Last week, I was selected as a Top 20 Under 40 professional by McGraw Hill’s South Central Construction magazine.  (…Thanks @SCConstruction…I’m humbled…)  In an exchange of emails, one of the editors asked me to identify some of the challenges for the construction industry in 2011 and how contractors should manage and deal with those challenges. 

What does the future hold for the construction industry in 2011?

I am no prophet, but here are my thoughts.  As a construction lawyer, I would say the greatest challenge for the construction industry is how to best manage current economic risks into project design, development and performance.  There has been a lot of litigation over the past few years largely attributable to economic factors, whether the issue has been the fallout from the loss of construction financing or an overwhelming increase in lien claims. 

In the future, public contracting will continue to see growth, but I think we will also see more bid protests stemming from increased competition, as well as more claims asserted by contractors and suppliers.  Another area of growth will be sustainability and green building, where parties will need to be prepared for new legal pitfalls, such as the LEED certification process or energy performance issues.

The best way to manage and deal with the economic challenges is to … prepare for them!  That means, taking assessment of your problem projects that occurred over the past few years and identify some of the pitfalls.  If your contract did not contain certain protections (such as an audit provision), then you may want to pull your contracts for the new year and review them.  If disputes arose because your personnel did not take appropriate precautions (such as securing guaranties and adequate financial security), then you may want to schedule a "refresher" lunch with your contract administration staff.  Whatever the challenge, use your past experiences, learn from them, and prepare to succeed in the future.

Happy New Year to all … now let’s get to work!

Image: bb-matt

On Wednesday, I will be packing up our van full of kids and heading to Tulsa, Oklahoma to visit my in-laws for a few days.  I wish you the best this holiday season! 

My new firm chose a great organization, the Nashville Humane Association ("NHA"), as a recipient for charitable donations this year.  NHA is one of the oldest service organizations in Nashville, founded in 1946 to protect the well being of animals in Davidson County.  NHA is is a no-kill shelter, and they do amazing work in our area.

As shown in some of these pictures, John Partipilo of the Tennessean agreed to participate in our holiday charitable event.  Kevin Hartley … I mean … Santa showed up to take some gift requests from the animals.  Everyone had a great time, including fellow attorney JJ Johnson and family (shown left).

There is still time for you to make a year-end contribution to NHA.  If you want to make a donation, please contact Joanna Stanfield.  Woof! Woof! …  I mean … Happy Holidays!

Last week, Jim Gray (chief executive of Gray Construction) flew to New York for a round of meetings.  As reported in the New York Times, it was Gray’s newly acquired title as Mayor of Lexington, Kentucky that prompted his visit to New York to chat with Mayor Bloomberg.  Contractors and politics … what can we learn from this duo?

There are significant similarities between the successful construction executive and the local politician.  Consider the NY Times’ job description of the mayor:

. . . to oversee the police, fire and school departments, and to make sure the potholes are filled, the snow is removed and the budget is balanced. An energetic mayor can create jobs far more directly than the federal government — by helping lure new industry to town, or giving companies tax breaks to help them expand. He or she can push for new development — and then, with any luck, preside over the ribbon-cutting when the development is complete. It is probably the most hands-on job you can have in government, and the one where you can most easily see the fruits of your labor.

A successful construction executive, who is involved in all aspects of the company and its projects, has similar traits.  In the end, it is about being a "customer focused" leader — whether you a talking about mayor or chief executive officer. 

But you don’t have to run for office to be involved politics.  It is equally important to follow the legislative trends, which you can do through industry groups like the Associated General Contractors of America or the American Road and Transportation Builders of America.   For example, earlier this year the Florida legislature attempted to raid the Transportation Trust Fund to pay for general expenditures.

Enter the contractor into the political process … Bob Burleson of the Florida Transportation Builders’ Association (FTBA) recognized that the proposed raid would only push the real budget problems into the future, while freezing new transportation projects and eliminating tens of thousands of jobs in the present. An FTBA rally drew hundreds of protestors to Florida’s Capitol. This message came through loud and clear in Tallahassee: Governor Charlie Crist prevented the raid with a veto.

So, whether you are seeking govern a city with sound business experience like Jim Gray or seeking to defeat bad policies and legislation like Bob Burleson … get involved!

Image: wallyg

Earlier today, outgoing Governor Phil Bredesen spoke at the final 2010 membership lunch of the Exchange Club of Nashville.  Bredesen addressed numerous successes over the past eight years as governor, including conservation efforts to set aside 350,000 acres of land in Tennessee, economic development opportunities such as landing a new Volkswagen plant in Chattanooga, and his work to push solar and other alternative energy sources.

Aside from the Governor’s political ponderings, I took away a few "lessons learned" from the leadership style of this man who served eight years as Mayor of Nashville and eight years as Governor of Tennessee.   Whether you have to get along with a few development partners chasing a new alternative energy idea … whether you lead a crew of 10 masonry contractors complying with the new drug safety provisions .. or whether you manage a couple thousand employees worldwide in implementing a new information technology system, here are a few leadership lessons that I picked up from the Governor:

  • Increase expectations.  As a political leader, Bredesen wanted to leave office with the citizens of the state having a better expectation of government and its leaders than when he entered office.  As a business leader, you should want to raise the expectations of your partners, management and employees.  You should instill the sense of "possibility" in that financial success can be achieved, even in hard times. 
  • Pick to succeed in few areas.  For Bredesen, this meant concentrating on a few areas for the success of the state … and then doing that work "really well."  In the construction world, it could be an active decision to improve project administration and documentation in the new year.  For the developer, it could be chasing one particular investment really hard, as opposed to a few potential opportunities with less vigor. Whatever your industry, pick a few areas for success, work hard, succeed, and then expand your focus.
  • Lead from the center.  Bredesen spoke about the challenge of the election process. "Elections are fun," he said. "But, in this democracy, you have to eventually push aside the campaign signs." Bredesen concluded that the real trick in leadership is not how to win the election, but how you find common ground to solve problems after the election.  Today’s business leaders need to do the same.

Governor Bredesen said is working closely with Governor-elect Bill Haslam, who will take office in the new year.

As the college football seasons comes to an end, USA Today had a special report on the salaries of coaches, as well as a great article on coaches’ contracts.  The article described how some schools have the freedom to include "unusual provisions" in their contracts. 

 

How’s that for bargaining?  Middle Tennessee State coach Rick Stockstill’s contract includes a provision that if he terminates his agreement without cause and signs with another Division 1 school, then MTSU can accept either a $200,000 payment from Stockstill or require his new school to enter a contract to play a game with MTSU.  Purdue’s coach Danny Hope was more concerned about his personal affects, as his contract allows him to keep personal items and records, including playbooks, notebooks and other documents, upon termination or expiration of his contract. 

Did you know that you can be equally creative with your construction contracts?  A contract is about defining transactions and relationships. It is a set of instructions that "instructs" the parties on how to perform in various circumstances.  Although the contract should have some standard "must-include" provisions, you can include special language to address any situation conceivable.  Here are some examples:

  • Consider a cost-savings bonus.  Many construction projects include a cost-plus price, which means the owner pays the contractor the cost of the work plus a fee for the contractor’s services.  In this instance, the parties may consider including a guaranteed maximum price.  To provide an incentive for the contractor to come in under budget, parties often include a cost-savings bonus where the parties split any savings. 
  • Consider an early completion bonus.  Many times you hear about liquidated damages and penalties assessed against the contractor for delays in completion of the work.  As an incentive to get the work completed before schedule, consider including an early incentive payment.  But be clear in your words, as one contractor recently had to litigate the issues of an early completion bonus because the owner would not pay.
  • Consider non-monetary compensation.  Just as football coaches are thinking outside the box on their contracts, parties to a construction contract (whether owner, contractor, subcontractor or supplier) can be creative with the compensation.  Perhaps this construction contract may be the basis of a supplier contract that includes other projects and bulk savings for materials.  Perhaps the owner wants to negotiate a shorter warranty period with unit prices for certain repair and maintenance items. 

There are few limits (…perhaps statutory prohibitions…) to what the parties can include in their construction contract.  Think outside the box.

Image: pobrecito33

If you are a contractor, you love hearing about these types of boxing tales: Contractor works his butt off. Owner benefits from the accelerated work. Contractor seeks early completion bonus. Owner rejects the claim based upon technicality. Contractor fights in court … fights on appeal … and wins! 

That is exactly what happened in Ray Bell Construction Co. v. TDOT (pdf), a 2-1 "split decision" released by the Court of Appeals of Tennessee on November 29, 2010.  In RBCC, the claims commissioner awarded Ray Bell Construction Company a $2.5 million early completion bonus.  The primary issue in dispute was whether the completion date in the parties’ contract could be amended or moved to account for the impact of increased quantities and other delays.  TDOT argued that the completion date could be modified for purposes of the disincentive payment and liquidated damages, but under no circumstance could the date be modified for purposes of the incentive payment.  The contractor argued that the date could be modified for all purposes, including the incentive payment.

The primary issue in the litigation was whether the contractor could rely on evidence of other projects where TDOT had granted an extension to the incentive date.  During the dispute, the contractor learned from TDOT officials that there was a list of "existing" projects where TDOT and its financial participant, the Federal Highway Administration, had agreed in a set of letters between them that the incentive date could be moved, despite a change in FHWA policy.  Although the RBCC project was existing at the time of the TDOT-FHWA letters, it was not included on the list of "existing" projects. 

In the majority opinion, the court of appeals affirmed the claims commissioner’s finding that “a definite latent ambiguity exist[ed] for which parol evidence not only is admissible, but frankly, absolutely necessary in both understanding and deciding the issues in this case."   In his dissenting opinion, Judge Swiney believed that the parties’ contract was "crystal clear" in not allowing a modification to the incentive payment date.   The RBCC decision is a worthy read for a number of reasons:

  1. The decision provides a good overview of the public contracting claims process. Like many other jurisdictions, the Claims Commission in Tennessee resolves claims involving tax recovery, state employee workers’ compensation, negligence by state officials or agencies, and contract claims involving the State. The RBCC dispute went to trial before a claims commissioner and was appealed to the court of appeals.
  2. The decision summarizes the two sides to a contract interpretation question.  Like almost every construction dispute, the contract will determine the rights and obligations of the parties.  In this case, a $2.5 million early incentive payment was at stake and the decision turned on whether there was an ambiguity in the parties’ contact and what evidence could be used to resolve that ambiguity.  The majority and the dissent describe both sides to the issue.
  3. The decision involves a truly "interesting" factual story.  As noted above, the dispute involved a multi-million dollar claim … design delays … easement delays … unexecuted change orders … quantity overruns …  contract ambiguities … a compelling letter by the state agency … a compelling letter by the federal agency … and much more.

Will there be a Round 3?  Don’t know.  TDOT can file an application for permission to appeal to the  Tennessee Supreme Court, which must be filed within 60 days of entry of judgment by the Court of Appeals.  According to the appellate rules, the application shall be granted if two members of the Supreme Court are satisfied that the application should be granted.  In determining whether to grant the application, the Court looks to: (1) the need to secure uniformity of the decision; (2) the need to secure settlement of an important question of law; (3) the need to secure settlement of questions of public interest; and (4) the need for the exercise of the Supreme Court’s supervisory authority.  At this point, it is a waiting game on whether there will be Round 3.

[Note: I was one of the boxers in the ring, along with lead counsel Greg Cashion of Smith Cashion & Orr PLC, at the trial court and court of appeals, but I moved law firms before oral arguments in the appeal. Special thanks to Greg for allowing me to write about this victory.]

Image: Fonzie’s Cousin

Today’s guest post is by fellow Stites attorney Bill Gorton, who acts as national counsel to numerous clients on natural resource, environmental regulatory and land and water resources matters. He has been counsel in the development of over 10 power plants. If you have questions, you can contact Bill by email or phone at 859-226-2241.

 

It has been more than ten years since the Federal Trade Commission (FTC) revised its guidance to American industry regarding what are appropriate claims of “eco-friendly” products.  Since then, substantial marketing efforts by manufacturers to tag their products as “green,” “recyclable,” “degradable,” “renewable,” “free of ______,” “eco-friendly,” “certified,” “carbon neutral,” and other environmentally friendly claims have proliferated.

Whether or not such claims can be substantiated has drawn the attention of the FTC as it has recently published proposed revisions to its “Green Guides” to “deter” marketers from making misleading environmental claims.  In its press release on October 6, 2010, announcing the newly proposed Green Guides, FTC Chairman Jon Liebowitz noted that “businesses have increasingly used ‘green’ marketing to capture consumers attention, …but what companies think green claims mean and what consumers really understand are sometimes two different things.”

The FTC found, through its own intensive consumer perception studies, that its Guides were in need of updating and tightening if there is to be market place credibility regarding environmental representations to consumers.  It frowns on general “environmental friendly” claims, without more information to back up the advertising slogans.

Published on October 6, 2010, the revised and strengthened Guides admonish marketers about certain types of product representations including several new categories.  Several of those categories and their context include:

  • Unqualified Certifications– The FTC found that “seals of approval” and similar general certifications often do not specify the basis for such certifications.  The FTC advises that general environmental benefit claims should be clear and specific.  General “eco-friendly” claims are prohibited since such claims are not specific and cannot be substantiated.
  • Buzz Words– Environmental protection related terms require details.  Words such as “degradable,” “compostable” and “free of” must specify the basis and details related to the description.
  • “Renewables” defined – The use of the term “renewable,” such as “renewable energy” or “renewable materials,” are often misleading, and marketers may not make unqualified claims if, for example, any part of the product was made using fossil fuel-derived energy.
  • Carbon Offset Claims – Marketers must disclose if emission reductions that are being offset by a consumer’s purchase will not occur within two years.  Offset claims may not be made if the producer is already required to offset by law.

The FTC is seeking comments to the proposed Green Guides by December 10, 2010.  Comments can be submitted to https://ftcpublic.commentworks.com/ftc/revisedgreenguides/.

I woke up very early this morning so that I could get a jump start on all the work projects that need to get done before the Thanksgiving weekend.  As I tiptoed down the hallway, the rumbling little snores of 6 children made me smile.  Yep, I am thankful for many things … but especially family and friends.  I wish you the best this Thanksgiving Holiday.

Happy Thanksgiving

If you are traveling by vehicle this weekend, did you know that road construction projects in many states take a holiday, too?  For example, The Tennessee Department of Transportation is halting all lane closure activity on interstates and state highways in anticipation of higher traffic volumes this weekend from noon on Wednesday, November 24 until 6:00 a.m. Monday, November 29.

The lane closures certainly help alleviate some of the traffic congestion this week.  However, it will also impact all of the construction activities and project schedules.  When preparing the construction schedule for the holidays, here are a few tips: 

  • Remember to include the public holidays and extended days. You would be surprised that regular holidays are sometimes left out of the schedule.  It is equally important to account for extended days, even where the public holiday may only be one day.
  • Move critical tasks before or after the holidays. Distractions during this time will undoubtedly affect morale, concentration and longevity. People want to be with their families and productivity often suffers.
  • Account for lighter days beginning the second week in December. While you don’t have to write off the entire month of December, a realistic schedule of work allocates a lesser number of hours per day as your approach year end.
  • Encourage your project team to hit goals during limited work times. The project manager is not going to get very far by pressuring the team with threats and commands. Instead, create an incentive for productivity—i.e., perhaps a shopping gift card or gift certificate for a restaurant.

Some project managers, consultants and experts allocate seven hours in a regular day because workers realistically are not productive for a full eight hours. The best way to ensure quality work from your construction employees during the holidays is to plan for the inevitable loss of productivity.

Image: amy.sept

I have often wondered whether there is such a thing as too small a dispute.  Well, the parties in Earl Faulkner v. Tom Emmett Construction Company (pdf) determined to take their $3,000 construction dispute to the Tennessee Court of Appeals.  In the end, the Court gave some good instructions on the "first material breach" rule, which applies in many states.

 The Owners hired the Contractor to build a new driveway at their home.  The total contract price was $18,000 and the Owners refused to pay the balance of $8,000 because they were dissatisfied with the workmanship of the driveway.  The Owner sued the Contractor, seeking the cost to remove and replace the allegedly defective driveway. The Contractor claimed that the driveway was properly constructed and filed a counterclaim for the remaining $8,000 balance owed on the oral contract.

The trial court concluded that any problems with the driveway were not sufficient to require that it be removed and replaced.  Because there was a problem with how the concrete on one portion of the driveway had been poured, the trial court ordered the Owners to pay only $5,000 of the remaining
$8,000 owed on the contract.

The appellate court affirmed the findings of the trial court, but modified the judgment.  The court held that the Contractor committed the first material breach of the contract when it failed to construct the driveway in accordance with the plans.  Accordingly, the Owner was relieved of any obligation to pay:

A party who has materially breached a contract is not entitled to damages stemming from the other party’s later material breach of the same contract. Thus, in cases where both parties have not fully performed, it is necessary for the courts to determine which party is chargeable with the first uncured material breach.

. . . We conclude that [Contractor’s] admitted failure to use a gravel base prior to pouring the driveway extension constitutes a material breach of the contract, thereby prohibiting [Contractor] from challenging [Owner’s] later material breach of failing to pay the balance of the contract price.

Based upon the above reasoning, the appellate court concluded that the Owner was not required to pay the remaining $3,000 breach of contract damages awarded by the trial court. 

While the amount in controversy in Faulkner does not seem significant, the decision provides a good illustration of the first material breach rule.

Image: DavidDMuir

I recently read a BNA article on commercial arbitration entitled Achieving the Perceived Cost Savings and Expedience of Commercial Arbitration (pdf).  In the article, Chicago attorney William O’Neil identifies six essential terms you should include in your arbitration clauses.

While I agree with most of the essential terms, the recommendations really depend on the type and size of the dispute.  Here are O’Neil’s recommendations to include in your arbitration provision, along with some of my thoughts for construction disputes in particular:

  1. Insist on a Single Arbitrator.  Three member panels are, indeed, expensive.  While the average case cannot support the arbitration fees for a full arbitration panel, some construction disputes are of such a magnitude that a panel is necessary.  In other words, do you want one arbitrator deciding your $10 million claim?  There are ways to structure your dispute provision to have a single arbitrator for claims under $1 million and a three-member panel for claims over $1 million.
  2. Limit the Time to the Hearing, the Length of the Hearing, and Time to Decision.   I wholeheartedly agree with this recommendation, as arbitration should achieve two of its primary intended purposes … cheaper and quicker.  The problem is that parties rarely (if ever) spell out these deadlines in the contract and wait until the dispute arises to then argue about the time and length issues.
  3. Adopt a Notice Pleading Standard for the Notice of Arbitration.  Most arbitration disputes begin with a Demand for Arbitration, which is usually no more than a one-page form that provides the name of the parties, the nature of the dispute and the amount in controversy.  As a construction attorney, I generally will include a multi-page complaint attached to the demand for arbitration. (Side bar: I include a similar complaint with contractor claims against the State of Tennessee even though the initial form does not require it.)  By requiring a "notice pleading" standard in your dispute provision, you are required to describe the basis of your claims or you have more information to review the claim, depending on whether you are the party seeking or defending arbitration.
  4. Limit Discovery.  Again, depending on the nature and size of dispute, you may want full discovery just as you would have in the litigation process.  The point here is to decide the extent of discovery the parties want at the "contracting stage" as opposed to waiting for the dispute to arise and then be subject to either an arbitration rule of AAA or JAMS or no rule at all.
  5. Authorize Arbitral Sanctions.  I agree that the decision-maker should have authority to resolve preliminary disputes, grant interim relief, and award sanctions.  Again, the key is to include this power in the dispute resolution provisions.
  6. Ease the Confirmation Process.  Since arbitration is a creature of contract, the parties can contractually agree on its binding nature.  As O’Neil points out, arbitration is "wasted if there is a delay in confirming and enforcing a favorable judgment."  The problem is remedied by simply including a clause in your arbitration provision that vests jurisdiction in every district court in the United States to confirm and enforce the award.

Again, O’Neil makes some great points … but some of these may require tweeking depending on the nature and extent of the dispute.  Make sure you check out the Model Arbitration Clause in the article for some sample language.