How can construction firms protect themselves during materials shortages?

Rob Remington
Partner
Hahn Loeser & Parks LLP

A contractor must ensure that it:

1. Limits, without exception, any bid that includes materials to the timeframe committed to by the materials supplier for pricing and delivery.
2. Insists on a provision in the upstream contract allowing for escalation of materials costs and an extension of time for any material(s) for which the supplier cannot hold the price and guarantee a time of delivery.
3. Includes contract language that allows for compensation associated with early delivery and storage of materials that may be in short supply or difficult to find and secure.
4. Requires force majeure language in the contract that expressly includes materials shortages out of the contractor’s control.
5. Strictly follows all contract notice and change order provisions associated with requests for additional compensation or extensions of time where materials shortages are suspected or a schedule change may adversely impact the timing or availability of materials.

Ben Westcott
Co-Managing Shareholder
Andrews Myers PC

The DOL’s proposal will streamline the prevailing wage determination process, while also significantly raising the prevailing wages paid by federal contractors.

Updating the use of weighted averages if no single wage rate is paid to more than 30% of the workers and allowing the use of metropolitan rates as prevailing wages in nearby rural areas where insufficient evidence of wage rates is received will result in higher rates, particularly in rural areas where actual prevailing wages are lower. The DOL’s Wage and Hour Division administrator will have authority to adopt state or local wage determinations that could result in federalizing prevailing wage determinations locally.

The proposal reduces the need for an employer to request a prevailing wage on a project where a specific wage was not previously issued. A new procedure will allow the DOL to base a wage upon related work types, geographical areas and “reasonable relationships” to other wages paid.
It will also add wages to the prime contract but not any subcontract, meaning, that the agency wouldn’t have to wait for modification of the prime contract to assess back wages and seek withholding from the prime contractor for all employees, possibly saddling prime contractors with unanticipated labor costs after the fact.

The DOL also proposes expanding the cross-withholding procedure for recovering back wages and including new anti-retaliation provisions in the Davis-Bacon Act making it unlawful for any person to discharge, demote, intimidate, threaten, restrain, coerce, blacklist, harass or in any other manner discriminate against any worker.

What should a contractor consider when hiring a construction attorney?

Robert Smith
Partner
Fabyanske, Westra, Hart & Thomson

Contractors need attorneys that specialize in construction law and understand the construction industry. There are many lawyers that list construction law as an area of practice on their website, but those lawyers may not specialize in construction law. Contractors should do their research to determine whether construction law is truly an attorney's specialty or whether it is one of many areas of the attorney's practice. Contractors should look for attorneys that devote the substantial majority of their practice—if not 100%—to construction law and related areas of law.

Most lawyers that specialize in construction are involved in industry organizations such as Associated Builders and Contractors as well as legal organizations devoted to construction law such as the American Bar Association Forum on Construction Law, the construction law section of the attorney’s state or local bar association. An attorney’s membership in those organizations is a good indicator that they understand the industry and the legal challenges a contractor will face.

Finally, contractors should do their due diligence to find out what types of cases the attorney has handled in the past and whether the attorney has previously represented clients in the same industry or with similar legal needs. An attorney that has represented similar clients or handled similar matters in the past will likely be a more efficient and more effective counselor and advocate.

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

A contractor should consider both their immediate needs and the long-term goals for their company.

Their immediate needs may include a solution to a problem—they need a lien filed to protect their rights, they have been terminated from a project, they need a contract reviewed or they have a claim on an active project. Each of these needs requires a particular expertise. Key considerations include whether the attorney has experience successfully resolving the problem (i.e., successfully recovered payment, resolved termination disputes, tried a case or negotiated a contract) and whether the attorney or their firm practices in the jurisdiction where the problem or the dispute resolution mechanism is located. It is better to hire an attorney who has experience dealing with the problem from a variety of angles. For example, does the attorney understand the owner and designer arguments associated with the contractor’s claim, so that the attorney can propose a viable solution that will result in the problem being resolved rather than a solution that will lead to protracted litigation?

With respect to long-term company goals, the contractor should consider whether the lawyer can help the contractor achieve those goals, such as performing construction work in other states. A firm that can be a trusted partner in all the states where the contractor is actively doing business is a big benefit.

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

Angela M. Richie
Partner, Co-Chair of Construction Practice
Gordon Rees Scully Mansukhani

For private projects, you need to preserve your mechanic’s lien rights by filing preliminary notices, notices of intent to lien and actual liens within the statutory deadlines. Each state law is different; therefore, you should immediately check the statutory deadlines.

For public projects, Miller Act payment bonds (for federal projects) and Little Miller Act payment bonds (for state projects) can provide a mechanism for payment if you have properly given notice and perfected the claim. If you do not have a direct contract with the principal on the bond (the party who obtained the bond), then you will need to give notice as prescribed by either the statute or the bond itself, which typically must occur within 30 to 90 days of your last date of work. For you to properly perfect your bond right after notice is given, you must file suit also as prescribed by the bond or statute, which is typically within one year of your last day of work.

During the project, make sure you are adequately modifying your lien and claim waivers to provide an exception for “unpaid contract balance, retainage and unpaid change orders.” Ultimately, the key to payment involves reserving claims on waivers and making sure you meet the statutory and bond deadlines to preserve your right to payment.

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

Jason Lambert
Partner
Dinsmore & Shohl LLP

Contractors should always use liens to secure their rights to payment when applicable. But there are certain circumstances where this is more effective than others. When a property is going to be sold, contractors typically recover 100% (or more) of the face value of the lien. When a lien can be used to leverage a quick resolution, contractors typically recover 90% of the face value of the lien. Only when a lien is defective do contractors typically recover nothing. This illustrates the importance of not only exercising lien rights consistently, but also ensuring they are exercised appropriately and with guidance from an attorney.

Joshua Levy 
Partner
Husch Blackwell LLP

When the contractor has properly requested payments but the owner is not issuing payments, the lien process is available to pursue payment. However, all contractors must be cognizant of the reality of liens. Liens in construction are “guerilla warfare.” Pre-lien notices and properly served and recorded liens get the owner’s attention. They establish transactional leverage because the owner may have a lender or other investors that demand the lien be cleared. The effort is “guerilla” because there are many steps to monetize a lien through the courts. Even if a contractor checks every box and obtains an order to foreclose the lien, there may be lenders or other claimants with a higher priority to foreclosure proceeds.

The lien process should be used when a significant balance is owed and lien deadlines are imminent. The contractor should not allow lien rights to expire if the amount owed is substantial. Finally, the lien process is state-by-state and should be reviewed before work commences. There are a variety of different deadlines depending on the state.

How can construction firms protect themselves during materials shortages?

Bret R. Gunnell
Founding Partner
Beltzer Bangert & Gunnell

There is a rising tide of escalation claims, related delivery delays and other impacts plaguing construction projects across the country. No project, regardless of size, is exempt from the potential for dramatic materials price escalation and/or unpredictable materials shortages. Contractors need a dual strategy to both successfully complete impacted projects already under contract and to effectively address escalation risk in new contracts.

For existing contracts that are silent on the issue, contractors may need to rely on legal theories such as force majeure, frustration of purpose, commercial impracticality, impossibility of performance, mutual mistake or changed conditions to avoid price escalation risk when dealing with owners. Contractors likely will encounter the same arguments when working with downstream subcontractors and suppliers. Smart contractors need smart contracts that specifically and thoughtfully address the risks of price escalation, materials shortages and delivery delays.

The days of relying on various legal theories (other than breach of contract) to resolve escalation claims are almost certainly behind us. Contractors should continue to engage legal counsel to help draft and negotiate risk-shifting or risk-allocation “escalation” language into their prime contracts and subcontracts. The approach can be varied and creative, including use of contingency, allowances, buy-out windows, escalation factors, escalation caps, mitigation plans and other shared-risk strategies. But the combination of global supply chain interruptions, rising energy costs and the current inflationary climate suggests the problem is not going away soon.

Michael Metz-Topodas 
Partner
Cohen Seglias

The best time for construction firms to protect themselves from periods of materials shortages is before those shortages occur and, luckily, contractors have multiple measures available. For each active project, contractors should assess risk related to where the project falls within a few categories: project delivery type (ranging from design-bid-build to integrated project delivery), the project owner type (public or private) and the project’s status (from bidding to completion).

Depending on the nature of the project, contractors should seek to ensure applicable contracts have provisions that expressly allow for extra time and compensation due to delivery delays and price escalations from materials shortages. For ongoing projects, certain events can magnify the scheduling and financial impacts from materials shortages, so contractors should make sure to document those events, which may include delayed submittal returns, late RFIs responses and rejected alternates. Contractors should also record in real time and with as much detail as possible any and all financial costs associated with materials shortages—for example, price escalations and extended general conditions costs from additional days onsite. Where materials shortages do impact performance duration and costs, contractors should look to negotiate possible resolutions with project stakeholders, but only after consulting with construction counsel who can assess reasonably expected recovery.

Wm. Cary Wright 
Chair, Construction Practice Group
Carlton Fields

The combination of a multiyear pandemic, restrictive trade policies and other market abnormalities has created the perfect storm of increased demand and decreased supply of key construction materials, resulting in frequent shortages. These shortages have contributed to unprecedented increases in the cost of construction materials and unavoidable delays in the completion of construction projects. Construction firms should take deliberate measures to protect themselves from these supply-related risks.

Arguably the most effective mechanism for shifting the risk of supply-chain disruptions to other parties is through careful and thoughtful contract drafting. For instance, firms can protect against the risk of increased costs by including materials escalation provisions in their construction contracts. Such provisions allow firms to pass a percentage of the risk to owners in exchange for built-in contingency pricing. In addition, well-drafted force majeure provisions can protect firms against damages for delays in construction projects resulting from unexpected events causing shortages in materials. Firms should also consider specifying preapproved substitutes in the contract documents for use where specified materials are unavailable. Further, a provision permitting stored materials billing should also be included, so materials can be ordered, delivered and paid for early in the project.

In addition to careful contract drafting, there are practical steps firms can take. For example, firms can conduct early buyouts of key subcontractors, bond key subcontractors and limit bidding to reduce the number of projects one undertakes during these uncertain times.

Eric Lewis Nelson 
Managing Partner
Smith Currie & Hancock LLP

Materials shortages (for items such as roofing materials, lumber and electrical supplies) are currently being felt across the construction industry. Generally, the risk of materials shortages is handled contractually. For private projects, contractors have some power to limit their risks during the contract negotiation process and through scope exclusions and clarifications. This may involve adding specific contract provisions to allow for a time extension in the event of materials shortages, requiring the owner to direct purchase and carry the risk for certain materials (e.g., appliances), or expanding on the definition of force majeure to include unforeseeable delays caused by materials shortages.

These types of negotiations, however, may not be available on public projects, where contractors typically have much less latitude in changing contract terms. There, the contractor may need to adjust its proposed project schedule to include contingencies for certain high-risk materials or procure and store certain high-risk materials far ahead of bid time. For public projects, contractors should also use the pre-bid RFI process to raise this concern and get a clear response from the owner as to how it intends to handle the potential cost and scheduling problems associated with materials shortages.

Regardless of whether the project is private or public, contractors should make sure they have a clear understanding, prior to proposing on a project, of the owner's intention as to where the risk of materials shortages will fall, which may lead the contractor to rethink its pricing and even whether it wants to propose or bid on the project. Owners, on the other hand, need to recognize that placing too much risk on the contractor will likely result in less competitive pricing and a reduced pool of quality contractors willing to submit a proposal.

Ben Westcott
Co-Managing Shareholder
Andrews Myers PC

In addition to pandemic- and natural-disaster-related production delays, various sources of interference in the shipping markets continue to cause materials shortages. Whether resulting from production issues or shipping problems, materials delays can prevent the completion of a project, resulting in substantial additional expense—potentially far exceeding the cost of the materials cost escalation. As such, prudent contractors will seek to avoid, if possible, or mitigate these risks and damages.

Contractors experiencing materials delays on existing projects must evaluate the provisions in their contracts related to materials, including the provisions related to the use of alternates, materials on hand, notice, force majeure and delays. Contractors should also evaluate whether the project insurance covers stored materials in the event the contractor elects to order materials in advance to avoid delays or price escalation. It is imperative to communicate with both upstream and downstream parties regarding potential materials delays and to attempt to mitigate the impact and cost on the project through cooperation and planning.

Contractors negotiating and entering into new contracts must acknowledge the current materials environment and possibly reevaluate standard revisions to common contractual provisions. For example, contractors should avoid provisions in which the contractor represents familiarity with the cost and availability of materials. “Termination for cause” provisions should be avoided as they allow termination for “repeated failure to provide materials.” Instead, contractors should seek to negotiate contractual provisions—including the provisions referenced above—anticipating the potential for unavoidable materials delays.

Can statements made during a mediation process later be used in an arbitration process?

Gregory Cokinos
President and CEO
Cokinos | Young

In federal and state courts, statements made during mediation are generally protected from disclosure pursuant to procedural or evidentiary rules (e.g., Federal Rule of Evidence 408 or Chapter 154 of the Texas Civil Practice & Remedies Code). But this general rule doesn’t necessarily apply to arbitration proceedings, many of which are conducted pursuant to arbitration agreements that do not specify (or do not sufficiently specify) rules and procedures that would govern this situation.

Further complicating matters is the fact that a party lodging objections to the disclosure of statements made during mediation to the arbitration panel must appeal to that same arbitration panel for protection, which must then review the statements to determine their admissibility (thus defeating the purpose of the objection). Many of these issues can be resolved by agreement—in your arbitration provision, afterwards via amendment or modification, or by addressing these items during an initial or early conferences with your arbitration panel to get guidance on how they intend to handle the discovery/admissibility of mediation statements.

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

Ben Dachepalli
Partner
Bradley

It all depends on the triggering event and the specific language of your force majeure clause.

A triggering event needs to first activate the force majeure provisions. The provision may describe the triggering event conceptually, specifically and/or in catch-all terms. In the era of COVID-19, a specific reference to “pandemics,” “epidemics,” “disease” or even “acts of God” make it easier for a contractor to invoke force majeure. If a force majeure clause does not include specific applicable language such as “pandemic,” then it will be necessary to consider whether a triggering event, like COVID-19, can qualify as an “act of God,” “action by government,” “civil commotion” or “industrial disturbance.” The force majeure clause can apply more broadly with catch-all language that refers to “circumstances beyond the control of a party.”

The triggering event must also be both outside of the control of the contractor and unforeseeable. So, are pandemic-related delays in supply chain and material deliveries even considered unforeseeable? Triggering events that are foreseeable and merely frustrate performance may be contractually permissible, and thereby prevent a contractor from invoking force majeure.

Some clauses require notice within a stated period or as soon as reasonably practicable. It is also important to assess whether a time limit runs from the occurrence of an event or condition, or from its effect on performance. Regardless of the type of notice provision, a failure to adhere to the notice requirements within a force majeure clause can waive a contractor’s right to invoke force majeure or be considered a breach of contract.

Therefore, a contractor should notify an owner as soon as reasonably possible of any triggering event that will prevent performance or render the performance of certain obligations either impossible or commercially impracticable.

Do local laws permit a contracting party to be indemnified against errors and omissions arising from the work of the other party, even when the first party is negligent?

Timothy Woodward
Chair of the Construction Practice Group
Shutts & Bowen LLP

Personal injuries or property damage can often occur during and as a result of construction activities. Though fault can at times be attributed to one person or entity, it is not uncommon for two or more participants in the construction process to be blamed for the injury or damage. As such, the question arises as to whether any of the construction participants being pursued by an injured party can obtain indemnity from other participants in the construction process. There are some protections under the law, subject to compliance with mandates imposed by state law, such as the Florida legislature in Florida Statute §725.06, provided that the claim for indemnity does not include claims of or damages resulting from a heightened degree of wrongdoing of the indemnitee, including but not limited to claims or damages resulting from gross negligence, willful, wanton or intentional misconduct of the indemnitee.

Due to the importance of “risk-transfer” of claims that can arise in the construction process, great care should be taken in drafting statutorily compliant indemnity language in construction contracts. If the indemnity provision does not comply with the statute, the indemnity clause will be void and unenforceable, leaving the party wanting to be indemnified with much less desirable means of obtaining protection from the potential losses arising from a claim.

What legal protections exist to ensure fair and open competition for government contracts, as well as to prevent bid rigging or other anticompetitive behavior?

Steven Weber
Partner
Peckar & Abramson, P.C.

As the custodian of the public fisc, the government emphasizes the importance of procuring goods and services at fair and reasonable prices. Access to the federal marketplace and a level playing field are crucial components of ensuring adequate competition and fair prices. To meet its goal of fiscal responsibility, Congress enacted a set of rules that govern the vast majority of its purchases called the Federal Acquisition Regulations (FAR).

One of the most crucial features of the federal procurement process to ensure fair and open competition in the award of government contracts is the fact that disappointed bidders can protest the award of a contract to its competitor. A contract award can be challenged and set aside if a protester can prove that either the contracting agency or the contract awardee did not comply with the requirements of the solicitation.

This theory that maximum competition will result in the best prices to the government is further reflected in the Competition in Contracting Act (CICA). CICA was established by Congress in 1984 to serve as the foundation for the FAR and to encourage “full and open competition” for government contracts.

One final protection to the integrity of the procurement system is the penal aspect of government contracting legislation. In addition to possible criminal penalties for certain kinds of egregious anticompetitive activities, the government also has the power to debar and suspend government contractors.

The combination of these features ensures the fair and open operation of the federal marketplace.