The construction industry is broad and the legal concerns of industry members can be far-reaching. What seems like tomorrow’s problem often jumps to the forefront and becomes a high priority today. 2018 was full of moments like these – and it’s important to keep track of legal developments for a glimpse at what may be waiting around the corner. With that in mind, here are some of the most important legal developments for the construction industry from the second half of 2018.
Sureties play a vital role on construction projects. On federal jobs and state, county or municipal jobs, surety bonds are typically required. That means it’s important to stay on top of how the courts are treating surety agreements.
A recent decision in the Federal Circuit of the United States Court of Appeals went a long way to show how important payment and performance bonds are on federal jobs. In K-Con, Inc. v. Secretary of the Army, the court found that despite the fact that the Army had not mentioned payment and performance bonds in the contract, K-Pon was still required to produce them, as set out under the Miller Act. That shouldn’t come as a huge surprise – when federal projects are in play, abiding by the Miller Act should be expected. Still, this case shows that the obligations created under the Miller Act are serious and contractual terms won’t do much to affect those obligations.
Another recent opinion swings quite the other way when discussing obligations under contract vs. the Alabama Little Miller Act. In Keller Construction Company of Northwest Florida, Inc. v. Hartford Fire Insurance Co., the Alabama Court of Civil Appeals found that a pay-if-paid clause between the contractor and subcontractor prevented the subcontractor from making certain bond claims. Specifically, the subcontractor made a claim for the payment of retainage from the contractor where the contractor’s retainage payment was withheld by the city for whom work was being performed. Ultimately, it came down to the fact that the contingent payment clause had been clearly expressed in the contract. The court found that the contractor was not liable for payment due to the pay-if-paid clause, and as a result, the surety was not liable either.
Finally, and back to federal projects, a case in the United States District Court for the District of Columbia has indicated that sureties might run into previously unforeseen liability under the False Claims Act. In United States ex rel. Scollick v. Narula, a contractor allegedly created an LLC and assigned a disabled veteran as the leadership of the LLC strictly in order to become eligible for benefits in the bidding process for acquiring federal jobs. Of course, when a federal job is in play, bonding is required under the Miller Act – and where fraud has taken place, that fraud could also implicate the surety. In this suit, the court contemplated whether the surety who provided that bonding could be held responsible under the False Claims Act rather than just the contractor alleged to have committed the fraud. While the surety avoided liability here, it did not shut the door to potential future liability for similarly situated sureties – and that could be something to keep an eye on.
Speaking of sureties and public projects, there are a number of current events that may affect contractors, subcontractors and suppliers. Specifically, the border wall, government shutdown and procurement methods for public jobs have all been the subject of discussion of late.
Regarding the border wall, several large contracts have been awarded in anticipation of construction. In Rio Grande Valley, a Texas contractor was awarded $145M to construct six miles of the wall. Another contract was secured for at least $172M in Arizona for 14 miles of wall – and the total contract value could reach as much as $324M if all options are granted under the contract. These are huge numbers and the question remains – where is all this money going to come from?
That question leads to another development-the government shutdown. The shutdown, of course, is centrally focused on funding for the border wall. At the time this is being written, the government has been shut down for about two weeks, and there’s no immediate end in sight. But what exactly does that mean for industry members?
Unfortunately, a government shutdown will probably mean the receipt of a stop work order and result in a project in limbo. When a shutdown is in place, payments stop flowing and projects are delayed – and those (necessary) project delays will result in even more costs. But remember, the payment chain sprawls. Shutdowns impact contractors, but subcontractors, sub-subs and suppliers feel the hit that much more. With a shutdown in play, the money will stop flowing down the payment chain to these parties, and things can get uncomfortable in a hurry. With notoriously thin margins, many links in the construction payment chain will be put in jeopardy. For those performing work on federal jobs, the only option might be to sit tight or to focus resources on those jobs that are still progressing and resulting in payment. By the time this is posted, in all likelihood, the government shutdown will have reached a conclusion. However, with shutdowns more frequent these days, it’s important for those performing work on federal jobs to anticipate the potential for a shutdown at some point during the life of the project.
According to the Washington Post, natural disasters caused $155 billion in damages in 2018. The construction industry is in a unique position when these disasters strike. The aftermath of a disaster provides construction participants the rare opportunity to increase business while also providing an opportunity to rebuild communities – beyond just the buildings that house them. Of course, with the current rate at which disasters strike, it’s important that structures aren’t simply rebuilt in order to only suffer when the next disaster strikes. Rather, building to withstand the next disaster should be paramount. The contractors, subcontractors and suppliers best suited to build disaster-resistant improvements will be primed for success in the aftermath of the California fires and while rebuilding communities affected by the active 2018 hurricane season.
Finally, Opportunity Zones have been a new topic of discussion in late 2018, construction projects specifically tailored for these zones may take off going forward. With the passage of 2017’s Tax Cuts and Jobs Act, these zones were created to give preferential tax treatment to those making investments in distressed communities. It should be no surprise that, following natural disasters, the areas most affected have been designated as Opportunity Zones. Because of the tax benefits associated, these zones are fertile ground for construction and development projects - and substantial investment and development is expected. Naturally, greater investment and land development is music to the ears of contractors, subs and suppliers. So be on the lookout for opportunities to perform work in one of these zones. A map of designated Opportunity Zones is available at the Department of Treasury’s website.
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