Does Your Scope of Work Mean What You Think It Means?

Does your scope of work mean what you think it means? The Iowa Court of Appeals tells one prime contractor NO.

It’s not inconceivable that two parties with different incentives may disagree about the meaning of contract language. In subcontracts, scope of work language provides a ripe source of disputes, especially if this important language is hastily written.

Drafting careful and effective scope of work language that meets both parties’ objectives can be a challenge. Prime contractors want to broadly incorporate their obligations under the owners’ contracts to ensure there are no gaps. Subcontractors typically want the opposite: narrow and specific obligations that limit their risk. When a conflict inevitably arises, fear of starting off on the wrong foot or harming relationships can be a convenient but poor excuse for ignoring the conflict instead of confronting it directly and promptly.

A recent case at the Iowa Court of Appeals reminds us that failing to clearly define scope of work at the outset of the project is a bad deal for everybody.

In Iowa, Dueling Interpretations

In Pro Commercial v. K & L Custom Farms, the prime contractor on a 2010 rest area project failed to clarify scope of work with its dirt and grading subcontractor. Instead, after IDOT awarded the project, they apparently made the shortsighted “compromise” of incorporating each party’s differing intentions into the written subcontract:

In accordance with the contract documents, as listed on Attachment “A,” furnish labor, material and equipment complete as described by the following Specification Sections:

Division 1-General Requirements (as applicable to your work); Division 31 Complete, Section 024100.

Supply all labor, material and equipment to provide all dirt work, site clearing, subsoil work, building removal, demolition, misc items per your quote in its entirety per plans and specifications.

Scope of work disputes “erupted almost immediately.” According to the prime contractor, “Division 31 Complete” meant all of the work in Division 31. According to the subcontractor, “per your quote in its entirety” limited the scope of work to only the itemized list in its bid.

Nearly four years later, the prime contractor’s interpretation prevailed at trial. After another year, the subcontractor prevailed on appeal. The Iowa Court of Appeals reasoned that people don’t write meaningless words into contracts, so when these parties signed the contract, they must have intended that the subcontractor would perform only the work itemized in the bid in a manner that conformed to Division 31.

The appellate judges rejected the prime contractor’s argument that “Division 31 Complete” required the subcontractor to perform “all the work described in Division 31.” To illustrate this point, the court quoted Inigo Montoya from The Princess Bride, who said, “You keep using that word. I do not think it means what you think it means.” Inigo believed the word “inconceivable” was being misused (or overused). The Iowa Court of Appeals believed the word “complete” could not possibly mean all of Division 31, since other subcontractors also performed work under that division.

Are the potential conflicts in your scope of work clause only “mostly dead”?

In addition to showing how scope of work conflicts might be resolved, this case underscores the potential cost to both parties who fail to confront these conflicts directly and promptly. After five years, the prime contractor had won at trial and the subcontractor won on appeal. However, disputes like these don’t exactly have “winners” when everyone involved spends considerable time, money, and energy adjudicating a conflict that could have been resolved five years sooner.

Negotiating language that clearly describes subcontractors’ scope of work and satisfies both parties’ expectations may require patience and persistence. Although it may not always result in the subcontract being drafted exactly as you wish, it may save you the drama of a lawsuit and the feeling that you’re climbing the Cliffs of Insanity.

Artwork image used with special permission from Michael Rohner at Michael Rohner Art. We encourage our readers to check out his other amazing work at www.rohnerart.com.

Build it right. Keep it real.

 

© 2015 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

North Dakota Joins Iowa and Minnesota in Limiting “No Damage for Delay”

After being awarded a contract to remove silt and debris from an empty lakebed, the contractor was ready to begin work, and was understandably surprised to find the lake filled with water. To make matters worse, the owner ordered the project to start anyway, and then refused to pay any of the extra costs. Despite clearly changed conditions and restricted site access, the owner took refuge behind a “no damage for delay” clause, dragging the contractor through years of litigation to get paid.

The best way to stay out of court is for all industry participants to perform contracts in good faith and reasonably. When contracts include “no damage for delay” clauses, contractors and owners should understand the potential reach, and limitations, of these unfortunate clauses.

“No Damage For Delay” Clauses Aren’t Blank Checks

A previous article addressed the sometimes-harsh effect of “no damage for delay” clauses, which can force contractors to absorb unanticipated delay costs caused by owners.

Those severe consequences are not inevitable. Contractors may be entitled to reimbursement of delay costs, despite these clauses, when an owner’s “active interference” caused the delay.

Active interference often involves owners behaving unreasonably. In the lakebed case described above, the Pennsylvania Supreme Court awarded delay costs to the contractor, not because the lake was filled with water, but because the owner insisted that the project move forward despite this changed condition. This constituted active interference, and the “no damage for delay” clause did not apply.

North Dakota Recognizes Active Interference Exception

Last year, the North Dakota Supreme Court affirmed the important right of contractors to be paid delay costs, despite a “no damage for delay” clause, for delays caused by an owner’s active interference.

In C & C Plumbing and Heating, LLP v. Williams County, the owner’s construction manager ordered steelworkers “to put up steel wherever [they] could . . . to demonstrate . . . that progress was being made.” The steelworkers usually erected the steel from the “inside-out.” When that wasn’t possible, the CM ordered them to work from the “outside-in,” which effectively altered the contractor’s chosen means and methods. Despite a “no damage for delay” clause, the contractor was (eventually) awarded its extra costs because the owner’s representative actively interfered with the work.

North Dakota joins a growing list of states that recognize the limited reach of “no damage for delay” clauses. This was recognized in Iowa over forty years ago. “No damage for delay” clauses are completely unenforceable in Minnesota. The South Dakota Supreme Court has not addressed this issue, but would likely follow the example of its neighbors.

Take Steps to Manage Delay 

Public contracts almost universally require us to start managing changes on day one, often before knowing all the facts, including the full impact of the change and the nuances of our legal rights. These risks can be effectively managed by diligently documenting delays, including providing timely written notice and tracking extra costs, at all phases of construction. This should be done despite an owner’s insistence that delay costs aren’t compensable under the contract. Contrary to owners’ wishful thinking, “no damage for delay” clauses do not require contractors to absorb costs simply because changes cause delays (as most changes do!).

Build it right. Keep it real.

 

© 2015 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Keeping Your Head Out of the Sand: The Duty to Inquire

Warning ostrich ahead yellow road signAs spring makes way for summer, companies can shift focus from potential projects to a more manageable number of awarded projects. Although estimators have already analyzed countless details, the bidding process also encompasses lost projects and requires judgment calls under short deadlines.

When your team revisits the details of each awarded project, they should ask if any details in the bid documents are unclear, in which case the “duty to inquire” might require that you seek clarification.

Silence Is Not Golden

If a bid document contains a defect, discrepancy, conflict, error, omission, ambiguity, inconsistency, or otherwise lacks clarity or remains open to interpretation, the duty to inquire can shift risk significantly if clarification is not promptly sought.

The consequences of failing to seek clarification can be harsh. Contractors can lose legal protections that are central to doing business, like the Spearin doctrine (allowing contractors to rely on bid documents) or not allowing parties to take advantage of their own drafting mistakes.

The duty to inquire should not be filed away after bid lettings. Courts have held contractors responsible for failing to seek clarification of apparent, obvious, or “patent” problems, yet generally do not shift the risk if the problem was hidden or “latent.” As lost bids make way for awarded contracts, it is reasonable to expect that several previously hidden problems may now become apparent.

The Duty to Inquire Upstream

When submitting bids on public jobs, the duty to inquire can often be found spelled out in the bid documents.

South Dakota DOT Specifications (2004) offer a good example. Under Section 2.5, bidders are required to investigate the project site and contract documents, and the Contractor “shall immediately notify the Department of any apparent error, omission, or ambiguity in any part of the bid package.” Section 5.4 additionally provides:

The Contractor shall not take advantage of apparent errors or omissions in the Contract. If the Contractor discovers an error or omission, the Engineer shall be immediately notified of the error or omission and its perceived consequences. The Engineer will make corrections and interpretations as necessary to fulfill the intent of the Contract.

This is a common requirement. For example,

  • Iowa DOT Specifications (2012) include similar provisions in Section 1102.09, Section 1104.01, and Section 1105.04.C.
  • Minnesota DOT Specifications (2014) include similar provisions in Section 1205.1, Section 1504, and Section 1508.
  • North Dakota DOT Specifications (2014) include similar provisions in Section 102.05 and Section 105.05.
  • The South Dakota DOT is scheduled to publish new specifications in 2015. The final draft of those specifications currently being reviewed includes similar provisions in Sections 2.6 and 5.4. (The new Section 5.4 also incorporates the “project Q&A forum” recently implemented in South Dakota.)

The Duty to Inquire Downstream

The duty to inquire can also apply when accepting bids from lower tier contractors, subcontractors, and suppliers. When applied in this direction, an obligation to ask for clarification is not generally written into the contract, but has been adopted by courts.

The Iowa Court of Appeals decided a case last year allowing the prime contractor to accept an unrealistically low bid from an insulation subcontractor, because the prime contractor lacked the expertise to recognize the subcontractor’s error. Portzen Construction, Inc. v. Cal-Co Insulation, Inc.

The question was whether the prime contractor knew, or should have known, that the subcontractor’s bid was “too good to be true.” Even though the bid was only 10 percent of the next lowest bid, the Iowa Court of Appeals decided that the prime contractor reasonably believed that this was explained by the type of insulation in the next lowest bid being “a lot more labor intensive” than the type proposed by the low bidder.

Based upon the experience and subjective knowledge of the prime contractor, the Iowa Court of Appeals decided the subcontractor’s mistake was not obvious, so the prime contractor had no duty to ask for clarification.

The standards applied by courts can vary depending on circumstances, and across state lines. The subcontractor in Portzen lost after relying on a Minnesota case in which an offer to pay $15,000 was mistakenly written as $50,000, and then promptly accepted by the other party. Speckel by Speckel v. Perkins. In that case, the Minnesota Court of Appeals did not consider any special knowledge of the party accepting the offer, but decided that this party had a duty to seek clarification because the context of the offer should have put a “reasonable” person on notice that the amount of the written offer was a mistake.

Should experienced contractors be held to a higher standard than start-up contractors? What is “reasonable” or “obvious” on our project? Different standards make it harder to predict how a situation would be decided in court—all the more reason to practice early prevention.

Manage Risk by Asking Questions

Clearly, it is risky to ignore problems once discovered. A few steps taken on every project can provide a simple strategy for managing that risk:

  • Shortly after being awarded a contract, revisit all plans and specifications in detail.
  • Identify all requirements that may be open to interpretation.
  • When accepting bids, look for large deviations between the low and next lowest bids.
  • Ask for clarification from whoever provided the document.
  • Carefully and promptly document the answer.

Addressing issues before bid time is always best. However, when “bid” documents become “contract” documents may be the first real opportunity to discover significant problems that were not obvious at the estimating phase.

The duty to inquire is intended to discourage end-of-project claims by encouraging parties to resolve issues early and to maintain a level playing field by constraining project participants from taking advantage of obvious conflicts. Whether legally required or not, raising issues early, when options are greater, reinforces our good faith commitment to building a successful project.

Build it right. Keep it real.

 

© 2015 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Pay-if-Paid Contracts: All Work and No Pay?

Hedgerow maze leading to a dollar symbolOne of the most significant financial risks faced by contractors is that of the “project banker.” Almost all contractors are expected to finance construction by supplying labor, equipment, and materials to a project before being paid. When this happens, there is always a risk that the owner might not pay in full, on time, or without additional demands. In the meantime, bills become due. Payroll, fuel, supplies, rent, overhead, and loans don’t wait for delinquent owners.

Prime contractors can attempt to shift these risks downhill by including “pay-if-paid” clauses in their subcontracts. While payment risks typically can be reallocated, the harder question is whether they should be. Depending on your role, the answer might seem obvious: “minimize my risk, shift it to the other guy.” As an industry, however, there are a few basic questions we should ask when writing and negotiating subcontracts, particularly when it comes to pay-if-paid clauses.

Payment risks can be reallocated.

The default rule in multi-tier, low-bid contracting is that prime contractors bear the loss if an owner fails to pay. The prime contractor remains obligated to pay regardless of an owner’s default. The most common application of this is sometimes called “pay-when-paid.” Under this arrangement, a subcontractor’s payment becomes due after the owner pays. However, if the owner never pays, the prime contractor ultimately owes payment anyway.

A valid pay-if-paid clause changes that ultimate risk: the subcontractor’s payment becomes due only if the owner pays. The prime contractor’s payment obligation is entirely contingent on the owner. If the owner never pays, then the prime contractor’s contractual obligation to pay never ripens.

Courts in most states will enforce pay-if-paid clauses as long as the intention is stated clearly. Earlier this year, the Supreme Court of Ohio added its endorsement to the majority rule and enforced a pay-if-paid clause because the contract made the owner’s payment an express condition that had to occur before payment was ever owed to the subcontractor. Transtar Electric, Inc. v. A.E.M. Electric Services Corporation.

High courts in Minnesota, Iowa, South Dakota, and North Dakota have not had occasion to decide in favor of, or against, enforcing pay-if-paid clauses. When the issue is litigated in those states, the courts will most likely decide in favor of enforcing these clauses, with certain limitations. Those potential limitations will likely be based upon the same questions contractors should ask when deciding whether to use a pay-if-paid a clause in the first place.

Should payment risks be reallocated?

In Transtar, five of seven justices decided to enforce the pay-if-paid clause on the sole condition that the clause was correctly written. Two justices disagreed. In his dissent, Justice O’Neill raised some important questions that both courts and contractors should ask when deciding how to allocate payment risks.

1. Is the intent clear?

Justice O’Neill recognized that “when a contract seeks to alter a fundamental custom between a general contractor and a subcontractor, such as shifting the risk of an owner’s default from the prime contractor to the subcontractor, the intent to do so must be clear.” This rule is pretty universally recognized, including by the majority in Transtar, and by other courts that have enforced these clauses.

2. Does the subcontractor have a remedy?

Justice O’Neill raised another important concern that has not been widely addressed by courts: “Even though it has completed all its work according to the contract, Transtar cannot bring an action against the project owner for breach of contract because no contract exists between Transtar and the owner, who now has the benefit of Transtar’s work essentially for free.”

Pay-if-paid clauses will undoubtedly work best when supported by a viable way for the subcontractor to pursue payment directly from the owner. Otherwise, there is a locked door with no key between the subcontractor and the owner, with a high potential for disputes among all parties.

3. Does the bid include the risk?

Risk affects prices. Deciding what risks are “included” in a bid may depend on whether the subcontractor should have been aware of the risk at the time of the bid, or whether the risk was specifically excluded from the bid.

Contractors working in Minnesota, Iowa, South Dakota, and North Dakota should assume that pay-if-paid clauses will be enforced, and should treat them accordingly. Effectively allocating risks requires a clear understanding of who bears the risk, what remedies are available, and how the job was bid. Well-written contract terms can not only help avoid disputes, but can help ensure reasonable expectations will be enforced in the event there is a dispute.

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

How would you pack for a three-year vacation?

Vintage Suitcase, OpenUnder a new Minnesota law, contractors with even a single violation of wage, labor, or contracting laws can be banned from performing public contracts for three years, and can even lose existing contracts.

Ben Franklin said that an ounce of prevention is worth a pound of cure. What if there is no cure? In this case, prevention—through strict compliance—is the only medicine, unless you are prepared to take a three-year vacation from public work.

New Verification Requirements in Minnesota

Effective January 1, 2015, contractors and subcontractors on public construction contracts in Minnesota will be required to verify that they are “responsible contractors.”

The law applies to all projects over $50,000 let by state agencies (including MnDOT), the Met Council, the Metropolitan Airports Commission, Minnesota State Colleges and Universities, the University of Minnesota, and municipalities.

At the time of the bid, contractors must submit to the contracting authority a signed statement, under oath, verifying compliance with several minimum requirements, including:

  1. Workers’ compensation and unemployment insurance;
  2. Department of Revenue registration;
  3. Department of Employment and Economic Development registration;
  4. Valid federal tax identification number;
  5. Certificate of authority to transact business in Minnesota;
  6. None of the following for at least three years*:
    • Underpayment of wages or penalties totaling $25,000 or more;
    • Department of Labor and Industry final order to comply;
    • Department of Transportation finding of underpayment to employees (more than once);
    • Department of Labor and Industry finding of repeated or willful violation of the Minnesota Prevailing Wage Act;
    • United States Department of Labor (Wage and Hour Division) final finding of underpayment;
    • Liability in court for underpayment of wages or for misrepresenting a construction worker as an independent contractor;
    • Violations of Minnesota laws governing independent contractors, construction codes, and licensing;
    • Certificate of compliance for public contracts revoked or suspended (more than twice); or
    • Monetary sanctions for failure to meet targeted business goals assessed by the Department of Administration or Transportation (more than once);
  7. No suspension or debarment by the federal government, State of Minnesota (including any of its departments, commissions or agencies), or political subdivisions;
  8. All subcontractors verified to the contractor through a signed statement, under oath, that they meet the “responsible contractor” criteria; and
  9. Any other criteria established by the contracting authority for defining a “responsible contractor.”

*Any violations of item (6) that occurred during the last three years but before July 1, 2014 will not be considered in determining “responsible contractor” status.

Verification of Subcontractor Compliance

The verification of compliance must include a list of all first-tier subcontractors. If a prime contractor or subcontractor hires a new subcontractor after submitting the initial verification, a supplemental verification for the new subcontractor must be submitted within 14 days.

Under the new law, prime contractors and subcontractors are responsible for false statements by first-tier subcontractors if they accept a subcontractor’s verification of compliance with actual knowledge that it contains a false statement.

Why Comply?

Failure to comply with wage, labor, or contracting laws—and the corresponding inability to verify compliance—has harsh consequences, including ineligibility for public contracts and termination from existing contracts. Because the verification requirements go back three years, a violation on your record will effectively result in a three-year ban on performing public work.

If you hope to perform public work in Minnesota, take all necessary steps to assure strict compliance with wage, labor, and contracting laws, and be ready to verify compliance (including for subcontractors) on future projects. Obviously, knowing and following the rules is critical. It is also important to defend against any unwarranted charges of violations through a contested case hearing or other administrative or court appeal if necessary.

Ben Franklin believed industry was a fundamental virtue. Certainly, he would allow more than a few ounces of prevention to avoid a three-year ban from performing public work.

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Are Your Emails Public Record?

Data security. Do good walls really make good neighbors? I don’t know, but in low-bid construction, good privacy rules really do make good competitors.

Recent developments in Minnesota, however, threaten to derail good and established privacy rules, by subjecting contractors and subcontractors who work on public projects to data practices laws that traditionally apply only to the government.

Sunshine laws creep into the private sector.

The United States and each of the 50 states have enacted “sunshine laws.” (These are sometimes called open records or data practices laws—the federal version is known as FOIA, or the Freedom of Information Act.) Sunshine laws generally require government entities to supply data to inquiring members of the press or the public, with a few exceptions. These laws are intended to open government to public scrutiny.

In response to increasing privatization of government, a few states have extended these laws to private contractors performing “government functions.”

Minnesota is one such state. It amended its Data Practices Act in 1999, requiring the government to include terms in its contracts that make it clear that private parties who contract with the government “to perform any of its functions” must follow the statute.

This requirement was largely ignored for 14 years. Then, in 2013, the Minnesota Supreme Court decided a case where a newspaper publisher sought a copy of a subcontract between two private businesses building and renovating several public schools in St. Louis County. Helmberger v. Johnson Controls, Inc., 839 N.W.2d 527 (2013). The court decided that the statute simply required contract terms, not actual disclosure of data. The court suggested that the statute should be changed if the legislature had a different intent.

In response, the legislature did change the statute. As of May 29, 2014, the relevant part of the statute now says:

If a government entity enters into a contract with a private person to perform any of its functions, all of the data created, collected, received, stored, used, maintained, or disseminated by the private person in performing those functions is subject to the requirements of this chapter and the private person must comply with those requirements as if it were a government entity.

Minn. Stat. § 13.05, subd. 11(a) (2014) (emphasis added).

State agencies have also started responding to the 2013 Helmberger decision by revising their contract documents to contractually require disclosure of contractors’ project data. For example, the 2014 MnDOT Standard Specifications for Construction include a new Section 1701.1—Data Practices, which states:

Bidders are advised that all data created, collected, received, maintained, or disseminated by the Contractor and any subcontractors in performing the Work contained in this Contract are subject to the requirements of MN Statute Chapter 13, the Minnesota Government Data Practices Act (MGDPA). The Contractor shall comply with the requirements of the MGDPA in the same manner as the Department. The Contractor does not have a duty to provide access to public data to the public, if the public data are available from the Department, unless otherwise required by the Contract.

These changes are extreme and unprecedented. How these changes will be applied remains open to serious debate. How these changes will impact the industry remains to be seen.

Is construction a “government function” subject to the Minnesota Data Practices Act?

These new mandates place a heavy burden on contractors and subcontractors performing “government functions.” The question is, what exactly is a government function?

The majority in the 2013 Helmberger court needlessly endorsed an overly broad view of what constitutes a government function, citing a 60-year-old decision that a government function simply “involves the exercise of power conferred by statute.”

The problem with that definition, as noted by Justice Page in his concurring opinion, “is that there are very few services, if any, that a private entity might contract to perform that would not constitute a government function.” Indeed, state and local governments have countless powers “conferred by statute,” including furnishing public works.

Fortunately, the majority’s view of what constitutes a government function is not binding law. Nevertheless, state agencies and courts will look to that view for guidance.

Are there legal alternatives?

Absolutely. As one alternative, Justice Page proposed a few factors to assess whether a contractor is performing a government function, such as “the degree to which the government entity has delegated decision-making authority to the private person.” Justice Page believed that construction and design services “are too attenuated from the actual function” of the government (which in that case was “to furnish school facilities”) and he concluded that construction was not a government function.

The U.S. Supreme Court has also provided guidance by addressing what “state actions” are subject to Constitutional limitations like free speech and equal protection. The Supreme Court applies a higher, narrower standard, often involving complex issues like whether the private party performs an “integral part” of a public function, whether the state and business are in positions of “interdependence,” and whether the state and business are a “joint enterprise” or have a “symbiotic relationship.”

While courts will have to work harder and answer more questions to avoid taking the easier “every contract” approach, they can and should limit public records rules to only those who perform traditional “government” functions, not everybody who enters into any contract with the government, and certainly not low-bid construction contractors.

What should contractors do now?

The law is unsettled and its application needs serious debate. As it currently stands, the statute is vague with respect to what constitutes a government function. The “every contract” approach was unnecessary to decide the Helmberger case, does not further the objectives of the Data Practices Act, and goes far beyond what any other state has done.

Although I disagree with imposing data practices requirements on private contractors, and I believe that the enforceability of new contract requirements is questionable, unfortunately ignoring these developments could carry enormous risks.

For now, contractors and subcontractors on public projects should know what their contracts say, learn about categories of public and confidential data under the law, keep track of all project data, segregate all highly sensitive and confidential data, and be prepared to vigorously object to requests for their private data. Legal counsel may be needed to assist with specific situations.

Over the next several years, I expect the law to be properly interpreted by the courts and amended by the legislature as needed. This will require a clear and sustained response by contractors insisting that we maintain established rules of privacy.

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

New Requirements under Iowa One-Call Law Effective July 1, 2014

Gas Warning FlagMost people know to “call before you dig.” Underground contractors, in particular, need to be familiar with One-Call laws wherever they operate.

On July 1, 2014, several changes to the Iowa One-Call statute went into effect. The statute, as amended, can be found here.

There are two new requirements, in particular, to which Iowa contractors should pay close attention:

Pre-Marking

Excavators are now required to pre-mark the proposed excavation area with white paint, white flags, white stakes, or all-of-the-above. (Electronic pre-marking is not yet supported, but this will be an option in the future.)

There are two exceptions when pre-marking may not be required, including:

        1. If the precise excavation area can be “clearly and adequately defined and described” on the phone, online, or at the onsite pre-con meeting; or
        2. If physical pre-marking can be shown to be “impractical.”

Relying on these exceptions is risky—if any utility operator disagrees that the exception applies, work might be delayed. To minimize potential delays, contractors should pre-mark excavation areas at the time they provide One-Call notice, unless an exception clearly applies.

Onsite Gas Line Representatives

Another new requirement is that a representative of the gas line operator must be present for excavations performed “within 25 feet of an underground natural gas transmission line.”

There are two important exceptions to this new rule:

        1. The gas line operator and the excavator can agree in writing that the operator need not be present.
        2. If the gas line operator and the excavator have agreed when work will commence in writing, but the gas line operator’s representative doesn’t show up, the excavator can notify the gas line operator (preferably in writing) that the representative failed to appear, and excavation operations can begin, provided the excavator is careful to avoid damaging utility lines.

The best way to avoid unnecessary project delays or unnecessary risks will be to maintain the documents referenced in the statute, every time. This means the excavation start time should always be agreed upon in writing, because you never know when the representative won’t show.

For more information please see the Iowa One-Call Excavators Manual.

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

No damage for delay: A work of contractual fiction

Time Is Money

Time is money, and extra days on the jobsite mean extra costs. Yet, construction contracts routinely pretend this isn’t so by washing the hands of owners who delay the work. A “no damage for delay” clause states that a contractor cannot recover extra costs from an owner for project delays, even when the owner caused those delays.

A typical “no damage for delay” clause may state:

No payment or compensation shall be made for damages resulting from hindrances or delays in the progress of the work, whether such hindrances or delays are avoidable or unavoidable. A delay caused either wholly or in part by the actions of someone other than the contractor shall only entitle the contractor to an extension of time.

The basic purpose of the clause is to shift the risk of delay costs from owners to contractors. Even when the owner causes the delay, the contractor cannot recover its extra costs, but can only seek a time extension.

There are five exceptions that may render a “no damage for delay” clause unenforceable:

(1) Statutory prohibitions;
(2) Delays not contemplated by the parties;
(3) Delays resulting from “active interference” by the owner;
(4) Delays of unreasonable length; or
(5) Delays resulting from fraud, misrepresentation, or bad faith by the owner.

The first exception arises because a few state legislatures have acknowledged that “no damage for delay” clauses are unfair and against public policy, and have limited enforcement of these clauses. In Minnesota, for example, such clauses are prohibited in public works contracts, but legal for private contracts. Minn. Stat. § 15.411.The majority of states, however, continue to allow “no damage for delay” clauses to be enforced, and the exceptions can be difficult to prove.

Are subcontractors protected in states that prohibit “no damage for delay” in public works contracts?

This question arose in St. Louis Housing Authority v. Hankins Construction Co.

Like Minnesota, Missouri prohibits the enforcement of “no damage for delay” clauses in public contracts, but allows it in private contracts. A subcontract on a public works project contained a “no damage for delay” clause, and also required the subcontractor to complete its work according to the terms of the public contract. After the project was delayed, the subcontractor sought delay costs, arguing that it was a protected “contractor” under the Missouri statute, and that the “no damage for delay” clause should not be enforced.

The federal district court disagreed, based on its determination that a contract between a general contractor and a subcontractor is not a “public works” contract under the statute. The court found that the statute unambiguously applied only to contracts to which the government entity is a party, so the subcontractor was not allowed to recover its delay costs.

Minnesota courts have not yet addressed this issue. However, the Minnesota statute and the Missouri statute contain nearly identical language defining “public works” contracts, which was central to the federal district court’s analysis of the Missouri statute. When, if ever, this issue comes before Minnesota courts, Minnesota may adopt the same interpretation.

Even in states that consider “no damage for delay” clauses unenforceable, contractors and subcontractors should understand the limitations that may apply, so they can bid, plan, and perform their work accordingly.

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Navigating Uncharted Waters: Iowa Supreme Court requires IDOT to guarantee payment to subcontractors of targeted small businesses.

Vintage magnifying glass, compass, telescope and a pocket watch

A recent decision by the Iowa Supreme Court marks a victory for common sense enforcement of the reasonable expectations of subcontractors and material suppliers on public projects—specifically, that they will be paid for their work. Star Equipment, Ltd. v. State of Iowa, Iowa Department of Transportation, No. 12-1378 (filed January 31, 2014).

When the State of Iowa waived bonding requirements under its Targeted Small Business (TSB) program, it did so with the assurance (in the bond statute) that subcontractors remain “entitled to any remedy” under the bond statute, and that those remedies will be available “in an action against the public corporation.”

Thus, when IDOT hired an unbonded TSB and the TSB defaulted, the unpaid subcontractors understandably looked to IDOT for payment.

Answering a question of first impression in Iowa, the Iowa Supreme Court interpreted the statutes according to the plain language, requiring IDOT to “step into the shoes of the TSB general contractor to pay unpaid subcontractors.”

The statutory dust settles with IDOT sitting in the surety’s seat.

The Iowa Legislature enacted a policy to encourage targeted small businesses, or TSBs, by waiving bonding requirements in order to allow those companies to compete for government contracts despite lacking the experience, net worth, or capital typically required to secure bonding.

After IDOT hired a TSB general contractor to improve two rest areas, the TSB general contractor failed to pay three of its subcontractors. IDOT maintained that the subcontractors, not the state, should bear the risk of default caused by waiving the bonding requirements.

IDOT’s position was wrong for two reasons. First, it would defeat the purpose of the TSB program by resulting in fewer subcontractors willing to work for TSBs, which would discourage the growth of TSBs. Second, it would defeat the purpose of the bond statute, which is to guarantee payment to subcontractors and material suppliers on public projects, where they cannot secure payment with a mechanic’s lien against public property.

Based on these policy considerations and the plain language of the bond statute, the Iowa Supreme Court correctly decided that the statute “permits the subcontractors to recover from IDOT amounts they could have recovered from the surety if IDOT had not waived the bond.”

Public owners can have unique and unexpected responsibilities, including (in this case) sitting in the surety’s seat.

IDOT’s constitutional challenge backfired with IDOT paying the general contractor’s tab.

Even though the statutes in this case favored the subcontractors, IDOT dug itself into a slightly deeper hole by challenging the statutes under the Iowa Constitution.

IDOT argued that it could not act as surety because Article VII of the Iowa Constitution prohibits the state from assuming or becoming responsible for the debts of any private party (i.e., from being a surety). The Iowa Supreme Court had to decide whether the bond statute “makes IDOT a surety for the TSB or rather imposes primary liability on IDOT to unpaid subcontractors.”

After examining the historical context and interpretations of Article VII and similar constitutional restrictions in other states, the court concluded that the bond statute “puts IDOT in the position of a coprincipal, not a surety, with its TSB.”

In other words, IDOT steps into the shoes of a TSB general contractor when the bonding requirement is waived. This opens the door to recovering attorney fees from IDOT, just like an unpaid subcontractor can do against a general contractor and its surety.

What can we take away from this unique case?

In some respects, the Iowa Supreme Court’s decision is limited to a particular set of circumstances, in a single state. Indeed, every state has its own bonding rules, and every state regulates TSBs, DBEs, and other designated groups under different sets of rules.

However, there are a few lessons all contractors can take away from the Iowa Supreme Court’s decision in Star Equipment:

  1. Governmental owners can have unique and unexpected responsibilities in public contracting.
  2. Contractors must hold onto their payment rights, even in the face of uncertainty and denial. Star Equipment is telling not only for what the court says, but for what it doesn’t say—the subcontractors apparently followed the bond statute, thus allowing them to tackle the big questions head-on without being defeated by the “small” questions.
  3. Iowa subcontractors and material suppliers can continue to bid public work (including for TSB general contractors) without adding premiums in their bids to cover the uncertainty and risk of prime contractor default.

I believe the Iowa Supreme Court made the right call. Payment should be secure on public projects—this rule is fundamental to public contracting because public projects are bid and priced according to risk.

What do you think?

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.

Differing Site Conditions: Appeals Court Makes the Right Call

Tunnel_smallerThere is a disturbing trend among government owners and engineers who think that taxpayers will benefit by shifting risks of differing site conditions to contractors. Of course, that is not true.

A recent decision by the United States Court of Appeals for the Federal Circuit put the brakes on this trend by reaffirming that a contractor’s duty to investigate the site does not shift to the contractor the risk that site conditions may be different than expected. Metcalf Construction Company, Inc. v. United States, No. 2013-5041 (decided February 11, 2014).

A Narrow Vision

Bid documents often include geotechnical data (as in soil boring logs), accompanied by interpretations, opinions, and general discussion (as in geotechnical reports). Public contracts often include “disclaimers” that may require additional investigation, or limit the contractor’s right to rely on the information provided.

How these disclaimers are interpreted is critical. One typical owner/engineer interpretation goes like this…

  1. A geotechnical firm takes a limited number of soil borings—contractors should use these for bidding purposes.
  2. The geotechnical firm also drafts a generic “report” that lists every subsurface condition known on Earth—contractors should refer to this report if they encounter one of those conditions.

Government owners and engineers may think this is a great strategy: get the benefit of a low bid, and a plan to pay nothing if conditions are different than expected.

This strategy is shortsighted. Differing site conditions clauses are designed to benefit both the government-owner and the contractor. The contractor knows how to bid, and receives extra compensation if unexpected adverse conditions are encountered. The government reduces large contingencies from bids that would otherwise cover the risk of encountering those conditions.

Put another way, differing site conditions clauses in public contracts prevent taxpayers from paying for the most difficult conditions on every project, because contractors do not have to include costs for such conditions in every bid—those costs should be addressed by change order only if and when necessary.

Contracts Mean Something – The Metcalf Decision

Contracts are worth little more than paper if parties fail to deliver, or receive, their side of the bargain.

In cases of differing site conditions, this means owners, engineers, and contractors need to understand that limited reliance or post-bid investigation clauses do not shift the risk of differing site conditions. The Federal Circuit recently issued a very good decision, which should help the industry understand this important concept.

In Metcalf, the Navy’s bid documents included a government-commissioned report stating that soils at the jobsite had a “slight expansion potential.” That information was provided “for preliminary information only,” and the contract called for the contractor to perform its own independent soil investigation. During that investigation, the contractor’s consultant reported that soils at the jobsite actually had a “moderate to high,” not a “slight,” swelling potential.

The Navy took over 300 days to make a decision, after which it denied the contractor’s claim. The Court of Federal Claims wrongly agreed with the Navy and decided that the contractor was owed nothing, and should pay liquidated damages:

The trial court interpreted the pre-bid site representations and related RFP provisions to be nullified by Metcalf’s investigative responsibilities during performance… because “the Contract required Metcalf to conduct an independent soil analysis [and so] Metcalf was on notice that it could not rely on the ‘information only’ report.”

Fortunately, on appeal, the Federal Circuit overruled this bad decision, stating that it was “based on a misinterpretation of the contract.”

The Federal Circuit interpreted the contract by its “natural meaning” that, “while Metcalf would investigate conditions once the work began, it did not bear the risk of significant errors in the pre-contract assertions by the government about the subsurface site conditions.”

The government made representations for bidders’ use in estimating and submitting bids. The Federal Circuit recognized that a differing site conditions clause “allows the parties to deal with actual subsurface conditions once, when work begins, ‘more accurate’ information about them can reasonably be uncovered.”

In the end, understanding and following this important rule of risk-allocation not only saves taxpayers money—it also supports a fair and robust construction industry.

Build it right. Keep it real.

 

© 2014 Welle Law P.C. No unauthorized use or reproduction.

This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.