detract from their ability to recover claims. If that opportunity is missed, having a construction lawyer review the already-signed contract can still be beneficial by revealing hidden pitfalls or problems.

If conflicts or misunderstandings arise during the construction process, an experienced construction lawyer can help navigate a resolution, whether the disagreement results from differing site conditions or a conflict in the drawings. The lawyer can also be effective in preparing letters, change order requests and RFIs.

After a project is complete, the construction lawyer can help ensure that the contractor gets paid and protect it from claims. In addition, the lawyer can advise about the insurance that’s needed to protect a construction firm from post-completion exposure to defect claims.

From the beginning to the end of a project, a good construction lawyer can save a contractor time, money and stress.

In terms of risk management, what can construction firms learn from the COVID-19 pandemic on what policies and procedures they should have in place?

David Hammargren
Head of Construction and Surety Practice
Larkin Hoffman

There are three risk management lessons construction firms can learn from the current pandemic. First, contract terms matter. A contractor needs more than a garden variety force majeure clause in its contract. Be certain to address all of the possible impacts of a pandemic—not just schedule impacts, but also cost increases and the impacts of additional government regulation and rules. Well-drafted indemnification and insurance provisions are essential to transfer to others (an insurer, the owner, subcontractors or suppliers) the risks associated with a pandemic.

Second, be intelligent when purchasing insurance. Work with an experienced agent that can find insurance companies that understand the risks associated with a pandemic and are willing to insure the contractor against them. Third, if a pandemic strikes, be proactive. Send all required notices to owners, insurers, subcontractors and suppliers, and make sure they are in writing. Keep and maintain a discrete data set of the impacts of the pandemic. Segregate this data from other data and records so it is easily accessible and so you can more easily demonstrate the causal connection between the pandemic, its effects and its impacts on your company.

John A. Greenhall
Partner
Cohen Seglias Pallas Greenhall & Furman PC

While there are many lessons to be learned from the pandemic, from the perspective of risk management, contractors must be prepared to survive in the “new normal.” First, it is critical that a contractor understand the legal implications of its contract beyond bricks and mortar. For example, I have heard the term “force majeure” more now than ever. It is extremely important for a contractor’s personnel to know some of the basics of contract language, as well as their implications, in order to safeguard the company.

The obvious followup from this first point is that most contracts require notice to be sent relating to requests for time extensions or extra costs. Even though the contractor thinks that everyone knows the project was suspended or that PPE costs were not anticipated, without sending notice, the contractor is putting itself in a difficult position where it is arguing constructive notice rather than just holding up a written notice.

Finally, a key lesson is to remember: do not sign something without considering its effect. I have been surprised by the number of releases I have seen since construction re-started in which the owner or higher tier contractor sought to have our clients increase their indemnity obligations due to injury from COVID-19 or waive their rights to time extensions, PPE extras or inefficiency costs. The releases have been hidden in change orders, addenda, lien waivers and the like. Contractors need to be extremely careful now and in the future.

Ben Westcott
Co-Managing Shareholder
Andrews Myers, PC

From my perspective, the COVID-19 pandemic reinforced the necessity for every construction company to have an effective crisis management plan. In most cases, these plans were drawn up, put in a drawer, and forgotten about. When the COVID-19 pandemic hit, the construction industry did not have the luxury of staying at home and planning out how to return to work. Most construction companies in Texas, for example, didn’t miss a single day of work.

As a result, these companies were forced to communicate daily changes to health and safety protocols, changes in local laws, and jobsite specific regulations to all of their workers. This type of situation requires a well-thought-out and workable crisis management plan. An effective plan includes a policy, structure, procedures, leaders and a preparedness culture.

It is also important to develop pre-approved messages, supply chain resources and other professional support vendors so that these constructs are firmly in place when the next crisis occurs.

Finally, to reinforce the preparedness culture, regular meetings among the crisis plan team members, both during and after the crisis, can help the organization effectively adapt and make changes to both deal with the current crisis and be better trained and prepared for the next one.

Michael Branca
Managing Partner - Washington, DC Office
Peckar & Abramson, PC

From a contractual perspective, the COVID-19 pandemic has been an eye-opening experience. While many force majeure provisions include relief for “epidemics,” such provisions may provide relief for time but no money. Prior to COVID-19 this likely was not seen as much of a risk because epidemics are quite rare. If one did occur, few would have contemplated the wholesale lock down of the American economy (indeed, the worldwide economic lockdown).

Even though construction in many jurisdictions was not formally shut down, the ability to advance a project without delay given the multitude of impacts resulting from COVID-19 was by no means certain. Going forward, construction firms should consider including financial relief in force majeure provisions, either in whole or after a short “holiday.”

The industry has also learned about exposure to infections on a construction site. It has become apparent that any onsite employee who contracted the virus can send ripple effects through the project. Measures to contain such risks include, at a minimum, tracing contacts, quarantining other employees who may have come in contact with the infected employee, adding hygiene facilities, reducing density, and enhancing sanitization and cleaning of work areas. Risk managers will want to consider such health and safety measures on future projects, much as they would other jobsite hazards. The cost of these measures may pale in comparison to the costs associated with quarantining large portions of a project workforce and shutting down a project, in addition to the human toll.

Hopefully, as many construction firms have had to deal with COVID-19, they can take these lessons learned and prepare in the event of a second wave or future pandemic.

What new technology do you think has been the most effective in preventing litigation in the construction industry?

Sonny Shields
Managing Partner
Shields Mott LLP

Great record-keeping may not prevent litigation but can cause the other side to think twice about taking that route; and if litigation comes, the odds of winning are enhanced. With today’s technology, great record-keeping is easier than ever and all supervisory personnel already have the means to accomplish that. Every cell phone today has a camera and voice-recording capabilities. With just a bit of effort and a dose of focus and some training, much better job records can be made and reported daily.

When claims need to be supported or defended, the ability to look back on contemporaneous electronic documentation is invaluable. As we have all seen, sometimes the need to make a claim isn’t always apparent right away, but becomes clear later. Whether that claim is made by you or another party later in the project, the first task is to get back to the tracking (or not) of exactly what happened on a specific occasion or over time. Having those well-prepared daily records is invaluable as an aid in putting the puzzle together.

Since everyone already carries the cell phone, the missing element is the emphasis and training of supervisory personnel to consciously note things that happen on the job which warrant recording; such things as delay, owner-architect instructions, interference with planned work, work beyond the plans and specs, and so on. Team member electronic record-keeping by cell phone can make the difference.

What should a construction employer be doing today to address unfunded pension withdrawal liability?

Andrew Martone
President & CEO
HesseMartone

The world has changed, and construction employers need to predict the effects of those changes and respond to them rather than simply react. The COVID-19 crisis has dramatically affected multi-employer pension funds in a number of ways. Construction employers need to get a handle on their new liabilities (and potential liabilities) and develop a game plan to address those liabilities before they become an extinction event.

First, construction employers should get and keep a handle on their collective bargaining agreements and other obligations to contribute to multi-employer plans. When the times get tough, the funds pick up the pace of auditing, and lost/forgotten legacy contracts can create substantial liabilities.

Second, construction employers should obtain regular estimates of their potential withdrawal liability to every multi-employer pension fund to which they contribute. This information can be sobering, and may itself drive important business decisions.

Third, construction employers should evaluate the relative strengths of the pension funds to which they contribute to determine if prompt action is required (or even desirable).

Fourth, construction employers should evaluate their options and put into place a fund-specific game plan for minimizing their exposure.

Construction employers have options with regards to dealing with pension fund withdrawal liability, but those options shrink (and become more expensive) the longer the employer waits.

What are the top 3 issues you see in construction contracts that can be avoided?

Christopher K. LeMieux
Managing Partner
Riess LeMieux, LLC

The most easily avoidable mistake we see contractors make is taking a one-size-fits-all approach to contract drafting. Although forms like AIA and ConsensusDocs are useful templates, contractors often don’t consider changes to the standard language. We find that contractors that tailor each contract to the needs of a project often avoid common pitfalls, particularly as it relates to claims, indemnity and insurance coverage issues.

The second major issue we see in our practice relates to compensation and responsibility for delays. Contractors should scrutinize the claim provisions of every contract to understand the ramifications if the work is delayed. Standard contract provisions, such as force majeure clauses, often permit only time extensions, not additional compensation. Contractors would be wise to negotiate for additional compensation for delay, particularly to cover general conditions.

Limitation of responsibility for delays is also important for contractors to keep in mind. Contractors often focus on delays, while overlooking impacts like acceleration, compression and disruption. These impacts are often distinguished from “delay” by the courts, rendering a no-damages-for-delay clause ineffectual.

The third preventable issue is noncompliance with notice provisions. The consequences for failing to provide requisite notice of a potential claim or delay can be substantial. Many contractors inadvertently waive their claims by not providing timely notice. Some notice clauses require a contractor to explain the delay or impact, estimate the length or extent of the delay to the work, and provide an itemization of costs incurred. Contractors can avoid tripping up on notice requirements by carefully reviewing their contracts with counsel.

Brian A. Wolf
Partner
Smith, Currie & Hancock LLP

The primary purposes of every construction contract are to define a scope of work, establish compensation and shift risks. It should not be surprising that the top three issues leading to claims and disputes in construction contracts are disagreements regarding the scope of work, disagreements regarding payment, and claims for extra costs caused by predictable categories of risks. All of these issues can be reduced by paying attention to the basics.

First, carefully define the contractual scope of work. Avoid reliance on catch-all phrases and instead use specifics tied to the appropriate construction documents. Always use exclusions. A carefully drafted list of exclusions will inevitably avoid scope-related arguments and decrease opportunities for overreach. When referencing plans and specifications, always include the document dates including revision dates.

Second, think through how and when compensation disagreements arise. Regarding fixed-price contracts, disputes arise with compensation for additional work and additional time. Define how compensation for change orders will be calculated and consider both agreed markups and agreed unit prices. Also, don’t forget to address rights to compensation for a partially-completed project. The most important part of any termination for convenience clause is the entitlement to compensation.

For cost plus contacts with or without a GMP, carefully consider your definition of cost particularly when it comes to general conditions.

Finally, take the time needed to review risk-shifting clauses such as indemnification, damage to work and equipment, and the right to compensation for delays and unanticipated expenses. The rule of thumb should be not to accept any risk that cannot be controlled either through best practices or with insurance.

Construction disagreements are predictable. A focus on the basics when preparing contracts will put a contractor in the best position to avoid and resolve disputes.

Allen W. Estes, III
Partner, Co-Chair of Construction Practice Group
Gordon Rees Scully Mansukhani, LLP

The top 3 issues which I encounter in construction contracts are the following: 1) the difficulty of recognizing and then limiting risk by utilizing airtight flow-down provisions; 2) failure to negotiate terms which are feasible; and 3) failure to consistently follow the contract terms. All of these issues often lead to litigation.

Contractors are placed in the position of having to appreciate the risk they contract to take on. They have to limit that risk by flowing it down to sub-tiers. Potential scope gaps and/or risk gaps can put a contractor in the position of retaining more risk than is necessary. Due to that risk, contractors have pressure to negotiate uneven contract terms. At times, subcontractors and/or suppliers sign contracts which they suspect will be difficult to perform in order to "win" the work. Too often everyone loses when this approach is utilized. For example, if the Prime Contract allows 30 days to provide notice of a changed condition and failure to provide timely notice results in waiver of the right to make a claim on the changed condition, why would a subcontractor sign a subcontract which gives them only 10 days to provide notice of a changed condition? The subcontractor should ask for at least 15 - 20 days to provide notice since they are often the party-in-fact whom experiences the changed event in the first instance. Another example is when a supplier's PO's is utilized and it is not compatible with the claims and dispute resolution provisions of the upper-tier contracts. These situations can often be avoided during the contracting phase of a project.

Lastly, the parties to a construction contract usually do not follow it by the letter because they are focused on finishing the project on time, rather than "papering" the project. Notices for changed conditions and other events are often not given timely or in the manner set forth in the contract. This may result in the waiver of claims and often litigation.

What questions should a construction firm ask before retaining a law firm?

Gina Vitiello
Shareholder
Chamberlain Hrdlicka White Williams & Aughtry

One of the most important questions a construction firm should ask before retaining a law firm is how that law firm handles ediscovery. Construction cases are very document-intensive because construction projects can typically run for more than a year and many different parties and individuals may have relevant documents and emails relating to the issues in the case. Collecting, processing, storing, reviewing and producing those documents to the other parties in the case can become very expensive part of any construction law case.

Law firms may have different tools or approaches as to how to handle the ediscovery process in the most effective and efficient way. Construction firms should understand the law firm’s plan for handling ediscovery and how that plan fits with the strategy and value of the case.

Rob Remington
Partner and Chair, Construction Law Practice Team
Hahn Loeser & Parks LLP

Finding the right law firm with a team that understands your business and the issues impacting the construction industry is crucial to your success. Some important questions to consider asking prospective counsel include:

1. How large is your construction team?
It is essential that your firm has the depth to handle your issues efficiently and effectively.

2. Does your team have field experience in the industry?
Finding a firm that has not only experienced attorneys who understand the construction industry but other industry professionals can ensure the firm will add significant value to your business. Look for a firm whose attorneys and professionals take an active role in industry associations and have engineers and project managers.

3. Does your firm have litigators? What are the results they have achieved?
Your legal team needs to have trial experience to help you manage your disputes and navigate any claims. Experienced litigators know how to evaluate claims quickly to save you both time and money.

4. How will your team help us proactively avoid issues?
Working with the right firm, you can avoid costly legal issues and ensure your company is implementing best practices. Look for a firm that provides training opportunities and other guidance, especially with the impact of the changing regulations and workplace best practices related to COVID-19.

Construction clients should be looking for a practice group that has industry experience in all aspects of construction law, a deep bench of construction professionals (including lawyers with industry backgrounds and industry professionals with real life project experience) with a proven track record of success and a commitment to providing value added client service.

Mark Becker
Attorney
Fabyanske, Westra, Hart & Thomson PA

The question we would ask if searching for a construction law firm is: “How are you going to resolve my dispute not just effectively, but also efficiently and quickly?"
With construction firms demanding earlier and more efficient dispute resolution, a construction law firm should emphasize skill and leadership in using early dispute resolution methods such as early mediator engagement and “guided choice” mediation techniques to resolve complex matters before lawsuits begin, or the most expensive phases of litigation are necessary. For disputes eluding early resolution, custom litigation or arbitration strategies can advance clients’ goals in the most efficient and expedited manner possible.

Many construction firms ask how attorney fees and costs can be managed, mitigated or transferred. Construction firms should have the right for insurers to pay independent counsel of the client’s choice, and to work according to alternative fee arrangements in appropriate cases.

Construction firms also need legal representatives responsive to the speed at which major construction contracts are negotiated to help get the deal done faster. Construction firms should ask counsel not only about their deal negotiating experience, but also how deal friction can be reduced.

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