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Construction In Brief: Summer / Fall 2009

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Reducing Your Risks from Weather Delays

The sun is shining and the weeks ahead are predicted to be warm and beautiful up and down the East Coast. But we all know that in just a few short months there will be ice, snow, freezing rain and frigid temperatures that can slow down or even halt a construction project. So, as we all enjoy these last few warm days of summer, it may be helpful to think about how to limit the adverse effect the coming winter weather could have on your project schedule and budget.

First, it is important to understand what adverse weather is in the context of a construction project. Adverse weather is a weather condition which exceeds the historical average gathered over a period of time. The adverse weather condition could be rain, snow, ice, wind or temperature. Generally, ten years is an appropriate time period to establish the historical average.

To put this in context, suppose, for example, a contractor intends to perform paving activities in Wilmington in December. And suppose the average number of days on which the temperature was too cold to perform paving activities in Wilmington in December over the last ten years was four. In preparing its bid, the contractor should anticipate that there will be four days on which it will not be able to work. Now, suppose this year, there are nine days in December on which the contractor cannot pave because the temperature is too cold. The contractor might have an adverse weather claim for those five extra days when the temperature dips below the ten-year historical average.

Whether you have a claim for adverse weather depends upon the terms of your contract. What does it say about weather? Provisions that govern claims involving weather include force majeure, or act of god, clauses, as well as clauses that specifically address "adverse" or "unusually severe" weather. Under most construction contracts, unusually severe weather that causes delays is excusable, but not compensable. This means that the contractor is entitled to additional time to perform, but not to additional money for costs that the contractor may have incurred as a result of the weather delay.

Some contracts have a force majeure provision which identifies severe weather as an unusual or unforeseeable delay that is not within the reasonable control of the delayed party and, therefore, is an excusable delay. While excusing the delay, this type of provision typically provides no detail as to how to submit a claim for such an event. As a result, you must look to the rest of the contract to determine how to submit a claim.

Similarly, the form American Institute of Architects (AIA) A201-2007 contract allows contractors extensions of time for "causes beyond the Contractor's control." Adverse weather is specifically addressed in a subparagraph that requires any such claim to "be documented by data that conditions were abnormal for the period of time, could not have been anticipated and had an adverse effect on the scheduled construction." The AIA A201-2007, however, does not define what is an "abnormal weather condition," which allows for plenty of disagreement between the parties as to whether a particular weather condition is "abnormal." If possible, therefore, you should try to define what is "abnormal" within the supplementary conditions.

Other contracts, particularly government contracts, often contain very detailed language as to what constitutes a weather delay and what type of data is necessary to include when submitting a claim. These contracts usually require historical data from the National Oceanic and Atmospheric Administration or a comparable agency and specifically stipulate that the contractor is entitled only to a non-compensable extension of time.
To protect yourself against the threat of adverse weather impacting your projects, there are several steps that you can take:

  1. Anticipate the number of days that weather will impact you based upon your work activities and the project schedule; build those costs into your contract price.
  2. If possible, negotiate a compensable extension for adverse weather beyond the historical average.
  3. Make sure weather conditions on the job site are being recorded on a daily basis.
  4. Be aware of the local averages and whether actual conditions are exceeding those averages.
  5. Submit timely notice according to your contract of any claim for adverse weather.

By following these steps you reduce your risk and ensure that you are prepared in the event a claim is necessary.

Don't Waive Your Right to Recover Impact Costs When Signing Change Orders

It's the end of a long construction project, and it is time to assess your profits and losses on the job. To your surprise, the cost reports show a significant overrun. The indirect, impact, and delay costs associated with the numerous change orders on the job are finally realized, and the individual (owner, construction manager, subcontractor) responsible for these additional costs is identified. A request for additional compensation is submitted – and immediately denied. The basis for the denial is that you waived your right to collect these costs by virtue of the language included in the change orders that you signed throughout the project.

Avoiding claims for additional time and compensation on a job with numerous changes is almost an impossible task for any contractor. Multiple changes on a project often have a cumulative impact on a contractor's performance costs that cannot be reflected in the change orders or calculated until the end of the project. Since you cannot avoid these costs, the real question you need to ask is, How do I preserve my right to collect the indirect, impact, and delay costs associated with changes in the work?

The best opportunity you have to preserve your claims is during the actual negotiation of the change orders themselves. First and foremost, you need to read and understand all of the terms and conditions included in each proposed change order. A typical change order will often contain language to the effect that the adjustments set forth represent full and final compensation to the contractor for the change in the work. A typical change order will also usually include a general release that relinquishes a contractor's right to "any and all future claims" associated with the change. Any time a change order includes both full and final compensation language and a general release, it should raise a red flag. In such cases, the courts have held that contractors who sign change orders with these provisions have effectively waived any right to bring additional claims for impacts associated with the change order work.

As a result, when presented with this type of language in a change order, you must negotiate (in writing) the terms of the release to include an "exception" for any potential impact claims. It is extremely important to use detailed language in drafting the "exception" in order to put the owner (or other higher-tiered contractor) on notice that you are reserving the right to seek additional compensation for the indirect, impact, and delay costs associated with the change. Significantly, courts have held that ambiguous references to claims in general will not be sufficient to enforce the "exception" to the change order release. You must provide the owner (or higher-tiered contractor) with an express, clear reservation of rightsprior to the execution of each and every change order during the project in order to protect your right to collect indirect, impact and delay damages.

Negotiation of the change order release language, can be a difficult and time consuming process.
Some owners (or higher-tiered contractors) may not accept the proposed language in your "exception" and demand that you sign the change order as provided. This tactic is commonly used at a time when delaying the project to resolve the disputed language is not an option and the change order is necessary so you can invoice for the added scope of work (sometimes already being performed). You often have little choice but to sign the change order without the exception.

In these instances, it is important to send a letter that includes:

1) the specific "exception" language you wanted to include in the change order;

2) that the "exception" language was rejected by the owner (or higher-tiered contractor);

3) that, as a consequence, you are signing the change order as provided;

4) that the change order does not include impacts costs, and;

5) that you are preserving your right to submit a claim for these costs at the end of the project.

 This will strengthen any claims you may have for an increase in your contract price and your right to indirect, impact, and delay damages even though you signed the change order. However, it is also important to seek legal counsel when faced with a change order that contains any sort of waiver or limiting language to make sure that you are taking all possible steps to preserve your rights.

Taking Advantage of Federal Construction Contract Opportunities…Does A Newcomer Have A Chance?

By Michael H. Payne

The recent decline in non-federal construction opportunities has resulted in a rapidly growing interest in the federal contracting market. The much-publicized American Recovery and Reinvestment Act of 2009 has made billions of dollars available to federal agencies to fund construction projects. Add to that the billions of dollars being spent on the Hurricane & Storm Damage Risk Reduction System in New Orleans, the Base Realignment & Closure program, and countless other military and civil works construction programs nationally, and it is easy to see why the federal market is generating so much interest. These federal opportunities are not necessarily easy for contractors to take advantage of, however, because increased opportunities have been accompanied

by increased competition.

If your company is interested in getting into federal contracting for the first time, you can be certain of one thing – you are not alone. We have received dozens of requests from existing and new clients asking us to advise them about the best ways to get involved in the federal market. The answer is not always easy, because contractors who have never performed federal work may be at a disadvantage when participating in negotiated, "best value," procurements. Unlike sealed bidding, where the competition is based on price alone and an award is made to the lowest responsive and responsible bidder, awards under negotiated contracting procedures not only consider price, but also consider evaluation factors like technical merit, past performance, experience, quality of personnel, and small business subcontracting. In a negotiated procurement, it is not uncommon for an award to be made to a contractor with a higher price who is evaluated as technically superior to the contractor with the lowest price. Past performance, when the contractor has not previously been awarded a federal contract, can be a serious obstacle.

The obstacle is not insurmountable, however. If a contractor has equivalent experience in the non-federal sector, and effectively demonstrates the value and relevance of that experience in its proposal, there are many federal agencies that will recognize the capabilities of the "new" contractor. It is important, moreover, to present an effective proposal and to communicate your company's capabilities in a clear and concise way. The good news is that awards are being made to contractors who have not performed federal work before, and federal agencies are always looking for enhanced competition. Your task, as an interested federal contractor, is to prepare an effective proposal that responds to each and every requirement of the solicitation and that addresses each and every evaluation factor.

Many newcomers to the federal marketplace are also concerned about the number of solicitations that are set aside for various types of disadvantaged small businesses, including minority contractors, historically underutilized contractors, and service disabled veteran-owned small business contractors. To some, it appears that too many opportunities that might otherwise be available to non-disadvantaged small businesses, and large businesses, are being set aside for disadvantaged groups. Do not be dismayed, however, because many disadvantaged small business concerns need the assistance of other small and large businesses to be able to perform multi-million dollar federal construction projects and to meet the bonding requirements.  As long as the rules prohibiting affiliation between large and small businesses are not violated, there are various types of teaming arrangements, joint ventures, and mentor-protégé agreements that allow
non-disadvantaged businesses to participate in the vast federal construction market.

While the growing use of negotiated best-value contracts as well as multiple award task-order contracts has seemingly made it more difficult to compete, many of the most qualified contractors are thriving as a result of these procurement methods. Again, if your company does not have the sort of track record that will enable you to compete successfully, consider teaming arrangements that will allow you to get that first project "under your belt." Earning the first federal award is the most difficult one, but the tremendous opportunities that lie ahead may very well be worth the effort.

We have learned that many of the projects funded by the Economic Stimulus Program will be solicited under sealed bidding because of the need to get the "shovel in the ground" quickly. Many of these sealed bid procurements will be set aside for small and small disadvantaged businesses, but some will be unrestricted, as well. For those entering the federal market for the first time, success on a sealed bid procurement may be the best way to get your foot
in the door.

Understanding Your Commercial General Liability Policy

By Jonathan A. Cass

This is the first in a series of articles explaining provisions and coverages available under a commercial general liability (CGL) policy.

As part of a construction project, ABC General Contractor (GC) and XYZ Subcontractor (SC) enter into a contract that contains an indemnity provision. The provision requires SC to indemnify GC for claims for personal injury or property damage brought against GC by third-parties as a result of the actions of SC in performing work under its subcontract. SC is also required to pay for GC's litigation costs in defending such a claim.

During the course of the project, an employee of another subcontractor is injured when he trips and falls over debris left on the job site by SC. The injured employee sues both GC and SC, and GC demands that SC indemnify it for the injured employee's claim under the contract's indemnity provision. Is SC covered under its CGL policy for this indemnity obligation?

Before answering that question, it is important to understand the concept of indemnification. Under an indemnification agreement, one party (the indemnitor) agrees to assume the liability of another (the indemnitee) for claims made by third-parties arising from services provided under the contract. Using the above example, if SC agrees to indemnify GC for claims brought against GC by third-parties arising from SC's work, it means that SC agrees to pay the claims on GC's behalf, and to pay GC's litigation expenses resulting from that claim.

In most construction projects, the parties use indemnity provisions to "push down" potential liabilities associated with the project to those in the contractual chain below them. For example, an owner tries to make the general contractor responsible for claims arising from the general contractor's work on the project, and the general contractor, in turn, tries to push that risk down to the subcontractors who will actually be doing the work.

Returning to the question of whether the SC is covered under its CGL policy for the indemnity obligation owed to GC, the general answer is yes, as long as the CGL policy provides so-called "contractual liability" coverage. The standard CGL form that many insurance carriers issue provides coverage to SC for the indemnification obligation it has assumed with certain specific exceptions (e.g., an indemnification obligation owed architects and engineers for claims arising from their design professional work). This contractual liability coverage would also pay for GC's litigation expenses since it is an obligation included in the indemnification provision.

However, the contractual liability coverage that a CGL policy provides is typically not as broad as the contractual indemnity obligations that many owners and general contractors require. For example, many indemnity provisions are not limited to just claims for personal injury and property damage, but extend to third-party claims for economic losses (e.g., a claim for lost revenue asserted by an owner against a general contractor arising from a delay caused by the subcontractor) for which there is no contractual liability coverage afforded under the CGL policy. 

Accordingly, before a subcontractor agrees to sign a contract with an indemnification provision, it is important for the subcontractor to ask its insurance agent/broker to review the provision to clarify the indemnity obligation and whether the CGL policy provides coverage.

A general contractor, on the other hand, needs to understand that the financial viability of the sub-contractor limits the value of an indemnity provision. Therefore, a general contractor needs to make sure, as part of the subcontractor's insurance requirements, that the subcontractor obtain a CGL policy that provides contractual liability coverage. This contractual liability coverage helps ensure that the subcontractor, or actually its insurance company, will be able to meet its indemnity obligations even if the subcontractor runs into financial problems.

Another means by which general contractors and subcontractors can seek to insure against the financial obligations assumed by "risk shifting" provisions in a construction contract is by requiring that the party assuming the risk name the other party as an additional insured on that party's policy. That subject will be addressed in the next article in this series.

Commercial Lease Renewals: Tenants Beware

By Steven M. Williams

Founded just five years earlier, ABC Corporation's business was thriving. Until, that is, March 1st, when ABC received a notice from its landlord ordering it to vacate its rental space by April 30th, the end of the term of the lease. ABC insisted, however, it had exercised the lease's 5-year renewal option.

While ABC was correct that its lease contained a renewal option, it had failed to properly exercise
the option. As a consequence, ABC's lease expired. Not only did ABC incur moving expenses, but it was forced to pay a higher rent in its new space than it would have paid had it renewed its lease.

Unfortunately, tenants often find themselves in ABC's shoes.

Renewal provisions in commercial leases come in all shapes and sizes. Some provide that the renewal is automatic unless the tenant notifies the landlord that it does not wish to renew. Others provide for a renewal only if the tenant notifies its landlord that it intends to renew. Many of them require that the tenant not be in default of the lease in order to exercise the option, and almost all leases contain a "notice" provision that dictates the timing and manner of delivery of notices under the lease.

The renewal provision in ABC's lease stated:

So long as Tenant is not in material default of any term of this Lease, Tenant shall have one (1) five-year option to renew. If Tenant desires to exercise the renewal option, it must give Landlord written notice, as defined below, no later than ninety days before the end of the Term.

On February 1st, three months before the end of the term of the lease, ABC sent a letter to its landlord stating that it was exercising the renewal option. ABC thought it had complied with this provision, but based on the entire lease, it had not. ABC had failed to read the notice provision and apply its requirements to the renewal provision. As a result, ABC's notice was defective for

several reasons. First, ABC's February 1st letter gave three months notice, but it did not constitute ninety days notice. Rather, it was only eighty-nine days. Second, ABC mailed its letter – but the notice provision in ABC's lease required that all notices be hand delivered. Third, ABC did not deliver its letter  to the landlord's lender, another requirement of the notices provision. Any one of these reasons was sufficient for ABC's landlord to require that ABC vacate by April 30th.

It is vitally important that tenants be fully aware of, and understand, the renewal process in their particular leases. In addition, as ABC learned the hard way, it is important that tenants understand how other lease provisions (in ABC's case, the notices provision) may affect the renewal process or prescribe how it is to be handled. The inadvertent failure to exercise a renewal option can be financially devastating to a business.

In the case of an automatic renewal provision (where the lease is automatically renewed unless the tenant provides notice that it does not wish to renew), an inadvertent exercise of the option can be destructive. In such a case, a tenant who believes that it had the right to vacate its rental space may nevertheless find itself legally obligated to pay its former landlord rent for the renewal term, even though it has vacated and is not using the rental space. If you fail to read your lease carefully and comply with all of its provisions, you risk losing your rights to terminate or renew the lease.

Traitors in Your Ranks

Lessons From The Front Line

Suppose you are a contractor with a small group of office employees, a handful of key supervisory personnel, and several field employees. For more than two decades, you have built a profitable business from the ground up, investing countless hours in "sweat equity." You have a reputation for excellence in a specialized sector of your industry. The major players on your team have been with you for a decade or more, rising through the ranks to hold key supervisory positions. You treat them like family and have tremendous confidence in them. Over the years, they have proven to be capable and deserving of your trust.

What seems to be a periodic slump in business takes a sharp turn for the worse, as significant projects have a high degree of problems and, minimal profitability, even running into the red. One key supervisor resigns claiming that he is going to work "in-house" at a major client. Two more key supervisors resign over the next year and a half. You subsequently lose a loyal client to an unknown competitor, and then a critical customer's major service contract.

And then the bomb drops. You discover that the three former supervisors had actually started a rival business while still working for you. Two of the supervisors stole your customers for, and then joined, the rival business. Just as devastating, the former supervisors stole a lucrative business opportunity that was presented to them while they still worked for you, copied confidential computer files and took documents before they left. More painful than your trusted employees stabbing you in the back is the grave threat to the continued success of your company.

These were the facts in a recent case handled by Cohen Seglias. On behalf of the contractor, Cohen Seglias initiated litigation and sought an emergency injunction to shut down the rival business and prevent the theft of more customers. We also obtained an order for expedited discovery before an injunction hearing, requiring the former supervisors to turn over documents and submit to depositions. Forced to respond to the discovery requests, the former supervisors provided hundreds of "'smoking gun" emails, documentation and computer files stolen from the contractor. The full extent of their wrongdoing was laid bare: a three-year conspiracy to steal the contractors' best customers and employees. With these materials out in the open, the three former supervisors could not avoid making damning admissions at their depositions.

It was shocking to see the way the supervisors betrayed their former employer's trust, and how close they came to getting away with it. Although the employer did obtain a very favorable settlement, the lack of certain policies made the litigation more costly and a positive result less certain.

Here are a few of the lessons learned:

Require that all high-level employees sign non-competition, non-solicitation and confidentiality agreements. 

Our client did not have any such agreements. Without these agreements, it is perfectly "legal" for an employee to quit one day and go to a competitor or start a competing business the next day. These agreements protect our clients, and make cases like this easier and less expensive to litigate.

Designate your confidential and sensitive documents as "Confidential," and control access to these documents. 

Our client had an excellent policy of marking all sensitive materials "Confidential" or "Do Not Copy," and did control access to these records. If you want a court to believe that a document is confidential, you must mark it "Confidential" and limit access to only those who need the information to perform their job.

Control your computer network and computer file access.

Technology is a mixed blessing. While your business becomes more efficient, your business information becomes easier to steal. You need to make sure that access to confidential and sensitive information and documents is completely controlled. Also, computer evidence can be the most effective form of proving who, when and how files have been wrongfully accessed. You must preserve all company computers, hard drives, and back up tapes to preserve potentially critical evidence.

Obviously, employers should have some level of trust in their employees, and unfortunately it is not possible to eliminate every potential avenue for abuse of that trust. But, having that trust must not prevent you from making every effort to protect your company and your livelihood.

What's New

Cohen Seglias is pleased to announce two new additions to our team. Both Dan and Kathleen join the Construction Group in the Philadelphia office.

Daniel E. Fierstein
Dan received his B.A. in Political Science from Emory University and a J.D. from Boston University School of Law. While at Boston University, Dan had the honor of authoring an article which was published in the Boston University Law Journal. Prior to joining the firm, Dan worked as a summer associate for a large Philadelphia firm. He was also a judicial intern for a Judge in the Philadelphia Court of Common Pleas, Trial Division.

Kathleen M. Morley
Kathleen received her B.S. in Criminal Justice from St. Joseph's University, where she was a member of the women's lacrosse team and still managed to graduate one semester early. She received her J.D. from Villanova University School of Law where she was a member of the Law Review. Prior to joining our team, Kathleen worked as a summer associate for a Philadelphia firm. She also clerked for a United States District Judge in the Eastern District of Pennsylvania.

AT THE PODIUM

Cohen Seglias is hosting several seminars in the coming months.  Michael Payne is presenting "The Rules of the Game Have Changed - Construction Contracting with the Army Corps of Engineers and Other Federal Agencies" on October 6th in Pittsburgh and October 13th in Orlando. Jack Graham and Shawn Farrell are hosting a three-part seminar series, on behalf of the City of Philadelphia Office of Economic Opportunity, that is designed to assist MBEs, WBEs and DSBEs conduct business in the currentchallenging economic climate. The seminars will take place on October 14th, November 12th, and December 16th in our Philadelphia office. Kevin Watson and Rene Quinlan are presenting a seminar in Harrisburg on October 14th on "Legal Issues for Pennsylvania Professional Engineers." Additionally, Cohen Seglias is partnering with accounting firm Amper, Politziner & Mattia, LLP to host a seminar on "The New World of Federal Construction Contracting" on October 27.  For event details, please visit our website at: www.cohenseglias.com 

For additional information, contact Crystal Garcia at (215) 564-1700, or cgarcia@cohenseglias.com.