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Executive Insights 2023: Leaders in Construction Law

Industry experts share their knowledge on all things construction law.
June 2, 2023
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Legal and Regulatory
Workforce

If a major project is interrupted or canceled, are there any laws that provide protection for unpaid contractors that have performed work?

Angela Richie
Partner, Co-Chair, Construction Practice Group
Gordon Rees Scully Mansukhani

a headshot of Angela Richie from Gordon Rees Scully Mansukhani

With the current volatility and uncertainty in the economy, project interruptions and cancellations are on the rise; hence, you need to take steps now to make sure you have a method to get paid for the work you have performed.

For private projects, make sure you have followed the pre-lien notification requirements for the state in which the project is located before you start work, if they are required. Then, be sure to follow the lien notice and lien filing requirements for the state. Each state is different, so you want to be ready with the appropriate documentation in advance of the project interruption or cancellation.

For public projects, you will want to familiarize yourself with the bond claim requirements and provide notice as required by the bond or statute. You will also want to check your contract for any language that would provide that the contractor does not have to pay you unless they are paid by the owner, as this language can be used to avoid payment to subcontractors.

On any project, public or private, upstream contractors must also check your downstream agreements and limit payment for any cancellation to the percentage of work completed as of the date of suspension or termination. As you are negotiating contracts in this uncertain time, give thought to what costs you may need to recover if a project is put on hold, like unabsorbed shop overhead, and make sure the contract allows you to recover such costs in the event of a termination.

What are the key risks that should always be taken into consideration before any construction contract is signed?

Allen Estes
Partner, Co-Chair, Construction Practice Group
Gordon Rees Scully Mansukhani

a headshot of Allen Estes of Gordon Rees Scully Mansukhani

Before any construction contract is signed, the parties should evaluate whether they fully understand and appreciate their risk and obligations under their respective contracts. In a design-bid-build relationship, each party should evaluate the following:

For the owner, it is important to ensure that all risks have been appreciated and contracted to the appropriate parties.

For the designer, it is important to ensure that the design contract documents accurately set forth which obligations the designer will have during the design phase of the project and during the construction phase of the project.

For the general contractor, it is important to ensure that all obligations have been reviewed with both the home office and the field team. There needs to be a clear team understanding regarding how communications between the owner, designer and general contractor will occur on the project pursuant to the requirements of the contract. All subcontracts should be reviewed to ensure that there are not any scope gap issues.

For subcontractors, it is important to fully understand any obligation which is flowed down from the general contract. Review all provisions in the contract documents that affect the subcontract to ensure consistency and to fully appreciate all risks that are flowed down. This is especially important for any notice, claim, change or dispute resolution provisions.

For suppliers, it is important to make sure that under the terms of your purchase order you are legally acting as a supplier and not acting as a subcontractor under the laws of the state in which you are delivering materials.

What are the key risks that should always be taken into consideration before any construction contract is signed?

Ben Westcott
Co-Managing Shareholder
Andrews Myers, P.C.

a headshot of Ben Westcott of Andrews Myers

Before signing a construction contract, the first concern is funding. Does the owner have the funds for the project? Many states, including Texas, have statutory requirements for disclosing the source and amount of funding as a prerequisite to starting work.

Next, look at the scope. How developed is the design, and what risks are tied to design development and scope changes? Contract terms relating to “reasonably inferable” items and “fully functional” systems or processes or “performance as intended” can push unexpected risk to the contractor causing pricing problems.

Also, what third-party contractors will be working on the site at the same time and near this contractor? There should be a risk management structure for dealing with delays, impacts, injuries or damages caused by third-party contractors. Does the indemnity and insurance structure for the overall project provide sufficient protection? Verify how insurance claims will be resolved in terms of presentation, funding and allocation of funding.

Then, how are delays being addressed? It should be pre-determined which will be compensable versus non-compensable, and what is the standard of proof for each.

Finally, what mechanism will be used for resolving claims and disputes quickly, allowing the project to keep moving? The expedited resolution of change orders and time extension requests are tools that can assist in limiting the risk of the cost of carry and the uncertainty of delayed resolution of disputes. Careful review and planning can assist a contractor with outlining and addressing these risks in the contract.

What are the key risks that should always be taken into consideration before any construction contract is signed?

Roy Cohen
Construction Chair
Cohen Seglias

a headshot of Roy Cohen of Cohen Seglias

While there are numerous form contracts available to owners, construction managers and subcontractors on a project, every project and contractual relationship must be considered independently to protect a party from its specific risks in the construction food chain.

Owners must ensure that their banking/financing treaties are protected with provisions requiring construction managers to bond off liens from subcontractors. They should also seriously consider receiving payment and performance bonds from construction managers or have each major subcontractor provide its own payment and performance bond. Owners must also look to the state laws where the project is located to take advantage of registration provisions prior to the start of the project that will help prevent against liens.

Construction managers must feel comfortable that the owner has sufficient financing in place, is preferably not a single-purpose entity without other available resources and has protected itself against subcontractor defaults by requiring payment and performance bonds, using subguard products or inserting default provisions, such as liquidated damages or actual damages, that give them the best chance to make themselves whole in the event of default.

Subcontractors, who are most likely to be delayed, accelerated or compressed due to the failure of others up the food chain (including owners, design professionals and precedential trades) and bear the brunt of cost overruns, need to insist on a base schedule and monthly updated schedules in native format. This allows subcontractors to accurately track the progress of the project and the causes of delay and inefficiency.

Each party in the construction process must assess their risks through their own prism and cannot simply rely on a standard form contract.

What are the key risks that should always be taken into consideration before any construction contract is signed?

Wm. Cary Wright
Chair, Construction Practice Group
Carlton Fields

a headshot of Cary Wright from Carlton Fields

Construction contracts are important for allocating risk. Contractual indemnity provisions allow parties to transfer the risk of loss among themselves, subject to statutory constraints. Although indemnity obligations were historically limited to personal injury or property damage to third parties arising out of the contractor’s work, it is not uncommon to expand upon these obligations. Indemnity provisions should be carefully reviewed to evaluate their impact on the contractor’s potential liability.

Consequential damages are more likely to be incurred by owners and can transform a relatively modest damages award into one crippling to contractors. To mitigate risk, contractors should negotiate a waiver of consequential damages provision. In the seminal case Perini Corp. v. Greate Bay Hotel & Casino, Inc., an arbitration panel awarded an owner $14.5 million in consequential damages where the construction manager’s fee was only $600,000, which was upheld on appeal. Consequential damages provisions also often contain carve-outs that should be evaluated.

If a contract is silent regarding changed or concealed conditions, the contractor likely assumes the risk, including delay or additional expense, associated with any such condition. Contracts should include a provision setting a reasonable notice timeframe of these conditions, a clear investigation process and an adjustment to the contract sum and/or time.

Most contracts contain express warranty provisions from the contractor to the owner. Contractors should note exactly what is being warranted, as they may include heightened standards different from those contained in standard forms (such as using “best efforts” or “highest quality”), which may be difficult to meet.

What are the key risks that should always be taken into consideration before any construction contract is signed?

Scott R. Sleight
Managing Member
Ahlers Cressman & Sleight PLLC

a headshot of Scott Sleight of Ahlers Cressman & Sleight

A well-drafted construction contract clearly allocates project risks and works in harmony with downstream contracts, insurance policies and bonds. Risk allocation should take into account which party is best situated to control certain risks and whether the risk is insurable. While each project requires specific evaluation, these are five common risk areas to consider:

  • Scope of Work: Contracts typically define the scope of work by reference to a collection of “contract documents,” which can include clarifications and assumptions. These should be carefully reviewed to confirm the expectations for scope and price are aligned.
  • Payment Provisions: The contract should properly reflect the agreed compensation structure, define what is reimbursable and what is not, and set forth clear terms for how disagreements will be promptly resolved.
  • Insurance and Indemnity: These provisions need to comply with state law, effectively assign risk to insurance and describe what occurs following an insured event.
  • Changes, Claims, Suspension, Default, Termination and Disputes: This broad category of provisions must be evaluated to ensure they fully explain how the parties will work through project disruptions. Special attention should be paid to defining the procedures for handling changes and delays, including what delay events are excused and/or compensable and what remedies exist.
  • Warranties: The contractual warranties provisions (which may be implied or arise by statute) should define how issues that arise after completion will be addressed.

A party that understands the above risks can more effectively allocate them and negotiate a Contract that will provide certainty and reduce project conflicts.

To what extent is a construction company liable for project delays, product substitutions, materials price increases and other problems related to its supply chain?

Gregory Cokinos
President and CEO
Cokinos | Young

a headshot of Gregory Cokinos of Cokinos Young

In short, the answer depends almost entirely upon the terms of your construction contract. More balanced and sophisticated construction contracts (and certainly those negotiated and executed post-COVID) should contain provisions that allocate those risks. If your construction contract is silent as to project delays, price escalation and/or other supply-chain-related impacts, the risk and cost of those impacts may very well be imposed upon the contractor (and an aggressive owner will certainly attempt to impose those risks and costs upon the contractor). Your first and primary line of defense is your construction contract. Negotiate thoroughly, negotiate deliberately and negotiate with that in mind—you will ultimately be bound by the terms of your contract.

So if you want protection from project delays and price escalation, attempt to build those protections into your contract. Furthermore, and as a word of caution, do not be overly comforted by the concept of force majeure. Force majeure is a creature of contract. If your contract does not contain force majeure provisions, you will not be entitled to force majeure relief. And even If it does, you will only be entitled to force majeure relief to the extent that the event effectuating force majeure (e.g., supply-chain-related impact) is included within the provision, and then only to the extent that the relief you seek (e.g., additional time and cost) is contractually recoverable.

Construction disputes (including those over supply-chain impacts) can be expensive and time consuming. We recommend engaging construction counsel early and as needed to limit exposure.

To what extent is a construction company liable for project delays, product substitutions, materials price increases and other problems related to its supply chain?

Rob Remington
Chair, Construction Law Practice Group, and Co-Chair, Litigation Practice Area
Hahn Loeser & Parks LLP

a headshot of Rob Remington of Hahn Loeser & Parks

Limiting liability for delay, substitutions, materials price escalation and supply-chain disruptions begins and ends with the contract documents and is why, in today’s world, a proactive approach to identifying and managing potential project risk at the contract negotiation stage is key. Failing to address these issues early leaves a contractor at the mercy of project impacts and market forces beyond the contractor’s control. Negotiating a contract that protects against these risks, however, is only half the battle. A well-drafted contract is of no use if the contractor fails to understand the importance of those protections and properly enforce its rights under the contract. As a result, it is equally key to train project managers to understand the purpose of the contract protections and the importance of strictly following contract requirements with respect to enforcement.

Beyond utilizing sound contract negotiation and enforcement practices, proactive contractors are managing risk in these three areas:

Supply Chain

  • Taking proactive measures to get control of supply channels and evaluate available inventory
  • Prioritizing orders (maintaining good relationships and communication with suppliers)

Materials Escalation

  • Working to modify design specs to utilize available materials
  • Locking in raw materials prices and suppliers to secure pricing where possible

Skilled Labor

  • Broadening recruitment efforts
  • Endeavoring to better engage workers and their families

What advice do you have to avoid defaults and terminations of contracts on major construction projects?

Joshua Levy
Partner
Husch Blackwell LLP

a headshot of Joshua Levy of Husch Blackwell

This topic is part of my “Breachless Execution” curriculum I teach to clients, organizations and ABC Wisconsin’s Construction U. While the question asks about “major construction projects,” the answer applies to all disputes. I emphasize that construction disputes on projects from bathroom remodels to sports stadiums have one common denominator: a breakdown in communication.

A threshold point is that both sides want to avoid defaults and terminations. No party wants to chase a remedy or defend a claim. Next, all parties should strive to be “Breachless” by following the communication requirements in their project agreements. These obligations range from properly completing daily reports, meeting minutes and schedule updates to delivering timely submittals, change order requests and notices of delay, etc.

Even with good recordkeeping, disputes may arise. The key to avoiding defaults and terminations is to remove emotion and establish a common understanding of the facts. Most agreements require advance notice prior to declaring a default, together with allowing the other party an opportunity to cure. If default conditions exist, the conditions that gave rise to the notice must be well-grounded and set forth with specificity, and the response must be timely and set forth a detailed schedule and description of the plan to cure. If the notice is challenged, the basis must be specific and supported by written project records. Finally, in all cases, the parties involved should discuss the issues, not rely on email and letter writing, and approach the matter as problem solvers rather than adversaries.

What should a contractor consider when hiring a construction attorney?

Scott Griffith
President and Founding Shareholder
Griffith Davison

a headshot of Scott Griffith of Griffith Davison

Construction law is a complex, often high-stakes area of law where demonstrable experience matters. When hiring a construction attorney, look for someone with extensive construction-specific legal experience, which could be evidenced by board certification. Additionally, look to see if the attorney is recognized or ranked in key publications and whether they have experience in speaking or writing on various construction law topics. This demonstrates not only a knowledge of construction law but also provides insight into how the attorney is viewed by their peers, which can be important in establishing credibility with opposing counsel, co-counsel, arbitrators and judges. An experienced, knowledgeable and well-respected construction lawyer is more likely to achieve positive, efficient results for his or her clients.

Another important factor to consider is the lawyer’s understanding of the business side of construction. Ideally, you want a lawyer who understands the terminology and operations within your business. This perspective may come from prior experience within construction companies or many years of experience practicing construction law.

Finally, the ideal construction lawyer should be a trusted adviser. A client should ask themselves, is this someone I would call when my business is in peril? Would I seek out and listen to this lawyer’s advice in the most desperate of legal situations? If the answer is a resounding “yes,” then you have the right construction attorney.

What should a contractor consider when hiring a construction attorney?

Larry Borda
Construction Group
Phelps Dunbar LLP

a headshot of Larry Borda of Phelps Dunbar

Experience matters! The larger and more complex the case, the more important the vetting process becomes. When choosing counsel, a contractor should first consider the number of economic loss cases of similar magnitude a lawyer has handled, or the number of bodily injury cases a lawyer has tried to verdict.

While hourly rates are clearly important, overall value—a combination of rates, experience and expertise—is far more important. Fewer cases are tried to verdict and the pool of qualified trial lawyers is dwindling. In addition to working more efficiently, a well-regarded trial lawyer will drive down the potential settlement value of a case by their mere presence.

Venue might also be a consideration, but, given that today’s courts are generally more tolerant of lawyers entering an appearance from “foreign jurisdictions,” it’s less important than it used to be. That said, a lawyer’s overall “fit,” style and even accent can be important considerations—for example, a lawyer with a strong Boston accent might not go over well with a jury in Texas or Louisiana, and vice versa. In addition, many of today’s cases are tried before the American Arbitration Association, where venue is not an issue when it comes to counsel.

Choice of counsel can make or break a case. When choosing counsel, it’s important to consider experience, overall value and a lawyer’s style or fit—with both the client and the venue.

When should a construction firm use liens or other methods to secure the right to payment of its costs and fees from an owner?

Sarah Donini Rodriguez
Partner
Shutts & Bowen LLP

a headshot of Sarah Rodriguez of Shutts & Bowen

A thorough understanding of contractor’s lien laws is important to anyone working in the construction industry. In Florida, construction liens are permitted to those in the construction industry who provide materials, services or labor to real property. Liens are not available on most public projects where bonds are statutorily required. But for the majority of private construction projects, payment bonds are not required, and as a result, a lien is often the best bet for recovery of unpaid sums due.

Some of the parties who may have a claim of lien (i.e., a lienor) because of nonpayment on a contract include contractors, prime contractors, subcontractors, laborers, materialmen who contract with a contractor or subcontractor (i.e., someone who provides materials to a project or jobsite), architects, engineers and surveyors. Additionally, Florida requires that contractors have all requisite licensing for the work related to a lien for it to be enforceable.

A lien can be filed during or, for a limited time, after performing work on a construction project. To file a valid lien, the lienor must be careful to follow specific statutory requirements for perfecting the lien (e.g., written notices, time limits and other recording rules).

When a contractor places a mechanic’s lien on a property, the lien holder has the opportunity to force the sale of the property through foreclosure and obtain a share of the sale proceeds in the amount of the unpaid contract price.

When should a construction firm use liens or other methods to secure the right to payment of its costs and fees from an owner?

Christopher K. LeMieux
Founding Partner
Riess LeMieux, LLC

a headshot of Christopher Lemieux of Riess Lemieux

Statutory liens and contractual claim notices are mighty tools a contractor can use to secure payment from owners. Despite the legal protections afforded contractors, many still hesitate to send the required notices or file liens due to fear of retribution. It is crucial for contractors to overcome this fear and understand the value of these tools in ensuring payment for their work.

By sending contractual notices of claims, contractors establish a clear record of their intent to enforce their rights to be paid. When contractual or preliminary lien notices do not result in resolution, filing a lien on the owner's property is the most cost-effective way to obtain payment from an unruly owner or upstream contractor. A lien places a legal encumbrance on the owner’s property, which can lead to the owner’s lender demanding the owner satisfy the lien and disrupt the owner's ability to sell or refinance until the lien is settled. Likewise, an owner may force an upstream contractor to make payment to its subcontractor or supplier. Failure to leverage these essential tools can have consequences for contractors, leaving them unpaid and significantly impairing their business capacity as they become sidetracked in resource-draining litigation, all while facing an owner with limited motivation to resolve the dispute.

Contractors must establish best practices for liens and notices to ensure payment for their work. Engaging counsel experienced in construction law to draft form statutory notices and demand letters can mitigate the contractor’s fears and result in payment.

What is the biggest risk to contractors that are having difficulty finding skilled workers?

Trent Cotney
Partner and Construction Team Co-Leader
Adams and Reese

a headshot of Trent Cotney of Adams Reese

Hiring and keeping skilled workers is a major challenge for contractors, and the most significant related risk for contractors centers on immigration laws. Even though many talented and experienced workers are U.S. citizens, most companies must rely on undocumented immigrant workers to ensure the completion and success of their building projects.

The reality is, without immigrants who come to this country seeking work, the skilled labor shortage will worsen. According to the Center for Immigration Studies, legal and illegal immigrants comprised 29% of the construction workforce in 2021.

While skilled workers can qualify for temporary visas, the process can seem intimidating. Most employers are required to complete I-9 forms for all new employees, but proving their eligibility to work in this country can be difficult. Furthermore, several states, including my home state of Florida, are starting to crack down with the mandatory use of E-Verify for all employees. Desperate contractors may start using sub work (not to be confused with subcontractors, who are licensed and insured), which can lead to other problems.

Although lawmakers see these immigration regulations as a way to control the borders, these restrictions can be devastating for contractors and the entire construction industry.

When can a contractor invoke a force majeure clause to be excused from performing contractual obligations owing to events beyond its control?

Nathan A. Cohen
Managing Partner, Los Angeles Office
Peckar & Abramson, P.C.

a headshot of Nathan Cohen of Peckar & Abramson

As always, the first step in determining a party’s rights and obligations is to review the contract. For those who review, negotiate and draft construction contracts, you already know that not every force majeure clause is created equally, and, in fact, due to recent world events impacting the construction industry, these clauses can vary significantly from contract to contract.

Before attempting to enforce a force majeure clause for events beyond the contractor’s control, a careful review of the clause should be performed to confirm whether the clause contains “catch-all” language entitling the contractor to an extension of the contract time for any event beyond its reasonable control. If the clause contains the desired catch-all language, then the contractor should be able to notify the owner of the triggering event while seeking a corresponding extension of the contract time. For contracts that do not contain the catch-all language, you will need to review the clause to determine whether the delay fits within one of the listed events for which an extension of the contract time may be granted. If it’s determined the force majeure clause doesn’t cover the delay, you should look for other provisions that might address the delay (for example, different site conditions clauses, provisions permitting relief for work stoppages/labors issues or government actions).

A related and important note regarding notice is to ensure that the notice to the owner is provided in the proper form and within the time required by the contract, as often failure to do so can lead to the contractor waiving its rights to seek relief.

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