Vaccination rates continue to rise, mandates are loosening for returning to work and school, and a $2 trillion infrastructure bill is looming on the horizon, but contractors remain cautious and counseled by the legal experts who thrive in the complex field of construction law.
According to the latest report by the Bureau of Labor Statistics, construction employment numbers did not move much in April despite an increased demand for housing and a recovering economy. Due to continued fallout from the pandemic—and what seems like no end in sight for the rising costs of materials—contractors have been turning to construction law firms to navigate delayed projects, interpret contract language, assist in risk mitigation and ensure the road ahead is paved with understandable and protective clauses.
For the 2021 survey for the annual U.S. ranking of The Top 50 Construction Law Firms™, Construction Executive’s editorial team reached out to dozens of attorneys at the nation’s best construction law firms to learn how the legal landscape is changing, as well as how legal teams are aiding clients with sharpening contract language and pivoting in response to challenges in the wake of the COVID-19 pandemic.
While the pandemic has slowed considerably and many states are returning to business as usual, a continued labor shortage, rising materials prices and decreasing availability have continued to be thorns in the side for many project owners and contractors looking to effectively manage risk and avoid profit fade.
The initial surge to procure materials coincided with a dip in production at the peak of the pandemic, creating a perfect storm of high demand and ever-increasing prices amidst dwindling supply. Steel, lumber and copper remained at historically high prices at the beginning of May and, while they are by no means the only materials experiencing price hikes in recent months, they are a prime example of why contractors need to plan carefully in advance for every project—and why contract language matters.
“Cost escalation and price volatility have led many of our clients to buy materials well ahead of schedule to ensure that they can obtain those materials for a certain price,” says Kenneth M. Roberts, the chair of Venable LLP’s construction law group.
While planning ahead might ease the pain of unexpected costs in the future, having prices skyrocket during projects left contractors searching for clauses in their contracts that addressed price hikes or sought to renegotiate altogether. “Materials cost escalation has been a very significant financial hit to many existing projects. COVID-19 is one of the top five deal points in every construction transaction today and most projects are grappling with its impacts,” says Robert Alfert, partner at Nelson Mullins Riley Scarborough LLP. “I suspect that these issues will continue through 2022, especially on the litigation side.”
Successful communication between contractors and owners can ease the challenges of rising costs, delays and materials shortages and keep projects moving toward a profitable end. Contractors should actively seek to have contract provisions in place to protect them and owners should be open to these requests.
“Many owners believe that all construction risks should be borne by contractors. I greatly admire contractors, because they take on tremendous risks in their everyday conduct of business. But some risks can put a contractor underwater. Contract provisions need to be watched carefully to include no damages for delay clauses, indemnity clauses that can’t be covered by insurance, and elimination or narrowing of the right to be paid when differing site conditions are encountered,” says Joseph C. Kovars, shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC.
“Owners need to be open to protective contract provisions—such as material escalation clauses—to encourage low competitive bids. Contractors must remain vigilant in providing notice of disruptions to protect rights to equitable relief. And owners need to remain flexible in addressing disruptions beyond the contractor’s control, making reasonable adjustments to ensure projects are completed promptly without unnecessary delay or claims,” says Anthony L. Byler, partner at Cohen Seglias Pallas Greenhall & Furman PC.
Making the responsibilities of all parties clear in contracts can also stem potential issues. A clear understanding of who is responsible for design completion plays a significant role for construction firms when reviewing contract documents.
“We continue to see a blurring of the lines between design and construction,” says Henry Bangert, founding partner of Beltzer Bangert & Gunnell LLP. “It has become commonplace for owners to insert language that ostensibly shifts responsibility for design completion onto the contractor in the general conditions or specifications (or the submittal process)—even on traditional design-bid-build projects. This is a recipe for problems and disputes. If the contractor has design-build responsibilities for portions of the work, such responsibilities should be clear and upfront. It should not be buried in boilerplate,” Bangert says.
Levi Barrett, partner and chair of the contracts, project documentation and risk management practice for Peckar & Abramson, PC, has also witnessed an increase in attempts to shift design responsibilities to the contractor. “Contractors have recognized the unreasonable exposures created by this shift and have not been shy about pushing back on these provisions. Depending on the location of the project, owners have generally been cognizant of these concerns and, with the help of persuasive advocacy, have often been willing to resolve the matter reasonably,” he says.
Force majeure clauses, which excuse a party with no fault from performing under contract due to unforeseen events, were heavily leaned upon this past year. The success of using force majeure is largely dependent on contract language, state law and the willingness of the parties involved to come to an amenable agreement.
“While parties can fight over it, the smart ones get to the table to craft a sensible business resolution. For example, on one lump-sum deal for a $100 million multi-family project, increased lumber pricing caused a $3 million bust. While the owner could have fought it and made the contractor prove force majeure relief, the owner negotiated for all stakeholders to kick in to make the deal work. Then we dealt with the lender to allow for payment of stored materials so that we could buy all materials before more escalation occurred,” Alfert says.
The COVID-19 crisis may not have been a foreseeable event, but the word “pandemic” is making its way into contract language going forward—as noted by David Toney, construction team leader for Adams and Reese LLP. “Although most delays arising out of or related to COVID-19 were arguably covered by excusable delay clauses initially, many clients realized a surprising gap both within those clauses and in their contracts—there was no mention of a pandemic. While there is no way to predict the next force majeure event, it is especially prudent to fill the gap by giving mention to pandemics due to the tremendous impacts of COVID- 19,” Toney says.
“Our clients have used force majeure clauses and defended against force majeure-based claims in response to the COVID-19 crisis. As with most disputes, the results depend on the specific facts, the contract language and the skill of the attorneys who have to combine the two. It takes more than putting COVID-19 and force majeure in the same sentence to have a successful claim,” says Jeffrey Hamera, partner and vice chair of Duane Morris LLP’s construction group.
When disputes do arise, careful consideration should be taken on how it will be resolved. Standard American Institute of Architects (AIA) contracts stipulate that mediation is a prerequisite to binding dispute resolution such as arbitration. This can help stave off costly litigation provided there is meticulous documentation and a willingness from all parties involved to correspond with each other.
“Communicate, communicate, communicate. Attempt negotiated settlements early, based upon a well-documented position of written and timely notices, as well as cost and time support. Settlement discussions should be elevated to senior management who may provide a broader overview of the business implications and may have a degree of detached objectivity regarding how the dispute arose,” says Claramargaret Groover, counsel at Becker & Poliakoff.
William B. Westcott, president of Andrews Myers PC, agrees that open communication among all parties involved will lead to effective negotiation. “Communicate early and often. You need to establish objective criteria for honest evaluation. In addition, you should work proactively to advance potential outcomes that provide benefits to all parties,” he advises.
Facing disputes head on is also key to successful resolution. “I believe it is key to hold weekly change order meetings to resolve the disputes early when the change is fresh in everyone’s minds. After time, memories fade and, unfortunately, key people involved in the change leave the company, making it more difficult to resolve claims over time,” says Angela Richie, partner and co-chair of Gordon Rees Scully Mansukhani LLP’s construction practice group.
Transparency and the sharing of facts and documentation can help both parties reach an equitable outcome by pushing project stakeholders to take a realistic look at all the information to see where the true strength of their positions lie.
“The most important step in resolving disputes is to determine and share the facts,” says Joshua Levy, partner at Husch Blackwell. “This means that both parties to a dispute can only resolve matters if they take an authentic view of the facts and records that may determine the outcome. If that hurdle can be overcome, the parties can realistically evaluate their positions and move towards an equitable resolution.”
Many courts have pushed civil litigation cases out a year or more due to the pandemic, making litigation a last resort. In addition to a slow-moving court system, litigation is expensive and may not be worth the cost compared to negotiating a settlement.
“Most courts are not going to hold trials for construction disputes, particularly complex disputes, any time in the near future,” says Eric L. Nelson, managing partner for Smith Currie & Hancock LLP. “Although arbitrations are starting to move forward, many clients and their attorneys are reluctant to conduct arbitrations remotely because of perceived inefficiencies and difficulties in putting on evidence and handling witnesses. In light of this, for parties that want to get their disputes resolved, they will need to be more focused on mediation or other early neutral involvement, which also means that they may need to be more flexible in their settlement expectations and negotiations.” Nelson says.
However, there are simply times when going to court cannot be avoided. Before making that decision, all factors should be analyzed, such as the cost of litigation and its impact on industry relationships, the time involved for management and employees, as well as the potential effect on the company’s reputation.
“We had one contractor client who would go to any extreme to avoid a lawsuit or arbitration. That company is no longer in business. Another contractor client was infamous for filing claims at the drop of hat. That company is also no longer in business,” says David Pugh, partner at Bradley Arant Boult Cummings LLP. “As with so many things, there is a balance: times when you must stand up for your rights or press an issue, and other times when you may have to take a loss and settle. Good legal counsel can help you decide what is right for the particular issue you are facing.”
Since the pandemic began, claims for delays, project overruns and material and/or labor shortages have increased, and many contractors are still dealing with the fallout. When defending against such claims, utilizing a law firm that has an inside view of the business of construction is a boon for any contractor.
“We are fortunate to have a construction services group composed of non-lawyer industry professionals experienced in project/schedule/cost management, in addition to claims management and avoidance. They work closely with our construction lawyers and clients to analyze project schedule and cost impacts; assess contract requirements and project documentation; implement enhanced recordkeeping strategies to manage actual claims; and avoid or minimize the risk of potential claims,” says Rob Remington, chair of Hahn Loeser & Parks LLP’s construction law practice.
“The terms and conditions are the starting points of the contract. We try to work those issues into the contract in a way that is fair for all participants. This is not always an easy task, as different constituents in the construction process have different points of view and bargaining power,” says Geoff Bryce, a capital member for Bryce Downey & Lenkov LLC.
Contractors have faced challenges this past year that have forced them to rethink how they mitigate risk. Ensuring safety is embedded in a company culture can boost morale as well as keep workers safe.
“Every construction professional should preemptively create and maintain good risk management practices. Many of our clients are utilizing disciplined enterprise risk management processes at the project and contract levels. These processes involve identification, assessment, prioritization, response planning, communication, assignment of responsibilities and monitoring. Clients who implement disciplined risk management practices early, and update their plans often, have better and more consistent outcomes,” Bangert says.
Training employees to maintain safety procedures, adhere to guidelines from the Centers for Disease Control and document changing project timelines should be rote for any business angling for success going forward. “Fair and market-reasonable contracts are a must, but on the practical level— training, scheduling and holding safety meetings onsite and routine site inspections to maintain compliance are critical,” Groover says.
Pugh agrees. “Continually invest in the training of workers, both existing employees and new potential hires. That training should include in-house training, as well as programs available through associations (such as Associated Builders and Contractors),” he says.
As the pandemic steadily slows, contractors need to remain vigilant about the risk allocation they are willing to take on and maintain a strict policy of writing material and labor shortages into their contracts.
Market demand for construction projects remains high, and contractors certainly aren’t lacking for work. “As the composition of urban commercial and mixed-use projects remains in flux, suburban commercial construction, warehouse facilities supporting e-commerce and residential construction have strong activity. Hospitality, recreation, education and entertainment have had a tough year but we see optimism for new facilities and upgrades,” Hamera says.
Of course, winning the project and delivering the project are two separate things entirely. While technology has taken some pressure off the industry, when it comes to building, skilled labor still needs to show up to make it happen.
“Most prognosticators say that 2021 will be a strong year for the economy, but that possibility comes with many conditions and impacting factors. Shortages of skilled craft labor, along with materials and equipment, will continue to pose risks even if inflationary forces do not arise. The rule remains that good supervision and construction risk management backed up by proper insurance programs are the best practices,” Groover says.
In the current economic environment, contractors would do well to remember the lessons learned from the pandemic when approaching new work. It’s always advisable to have skilled construction law counsel review contract documents before signing on that dotted line.
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