Potential Construction Liabilities Contractors Need to Know

Manipal Dhariwal | Construction Executive

The outbreak of COVID-19 started in early December 2019, gradually expanding to the other countries of the world. The spread of the pandemic did not just affect the world in terms of health, but also made industries suffer across all verticals—leading to a few unique challenges for construction contractors.

From financial imbalance to trouble retaining cash flow, the circumstances have turned to be completely unfavorable for the contractors that rely on banks for essential surety credits to sustain. To prevent loss of liquidity, the contractors are leaning toward construction accounting software and other technology to keep their accounting data in place and avoid risks with project deliveries.

But still, there are many other factors that must be considered to maintain cash flow for potential credit availability such as debt agreements and lines of credit, which involve financing of equipment and vehicles.

Nevertheless, it is completely the responsibility of the contractors to stick with the guidelines related to the line of credit and debt agreements which in most cases are covenant ratios.

TANGIBLE NET WORTH VERSUS LIABILITIES RATIO

The tangible net worth versus liabilities ratio can be defined as an evaluation of stakeholder’s equity (net worth of the company/contractor) and the total amount of liabilities. This is generally considered by the banks to check the financial status of the company to ensure that they are capable enough to return the lending amount.

It can also be considered as the weight of liabilities on the company, which may limit the bank to allow any disbursement of the loan. However, the standard value which is considered to prevent loss of finance and ensure premiums are paid on time, banks usually follow the ratio of 3:1.

DSCR 

Debt service coverage ratio (DSCR) can be defined as an evaluation of available cash that can satisfy existing debt obligations. In other words, DSCR could be defined as the minimum amount of cash flow that the bank uses to determine the company’s potential to pay any debts, existing or forthcoming.

The formula for DSCR:

(Net Income + Depreciation + Amortization + Interest) – (Unfinanced Capital Expenditures) – (Distribution Paid to Stockholders) divided by (Total Principal Payments on Long Term Debt + Interests)

Most of the banks usually have this ratio to be kept under 1.25:1, as the satisfactory DSCR ratio is measured using the financial year statements, which help the lending authorities establish a contract with the contractor.

However, when it comes to surety credits, it depends on various other factors that may cause financial obligations to the approval process. These obligations take consideration of stockholder’s equity or the total working capital that is measured as the difference between company liabilities plus existing assets, with respect:

Minus

  • Outstanding number of receivables (those older than 90 days);
  • The total value of 50% to 100% of inventory;
  • Prepaid expenses;
  • All the payments due to be paid by the parties involved (should include affiliates); and
  • Credit worthiness of any receivable notes.

Plus

  • The cash surrender value for life insurance.

Though most lending agencies and banks prefer to check financial year statements to confirm the potential of the contractors, some finance companies even prefer to have a check on all the accounting data. For this reason, most construction companies these days prefer to use construction accounting software, as it helps to avoid financial scarcity as well as unnecessary overruns. But still, there are some essential guidelines that contractors and construction companies should follow to have better chances with surety credits when the financial year ends.

  • To maintain a collection of all the outstanding receivable older than 90 days, which can help to pay debts and have an advantage with tangible net worth versus liability ration.
  • Always try to keep the inventory to the minimum to have a greater lead time.
  • Prepaid orders for items should be examined to counter upfront payment agreements and have reduced payments at the end of the financial year.
  • All the dues from related parties should be cleared to improve cash flow and minimize liabilities.
  • To approach banks or other lenders to finance existing equipment purchased in cash to improve working capital and minimize DSCR.
  • Last but not least, the owner may lend funds to the construction firm so the amount could be subordinated to banks and surety to drive working capital. Also, the subordinated amount can serve as equity to the lending authorities.

All in all, aligning with these practices and rules could help meet all the requirements necessary to get financial aid from the banks. Further, this money could be used to drive business goals while making way to financial projections and meet banking requisites.

However, it is equally important for the construction firms and contractors to have planned actions when it comes to finances, even when using the finest construction software. Whether it is inventory stocking or purchasing of equipment, it should be done with careful consideration to attain surety credit driving business towards better growth and sustainability.

Washington Appellate Court Reaffirms Rule That Contractors’ Defense of Deficient Plans or Specifications Must be the Sole Cause of the Breach in Order to Shield Contractors From Liability

Geoff F. Palachuk | Lane Powell

A contractor sued for breach of contract for construction defects will often assert an affirmative defense that the owner supplied deficient plans or specifications. Because that defense operates to completely shield the contractor from liability for alleged defects, Division One of the Washington Court of Appeals has reaffirmed the rule that the alleged breaches must be caused solely by the allegedly deficient plans and specifications. That rule is based on the 102-year old U.S. Supreme Court case, United States v. Spearin. The most recent expression by our court of appeals in Lake Hills Investments, LLC v. Rushforth Construction Co., Inc. illustrates how the Spearin Doctrine remains a viable defense for contractors in limited circumstances.

The Lake Hills decision, issued September 14, 2020, by the Washington State Court of Appeals, involved a development project in Bellevue. The owner (Lake Hills) sued the general contractor (AP Rushforth) for breach of contract. AP Rushforth counterclaimed, alleging that Lake Hills materially breached first, and AP Rushforth asserted multiple affirmative defenses to excuse AP Rushforth’s various breaches. The case involved tens of millions of dollars in disputed claims, including about $20M at issue during trial.

Generally, when an owner like Lake Hills provides building plans and specifications as part of a contract, the owner impliedly warrants that the plans and specifications will be workable and sufficient for the contractor to build the project. An alleged breach of that warranty can be the basis of a contractor’s affirmative defense where the owner is seeking damages from the contractor.

In the Lake Hills case, AP Rushforth alleged an affirmative defense based upon Lake Hills’ implied warranty and claimed that Lake Hills’ plans and specifications were deficient. AP Rushforth argued the allegedly defective plans and specifications caused all of the defects in AP Rushforth’s work. During the two-month jury trial in King County Superior Court, the jury returned a mixed verdict. One of the jury instructions directed the jury to consider whether “AP breached the contract by failing to construct certain areas of work in compliance with the contract documents,” and whether “Lake Hills was damaged as a result of AP Rushforth’s breach.” The jury found in favor of Lake Hills and held AP Rushforth liable for multiple breaches of contract.

AP Rushforth asserted an affirmative defense, however, claiming that Lake Hills’ defective plans and specifications caused the construction breaches and should shield AP Rushforth from liability or damages. An affirmative defense is an absolute bar to liability, even where a plaintiff establishes its prima facie case. A successful affirmative defense denies the plaintiff’s right to recover, even if all the allegations against the defendant are proven true. During trial, AP Rushforth carried the burden of proof to establish that its various construction breaches were a result of the allegedly deficient plans and specifications.

On appeal, Lake Hills argued the trial court erred as a matter of law because AP Rushforth’s burden of proof should have been that the construction breaches resulted solely from the defective or insufficient plans or specifications. The trial judge did not include the word “solely” in the jury instructions, which permitted AP Rushforth to argue that any alleged defect in the plans and specifications, regardless of how minor, served as an absolute bar to AP Rushforth’s contractual liability. Lake Hills argued that jury instruction was a misstatement of law. The Court of Appeals agreed, reversed, and remanded for a new trial.

Synthesizing several prior decisions, the Court of Appeals held that a contractor can be relieved from liability only by proving the alternate proximate cause of the allegedly defective plans and specifications solely caused the contractor’s breach. AP Rushforth’s affirmative defense rested on the theory that Lake Hills’ allegedly defective plans and specifications caused AP Rushforth’s various construction defects and the damages to Lake Hills. The court held: “To be relieved of all liability for its breaches, AP Rushforth had to prove Lake Hills’ defective designs ‘solely’ caused the plaintiff’s damages.” The court found that this holding most closely aligned with Washington case law and the standards acknowledged by commentators on construction law.

Owners and developers for both public and private projects should be aware of the issues highlighted in this case. Designs and specifications must be workable and sufficient, but the standard is not perfection. Contractors often try to claim that a defect in the designs or specifications serves as a complete defense to their potential liability. Our courts disagree, and Lake Hills reaffirmed the long-standing rule: It remains the law that a contractor may be shielded from liability only by proving that an alleged defect in the plans and specifications was the sole cause of the contractor’s construction breaches.

Finally, the court also denied AP Rushforth’s cross-appeal and vacated the trial court’s award of nearly $6M of attorneys’ fees in favor of AP Rushforth. Lake Hills contended that it should have been awarded attorneys’ fees for the issues upon which it prevailed at trial under the apportionment rule stated in Marassai v. Lau, 71 Wn. App. 912, 859 P.2d 605 (1993), abrogated on other grounds by Wachovia SBA Lending, Inc. v. Kraft, 165 Wn.2d 481, 200 P.3d 683 (2009). After trial, the court awarded AP Rushforth essentially all of its requested attorneys’ fees, expert fees, and litigation costs, despite the fact that Lake Hills had prevailed on many of the contractual issues. The court of appeals declined to rule on the merits of Lake Hills’ argument. Instead, the court vacated the award of attorneys’ fees consistent with its reversal and instructed the trial court to determine “the ultimate prevailing party or appropriate proportional amount of attorney fees.”

Maybe Relief for Public Contractors Should Come from Thoughtful Legislation

Lexie R. Pereira | The Dispute Resolver

With loss, comes suffering; and, when it comes to the coronavirus, loss exists in many forms. Attorneys across the country – particularly those representing contractors on public projects – are asking themselves, generally, “how can my client suffer less?” Or, more pointedly, “is there an argument to support my client’s right to entitlement to compensation for COVID-19-related costs?”

On public projects, the short answer is maybe not until the government steps in. Construction lawyers are faced with the unfortunate reality that public sector contracts appear to preclude contractors from seeking adjustments to the contract price because these contracts commonly include (1) a clear “no-damages-for-delay” provision, (2) time as the sole remedy for “force majeure” delays, and (3) a “compliance with laws” provision that is silent as to which party bears the risk of a change in laws. These provisions help public owners properly protect the interests of the citizens by appropriately allocating their tax dollars to a construction project that follows a carefully thought-out contract. However, as a result of these well-intentioned owner-friendly provisions, public contracts can make it difficult for contractors to receive compensation for COVID-19-related costs.

One can draw a parallel between public contracts and some of the insurance industry’s business interruption coverage policies. Of course, every insurance policy is different and must be analyzed on a case-by-case basis; however, the business interruption policies at issue often (1) have a clear “virus” exclusion, (2) require “property damage” to trigger coverage, and (3) are silent as to the application of the “civil authority” exclusion when it comes to partially mandated shutdowns (i.e. when the case is that construction offices, but not jobsites, may have been required to shut down). As a result, policyholders’ business interruption claims arising from COVID-19 are facing blanket denials from insurance carriers.

However, the denials of claims in both the insurance and construction industries alike can have potentially crippling effects. With respect to insurance, the consensus is becoming somewhat clear: the federal and/or state governments may need to step in. In response, several states (including Massachusetts, Rhode Island, New York, and New Jersey) have sponsored bills to provide long-term reimbursement relief to insurance companies and even to create exceptions to the policies’ strict exclusions, like the “virus” exclusion. As follows, attorneys are advising policyholders to follow the old adage “a claim never made is a claim never paid.” Therefore, attorneys who want to help their clients suffer less should encourage strict compliance with the “prompt” notification mechanisms to preserve claims under their insurance policies.

Similarly, attorneys are encouraging contractors to comply with the claim procedures in their public contracts, despite the currently-present contractual roadblocks. This advice is perhaps motivated with the hope that relief will be provided, whether it comes from the owner or as a part of a government-sponsored relief scheme similar to that of the insurance industry. The good news is: over one-hundred and thirty-five members of Congress agree with this approach, at least when it comes to supporting State Departments of Transportation (DOTs). On May 11, 2020, Representatives Conor Lamb and Bob Gibbs led the House in calling on Speaker Pelosi and Leader McCarthy to support approximately $49.95 billion in federal funding for State DOTs in the next COVID-19 response package.1 The request explained how support of State DOTs can help ensure planned transportation projects proceed as planned, which in turn supports the economy by protecting the jobs of State DOT employees and construction workers. Comparably, the Under Secretary of Defense released a memorandum on March 30, 2020, with the subject “Managing Defense Contracts Impacts of the Novel Coronavirus,” stating that “Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g., FAR 52.243-1 or FAR 52.243-2).”2 This memorandum suggests that contracting officers may have the authority to treat COVID-19 impacts as compensable delays under the FAR Changes clause.

As a matter of public policy, government intervention in line with the above makes sense. Despite the general rules that deny contractor recovery in the face of (1) a clear “no damages for delay” provision,3 (2) time as the sole remedy,4 and (3) a silent compliance with law provision,5 these rules are unfair (and perhaps unlikely to be upheld) considering the ongoing global pandemic. For example, on lump sum and GMP projects in particular, it would be inequitable for a public owner to completely deny claims for additional costs – like those of COVID-19-required demobilization and remobilization – on the basis of (1) a clear “no damages for delay” provision, (2) time as the sole remedy, and (3) a silent compliance with law provision. What’s more, public contracts are often procured via competitive bidding, which naturally means that contractors cut as many costs as safely as possible, not pricing out a ‘just in case a global pandemic shuts down this project for a couple weeks’ cushion. In fact, because public owners want to ensure that workplaces, including construction jobsites, are operating safely and in full compliance with new COVID-19 safety measures, they have a competing interest when it comes to compensating COVID-19-related costs. Since their competing interest brings with it some additional costs that were in no way contemplated by contractors when they priced their jobs, they ought to have some skin in the efforts for recovery as it would be unfair for public owners to ask contractors to simply absorb COVID-19-related costs.

Indeed, the ramifications of allowing owners (and insurers) to benefit from such harsh claim denials could have detrimental effects on the entire construction industry. Consider the alarming fact that if contractors continue to be denied compensation for COVID-19-related costs, then numerous contractors, subcontractors, and suppliers will inevitably goes out of business, thereby crumbling the industry and, likewise, the economy. While public owners and insurance companies may suffer in the short-term in light of legislation that requires exceptions to their contracts, they are in a much more stable position to weather this storm over the long-term. In other words, at present, they are not the string that will make the sweater unravel. After all, the greater suffering ought to be borne by the owner anyway, even if it is the state. One can reason that even though neither the owner nor the contractor could have ever predicted COVID-19, it is the owner – not the contractor – who remains the ultimate beneficiary of the project. As follows, maybe relief for public contractors should come from thoughtful legislation, like that already pending for the benefit of the insurance industry.


https://www.agc.org/sites/default/files/State%20DOT%20House%20Support%20Letter_Signed.pdf

https://federalconstruction.phslegal.com/2020/04/articles/contractor-information-sources/delays-resulting-from-coronavirus-may-be-both-excusable-and-compensable/https://www.nationaldefensemagazine.org/articles/2020/3/16/industry-may-find-relief-for-coronavirus-delayshttps://www.jdsupra.com/legalnews/delays-resulting-from-coronavirus-may-58448/

Although a contract has a clear “no damages for delay” clause, the contractor is not necessarily foreclosed from recovery if there exist other avenues for recovery within the contract. In fact, in many jurisdictions, “no damages for delay” clauses are not enforced where the delay for which recovery is sought was not reasonably contemplated by both parties at the time of contracting. JWP/Hyre Elec. Co. v. Mentor Village Sch. Dist., 968 F. Supp. 356, 360 (N.D. Ohio 1996); see Corinno Civetta Const. Corp. v. City of New York, 493 N.E.2d 905, 910 (N.Y. 1986). That is not necessarily the case in Massachusetts; however, there exist other ways a contractor can avoid the harsh effects of a “no damage for delay” clause. Joel Lewin & Eric Eisenberg, Delays, Suspensions and interruptions—No damage for delay clauses—Exceptions, Massachusetts Practice Series on Construction Law § 6:22 (2018). For example, a contractor may point to other contract provisions that provide relief. Id. (citing Stone/Congress v. Town of Andover, 6 Mass. L. Rptr. 330, 1997 WL 11737 (Mass. Super. Ct. 1997) (denying a summary judgment motion in favor of a contractor that argued that its damages were not for delays, but rather for changes in the work for which it was entitled to compensation under the changes clauses in the general contract). A closer look into the specific contract language is necessary in order to determine whether there exist other avenues for recovery.

Despite the fact that the sole remedy is time, there may still be room for a claim for additional compensation if contractor has a separate delay claim. “Force majeure” events, like abnormally bad weather and presumably the COVID-19-related costs at issue here, normally entitle the contractor to time, but not money. However, similar to the idea above that a contractor can avoid the harsh effects of a “no damage for delay” clause by pointing to other contract provisions, a contractor may recover for “force majeure” events when they are coupled with other compensable delay events. See id.; Philip J. Bruner & Patrick J. O’Connor, Jr., §3.7.2—Contractor’s Compliance with Law, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update). For example, in Appeals of Bechtel Environmental, Inc., a contractor was adversely affected by weather when a government-caused design delay pushed toxic waste landfill remediation activities into the hotter summer months, resulting in lower efficiency. Philip J. Bruner & Patrick J. O’Connor, Jr., §15.1.6.2—Weather delays, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing Appeals of Bechtel Environmental, Inc., E.N.G.B.C.A. No. 6137, E.N.G.B.C.A. No. 6166, 97-1 B.C.A. (CCH) ¶ 28640, 1996 WL 686423 (Corps Eng’rs B.C.A. 1996)). Perhaps the express language in the AIA A201-2017’s § 8.3.3 provides the support for this: “This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”

As a general rule, if the contractor agrees to perform the work for a stipulated sum and further agrees to comply with all laws and regulations governing the performance of the work, then, in the absence of any contractual provision permitting relief, it bears the risk. Philip J. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing DiCara v. Jomatt Const. Corp., 52 Misc. 2d 543, 276 N.Y.S.2d 11 (Dist. Ct. 1966) (contractor who agreed to sell a house at a specified price bore a responsibility for increased costs due to a 2% sales tax made applicable to the sale after the parties had reached agreement); Edwards v. United States, 19 Cl. Ct. 663 (1990) (government contract’s “permits and responsibilities” clause obligated the contractor to comply with all local laws and regulations regardless of whether they became effective before or during the term of the contract and applied to zoning changes affecting the work)).

Starting July 1, 2020 General Contractors are “Employers” for All Workers on Their Jobsite

Christopher G. Hill | Construction Law Musings

I have discussed the impactful legislation to the Virginia construction industry in prior posts here at Construction Law Musings.  One of those statutes that will take effect on July 1, 2020 will fundamentally change the relationships between general contractors and their subcontractors and suppliers.

Senate Bill 838 does the following on construction projects with a value of $500,000 or greater that are not single family residential construction projects:

  • Makes the general contractor, and all tiers of subcontractors on a particular project contractually liable to pay their subcontractors’ (at any tier) employees wages.
  • Requires that the payments are equal or exceed those required by other statutes.
  • Deems contractors to be the employers of their subcontractors’ employees for purposes of Va. Code Section 40.1-29 that imposes criminal and civil penalties for failure to pay wages when due, and
  • Grants employees a private right of action for any violations, including the right to a class or joint action, award of liquidated damages, reasonable attorney fees and possible treble damages for “knowing” violations by the contractor.

What does this mean? It adds a new liability for contractors for the failures of thier subcontractors and suppliers, entities over which contractors have no control aside from contractual provisions, to pay their employees.  It further encourages employees to bring these actions with its possible treble damages, class action rights and attorney fees provisions.  In short, it adds a whole lot more of a burden on contractors in Virginia to screen their subcontractors of every tier and all suppliers to those subcontractors, to assure that they are both willng and able to pay their employees and to keep tabs on all payments in the payment stream of a project.

If there is any good news in this new bill for general contractors, it is that the statute requires a subcontractor to indemnify the contractor for any damages paid by the contractor due to subcontractors failure to pay its own employees.  An exception to this requirement is where the non-payment of wages is due to the contractor’s failur to pay its subcontractor as required.  Of course, one reason for a subcontractor failing to pay wages it the subcontractors inability to due so because of financial difficulties due to anything from financial mismanagement to problems on other projects.  If that subcontractor simply can’t pay the wages, it certainly would have a difficult time paying any indemnification obligations.

What can you as a contractor in Virginia do to mitigate this risk?  Aside from working with a Virginia construction attorney to understand the various possible results of this new obligation, your contract will be key.  Among other steps you can take you should: take pre-qualification and identification of subcontractors and suppliers on your project a priority;  possibly require subcontractors to provide their own payment bonds; expand the contractual indemnity language to explicitly encompass payment of wages; require more explicit language relating to the payment of wages in your lien wavers and payment applications; and, look into expansions of your insurance coverages to protect against potential claims.

While the above list is far from exhaustive, and the true implications of this legislative change have yet to be seen, all contractors in Virginia should be aware of these new obligations.

A Few Things You Might Consider Doing Instead of Binging on Netflix

Garret Murai | California Construction Law Blog

Governments throughout the world have issued “shelter in place” orders requiring that residents stay at home except for “essential” purposes. As a result, in the United States, more than a third of Americans have been ordered to stay at home. This, in turn, has had a direct impact on construction projects which have slowed or have been temporarily shuttered altogether, and it will (not may) have an impact on the flow of project funds. So what can project owners and contractors do? We’ve got a few tips.

1.     Read Your Contract, Paying Particular Attention to Force Majeure, No Damages for Delay and Notice Provisions

For the most part, with the exception of statutory rights and remedies which we will discuss below, your contract spells out your rights and remedies should the proverbial “S” hit the fan. It is, in other words, the rules you agreed to, and you should know what those rules provide. Three provisions you should look for, and if they’re in your contract, you should review carefully are: (1) Force majeure provisions; (2) No damages for delay provisions; and (3) notice provisions.

Force Majeure Provisions

Latin for “superior force,” a force majeure provision defines circumstances beyond a party’s control that may render contractual performance by that party difficult or impossible to perform. A force majeure provision is, by its nature, defensive. In other words, it is a defense against a higher-tiered party’s claim that a lower-tiered party has failed to perform its obligations under a contract.

Most people think of force majeure events as being “Acts of God,” or, in other words, earthquakes, tornadoes, tsunamis and other naturally occurring events. That’s not always the case though. Force majeure provisions can include any number of “triggering” events including government actions, terrorism, riots and other events that aren’t naturally occurring.

In short, if your contract includes a force majeure provision, you need to read and understand it, so that you know what events trigger the provision. You also need to understand the intricacies of force majeure provisions. For example, few force majeure provisions that I’ve seen include a trigger for plagues or epidemic outbreaks such as the coronavirus, but many include government actions as a “triggering” event. Thus, while the coronavirus itself may not be a “triggering” event, state and local “shelter in place” orders currently in effect would likely constitute a “triggering” event.

No Damages for Delay Provisions

The current crisis is going to cause delays on construction projects, whether because the project itself is temporarily shut down due to “shelter in place” orders at the state or local levels, because of an inability to get workers out to the job site because they are sick or scared, because your work is impacted because other trades are not coming out to the project site, or because of delays in the delivery of or the inability to purchase materials and equipment.

There are many grey areas here, but the impact is the same: Delays on the project. Some contracts, recognizing that there could be delays on the project which no one could have foreseen or controlled, include “no damages for delay” provisions. An example of what a “no damages for delay” provision might look like is the following:

In the event that Subcontractor’s performance of its Work is delayed through no fault of its own, Subcontractor may request an extension of time for performance of its Work, but in no event shall be entitled to any increase in the Contract Price or damages arising from such delay.

In short, a “no damages for delay” provision, while allowing a contractor to seek an extension of the contract time due to delays, prevents a contractor from seeking an increase in the contract price, whether due to the need to pay workers for overtime or hazard pay, for increases in material costs, for extended general conditions, etc.

Notice Provisions

Most construction contracts include notice provisions setting forth when, under what circumstances, and how notice may be given. Importantly, they often also set forth happens if you don’t give proper notice. In the current situation, notice provisions are extremely important as contractors face delays and time-related costs impacting their ability to meet contractually agreed upon completion dates and ability to perform their work without coming out at a financial loss.

Many notice provisions provide that if notice is not given, or not timely given, that a contractor waives its right to pursue claims in which notice was required. An example of notice provision related to delays and time-related costs is the following:

In the event that Contractor claims that its Work has been impacted through no fault of its own, Contractor may request an extension of the Contract Time and/or increase in the Contract Price by providing written notice to Owner no later than fifteen (15) days of the event giving to the claim. Provided, however, that should Contractor fail to provide timely notice, Contractor waives any right to an extension of the Contract Time or increase in the Contract Price.

In short, notice provisions are extremely important right now. In fact, even if your contract doesn’t include a notice provision requiring that notice be provided of delays and/or time-related costs, my suggestion, is that you consider sending notice anyway. To successfully bring a delay and/or time-related cost impact claim a contractor needs to show that the delay was both compensable and excusable.

2.     Understand Your Statutory Payment Rights

In California, there are three primary statutory payment remedies available to those performing work on construction projects: (1) mechanics liens and design professional liens; (2) stop payment notices; and (3) payment bond claims. Who can assert these payment remedies, when they can be asserted, and how they are asserted, varies. You can read more about each of these payment remedies by clicking the links above, but here’s a snapshot:

Who Can Assert These Payment Remedies

Only design professionals, that is, licensed architects, registered engineers, and registered land surveyors, can assert a design professional lien.

Only direct contractors, subcontractors, material suppliers, equipment lessors and laborers may asset mechanics liens.

And, only subcontractors, material suppliers, equipment lessors, and laborers may assert stop payment notices and payment bond claims.

When Can They Be Asserted

Here’s where it gets interesting, most people think that mechanics liens can only asserted after completing their scope of work. For direct contractors who are serving as general contractors that usually means when the entire project is completed. For all others it is when their work is completed.

But, importantly, given the situation we are in, “completion” under Civil Code section 8180 includes, not only completion of the entire project (in the case of general contractors) or completion of a party’s scope of work (in the case of all others), but also “cessation of labor for a continuous period of 60 days.”

Thus, in a situation where project sites may be closed for a prolonged period of time due to the various “shelter in place” orders, if this includes a cessation of labor for a continuous period of 60 days, contractors, subcontractors, material suppliers, equipment lessors and laborers would be able to record a mechanics lien even though the project or their scope of work has not yet been completed.

As to stop payment notices and payment bond claims, there is no requirement that that a subcontractor, material supplier, equipment lessor, or laborer complete its work before serving a stop payment notice or making a payment bond claim.

Similarly, for design professionals, a design professional does not need to complete its work before recording a design professional lien. However, there are three requirements that must be met first: (1) a building permit or other “governmental approval” must have previously been obtained; (2) construction must not yet have commenced; and (3) the design professional must make demand for payment not less than 10 days before recording its design professional lien.

Requirements Prior to Assertion

In order to record a mechanics lien, serve a stop payment notice or make a payment bond claim most claimants, with the exception of direct contractors, but then only if there is no construction lender on the project, must have first served a preliminary notice. More information on each of these statutory payment remedies, as well as forms, can be found in the Blueprints and Toolbox section of our blog.

3.     Know How You Can Statutorily Shorten Deadlines 

While there are statutory payment remedies available to contractors and others who furnish labor, materials and equipment on a construction project, project owners are not without their own remedies. For projects that are at our near completion, or that are mid-way through construction, a project owner can shorten the deadlines for a claimant to record a mechanics lien, serve a stop payment notice, or make a payment bond claim, by recording a notice of completion or notice of cessation.

Notices of Completion

A notice of completion may be recorded upon the occurrence of any of the following events:

  1. Actual completion of a work of improvement;
  2. Occupation or use by the owner accompanied by cessation of labor;
  3. Cessation of labor for a continuous period of 60 days; or
  4. For public works projects, acceptance by the public entity.

A notice of completion may be recorded on or before 15 days after completion of a work of improvement.

Notices of Cessation

A notice of cessation can be recorded if there has been a cessation of labor for period of 30 days.

When statutorily permitted, by recording a notice of completion or notice of cessation, a project owner may shorten the time period for potential claimants to record mechanics liens, serve stop payment notices and make payment bond claims, by shortening the time to make such claims by as much as two-thirds.