Construction in the USA

Craig Ledet, Martha Buttry Daniels, Scott A. Greer, Mike Stenglein | King & Spalding LLP | January 8, 2019

Construction

Sector overview

Trends, developments and prospects

What is the general state of the construction sector in your jurisdiction, including current trends, notable recent transactions/developments and future prospects?

The United States continues to be one of the largest construction markets worldwide, with $1.23 trillion worth of construction in 2017. As recently as April 2018, construction industry employment surged by 17,000 jobs. Notable developments in the energy industry include many large petrochemical projects across the Gulf Coast. Commercial construction is booming in most urban areas, exemplified by the recent completion in San Francisco of the 61-story Salesforce Tower. Major construction is anticipated as a result of the Trump administration’s $1 trillion infrastructure plan. 

Legal framework

Legislation

What primary and secondary legislation governs the construction sector in your jurisdiction?

U.S. construction projects are subject to state-specific legislation such as anti-indemnity statutes, prompt payment acts, lien statutes, ‘home court’ governing law and venue rules, and retainage statutes. State legislation may pertain to specific types of project as well. For example, the majority of states legislate public-private partnerships. Federal legislation interfaces with the construction sector only in specific circumstances, such as construction of a federal infrastructure project.

Authorities

Which authorities regulate the construction sector and enforce construction law, and what is the extent of their powers?

The state courts and private arbitral tribunals play the largest roles enforcing rights between contracting parties. They also enforce state-specific legislation touching on the construction industry, such as anti-indemnity statutes, prompt payment acts, lien statutes, ‘home court’ governing law and venue rules, and retainage statutes. Federal regulatory authorities, and their state counterparts, may also oversee construction when the project interfaces with a regulated issue. For example, the Environmental Protection Agency oversees a project’s environmental components, the Occupational Safety and Health Administration regulates worker safety, the Department of Labor has authority over issues such as minimum wage and overtime, and the Federal Energy Regulatory Commission governs transmission and wholesale sale of electricity and natural gas, while also regulating the transportation of oil by pipeline.      

Licensing

Project licensing

What licensing requirements and procedures apply to construction projects in your jurisdiction (eg, planning consents)?

The applicable licensing requirements and procedures for construction projects vary depending on the type of construction (e.g., residential, commercial, or industrial) and the particular state. Licensing requirements are generally not stringent. Certain construction projects may also need to satisfy governmental inspection and permitting requirements, which again vary by state and municipality. 

Professional licensing and qualification

What licensing requirements and procedures apply to construction professionals, including any required qualifications?

Most construction professionals are not required to have specific qualifications, as the primary gauge in the industry is years of experience and past projects successfully completed. Construction project owners and contractors may establish their own qualification requirements.

Certain types of professional may need licenses or certifications, such as electricians, installers of heating, ventilation, and air conditioning, and non-destructive testing professionals.

Design professionals wishing to become licensed may do so by becoming professional engineers. The requirements for such licensure are state-specific, but often include a four-year college degree, years of work experience, and passing one or more exams. In some circumstances, again regulated on a state-by-state basis, a professional engineer may be required to sign, seal, or stamp technical documents.

Do any special rules and restrictions apply to foreign construction professionals?

Foreign construction professionals are not subject to any special rules and restrictions, apart from needing work authorization under U.S. immigration law. Several different visas are available to foreign workers, such as the H-2B Visa (for temporary non-agricultural labor) or the E-B3 Visa (for skilled workers, professionals, or non-temporary unskilled workers). From a practical standpoint, foreign construction professionals must be able to communicate fluently with the workforce, although some even rely on interpreters to assist in communications.

Project structures and relationships

Project structures

What corporate/formal structures are available for construction projects in your jurisdiction? What are the advantages and disadvantages of each? Are any structures explicitly prohibited?

No corporate or formal structure is prohibited for construction projects, so long as it does not run afoul of business associations’ requirements (e.g., it cannot be a ‘sham’ company). Owners and contractors can structure a project however they see fit, often relying on joint ventures (JVs), corporations, or limited liability companies. The benefits of different corporate formations depend on the circumstances.

For large-scale projects, JVs are prevalent because one company rarely retains all of the requisite expertise or resources to succeed by itself. Further, due to the size of these projects, many owners and contractors desire to spread the completion risk across several balance sheets. Whether the JV is long term or short term depends on the different business needs of the JV partners, and the anticipated requirements of the project itself.

Owners commonly use subsidiaries and special purpose project entities to help shield parent and affiliated companies from project-specific liabilities. Contractors may establish special purpose entities, but if they do, owners will generally require guarantees from the contractor’s parent company.

Relationship management

Are there any special considerations for managing relationships with:

(a) Joint venture partners (where applicable)?

The JV agreement should clearly lay out each partner’s roles and responsibilities, how the JV ends, how important operational decisions will be made without reaching impasse among the JV partners, and how disputes between the JV members—and with third-parties—are to be resolved. Failure to do so can have serious implications on the project.

A project’s success often relies on the alignment of the JV partners, which should maintain constant contact with one another. Communications between the partners may not be protected by the attorney-client privilege (depending on the state); consequently, inter-JV communications on legally sensitive topics should be approached with caution.      

(b) Contracting government entities in public-private partnerships (or other construction projects with a public element)?

In a public-private partnership, the government entity seeks to meet its development needs with a reduced capital expenditure and to capitalize on private sector expertise to deliver assets cost-effectively and efficiently. One should define the division of services and allocation of risk between the private and public sector. Risks must be allocated with the entity best able to manage them, including construction risks (e.g., increased construction or delay costs) and operating risks (e.g., certainty of revenue stream, costs of servicing the project, and costs associated with performance issues). There are two key considerations in risk allocation: which entity can better control the occurrence of the risk, and which entity is better able to manage the impact of the risk. If too much risk is allocated to the private sector, it can result in increased bid costs and/or the private sector failing to meet its contractual obligations.

(c) Subcontractors?

The successful management of subcontractors requires transparency, constant communication, and a clearly defined scope of work. Subcontract terms and conditions must align with the degree of definition of the scope of work to be performed.

There are often multiple subcontractors working on one construction project, so each must be treated fairly and equally (a ‘sweetheart’ deal with one subcontractor will almost certainly lead to unrest and dissention between the other subcontractors and the contractor). It is important for both the owner and prime contractor to understand the rights and responsibilities of each subcontractor. Ideally, each subcontractor will have similar contracts, as failure to maintain consistent subcontracts can prove problematic. For example, all subcontracts should have identical dispute resolution provisions (e.g., requiring arbitration in the same forum and under the same rules). If a dispute should arise, inconsistent dispute resolution provisions could result in disputes across multiple forums.       

(d) Architects, designers, engineers and any other related professionals?

Managing relationships with design professionals requires constant communication across disciplines—between architects, engineers, and related professionals, as well as all downstream designers, fabricators, and constructors. Project managers should consider the important interplay between design and construction work. Sometimes cost or time-saving shortcuts in construction will nullify important aspects of the design.

(e) Any other relevant parties typically involved in construction projects?

Banks, lenders, and insurers play a large role in construction projects, especially large-scale ones. Loan covenants and insurance coverages can sometimes be implicated by decisions made during the execution phase of a project, so they should be carefully consulted whenever significant decisions are made that may depart from the original project plan.      

Contracts and performance

Standard contract forms

What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?

U.S. construction projects do not rely on one standard contract form. In fact, even when a form is used, the parties often make revisions. The most commonly used forms are those developed by the American Institute of Architects (AIA) and the American Society of Civil Engineers (ASCE), or are state-specific. AIA forms are popular in commercial real estate and are considered architect-friendly, so owners and contractors often push for a negotiated AIA. ASCE forms are more common in the industrial context. Residential construction contracts, such as for single-family homes, often rely on forms established by individual states. While forms from the International Federation of Consulting Engineers are popular in Europe, they are typically not used in the United States.

For larger projects, the parties often find it advantageous to negotiate their own contract, without relying on a standard form.

Definition of ‘construction work’

How is ‘construction work’ legally defined?

There is not one single definition for ‘construction work.’ Generally, individual states’ lien, anti-indemnity, or other construction-related statutes define construction broadly. The scope of work is usually defined by contract and will vary in specificity from project to project.      

Governing law

Are there any rules or restrictions on the governing law of construction contracts?

Many states have ‘home court’ rules specific to projects constructed in the respective state. While the language in each statute differs, the general rule is that a provision in a construction contract is void or voidable if it requires litigation to occur in, or be subject to the laws of, another state. To get around the venue rules, parties may agree to arbitrate, rather than require litigation in a specific court system. That said, any contractual provision purporting to require the application of the laws of a state other than the state where the project is being built could still run afoul of the home court rules. These governing law restrictions can be complicated when horizontal construction occurs across borders, such as a pipeline running through different states.      

Formalities

Are construction contracts subject to any formal requirements?

Construction contracts are subject to state-specific requirements. Many states have requirements on issues such as retainage, anti-indemnity provisions, prompt payment, and waivers of negligence or gross negligence—to name a few. These requirements often differentiate between the type of project: residential, commercial, or industrial. When drafting a construction contract, the best practice is to review the contract law of the relevant state.    

Mandatory/prohibited provisions

Are there any mandatory or prohibited provisions in relation to construction contracts?

Whether a construction contract has prohibited provisions is subject to state-specific requirements. Every state has some restrictions on risk-shifting, but the extent of those restrictions varies. Similarly, the states scrutinize waivers of rights and responsibilities, as well as limitations of liability. Some states also restrict or prohibit the use of design-build delivery systems for public projects, although this method is becoming increasingly more popular in the public space. While there are restrictions, the states do not have mandatory contract provisions. When drafting a construction contract, the best practice is to familiarize oneself with the relevant state’s contract law.    

Implied terms

Can any terms be implied in construction contracts?

The terms most commonly implied in construction contracts are warranties, which are subject to state law. Both owners and contractors may be subject to implied warranties. Under the Spearin Doctrine—effectively adopted by all 50 states—there is an implied warranty of accuracy for any information that the owner shares with the contractor. This can be critical for engineering, procurement and construction (EPC) contracts, but the majority of states allow the parties to waive this implied warranty. Various implied warranties apply to the contractor’s work, such as the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

In addition to implied warranties, state-specific products liability and consumer protection laws may be implied by law into contracts.    

Risk allocation

How are risks typically allocated between parties to construction contracts?

The contract delivery strategy dictates how liabilities are handled. A traditional design-bid-build model is one liability set that consciously separates the liabilities (e.g., the construction contractor is not responsible for design errors unless the contractor discovers the error and fails to report it). In the EPC context, greater risk falls on the EPC contractor. There are many ways to allocate risks between parties to construction contracts (e.g., indemnities, limitations of liability, risk of loss provisions, performance guarantees, etc.), and that allocation often depends on the parties. The liability structures also depend on the industry, what is being built, who can bear the risk, each parties’ financial wherewithal, economic undercurrents, geography, issues with union labor, and political considerations.    

Limitation of liability

How and to what extent can parties to construction projects contractually limit or exclude their liability?

There are many ways to contractually limit or exclude liability, through clauses such as limitations of liability, risk of loss provisions, waivers of consequential damages, and waivers of implied warranties. The states have their own restrictions on such limitations. For example, most states will enforce a limitation of liability provision only if it is explicit, prominent, clear, and unambiguous. Indemnities are also used to limit liabilities, but the drafter should take into account construction anti-indemnity statutes. Because each state has its own requirements, one should always analyze the relevant state-specific rules when drafting a construction contract.

In addition to the aforementioned mechanisms to limit or exclude liability, the parties may also shape their liabilities with warranties and representations, as well as contractual limitations on when and how relief may be sought.      

Liquidated damages

How are liquidated damages typically calculated and to which liabilities are they usually applied?

Liquidated damages are traditionally used as a remedy for delay (including the contractor’s failure to mobilize or failure to complete its scope of work by a specified date), but they may also address performance elements. Interim liquidated damages can be based on delivery dates for multi-prime coordination.

Most states have specific case law on how liquidated damages should be determined and when they will be held unenforceable. Generally speaking, most states require liquidated damages to be calculated based on a genuine pre-estimate of what the party believes its damages would be in the event of breach by the other party. The damage amount may consider lost profits related to failure to start up. For commercial real estate, it may be calculated based on lost real estate rental income. Liquidated damages amounts can also take into account debt service and the extension of corporate and on-sight overhead.

Force majeure

How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?

There is not a single legal definition of force majeure events in the United States, as these clauses are analyzed on a state-by-state basis. As a general rule, a force majeure event must be beyond the reasonable control of the party, or unforeseeable at the time the parties entered into the contract. Force majeure typically allows only for schedule relief, rather than cost relief.  

The parties may choose to define force majeure in the construction contract as they see fit, and they may agree that cost relief will be available in certain limited circumstances. Force majeure is negotiated differently depending on the industry, location, what is being built, and how the parties want to handle risk. In many contracts, the parties will negotiate and agree upon an exclusive list of events that qualify as a force majeureevent, rather than relying upon a general definition.      

General performance obligations

What are the general performance obligations of contractors and employers?

The parties’ general performance obligations depend on many factors, including what is being built, how the delivery system is set up, the expectations for the project, and the express terms of the contract.

Construction professionals are subject to various ethical and professional obligations. For example, engineers generally have a duty to perform to the standard of a reasonably prudent engineer, although the relevant contract may establish an even higher standard. For example, if the contract is an EPC contract, the standard in the industry is that there shall not be any defects in design or engineering, rather than relying solely on the standard of a reasonably prudent engineer. Contractors may also be subject to agency rules and fiduciary duties. 

Project delays

How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?

Project delays are one of the most commonly litigated construction issues in the United States. Well-drafted contracts establish clear grounds for entitlement to relief for delay. Disputes often arise regarding who caused the delay and how to calculate the relief for such delay. The modern trend in most U.S. jurisdictions is to allow apportionment of fault for delays. Additionally, contractors often challenge liquidated damages for delay as unenforceable penalties. To overcome that challenge, the party seeking to recover liquidated damages must generally be able to show that the amounts were a genuine, good-faith pre-estimate of the damages that would be incurred in the event of delays.

Contract variations

To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?

A well-written contract will prohibit contractual variations unless it is done through a formal amendment or approved change order. Contract provisions are often found ambiguous, though, in which case most courts will allow some extrinsic evidence to resolve the ambiguity. In practice, this sort of evidence can change many core components of the parties’ arrangement. For this reason, even if the contract seems perfect, parties to a construction contract must stay engaged and ensure that the trail of paperwork properly reflects the contractual intent. The rules on contract variations exist on a state-by-state basis.      

Termination

What are acceptable grounds for the termination of a contract?

Typically, a contract may be terminated for convenience or cause. Termination for convenience is common in construction contracts and is usually available only to the owner. When properly described in the contract, it allows an owner to terminate its contractor at will, and pay for costs incurred by the contractor up to the termination date. These costs largely depend on the industry and contract.

The contract should also define when an owner may terminate a contractor for cause. Termination for cause can be for many reasons, including, but not limited to, the contractor’s failure to perform the work, refusal or failure to supply enough skilled workers, failure to pay its subcontractors, and insolvency. Sometimes the owner may replace the contractor for safety reasons or because the contractor has repeatedly disregarded applicable laws.

The contractor can also terminate the contract for default, but that right is typically narrower.  Justified reasons for doing so generally include the owner’s failure to pay undisputed amounts under the contract after a grace period has expired.    

Remedies for breach

What remedies are available for the breach of construction contracts?

The owner generally has several different remedies for the contractor’s breach, including liquidated damages, termination of the contractor (for convenience or cause), and withholding payment. In certain circumstances, the owner may also pursue injunctive relief or specific performance. Under express and implied warranties, the owner can require the contractor to correct defects to its work, or pay for a third party to do so, then pass that cost on to the contractor.

The contractor’s remedies are often more limited, but may include termination for cause if the owner defaults. The contractor’s primary remedy is an entitlement to additional cost or schedule extension when an owner breaches its obligations. In the event of non-payment, the contractor may also lien the project. This often requires the contractor to satisfy specific requirements, defined by each individual state.

Either party may proceed under standard breach of contract theories. All of these remedies should be defined by the contract and may be addressed more generally by state law.    

Financing

Types of financing

What types of financing are used for construction projects in your jurisdiction? Which are the most common? Are there any restrictions on available financing methods?

The different types of financing used for construction projects depend in large part on the size of the project. For smaller projects, such as residential or commercial construction, the contractor or bank will finance the company or the project itself. Public construction projects often rely on bonds (e.g., a municipal bond may raise funds for a sewer project), and the federal government will finance larger infrastructure projects (e.g., interstate highways). Many parties to large-scale projects use non-recourse project financing, where the lender provides financing based on the contract commitments and the equity in the project, and without a guarantee from the project owner or its affiliates or parent companies. Parties may also use balance sheet financing, where the company finances the project out of its own cash reserves.

Security

What forms of security are used in construction project financing?

It depends. Owners often require performance and payment bonds, letters of credit, parent company guarantees, and hold retainage to guaranty performance. Public-private partnerships will use surety bonds with a liquid element that is similar to a letter of credit. Bank guarantees are more common abroad, and less common in the United States.    

Payment

Methods and timing

What are the typical methods and timing of payment for construction work? Are there any restrictions on ‘pay when paid’ and ‘pay if paid’ provisions? Do any other rules, restrictions or procedures apply?

The timing of the owner’s payment to the prime contractor is typically 30 days, although the payment term may be longer or shorter. The prime contractor’s payment to subcontractors is often less than 30 days.

Contract language is often unclear as to whether the parties intend to create a ‘pay when paid’ or ‘pay if paid’ arrangement. Conflicting interpretations of these clauses can mean the difference between subcontractors receiving payment within a reasonable time after the prime contractor is paid, or the subcontractors remaining unpaid until the prime contractor resolves disputes with the owner. These clauses are commonly litigated in state court, and many courts interpret ambiguities as creating a ‘pay when paid’ arrangement. Common grounds for challenging a ‘pay if paid’ arrangement includes arguing the clause is contrary to the parties’ intent, the clause is unconscionable, or the party has waived its right to enforce the clause by making partial payments.

The most common restriction to these clauses is that the prime contractor is not permitted to enforce an otherwise valid contingent payment clause if the reason for the owner’s non-payment is the prime contractor’s own failure to comply with the contractual requirement.

Non-payment

How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?

The most common way for a contractor to secure itself against non-payment by the owner is by filing a lien against the project. Each state has its own rules describing the necessary steps to secure a lien, and many of these rules have very specific requirements. However, where project financing is used, the contractor should recognize that it will be required to subordinate its liens to the lenders.

The contractor may also terminate the contract for default, usually after a contractually defined grace period. The parties can include other remedies in the contract to protect the contractor in the event of non-payment, including circumstances that expressly authorize suspension of the work.

How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?

In the event of non-payment, subcontractors may lien the project, then require the owner and prime contractor to resolve the issue of non-payment. The availability of this relief, and the directions for how to file such a lien, are state-specific. The subcontractor should put the owner on written notice immediately if payments are past due. In many jurisdictions, such a ‘fund trapping’ notice may require the owner to hold certain funds for the subcontractor or place them in a trust account until the subcontractor’s dispute with the general contractor is resolved. The subcontractor may also begin the dispute resolution process based on the contractor’s breach of contract.

Generally, a subcontractor should be very careful about suspending work for non-payment as doing so may result in the subcontractor’s own breach of contract. In the instance of the prime contractor’s non-payment, it is important for the subcontractor to understand its rights and responsibilities under the contract before taking any action. This may be affected by the existence of a ‘pay when paid’ or ‘pay if paid’ clause in the subcontractor’s contract.      

On what grounds can payments be withheld?

Payment can be withheld if the contract permits withholding and if the withholding does not run afoul of the respective state’s prompt payment act.      

Insolvency

Contractor insolvency

What recourse is available to employers in the event of the contractor’s insolvency?

In the event of the contractor’s insolvency, the owner usually may terminate the contract for cause, provided that termination is not prohibited under applicable bankruptcy laws.      

Insurance

Coverage

What mandatory insurance coverage applies to parties involved in construction projects? Is any additional coverage recommended?

The United States has no uniform federal insurance law, and the types and amounts of coverage required vary by state. In most states, businesses with one or more employees are required to carry worker’s compensation/employer’s liability insurance, and businesses that own one or more automobiles are required to carry automobile liability insurance. Other recommended coverages for construction projects include:

  • all risk/builders risk;
  • commercial general liability;
  • umbrella or excess liability;
  • environmental/pollution liability;
  • professional liability (including coverage for construction or design professionals);
  • delay in start-up;
  • marine cargo (insurance on equipment);
  • property coverage (e.g., to cover damage to existing facility if the facility is on a brownfield site);
  • employer premise liability;
  • performance bonds/contractor default insurance;
  • wharfingers coverage (e.g., if a ship hits a dock);
  • crime and fidelity insurance;
  • cyber liability insurance; and
  • owners/contractors’ protective professional indemnity and liability insurance.

The need for these coverages depends on the role of the entity seeking coverage (e.g., whether the design professional, construction contractor, or project owner is the insured). Certain coverages may be purchased on a project-specific basis—for instance, in the form of wrap-up programs or policies issued to joint ventures.  

Tax issues

Liability

What tax liabilities arise in relation to construction projects?

A variety of different tax considerations must be taken into account for construction projects. This includes, but is not limited to:

  • state-by-state sales and use tax;
  • state and federal income tax;
  • statutory and employment taxes, which may be depend on the corporate/formal structure for the project;
  • import duties; and
  • property taxes, including the local appraisal district’s taxation of assets on the property (e.g., compressors or other equipment).

Owners and contractors also need to be increasingly mindful of tariff issues.

Incentives

Are there any tax incentive schemes to promote construction and development in certain areas?

The availability of tax incentive schemes to promote construction depends on the state. There are often manufacturing or process exemptions for construction projects such as refineries or processing plants. In these situations, sales and use tax exemptions may be available. It is important for an owner to explore possible tax incentives before committing to build the project in a particular locale.

Environmental issues

Environmental protection

What environmental protection legislation and regulations apply to construction projects in your jurisdiction?

Construction projects that are built on previously used land may trigger applicability of remediation provisions under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA). Remediation liability is strict liability, and a party cannot claim that it acted in accordance with industry standards, or even that it acted negligently only, to avoid liability. CERCLA liability applies retroactively, and holds the potentially responsible parties jointly and severally liable. Most states have equivalents to CERCLA and RCRA (although the restrictions and protections vary greatly), including ‘voluntary clean-up’ programs that can offer liability protection for a new project.

Authorisation/certification

What environmental authorisations and certifications are required for construction projects and how are they obtained?

Construction projects are required to comply with a range of environmental laws, including obtaining any applicable permits or other authorizations, and these may include federal authorizations and equivalents that are state-specific. The most commonly required authorizations for construction activities include air permits (particularly for concrete batch plants and diesel generators), stormwater (for construction runoff), and spill prevention and reporting. Certain projects may also require permits for water use, hydrostatic testing, noise, and waste management. In addition, other authorizations are often required to address potential land use impacts. These may include a general environmental impact review, as well as more specific clearance for impacts to wetlands and waters, threatened or endangered species, archaeological or historical sites, and navigable airspace. Every project needs construction permits from the local jurisdiction. How each is obtained varies widely by municipality, county, and state.      

‘Green’ regulations and incentives

Are there any regulations or incentive schemes in place to promote the construction of energy-efficient and low-carbon buildings?

While the United States has incentive schemes to promote the construction of green energy projects, the most recent tax reform has reduced some of those incentives. Many states and municipalities will provide tax abatements and deferments for green construction, which is especially common in the residential and commercial space.    

Employment issues

Employment and labour law

What employment and labour legislation applies to construction projects in your jurisdiction? What rights and protections are provided to construction workers?

The Fair Labor Standards Act establishes minimum wage and overtime pay requirements for construction worker ‘employees’ across the United States, in addition to state-specific rules that may establish more stringent standards. While individuals classified as ‘independent contractors’ are not subject to the same protections, the Department of Labor is increasingly suspicious of misclassifications of employees as independent contractors.

The Occupational Safety and Health Administration protects the health and safety of construction workers, and the states may promulgate more stringent standards. The states’ worker’s compensation laws also provide insurance protections for injured workers.       

Occupational health and safety

What occupational health and safety regulations apply to construction projects?

Construction projects are subject to the health and safety regulations of the Occupational Safety and Health Administration, and analogous state agencies, which may choose to promulgate more stringent standards.     

Employment contracts

What types of employment contract are typically used for constructions work? Are there any mandatory or prohibited provisions in relation to employment contracts?

Construction workers are contracted as employees or independent contractors. This structure depends on many factors, including the size and scope of the project. A construction company with a small employee base may choose to contract with a large number of independent contractors. Other companies will use a subcontractor, or even its own subsidiary, as a staffing contractor. Most states regulate the scope of non-competition agreements and tend to strictly construe them.

Some projects use union labor, but the strong trend is towards at-will employment, subject to state-specific provisions. Many states regulate the scope of non-competes in employment contracts.      

Foreign workers

What rules, restrictions and considerations apply to the hiring of foreign workers?

Foreign workers are not subject to any special rules and restrictions, apart from needing work authorizations under U.S. immigration law. There are several different visas available to foreign workers, such as the H-2B Visa (permitting employers to hire foreign workers to perform temporary non-agricultural labor) or the E-B3 Visa (providing work certification to skilled workers, professionals, or non-temporary unskilled workers).

Often there are state and municipal tax incentive schemes with local content requirements. While not a restriction, this often incentivizes the employment of local workers instead of foreign workers. Hiring foreign workers can also create issues with local unions. For large-scale projects, especially those anticipating hiring thousands of workers, hiring foreign workers can cause unwanted political and media attention.    

Anti-corruption rules

Applicable rules

What regulations and procedures are in place to combat corruption, bribery, fraud, collusion and other dishonest practices in the construction sector in your jurisdiction?

The primary restrictions on corruption and bribery come from the U.S. Foreign Corrupt Practices Act, which broadly prohibits paying or offering anything of value to government officials and employees of government-owned or government-controlled businesses. Within the United States, the domestic bribery statute prohibits similar conduct as to U.S. government officials. Many states also have enacted prohibitions on commercial bribery that prohibit paying or offering benefits to employees of private companies to obtain an improper business advantage.    

Best practices

What best practices are advised to ensure compliance with the relevant anti-corruption rules?

Compliance with applicable restrictions depends on strong internal policies and procedures that are explained to employees in routine training sessions. Successful compliance programs combine consistent communications from senior management about the importance of compliance and ongoing monitoring of potentially risky activity, including standardized processes for vetting agents and other third parties operating on behalf of the company.    

Dispute resolution

Courts

What courts are empowered to hear construction disputes in your jurisdiction? Are there any specialist construction courts?

State courts most commonly preside over construction disputes, though construction disputes are brought to federal court when the court has diversity jurisdiction or there is a federal question at play. The parties’ contract may identify an agreed court for litigation, although these provisions cannot confer jurisdiction on a court if it is otherwise lacking, and the parties must be careful of ‘home court’ venue rules. In addition to traditional litigation, many parties choose to resolve disputes through arbitration. The American Arbitration Association and International Institute for Conflict Prevention Resolution are two of the most commonly used institutions to administer U.S. domestic construction arbitrations.    

Common disputes

What issues are commonly the subject of construction disputes?

The issues most commonly the subject of construction disputes are:

  • breaches of contract;
  • liquidated damages;
  • delay and disruption damages;
  • limitations of liability;
  • breaches of express and implied warranties;
  • non-payment by the owner or prime contractor;
  • disputes related to change orders, and amendments to the contract, or the scope of work; and
  • occasionally, fraud or fraudulent inducement claims based on representations made before or during the course of the construction project.

There are many additional issues—such as employment, environmental, or IP concerns—that can intersect with a construction dispute.   

Statute of limitations

What is the statute of limitations for filing construction-related claims?

The statute of limitations for construction-related claims depends on both the state and the underlying cause of action. When contemplating a specific claim, the best practice is to review the statutes of limitation for the relevant state, as well as considering tolling, how each state describes the discovery rule, and any relevant statute of repose.      

Mediation

Is pre-litigation mediation required or advised for construction disputes?

Pre-litigation mediation is not required for construction disputes, although it is often required under the contract. Recently, mechanisms like Dispute Resolution Boards and Dispute Adjudication Boards are being used to resolve in-project disputes on larger projects. It is often advisable to require some level of dispute resolution or mediation between the parties before formal disputes are initiated.    

Arbitration

How often is arbitration used to resolve construction disputes? What arbitration forms and institutions are typically used?

Arbitration is becoming increasingly common in the construction dispute context, and more parties are requiring arbitration in their contracts. The American Arbitration Association and International Institute for Conflict Prevention Resolution are two of the most commonly used institutions to administer U.S. domestic construction arbitrations, although the parties may select whether the arbitration is administered or non-administered.

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Michael Kaney | Shutts | December 28, 2018

WHY DO WE NEED TO DOCUMENT PROJECTS IN THE FIRST PLACE?

Project documentation can help avoid claims or litigation altogether.  Good and timely communication can mitigate or eliminate surprises between parties.  A clear understanding of what transpired during a project can prevent claims from turning into costly litigation.

Project documentation helps answer the important question of: “who knew what, when?”  If an issue is well documented then there is very often no reason to disagree and any questions that arise will generally have an answer that is supported by a paper trail of documentation.

The outcome of construction litigation is determined by the FACTS of what occurred at or on the project.  The facts can be shown through accurate and up-to-date documentation.  Thus, effective project documentation can lower litigation costs or prevent litigation altogether.

SOME SUGGESTED METHODS OF PROJECT DOCUMENTATION

Daily Reports

Daily reports can be essential for supporting and defending pre-litigation and litigation construction claims.  These reports should be created contemporaneously with the work that is completed each day, meaning, these reports should actually be daily reports.  It is much easier to recall what happened on a particular day the day it occurred as oppose to trying to piece the puzzle together a few days later.  Daily reports should become a routine.

Daily reports can consist of some of the following items:

  • Workforce
    • Who worked on the project that day?
    • Who are they employed by? Are they covered by insurance?
    • What are their daily duties/tasks?
    • Were those tasks completed? If not, why?
    • How many hours were workers present on the job site?
  • Equipment
    • What equipment was used on the job site that day?
    • Who owns the equipment? Is the equipment owned by the contractor(s) or was it rented?
    • What was the purpose of the equipment?
  • Events/Jobs
    • What events were scheduled for the day? Were they completed?
  • Weather
    • What was the weather on the given day?
    • Were there any delays due to weather? How long were the delays and will that affect the overall completion time of the project?
  • Time and Date
  • Visitor and/or Delivery Log
    • Who visited the job site? What was their purpose of visiting?  How long did they stay?
    • Were there any deliveries to the job site? If so, what were they and what purpose did the materials serve?

Meeting Minutes

Meeting minutes should be a complete reflection of every topic or issue discussed during the meeting.  The overall purpose of the meeting should also be reflected.  This ensures that anyone reading the minutes thereafter that was not in attendance has a comprehensive understanding of what transpired during the meeting.  The minutes should be inclusive insofar as they capture all comments from both sides on any particular issues or topics that were discussed.  Accuracy and completeness are the goals of documenting meeting minutes.

E-Mails / Text Messages

How are you currently set up?  One server?  Multiple servers?  Employees use personal email?  E-discovery issues!!  Text?  Company phone or personal?

All emails are subject to discovery and turnover to the other side in the unfortunate event of a lawsuit.  E-mails and text messages should only be sent with the understanding that they may become public in litigation at some point.  I know that is scary.  What is your email retention program?  Do you print and file your emails?  It may be useful to print and store hardcopy emails just like you should store these electronically in whatever email retention program you have.

Emails are useful as a form of contemporaneous communication.  Emails are just as important as hard copy correspondence and thus must be given the same due diligence as any form of hard copy communication.

Schedules

Schedules allow contractors to provide the owner of a project with a timeline for when specific work will be completed.  Schedules serve as guideposts for all parties involved in a project.  A schedule should set out attainable deadlines that give each party the ability to understand what is occurring at any given point on a project.  Schedules are a record of what has happened and what will happen on a project and should be used as a contemporaneous communication between the owner and contractors.

Miscellaneous

  • Daily reports in the version of a checklist can help save time.
  • Electronic checklists on a phone or tablet can also save time and ensure that information is stored legibly as opposed to handwriting a daily report.
  • Take pictures! Pictures capture the facts, evidence, and events at a project.  Be sure to note the time and date the picture was taken.

This list is not exhaustive or all encompassing.  Rather, it is a good starting point for construction project participants to ensure they are documenting their projects in a way that can hopefully prevent costly litigation in the future.

New California “Construction” Legislation

Richard H. Glucksman, Esq. and Chelsea L. Zwart, Esq. | Chapman Glucksman Dean Roeb & Barger | November 8, 2018

Governor Jerry Brown signed two potentially impactful Senate Bills relating to the construction of apartment buildings late last month. These Bills, discussed further below, were introduced, in part, in response to the Berkeley balcony collapse in June 2015, which was determined by the California Contractors State License Board to be caused by the failure of severely rotted structural support joists the repair of which were deferred by the property manager, despite indications of water damage.

SENATE BILL 721 ESTABLISHES HEIGHTENED “LOAD-BEARING” INSPECTION REQUIREMENTS

On August 21, 2018, the California State Senate passed SB 721, one of two bills by Senator Jerry Hill introduced this year seeking to address the safety of multifamily rental residences. Now that the Governor has signed the Bill, a new section will be added to the California Health and Safety Code, requiring that every 6 years, destructive testing be performed on at least 15% of each type of load-bearing, wood framed exterior elevated element (such as balconies, walkways, and stair landings) in apartment buildings with 3 or more units. Interestingly, prior to being passed by the State Senate, SB 721 was revised in June 2018, such that the inspection requirements do not apply to common interest developments (i.e., condominiums).

As set forth in the new HEALTH AND SAFETY CODE SECTION 17973:

“the purpose of the inspection is to determine that exterior elevated elements and their associated waterproofing elements are in a generally safe condition, adequate working order, and free from any hazardous condition caused by fungus, deterioration, decay, or improper alteration to the extent that the life, limb, health, property, safety, or welfare of the public or the occupants is not endangered.”

The inspection must be paid for by the building owner and performed by a licensed contractor, architect, or civil or structural engineer, or a certified building inspector or building official from a recognized state, national, or international association. Emergency repairs identified by the inspector must be made immediately. For non-emergency repairs, a permit must be applied for within 120 days and the repair completed within 120 days of the permit’s issuance. If repairs are not completed within 180 days, civil penalties of $100-$500 per day may be imposed.

The required inspection must be completed by January 1, 2025 and every 6 years thereafter, unless an equivalent inspection was performed during the 3 years prior to January 1, 2019, the effective date of the new law. For a building converted to condominiums that will be sold after January 1, 2019, the inspection required by Health and Safety Code Section 17973, must be performed prior to the first close of escrow.

SENATE BILL 1465 SETS CONTRACTOR REPORTING REQUIREMENTS

The Governor also signed SB 1465, adding Sections 7071.20, 7071.21, AND 7071.22 to the California Business and Professions Code. The new law requires that a contractor licensed with the Contractors’ State License Board “report to the registrar in writing within 90 days after the licensee has knowledge of any civil action resulting in a final judgment, executed settlement agreement, or final arbitration award in which the licensee is named as a defendant or crossdefendant, filed on or after January 1, 2019,” that meets certain and specific criteria, including that it is over $1 million and arises out of an action for damages to a property or person allegedly caused by specified construction activities of the contractor on a multifamily rental residential structure.

Where more than one contractor was named as a defendant or cross-defendant, each of the contractors apportioned more than $15,000 in liability must report the action. Importantly, the new statute also imposes similar reporting requirements on insurers of contractors. SB 1465 also addresses an impacted party’s failure to comply with the reporting requirements.

COMMENT

Both SB 721 and SB 1465 are potentially significant and seek “legislative reform” to address construction issues by placing a greater burden on apartment owners as well as builders and subcontractors. How pragmatic and what impact they will have on the industry is obviously developing. If you are interested in receiving further detail concerning the Bills, please contact us. We are analyzing the new legislation and its intent and will be providing our ongoing comments.

There is No Crying in Baseball . . . Facility Construction

Mark O. Morris and Zaven A. Sargsian | Snell & Wilmer | September 25, 2018

The Utah Court of Appeals recently decided Camco Construction, Inc., et al. v. Utah Baseball Academy, Inc., et al., 863 Utah Adv. Rep. 58, 2018 UT App 78. The case involved the plan of Athletic Performance Institute LLC (“API”) to build an indoor athletic facility, which it would then lease to the Utah Baseball Academy Inc. (“UBA”). Robert Keyes owned both API and UBA. Unfortunately, the baseball facility was not built and no one came. Rather, the project became mired in a dispute and litigation.

API’s plan to build an indoor athletic facility began smoothly. To obtain financing for the project, API reached out to a banking institution (the “Bank”). The Bank agreed to provide API a 12-month construction loan, which would then convert to a 20-year, $1.9 million loan. Mr. Keyes and UBA guaranteed the loan to API, and hired Camco Construction as its general contractor for the project. After beginning construction, things took a turn for the worse. The project faced several difficulties, including funding issues and a floor elevation issue that made the sports facility suitable for only baseball—even though the plan was to make the facility usable for basketball and other sports.

When API and Camco could not resolve the construction-related dispute, Camco filed a mechanic’s lien and, eventually, a lawsuit against API. The legal battle, however, spread to the Bank. After Camco filed its mechanic’s lien, the Bank refused to fund API’s draw request. This refusal became a source of conflict between API and the Bank, and API, UBA, and Mr. Keyes (collectively, “Owner”) asserted multiple claims against the Bank in the litigation. Among its many claims, Owner claimed that the Bank caused intentional infliction of emotional distress, breached the loan documents, acted in bad faith by failing to fund its draw request, failed to cooperate with Owner’s attempt to refinance, and demanded a larger payoff than the Bank what was actually due.

The Bank ultimately prevailed on all counts. During a long and complex case, the trial court struck Owner’s jury demand, granted the Bank summary judgment on several of Owner’s claims and, after a bench trial on the remaining claims, ruled in favor of the Bank. Owner appealed from the ruling, raising numerous issues on appeal. Although many of the issues were easily affirmed by the Court, and do not deserve attention in this article, there are three things that can be learned from the Court’s opinion.

First, a claim by a corporation of intentional infliction of emotional distress (IIED) is not viable. At the district court, API and UBA had argued that the Bank’s failure to fund its draw request was “outrageous conduct” giving rise to an IIED claim. This claim was dismissed on summary judgment and the Court of Appeals affirmed. After noting that API and UBA were both corporations, the Court held that corporations cannot suffer emotional distress. The Court explained that it “is a logical tenet . . . because a corporation lacks the cognizant ability to experience emotions,” and therefore “cannot suffer emotional distress.”

Second, jury waivers are enforceable against sophisticated parties, even if the parties, as a matter of fact, did not—but had the chance to—read the waiver. Here, although Owner had signed multiple jury waivers in the loan documents with the Bank, Owner argued that the “right to a jury trial may only be waived if done knowingly and intentionally.” Owner argued that if the documents containing the jury waiver were not read, then the right to jury could not have been knowingly and intentionally waived. In discussing Owner’s argument, the Court of Appeals assumed the federal requirement that a jury waiver be made knowingly and intentionally applies in Utah for purposes of deciding the case. The Court, however, rejected Owners’ substantive argument. The Court explained that it has repeatedly held that a sophisticated party cannot assert failure to read a contract as a defense to a claim that it waived its rights. In this case, the Court was incredulous as the jury waiver was contained in 20 of the loan documents. The Court stated that, to the contrary, Owner’s failure to read a jury waiver, 20 times, operated to support the trial court’s decision to strike Owner’s request for a jury.

Third, attorneys need to adequately brief all arguments on appeal. No less than seven times, the Court of Appeals refused to consider Owner’s arguments because they were inadequately briefed. This included (1) Owner’s challenge to the district court’s dismissal of their fraud claim; (2) that the jury waiver provision was an adhesion contract; (3) that the jury waiver was overbroad and ambiguous; (4) that there was a fiduciary relationship between the Bank and Owner; (5) that the Bank failed to cooperate in the refinance process; (6) that the Bank breached the loan documents by demanding more than it was due; and (7) that Owner was entitled to a mistrial. The Court cautioned that “[a]n adequately briefed argument contains the contentions and reasons of the appellant with respect to the issues presented with citations to the authorities, statutes, and parts of the record relied on. . . . A reviewing court is not simply a depository in which the appealing party may dump the burden of argument and research.” Thus, attorneys need to adequately brief all issues raised on appeal lest potentially winnable arguments are disregarded by the Court.

3 Commercial Construction Issues to Hammer Out Before the Shovel Hits the Ground: Insights from Chris Papavasiliou

Chris Papavasiliou | Nutter McClennen & Fish LLP | September 10, 2018

All of the parties involved on a project should agree on the following: 1) price and method of compensation; 2) the scope of the project; and 3) timing for completion.

Q: What are the three issues that all parties need to agree on before embarking on a commercial construction project? Christopher W. Papavasiliou: Often times, construction projects need to move quickly and there is little time to get a construction contract in place. But, you can do yourself a favor and avoid future disputes by making sure you and your contractor are on the same page on the following: 1) price and method of compensation; 2) the scope of the project; and 3) timing for completion. Even if a project is moving quickly on bare-bones AIA form documents (i.e., form documents created by the American Institute of Architects), those three items will let everyone know who’s doing what by when and what the costs will be.

Q: Could you explain the difference between Lump Sum compensation and Guaranteed Maximum Price compensation? CWP: Guaranteed Maximum Price and Lump Sum contracts share some similarities in that they limit the exposure of the owner for cost overruns, but they differ substantially in practice.

A Guaranteed Maximum Price contract (also known as a GMP Contract) has four main components: 1) The “Cost of the Work,” which is the actual cost to complete the work. There is a give-and-take on what is excluded, i.e., bonuses, main office salaries, and other items; 2) The “Fee,” which is generally a percentage of the Cost of the Work; 3) The “Guaranteed Maximum Price,” which is the maximum amount that the contractor will charge; and 4) “Savings,” in the event of the Cost of the Work being less than the Guaranteed Maximum Price. Savings are allocated between the owner and contractor on a pre-determined percentage breakdown. Because compensation is based on the contractor’s actual costs incurred, a Guaranteed Maximum Price contract requires that the owner review requisitions in detail, including invoices, and is administratively more time consuming for the owner.

On the other hand, a Lump Sum contract (also known as a Stipulated Sum contract) is easier to administer. It boils down to the contractor saying “I’ll build the project for $X.” The owner knows how much the project will cost, and all cost savings inure to the contractor. Lump Sum contracts are often favored due to their simplicity.

Keep in mind that the Guaranteed Maximum Price and Lump Sum amount will increase for change orders.

Q: How can the owner ensure that the project is completed in a timely manner? CWP: Approximately 95% of the time, the construction contract will be based on standard AIA documents. These forms cover the basics, but are a little light on the owner’s recourse if the contractor is late in timely completion. Two options on how to handle timely completion are incentives/cost savings and liquidated damages. Cost savings under a Guaranteed Maximum Price contract often get divvied up between the owner and construction manager. One way to incent the contractor to achieve early completion is to alter the percentage rate of savings going to the contractor based on when substantial completion is reached. Usually, liquidated damages are assessed on a day-for-day basis.