ASBCA Confirms that the Government’s Failure to Identify a Defect During Construction is a Constructive Waiver of the Specifications

Maria Panichelli and Michael Richard | Obermayer Rebmann Maxwell & Hippel

Many federal construction contractors have been there: it’s near the end of the project and the government raises an issue with work that was done much earlier, but is not in strict compliance with the specifications. The contracting officer demands strict compliance with the specifications, even if it means tearing out completed work to fix the defect. And of course, the contracting officer insists that the government does not have to pay for the additional work. The contractor has to proceed as directed, but is the contractor actually entitled to additional compensation or not? On December 17, 2019, the Armed Services Board of Contract Appeals handed down its decision in the Appeal of Buck Town Contractors & Co., confirming that if the government knew about the defective work during performance but said nothing, then it has constructively waived strict compliance with the contract specifications and the contractor is entitled to additional compensation.

Buck Town involved a U.S. Army Corps of Engineers project to rebuild a levee with strips of reinforcing geotextile. The specifications required that all seams between the strips be perpendicular to the centerline of the levee. The contractor installed the strips in the right direction, but when it reached the end of a roll of geotextile, it would simply continue that installation with a piece from a new roll. This created a seam on certain strips that was parallel to the centerline of the levee, in clear violation of the specifications.

During performance, this non-compliant work was observed by the Corps’ Quality Assurance representatives, who approved of the work without objection. Buck Town’s installation of connected strips with parallel seams was noted in both the government’s QA logs and the contractor’s Quality Control logs, without identifying it as non-compliant with the specifications. In reliance on the government’s approval, Buck Town rebuilt the levee above the non-compliant geotextile installations. Later on, Corps’ personnel from another project discovered the defect, and the contracting officer directed Buck Town to remove the levee and reinstall the geotextile in compliance with the contract specifications. Buck Town did the additional work and then submitted a claim for the time and costs incurred.

The Corps denied the claim arguing that it was entitled to strict compliance with the contract specifications. Buck Town appealed to the ASBCA, arguing that the Corps had waived strict compliance by approving the non-compliant installation and allowing it to proceed with the work. The contracting officer testified that he was unaware of the non-compliant installations, and the Corps’ QA representatives testified that they were unaware that the geotextile installations failed to meet the contract requirements. The Corps argued that it could not have waived compliance with the contract specifications when the contracting officer did not have actual knowledge that the reinforcing geotextile was not being installed in conformance with the contract requirements.

The Board rejected these arguments, holding that the knowledge of the QA representatives was imputed to the contracting officer and therefore he knew, or should have known, that the work was not being performed in strict compliance with the contract. By failing to identify the non-compliant work during performance, the government waived strict compliance with the contract specifications. The Board sustained Buck Town’s entitlement to time and money incurred in correcting the defective work.

The takeaway for contractors is that you may be entitled to additional time and money for corrections to defective work, provided you can show that the government knew about the defective work and allowed you to proceed anyway.

Where Pragmatism and Law Collide

Christopher G. Hill | Construction Law Musings

If there is one “theme” to Construction Law Musings, those that read regularly hopefully see that I take my role as counselor to construction companies seriously.  Aside from the fact that litigation and arbitration are both expensive and not a great way for any business, particularly a construction business, to make money, I have found construction professionals to be a pragmatic group of people that would rather solve a problem than go to court.

I have also discussed the need for a good foundation for the project in the form of a well drafted and properly negotiated contract.  This contract sets out the rights of the parties and essentially makes the “law” for your construction project.  Virginia courts will not renegotiate the terms for you and while this can lead to problems where parties either don’t understand the terms or don’t work to level the terms, it does mean that the parties know what the expectations are where the expectations are properly set, preferably with the help of your friendly neighborhood construction attorney and counselor at law.  Practical considerations such as your feel for the other party and which terms are worth forgoing the work for should drive your considerations almost as much as the legal implications.

With a good contractual foundation, hopefully you won’t ever have to call your attorney to deal with a dispute (at least in a “public” sense).  While I highly recommend getting advice early and often when you see a problem coming down the pike (and there will be problems), be practical about whether you want to use any of the “hammers” in the contract (which can range from termination to stopping work to arbitration).  The first and likely best option is to try and work through the problem and figure out a solution.  The least expensive and fastest way to get through to the end of a project that has problems almost never to terminate a subcontractor or walk off a job.  While these are proper in the right circumstances from a legal standpoint, they lead to additional issues, non-payment, mechanic’s liens, and in the end litigation or arbitration.

While I come from a litigation background, and litigate more often than I’m sure my clients would like, most often the practical approach, with a healthy dose of understanding the contract and the law, will get a construction project to the end and resolve issues in a less expensive and more satisfactory manner.

Performance Bond Surety Takeover – Using Terminated Contractor to Complete Work

David Adelstein | Florida Construction Legal Updates

When a contractor is defaulted under a performance bond, can its surety hire the same defaulted contractor to complete the work?  Stated differently, can the performance bond surety engage its defaulted bond-principal in taking over and completing the same work the contractor was defaulted under?   The answer is “yes” if you are dealing with a standard form AIA A312 performance bond (and other bond forms that contain analogous language), as demonstrated by the recent decision in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, 2019 WL 4850194 (Fla. 3d DCA 2019).

In this case, a condominium association hired a contractor in a multi-million dollar contract to renovate condominium buildings.  The contractor provided the association, as the obligee, a performance bond written on an AIA A312 performance bond form.  During construction, the association declared the contractor in default and terminated the contractor. In doing so, the association demanded that the performance bond surety make an election under paragraph 4 of the AIA A312 bond form that gave the surety the following options:

4.1 Arrange for the CONTRACTOR, with consent of the OWNER, to perform and complete the Contract; or

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the OWNER for a contract for performance and completion of the Contract, arrange for a contract to be prepared for execution by the OWNER and the contractor selected with the OWNER’S concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the Bonds Issued on the Contract, and pay to the OWNER the amount of damages as described in paragraph 6 in excess of the Balance of the Contract Price incurred by the OWNER resulting from the CONTRACTOR Default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances;

4.4.1 After investigation, determine the amount for which it may be liable to the OWNER and, as soon as practicable after the amount is determined, tender payment therefore to the OWNER; or

4.4.2 Deny liability in whole or in part and notify the OWNER citing reasons therefore.

Seawatch at Marathon Condo. Ass’n, 2019 WL at *1-2.

The surety elected the option under section 4.2, underlined and bolded above.  The surety wanted to complete the construction contract and provided the association with a surety takeover agreementi.e., an agreement where the surety takes over the completion of the defaulted / terminated contractor’s contract.   The takeover agreement was predicated on the terminated contractor continuing to serve as the contractor to finish the contract.

The association rejected the takeover agreement largely because it was adamant that the terminated contractor cannot serve as the completion contractor under the takeover agreement.  The association also argued that the surety could not properly elect section 4.2 because it was not a licensed contractor and needed to be a licensed contractor in order to undertake the completion of the defaulted contract.  Because an agreement could not be reached, the association filed a lawsuit for declaratory relief on these issues seeking judicial intervention as to its rights under the performance bond.

A. The Performance Bond Surety Can Use the Defaulted Contractor to Complete the Work

The trial court, as affirmed on appeal, held that the surety was well within its rights under section 4.2 of the bond to complete the contract with the defaulted contractor (bond-principal).  Section 4.2 places NO restrictions on the surety in using the defaulted contractor or any other contractor, for that matter.   As noted by the appellate court:

Finally, “[i]t is common practice for a surety undertaking to complete the project itself to hire the original contractor, as [Guarantee] elected to do here.”  “By completing the project itself, the surety obtains greater control than it would have had if it elected to require the obligee to complete, because the surety can select the completing contractor or consultants to finish the project as well as control the costs of completion.”

Seawatch at Marathon Condo. Ass’n, 2019 WL at *4 (internal quotations omitted).

B. The Performance Bond Surety Does Not Need to be a Licensed Contractor to Enter into Takeover Agreement

The appellate court summarily rejected the argument by the association that the surety needed to be a licensed contractor to enter into a takeover agreement and undertake the completion of the defaulted contract.  Since the surety is not actually performing the completion, the court rejected this outright which would prohibit the surety from ever exercising rights under section 4.2 unless it was a licensed contractor.

One thing to consider after reading the outcome of the case is that there is nothing to prevent the obligee of a bond from modifying a standard form bond form, or my preference, creating its own manuscript performance bond form.  Creating your own performance bond form gives you more flexibility regarding rights to trigger a surety’s obligations under the bond and the recourse under the bond.

2020 California Construction Law Update

Garret Murai | California Construction Law Blog

As 2020 fast approaches, we ring in many new changes to California’s construction laws.

Among other changes, California adopted its 2019 triennial revisions to the California Building Code which take effect on January 1, 2020. Revisions include aligning state structural steel and masonry construction engineering requirements with national standards, minor revisions to standards for wood construction, support and anchorage requirements of solar panels in accordance with industry standards, and clarification of testing and special inspection requirements for selected building materials during construction.

On the state legislative side, California enacted a number of new laws in the areas of affordable housing and alternative energy use.

So, without further ado, here are the new laws going into effect on January 1, 2020:

Building Code

The California Building Standards Commission adopted its 2019 triennial revisions to the California Building Code. A few highlights:

Engineering Requirements

  • Precast concrete diaphragms designs must use ASCE 7 Section 14.2.4.
  • New design standard for open-web steel joists.
  • 2015 AISI standards for cold-formed steel adopted.
  • Wood structural panel roof sheathing may have cantilevers 9 inches beyond supporting gable end wall without support.

Special Inspection Requirements

  • Metal-plate-connected wood trusses for trusses 60 inches or greater in height are subject to new special inspection requirements.
  • Automatic fire sprinkler systems equipment is subject to new special inspection requirements.

Barrier Systems/Balconies and Elevated Walking Surfaces

  • Plans submitted must detail all elements of impervious moisture barrier system as well as manufacturers installation instructions for exterior balconies and elevated walking surfaces.
  • Elements of moisture barrier system must not be concealed until inspected and approved.
  • New slope requirements for impervious moisture barrier systems protecting structure supporting floors.
  • To maintain consistency with the ASCE 7, the live load for balconies and decks is updated to 1.5 times the live load for the area served.
  • Venting is required for enclosed framing in exterior balconies and exterior walkway surfaces that are exposed to rain or drainage.

Stairs

  • Maximum rise of a flight stairs has increased from 147 to 151 inches.

Accessory Storage Spaces

  • Accessory storage spaces no longer need to be less than 100 square feet to be classified as part of the same occupancy.

Solar Panels & Ventilation Systems

  • Solar panels are required in all new construction homes and certain remodeled homes beginning January 1, 2020.
  • Revised requirements for the design of live, dead, and wind loads for roofs with solar panel systems.
  • Air handling units are now required to have ratings of MERV 13.
  • Air filters for heating/cooling or ventilation systems must have a MERV rating of 13.

Parking

  • Electric vehicle charging infrastructure required for new parking areas and additions to existing parking.
  • Minimum number of shade trees needed to provide shade to surface parking areas as well as landscape and hardscape areas.

Affordable Housing

SB 330 – Reduces the number of hearings a city or county conducts if a proposed housing development complies with applicable, objective general plan and zoning standards. Reduces the number of days a lead agency is required to approve or disapprove a project from 120 to 90 days for a development project and 90 to 60 days for a development meeting certain affordability conditions. Prohibits a county or city from enacting policies, standards, or conditions changing land use designation or zoning of property a less intensive use within an existing zoning district below what was allowed under the general plan or specific plan land use designation and zoning ordinances of the county or city; impose or enforce a moratorium on housing development; impose or enforce non-objective new design standards; or establish or implement limits on number of permits issued.

AB 68/AB 670/AB 881/AB 587/SB 13 – Deletes minimum lot size requirements to build an accessory dwelling unit (aka in-law unit) and prohibits imposition of limitations on lot coverage, floor to area ratio, open space, and minimum lot size if they prohibit construction of accessory dwelling units meeting those limitations. Makes any covenant, restriction, deed, contract, security instrument, or any provision of a governing document that prohibits or restricts the construction of an accessory dwelling unit on a lot zoned for single-family residential

AB 1485 – Adds a new class of eligible projects qualifying for streamlined permitting approval under SB 35 because of the difficulty for developers to meet the affordability requirements of SB 35.  Adopted in 2017, SB 35 requires local entities to approve certain housing projects through a ministerial approval process within certain timeframes and excepted from the California Environmental Quality Act (CEQA) analysis as well as Conditional Use Authorization requirement.

Projects located in certain qualifying San Francisco Bay area cities or unincorporated areas (Counties of Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Clara, Solano, Sonoma, and San Francisco), containing 10 or more units and providing 20% affordable housing to households earning below 120% AMI, qualify for streamlined project approval. Units used to satisfy the affordable housing requirements can also be used to satisfy other inclusionary affordability requirements.

Alternative Project Delivery

SB 128 – Extends the pilot program allowing certain counties to select a bidder on a “best value” basis for construction projects over $1 million to January 1, 2025 and adds the counties of Monterey and Santa Clara in addition to the existing counties of Alameda, Los Angeles, Riverside, San Bernardino, San Diego, San Mateo, Solano, and Yuba. Best value construction contracting method may be used to award individual annual contracts, not exceeding $3 million for repair, remodeling, or other repetitive work. Participating counties must submit a report describing, among other things, the projects awarded using the best value procedure.

AB 695 – On or after July 1, 2020, a design-build entity cannot be prequalified or shortlisted unless the entity provides an enforceable commitment to the school district that the entity and its subcontractors use skilled and trained workers or building and construction trade apprentices to perform all work on the project or contract.

Alternative Dispute Resolution for Public Works Projects

AB 456 – Extends the claim resolution process for any claim in relation to a public work project from January 1, 2020 to January 1, 2027.

Prevailing Wages

AB 1768 – Workers employed on public work project may not be paid less than general prevailing rate of per diem wages. Expands the definition of public works to include preconstruction works such as design, feasibility studies, land surveying, and site assessments.

Common Interest Developments

SB 326 – An association of condominium project must conduct a reasonably competent and diligent visual inspection of exterior elevated elements, defined as load-bearing components and associated waterproofing systems.

Progress Payments

SB 197 – Department of Transportation is indefinitely prohibited from withholding retention proceeds when making progress payments for work performed by a contractor.

Wishing you and yours a happy 2020!

‘Coyotes’ On The Loose At Utah Construction Sites May Be Trouble For Contractors

Courtney Malveaux, Christopher Moon and Richard Vitarelli | Jackson Lewis

Following a local television station’s report of labor brokers paying cash to construction laborers to avoid paying taxes for these workers, a Utah state legislator said she plans to introduce legislation in 2020 to increase fines and make subcontractors liable for the acts of these labor brokers. 

A Salt Lake City television station investigated and reported on the use of labor brokers, colloquially known as “coyotes,” who pay cash under the table, or off the record, to construction laborers. One legislator called the practice a robbery of tax dollars. Indeed, the report highlights that such employers pay their construction laborers cash to avoid paying workers’ compensation, unemployment insurance, and federal and state taxes. Union representatives quoted in the story also decried the practice because of the inability of employers who use union workers and abide by the law to compete under such circumstances.

Several contractors who worked with the suspected coyotes interviewed during the investigation said they did not have an obligation to audit the pay practices of another company with whom they worked and denied any reason to believe illegal activity was taking place.

Yet, these construction employers may be playing with fire. Depending on the circumstances, contractors can be held responsible for the actions of their subcontractors. For example, some states, such as California, hold general contractors liable for a subcontractor’s unpaid wages. Thus, general contractors should beware of possible illegal employment practices by other employers on the construction site. If a bid from a subcontractor appears too good to be true, then it probably is. A subcontractor paying employees in cash out of a large envelope should also raise concerns. (See our article, Are General Contractors Liable for Their Subcontractors’ Actions or Inactions?)