It happens all the time! The owner-contractor agreement contains a “no damages for delay” clause; a clause requiring that all changes be in writing before work is performed; and a clause requiring partial lien waivers and releases with each periodic payment.  And yet we see a claim for delays and extras filed at the end of a construction project that challenges these very contract provisions.

The Court of Appeals of North Carolina recently grappled with this exact scenario in Gamewell Mechanical, LLC v. Lend Lease Construction (Sept. 1, 2020) (PDF).  The project involved the new construction of three buildings in Durham, North Carolina.  The mechanical subcontractor filed suit against the prime contractor for $2.7m for breach of contract for nonpayment, claims for delay damages and enforcement of its lien rights.  The prime contractor argued that subcontractor’s claim should be limited to its contract balance of approximately $500k in retainage. Ultimately, the trial court awarded the subcontractor more than $800k for its claims.

On appeal, the contractor argued that the award should have been limited to the $500k in retainage.  By executing lien waivers and releases with each periodic payment, the contractor argued, the subcontractor had waived all of its claims other than retainage. The parties’ lien waiver contained language where the subcontractor could have reserved disputed claims, but the subcontractor never did so. The appellate court held that the trial court properly rejected a majority of the subcontractor’s claims that were subject to either the “no damages for delay” clause or the period lien waivers.

Notably, the trial court made a distinction for “day-to-day” or “daily” changes in the field for extra work, which was credited by the appellate court as follows:

[I]t is undisputed that there were delays, numerous Change Orders issued, re-sequencing, and coordination issues occurring throughout the project. Given the daily problems that arose as a result of these issues, [subcontractor’s] failure to reserve claims regarding the day-to-day miscellaneous items done in the field at the direction of [contractor] is not a material breach-of-contract. . . . The waiver and release documents submitted with each pay application could not cover claims not readily apparent due to daily changes on the job.

The appellate court held that competent evidence supported the trial court’s decision on each of these points.

A New Exception?

The opinion is notable because of the court’s findings that are highlighted in bold and underline above. When I read the court’s opinion, I started to think: (1) Is there now a “daily changes” exception to lien waivers and releases? (2) Are day-to-day miscellaneous items compensable even where a party fails to reserve their rights on these type of  cumulative claims? According to the court in Gamewell Mechanical, the answers these questions is yes. It would be interesting to see what other courts have reached similar conclusions.

Question: Do you know any similar cases?  If so, please share in the comments below.

If you are left in the dark about something, you don’t have the information you should have to make an informed decision.  Delay claims on a construction can be confusing, especially when you think about the delay to the work being performed and the disruption to other activities.  A few years ago, I found a case the shed some light on the delay v. disruption distinction.

In County of Galveston v. Triple B Services, LLP, decided on May 26, 2016, the Court of Appeals of Texas reviewed a contractor’s claim for damages on a road expansion project.  While the legal issue focused on the County’s right rely on the defense of sovereign immunity, the Contractor’s (and it expert’s) characterization of the damages was critical to the outcome of the case.  Since the applicable statute waives a county’s sovereign immunity for breach-of-contract damages that are “a direct result of owner-caused delays,” the Court had to decide whether disruption damages—as opposed to delay damages—were recoverable.

The Contract.  The County entered into an agreement with the Contractor to expand a three-mile stretch of road. Under the contract, the County was responsible for moving gas, water, and fiber-optic utilities.  According to the Contractor’s expert, the contract established a “baseline schedule … created by the County’s engineer,” which showed a starting date with unhindered access along the area of the road where the utilities were located. The contract allowed for “delay damages” if the Contractor’s request for those damages “is determined to be compensable.”

Owner-Related Delays.  Although the Contractor’s plans for the construction project anticipated that the County would move the utilities by a particular date, those utilities were moved almost one year later.  Nevertheless, the Contractor completed its work within the contract time.  According to the Contractor, it incurred additional costs to hand-form manholes, set and reset barricades, extended field office overhead, as well as additional labor, equipment, street cleaning, flagging, and traffic control—all of which resulted from the County’s delays in moving the utilities.

Sovereign Immunity Argument.  The County argued that Section 262.007 of the Local Government Code waives a county’s sovereign immunity for construction contracts involving claims for delay damages.  Here, the County relied heavily on the testimony of the Contractor’s expert witness who testified about the Contractor’s damages resulting from the County’s delays. Since the County did not timely move the utilities as anticipated in the original construction plan, that schedule of work was “disrupted.”  By seeking disruption damages, the County argued, the Contractor sought damages that were excluded from recovery under the statute.

So, are these delay damages or disruption damages?

On appeal, the Contractor agreed that its “disruption damages” do not meet the definition of “delay damages” as traditionally understood in the construction law arena. However, it argued that the statutory waiver of sovereign immunity for damages that are “a direct result of owner-caused delays or acceleration” includes more than “delay damages” as defined under construction law: “Disruption and lost productivity costs are … recoverable damages under the clear meaning of the words of the statute.”

The Court turned to the construction law bible written by Phillip Bruner and Patrick O’Connor to address the inquiry, noting that delay damages have a technical definition distinct from disruption damages:

 Delay damages refer to damages “arising out of delayed completion, suspension, acceleration or disrupted performance”; these damages compensate the contracting party that is injured when a project takes longer than the construction contract specified. . . .

Disruption damages, on the other hand, are for a project that may be timely completed but nevertheless includes disruption to the contractor and compensates it for “a reduction in the expected productivity of labor and equipment—a loss of efficiency measured in reduced production of units of work within a given period of time.” . . . Disruption damages can also be caused by an “event [that] both disrupts and delays a critical path activity….” A project that finishes on time but at greater expense because of disruptive events or scheduling errors presents a claim for disruption damages.

The Court’s Decision.  Based upon a plain reading of the statute, the Court concluded that Section 262.007 allows a claim for disruption damages against a county “if the disruption damages directly result from the county’s delay in performance of its contractual obligations….” Significantly, the statute did not distinguish between “delay damages” and “disruption damages” that are directly caused by the breaching party’s delay.

Lesson Learned.   According to the expert in this case, the Contractor incurred significant increased costs to finish the work on time. The Court’s opinion provides an excellent roadmap of the type of expert proof required to establish the damages sought by the Contractor, including the following:

  • The expert examined the “daily summaries” of work and “the manner [the project] was intended to be executed … [and] the manner by which the project was actually executed and some of the specific things that caused that deviation.”
  • Using this information, the expert testified that the Contractor had to adjust its approach to accommodate the County’s delay by “segmenting the work into smaller segments of the roadway, waiting on the utilities … just a various sundry of impacts that caused them to not be as productive from a direct labor standpoint.”
  • The “waiting on the utilities” caused the Contractor to waste “man-hours trying to deal with working around utilities and bouncing around back and forth and dealing with not being able to set barricades and … progress the roadway [in the way] that they thought they would be able to in an unhindered manner.”
  • The expert also testified that the Contractor had to add “a number of crews because they were working in so many different areas to try and progress the work….”
  • Finally, the expert opined that the Contractor’s clean-up crew also had to perform additional work because “whenever you slow down that progression and create situations where you’re excavating and you’re staging materials in one location[,] … you wind up with … more debris than if you were just moving in a steady progressive manner.”

Although the project in this case was finished on time and the Contractor never completely “stopped” its work, the Court readily found that the Contractor was “hindered” because of the County’s actions.  Since the type of recoverable damages include those that are “a direct result of owner-caused delays,” the Contractor could recover its disruption damages.

With six kids, not a week goes by that I don’t catch one of them running through the house.  In fact, I was on a call this morning when out of the corner of my eye I saw a blur racing down the hall.  I did a double take—not knowing which one it was—and whispered loudly, “Hey you! Please no running!” As a construction litigator, every so often you read a case that leaves you with the same feeling.

In Wickersham Construction and Engineering, Inc. v. The Town of Sudlersville, Maryland (Sept. 22, 2020) (PDF), the United States District Court for the District of Maryland held that a construction contractor had waived certain payment obligations by accepting late payments without, but that it did not waive the same payment obligations with respect to future payments.  Stick with me … there’s more.

The contract. The parties’ agreement required the owner to make payment within 20 days of submission of an application for payment by the contractor.  The agreement also contained a provision that any modification of the contract was required to be in writing.

The court’s decision. At trial, the contractor established that most, if not all, of its payment applications were paid late beyond the 20-day period.  However, the court held that the contractor waived the contract requirements by accepting the front end late payments without objection:

The court finds, however, that [contractor] waived the payment deadlines as to the first eight payments because it accepted them late without sufficient objection. “Parties to a contract may waive the requirements of the contract by subsequent oral agreement or conduct, notwithstanding any provision in the contract that modifications must be in writing. If a provision in the contract requires modifications to be in writing, it must be shown, either by express agreement or by implication, that the parties understood that provision was to be waived.”

Notwithstanding the finding of a waiver as to the first eight payments, the court concluded that the contractor did not waive the payment terms as to subsequent payments: “… the fact that [contractor] initially accepted some late payments does not show a mutual consent to modify the payment provision as to all future payments.”  Ultimately, the contractor suspended its work for nonpayment for approximately four months.

So what? You may have done your own “double take” as you consider why the court concluded that the contractor waived the time requirements for part of the payments while at the same time concluding that the overall payment provisions were not waived.  Ultimately, it came down to the contractor’s decision to exercise its right to suspend work. Since it accepted the original payments without objection or claim for interest, the court felt that the contractor could not complain about the lateness of those payments. But eventually, the contractor suspended work for nonpayment and the court found such conduct to actually affirm (and not waive) the contract obligations.  Lesson: Read your contracts, reserve your claims, and exercise your rights.

 

 

You probably saw last month’s report about a major accident at a construction site in downtown Miami, Florida. Investigation is still underway as to the root cause.

This is a good reminder of the lessons to learn when investigating or handling an accident on a construction site. These include:

  1. Prepare before the accident. It is important to prepare before the accident by having a checklist or best practices protocol to follow if an accident should occur. This should include identifying chain of command for notice purposes, identifying internal investigation team members, identifying who will be a company spokesperson, and identifying your risk management team (insurance and legal).
  2. Act diligently when an accident occurs. Don’t waste all that preparation time before the accident and then not follow your protocol. Make sure medical issues are resolved immediately and lock down the site for evidence preservation. Make a list of all witnesses. Photograph and video the conditions.
  3. Organize post-accident activities. There may be contractual obligations, regulatory requirements and public relation issues that will come after the accident occurs. Make sure that you review your contract to comply with any notice requirements that may need to be given. If OSHA becomes involved in the workplace accident, then prepare for the investigation with your safety team and risk management team.
  4. Manage the accident documents. While on the job site, an investigator may ask to see certain records such as the OSHA 300 logs, safety manuals, first aid / medical records, training records, safety meeting minutes, inspection records, and accident reports. In order to keep track of what has been requested and provided to the investigator, make a list of all requested documents and keep a transmittal log of how various documents were transmitted.
  5. Understand privileges. Please note that accident reports should be reviewed by your attorney prior to production to any investigator. Accident reports should be limited to the facts and should not contain any speculative theories or guesses as to why an accident occurred. If your attorney has directed the preparation of the accident report, that report is privileged and should not be produced to the inspector.

Most construction companies, at some point in their life, will experience a job site accident. It is important for your company to have a plan in place for the day. What lessons learned can you share?

The last six months have been a whirlwind, especially for this single dad of six school children (who are no longer in school) while I work from home/office/car/jobsite/court.

During the first week of the pandemic, I wrote an ebook for contractors on how to deal with COVID-19. Over the next month, I answered countless phone call and emails, asking about safety and employment issues in the construction industry.  Weeks four through six had me revising safety policies and employment policies to deal with the impact of COVID-19 on the day-to-day operations of contractors, subcontractors and suppliers.  Over the past two months, I have reviewed more construction contracts than ever.

So, what have I learned about the construction industry, working from home and the life of a single dad?  Here are a few lessons:

    1. The two most important attributes for success have been communication and flexibility. Of course, communication is always important in life, but it is especially important when you face challenges and changes. While working from home, this required an open dialogue with my colleagues and assistants who were able to understand my new “working hours” and assist with technology issues. As far as flexibility is concerned, change requires an ability to adapt.  The better able you are to respond to change, the more likely you will succeed. For me, once I learned that I would be working from home with six kids in a remote learning environment, I had two choices: complain or adapt.  So I turned a play room into a new home office; I set up working stations in the house; and I got a 6-person daily calendar to—what do they call it in the construction industry—identify and schedule the critical activities of numerous trades!  Communication and flexibility have helped me adjust to the post-COVID practice of law.
    2. The construction industry is resilient as ever.  I made major move from Washington, DC to Nashville, Tennessee in 2006 during the start of the housing collapse.  While it was certainly challenging for me and my family, I saw many contractors either shut doors or tighten their belts. The year of 2020 has been no different.  We saw the construction industry as a whole be classified as “essential” work, enabling projects to continue.  We saw new OSHA and safety standards be put in place, requiring the whole construction team to adjust “how” work was being performed.  Resiliency is defined as “the capacity to recover quickly from difficulties; toughness.”  Let me say this: the construction industry has toughness!
    3. You can only manage risk if you take the time to manage the risks. What does that even mean?  It means that there is no better time than now to realize that “words matter”. It means that what you have agreed to in your existing contracts will affect how claims are handled as delays are mounting, job sites are facing new health hazards, and payment is being held up.  Some clients have not updated their new form contracts; some clients have.  Some clients don’t have an attorney review new contracts; some clients do.  If there were ever a time to invest a little time on the front end of a project with risk management, now is the time.

Let me ask you: how have you adjusted to a world pandemic and what lessons have your learned over the past six months?

I have been thinking of launching a leadership mastermind for construction professionals.  And this idea came to me over the past month as the world basically came to a complete halt—except for the construction industry, which has instead been on a roller coaster ride.

You see, most of the states and cities have enacted various “stay at home” orders with various exceptions for construction work, depending on the locality, the type of construction work, or the status of the project.  Executives, management and office personnel are working from home, while project managers, superintendents and field workers are clocking in at the jobsite on a daily basis.  There are stresses in the new “home” office, as well as new challenges on the project site.

And so I started to have more and more people asking me how to respond to the changes in the construction industry and how to adjust professional and personally. If you have seen me speak or if you have read of any of my articles, you know that leadership is just as important as construction accounting or risk management to your project and company’s successes.

My solution is a small, intimate group of construction professionals and leaders who are really focused on adapting and rebuilding through this global pandemic—to come out stronger, more financially secure, and risk ready for their companies and families. This will be a group of like-minded individuals, working with each other, helping each other, sharing different strategies and tactics with each other.  It’s going to start with this first group of founding members, but it is going to evolve into a group of industry leaders committed to rebuilding for success.

And I’d like to invite you to join me as a Founding Member. Again, this isn’t something that has been created yet and I am gauging the level of interest.  But, as a Founding Member, you get to participate in a six-week program. We will have weekly calls, where we will be given a challenge at the end of each and will report back our successes the following week.  We will develop content together for a workshop that will be given to your business or group. Finally, as a Founding Member, your only commitment is that you will show up and do the work. If you do so, I will cover the cost of this first 6-week mastermind.

If this sounds interesting to you and you’re interested in being considered to join as a Founding Member, simply send me a private message or email to mdevries@burr.com.

Many jurisdictions have allowed construction activities to continue through the COVID-19 pandemic. But the “stay at home” restrictions have varied from a state to state. Restrictions vary depending on whether the project is public infrastructure, to commercial, to health care, to multifamily and residential. (Make sure that you confirm your particular jurisdiction’s orders to see what restrictions are in place.)

When the Center for Disease Control (“CDC”) initially released its guidelines on social distancing in late March (for workplace, school and homes), it would be weeks before construction-specific guidelines were released.  Even then, the CDC did not give a clear answer for how to conduct construction activities when the work required closer proximity of workers.  On April 20, 2020, the CDC released new guidelines for “critical infrastructure workers,” and on April 21, 2020, the U.S. Department of Labor’s OSHA released an alert that basically adopted the CDC guidelines.

Remember, words matter.  In the following OSHA Alert, I have highlighted the terms that I believe continue to give contractors leeway in continuing to work during this pandemic as long as training and safety precautions are taken:

Measures that can help protect employees working in construction include:

      • Encouraging workers to stay home if they are sick;
      • Training workers how to properly put on, use/wear, and take off protective clothing and equipment;
      • Allowing workers to wear masks over their nose and mouth to prevent them from spreading the virus;
      • Continuing to use other normal control measures, including personal protective equipment, necessary to protect workers from other job hazards associated with construction activities;
      • Advising workers to avoid physical contact with others and directing employees/contractors/visitors to increase personal space to at least six feet, where possible. Where work trailers are used, all workers should maintain social distancing while inside the trailers;
      • Promoting personal hygiene. If workers do not have immediate access to soap and water for handwashing, provide alcohol-based hand rubs containing at least 60 percent alcohol;
      • Using Environmental Protection Agency-approved cleaning chemicals from List N or that have label claims against the coronavirus; and
      • Encouraging workers to report any safety and health concerns.

The crux of any safety policy or training program involving construction workers is to “avoid physical contact” and implement physical distancing protocols.  If the work requires multiple crew members in close proximity, then steps should still be taken to avoid physical contact, as well as making sure the other hygiene recommendations are followed to minimize risk.

I am not going to even attempt to describe what has occurred over the past week.  You’ve read it online. You’ve watched the daily news reports. You’ve listened to the radio. And you’ve even had to adjust your own schedule to accommodate school closings. While working remotely myself, my mobile phone has been constantly pinging me with calls, emails and texts—all asking substantially the same question: How do we response to this mess?

After four days of answering client inquiries (that’s my favorite part my job as a construction attorney), I decided to write an ebook addressing: (1) the most important legal issues facing contractors in this time of uncertainty; (2) the practical day-to-day issues involving site access, safety, wages, unemployment and other benefits; (3) tips for documenting impacts and delays related to supply chain interruptions, work stoppages, and labor/material cost increases; and (4) the top ten contract issues in dealing with this pandemic.

You can download a complimentary copy here: Best Practices – COVID19 and Construction Claims, but please do me a favor and subscribe to the blog on the sidebar to the right.  Just enter your email, and you will receive regular updates. And feel free to pass on the book to a friend or colleague with same request…subscribe to the right!

Contractor licensing violations raise serious concerns for all parties. For an owner, an unlicensed contractor may affect financing options on one end and the contractor’s entitlement to recover profits on the other end. For contractors, a licensing violation can have a crippling effect on all projects, the ability to perform, and the ultimate ability to recover amounts owed under a contract. For subcontractors and suppliers, an alleged licensing violation can be used as leverage to secure payment for labor and materials.

In Mississippi State Board of Contractors v. Hobbs Construction, Inc. (Mar. 6, 2020), the Supreme Court of Mississippi recently held that the Board’s decision to revoke a contractor’s license violated its Due Process rights because the Board had based its decision, at least in part, on prior complaints and allegations—grounds which the contractor had not been provided notice.  In this case, the Board revoked the contractor’s certificate of responsibility (“COR”), and the contractor sought a preliminary injunction enjoining the Board from revoking the COR pending appeal.  The trial court granted the injunction and ultimately reversed the Board’s decision.

The original complaint to the Board had been filed by a supplier who had not been paid approximately $13,000 for materials on a commercial project.  Although the contractor and supplier had reached a settlement agreement for less than the disputed amount, ultimately the contractor did not pay the supplier the settlement payment. The Board proceeded on its hearing for the alleged licensing violation, and neither the contractor nor the supplier appeared.  The Board’s investigator presented evidence about the failure to pay the supplier, which formed the basis for the Board’s revocation of the contractor’s COR.

Although the contractor was not given notice that prior closed matters would be considered, the investigator testified about the contractor’s history before the Board, including eight prior complaints for failure to pay a subcontractor. While all of the prior complaints had been resolved in the contractor’s favor, a review of the hearing transcript demonstrated that Board members considered the contractor’s prior alleged licensing violations and its reputation in the contracting community.  One Board member commented, “We’ve seen this guy every meeting.” Another Board member stated, “We know this guy is irresponsible. You know, if we let him continue doing business like this, it’s just gonna be a matter of time before we see him again.”

The Board voted 5-1 to revoke the contractor’s COR.  Both the trial court and the appellate court found that a contract dispute between a prime contractor and a subcontractor or supplier is outside the Board’s authority to regulate.  In addition, both courts found that the Board’s decision violated the contractor’s procedural due process rights because the contractor was not given notice that the Board would consider the prior complaints in the revocation decision. The appellate court noted: “But the Board’s minutes reflect that its members decided, after learning from the investigator that [the contractor] had eight prior complaints, that they were tired of dealing with him and that his license should be revoked.” Following a lengthy analysis of due process, the appellate court affirmed the trial court’s reversal of the Board’s revocation.

A couple of practical lessons emerge from the Hobbs Construction decision. First, as a contractor, it is imperative for you to stay up to date with your licensing requirements, whether you are contracting within the state of your principal office, or acting as a foreign entity performing work in another state.  Next, recognize that each state may have a different complaint process and you should cooperate fully and truthfully with investigators.  Finally, and perhaps most importantly, understand that many state licensing boards are not interested in investigating payment disputes that can be brought in civil court, so you are well advised to address those disputes as quickly as possible to avoid a regulatory licensing violation.

They say that hindsight is 20/20.  Who is they, anyway?  The old proverb means that it is easy to understand something after it has already happened. In the world of construction contracts, preservation of claims made in hindsight does not always get you what you want.

In Appeal of Matcon Diamond, Inc., ASBCA No. 59637 (Feb. 20, 2020), the Armed Services Board of Contract Appeals recently denied a claim for Eichleay home office overhead delay damages  because: (1) the contractor failed to show there was a critical path impact or that the Government’s actions impacted the critical path; and (2) the claim was barred because it was not presented prior to final payment. The opinion in Matcon Diamond is a good read for government contractors wanting to understand delay claims, critical path schedules, contractor delays versus Government delays, Eichleay formula for quantifying damages and understanding the difference between work stoppages and standby or idle periods of time. You can get a copy of the decision here.

As to the preservation of the contractor’s claim, the ASBCA held that the contractor submitted its claim for delay damages after receipt of final payment. The Government’s final payment defense is an affirmative defense on which the Government bears the burden of proof.  Final payment does not bar a claim where the contracting officer knows that the contractor is asserting a right to additional compensation, even though a formal claim has not been filed.

Based upon the record, the Board concluded that the contractor never presented, let alone formulated, a claim for extended home office overhead.  At the time the contractor submitted its final invoice (which was five months after completion), the contractor did not inform the contracting officer of its intent to seek additional compensation.  Nonetheless, the contractor argued that an email sent ten days after final payment had properly and timely put the government on notice.  The Board disagreed: “This email, however, does not establish that, at the time of final payment, [the government knew the contractor] was asserting a right to additional compensation.”

So what?  Again, the opinion is a good refresher on delay claims and the required proof for a contractor to support its claims.  But more importantly, contractors are advised to adhere to all notice provisions in the contract and applicable regulations, and especially, to submit notice of an intent to seek additional compensation before submitting a request for final payment.  Given the language in the Board’s opinion, it is also likely that a mere “reservation of rights” statement will be insufficient to actually put the government on notice of a claim.