Supplemental Conditions

Fighting Back Against Union Tactics

By Wally Zimolong on Posted in Picketing

Anyone who has tried to undertake a significant construction project in the City of Philadelphia can testify to the brotherly love organized trade unions show them.  Well according to the Philadelphia Daily News, one developer is fighting back.

Like many developers, Post Goldtex is the victim of a classless and illegal picketing campaign brought by the Philadelphia Building Trade Council.  Among the tactics Big Labor is employing in this particularly nasty dispute is the circulation of a flyer showing the wife of the principals in the development group in a photoshopped pornographic picture.  Talk about the War on Women.  Even worst, the Philadelphia City government seems at best complicit to the entire ordeal and at worst actively involved.

However, the developers are not rolling over.  Instead they have started a web page www.phillybully.com to tell their side of the story.  In my experience, Big Labor cannot take a taste of their own medicine and the developer should aggressively counter-picket the unions and beat them at their own game.

Pipe Dream

By Wally Zimolong on Posted in Contracts

Are you a pipe fitting contractor or excavator looking for more work?  Are you a material supply house looking for a swift selling product?  Then you better get to know gas-line pipe.  ENR reports that the discovery of natural gas formations present a tremendous opportunity for pipe line builders.  Meeting the demands of the natural gas market:

“will require the annual construction of nearly 2,000 miles of pipeline in the lower 48 states and the Gulf of Mexico, roughly a 17% increase over current capacity. Additionally, an average of 1,300 miles of oil and natural-gas-liquid (NGL) pipeline will need to be constructed annually. The study predicts more than $250 billion of investment in the new lines.”

7 Essential Construction Contract Clauses: Change Claims (Part 7 of 7)

By Wally Zimolong on Posted in Contracts

Even on modestly sized projects changes are inevitable and a project is rarely constructed exactly as originally designed. The reasons for changes in the work are as numerous as the stars in the sky. However, one certainty is that entitlement to additional compensation for changes is a frequent battle ground for construction disputes.

Several areas of the contract will address changes. Of particular importance is how a contractor perfects a claim for compensation for a change. Pity the contractor that has performed work clearly outside the scope of his contract only to see his claim be lost because he failed to perfect his claim under the contract. Your lawyer cannot argue a claim for compensation because of a change if the claim was not perfected. Therefore, it is imperative that a contractor know how a change claim is perfected.

A contract should state the “who, when, and how” of change claims:

  •  Who is authorized to direct changes?
  •  When is the deadline for submitting claims for changes?
  •  How must those claims be submitted?

 Who is authorized to direct change orders?

The contract should state who is authorized to direct changes in the work. In First General Construction Corp., Inc. v. Kasco Construction Co., Inc., the Federal District Court for the Eastern District of Pennsylvania held that verbal directives to perform additional work from a person not authorized to approve extra work are insufficient to support a claim for additional compensation related to that work. In First General, the Court granted summary judgment in favor of the defendant on a subcontractor’s claim that it was entitled to compensation for additional work directed at the behest of defendant’s project superintendent. The Court held that the only person from defendant that was authorized to direct such work was the project manager and the directive in question came from the project superintendent.

Therefore, the contract should be clear as to which persons are authorized to direct the work. Contractors should follow directives only from those authorized persons and when the directive comes from a non-authorized person should confirm the directive from the person that is authorized.

When is the deadline for submitting claims?

Contracts will typically require written notification on claims for compensation to be submitted within a certain time period. The time period can range from between 7 to 21 days after a contractor is aware of an event giving rise to a claim. Failure to provide notice within the prescribed time period may result in a claim being barred. Therefore, contractors should be wary of any such notice provisions and deadlines for making claims for changes.

How must the claims be submitted?

Knowing how claims are submitted is just as important as knowing when they must be made. Typically, the contract will require claims to be made “in writing.” Contractors should take care to learn what the written notice must include in order to validate the claim. Moreover, to whom is the claim being made? Is it to the architect, the construction manager, the owner, or some combination of them?

Of course there are exceptions to these rules, but why make claims for entitlement more difficult to prove; especially, when the burden of proof in demonstrating the exception applies is on the party claiming the exception.

 

Imagine No Lawsuits – It’s Possible if You Try IPD.

By Wally Zimolong on Posted in Contracts

Recently, I am become interested integrated project delivery (“IPD”) as a project delivery method for construction.  For those of you familiar with IPD, the concept truly involves a mind shift.  A true IPD project is a radical departure from the traditional project delivery methods we all are familiar with.  The reasons that IPD is a dramatic departure are many.  However, what I view as the most dramatic, especially as a construction attorney, is the concept that the parties agree to waive most traditional construction claims against each other.

Yes, that means the owner, architect, and contractor (and perhaps key subcontractors) agree not to bring litigation for delay claims, inefficiency claims, change order claims, or any claims for consequential damages.   You might ask how the parties would resolve disputes that are sure to arise on a complex construction projects?  Through collaboration and mediation.

Sound impossible.  Well consider that the entire concept of IPD is predicated on a collaborative approach to delivering the project with a stated goal of preventing traditional construction claims from occurring.  Moreover, imagine if the parties approached this collaborative environment knowing that they would not sue each other.  Furthermore, imagine if you knew that the only way claims could be resolved would be through mutual agreement rather than litigation.  If this one simple not to sue concept were put in place on a project you are currently working  on would it benefit the project or make matters worse?

A “litigation free” zone creates an environment were the parties are not defensive and are free to provide ideas on how to solve a problem without fear that it may be used against them in future litigation.  The parties are not “creating a record” the moment a dispute arises.  While this may be a radical concept for the construction industry, our military has been using a similar concept for years.  Military combat teams from all branches routinely use a concept known as “red teaming.”  Basically, after a mission the participants review the mission and discuss how they could have made it go better.  The discussion occurs without regard to rank. In fact, rank patches are sometimes left at the door.  Moreover, no one is permitted to defend criticism of one’s actions by another member of the squad.    Therefore, you create an environment where even a low ranking soldier can give critical input on the mission without fear of retribution by someone with higher rank.  What results is a dynamic environment which create future successful missions. After the meeting is over patches go back on and rank formalities resume.

IPD is not something that is going to happen in the far off future.  IPD is here now.  In fact, whenever Congress gets around to passing a long term highway bill IPD – or at least IPD concepts – will be part of that bill.

Does this mean that construction litigators are now dinosaurs and should begin brushing up on other practice areas?  No, of course there will still be disputes that require legal advice on an IPD project.  It is just that the method of resolving those disputes is likely to change.

Alert – PA House Passes Bill Making Major Changes to the Mechanics Lien Law

By Wally Zimolong on Posted in Mechanics Liens, Uncategorized

On March 27, 2012, the Pennsylvania House of Representatives passed HB 1602, a bill that makes major changes to Pennsylvania’s mechanics lien law and if passed by the Senate and signed into law will impact any contractor working in Pennsylvania.  All contractors should be aware that HB 1602 weakens a contractor’s most effective weapon against non-payment, the mechanics lien.

1.  No Right to Lien a Residential Project.

HB 1602 amends Section 301 of the Mechanics Lien Law, 49 P.S. Section 1301, adding a sub-part (b), which states that a subcontractor shall no longer have the right to lien a residential project when the owner has paid the general contractor in full.  While other States, like New Jersey, have different rules for filing mechanics liens against residential property, I am not aware of any State that prohibits the filing of a mechanics lien against a residential property outright, as HB 1602 does.

HB 1602 would effect small contractors the most and it would take away a cost effective and efficient means for ensuring payment.  The amounts owed on most residential projects are small.  However, these small amounts have a huge impact on a small construction firm’s cash flow.  Moreover, most small construction firms do not have the resources to devote to litigation for such small amounts, especially when litigation costs can easily exceed the amount owed and collection from a general contractor is often doubtful.

2.  Notice of Commencement

The other major change to the Mechanics Lien law that HB 1602 makes concerns the prerequisites to filing a mechanics lien.   Under HB 1602,  an owner can require a subcontractor to provide a “notice of furnishing” to the owner within twenty days of its first day of work in order to preserve its mechanics lien rights.  A subcontractor is required to provide the owner with a notice of furnishing when the owner has filed a notice of commencement in the “State Construction Notices Directory” maintained by the Department of Labor and Industry.

An owner files a Notice of Commencement by filing it with the Department of Labor and Industry and it must include:

  • the name and address of the general contractor, name and location of the project,
  • legal description of the property upon which the improvements are being made,
  • name, address, and email address of the legal record owner of the property,
  • name, address, and email address of the person other than the owner at whose direction the improvements are being made (I would imagine this means a tenant), and
  • name, address, and email address of the surety if performance and payment bonds are posted (this makes no sense because if a payment bond is posted then subcontractors probably have no lien rights anyway.

Additionally, the owner must post a copy of this notice conspicuously at the project site before any “physical work” commences and ensure that the posting remains posted during the duration of the project.

For the subcontractor’s part, when a Notice of Furnishing is required it must state:

  • a general description of the subcontractor’s work;
  • name and address of the subcontractor; and
  • name and address of the person with whom the subcontractor contracted.

Basically, all of the same information that a subcontractor is already required to give when it files it formal notice of intention to file a mechanics lien under Section 501.  Moreover, HB 1602 dictates the format of the Notice of Furnishing.

This Legislation is a disaster and fails my test for supporting legislation:

(a) is there a compelling reason for changing current policy?, and (b) does it makes sense?

The answer to both questions is NO and I am not sure who this bill is intended to benefit.  It is entirely unclear what problems with the current lien law this bill would solve.  I do not see it benefiting owners who must not only pay a fee to file a Notice of Commencement but also assure that the Notice is posted and maintained.  Additionally, it clearly makes it more difficult for subcontractors to file a mechanics lien, which I am not sure why we want a policy against that.

Hopefully, the Senate comes to its senses and defeats this Bill.  We will be sure to keep you posted.

Commonwealth Court Rules Bid Specification Concerning Performance Bond is Non-Waivable

By Wally Zimolong on Posted in Public Bidding

Last month the Commonwealth Court issued an opinion that reiterated the need not deviate from the requirements of the bid specifications when bidding on public work.

Section 1402 of the Pennsylvania Borough Code requires all contracts in excess of the base amount of $18,500 to be made to the lowest responsible and responsive bidder.  Generally, the criteria set forth in the bid documents are mandatory and must be strictly adhered to in order for a bid to be valid in order to “to invite competition and to guard against favoritism, improvidence, extravagance, fraud and corruption in the award of municipal contracts.”. Fedorko Properties, Inc. v. Millcreek Township School District, 755 A.2d 118 (Pa.Cmwlth.2000); Kimmel v. Lower Paxton Township, 159 Pa.Cmwlth. 475, 633 A.2d 1271 (1993); Dunbar v. Downington Area School District, 901 A.2d 1120, 1126–27 (Pa.Cmwlth.2006) (citation omitted).

Yet, a municipality can waive deviations from the criteria in the bid documents and accept a non-compliant bid for public work if: (1) the effect of a waiver will not deprive a municipality of its assurance that the contract will be entered into, performed and guaranteed according to its specified requirements; and (2) a waiver will not adversely affect competitive bidding by placing a bidder in a position of advantage over other bidders. Gaeta v. Ridley School District, 788 A.2d 363 (Pa. 2002).

Recently, in Dragani v. Borough of Ambler, 37 A.3d 27 (Pa. Cmmw. 2012) the Commonwealth Court considered whether a bid that did not conform to the bid specifications by not including a consent of surety from a surety company listed with at least $20 million in underwriting capacity was a material defect that could not be waived.   The Commonwealth Court held it was a material defect that could not be waived and reversed the trial court’s refusal to issue an injunction preventing the award of the contract to the bidder with the defective bid.

On its face, Dragani appears to be similar to Gaeta.  There the Court held that a bidder’s failure to follow the bid specifications requiring a bid bond from a surety with a rating of A- or higher was a waivable defect and a School District could accept a bid when the bid bond posted only had a B rating.   The Gaeta Court held the defect was waivable because ”the bid defect at issue was not material [and] the effect of a waiver did not deprive the School District of adequate assurance and did not confer a competitive advantage as would compel bid rejection.”  Gaeta at 509.

While a defect in a bid bond was potential waivable, the DraganiCourt concluded that a defect in a performance bond was not.  The Dragani Court distinguished bid bonds from performance bonds.  Unlike performance bonds, bid bonds do not deprive the municipality of assurance that the project will be completed.  The Court noted that “the restrictive purpose, duration, and scope of liability associated with bid bonds favors a degree of latitude in terms of absolute responsiveness.”  Dragani, at 32.

Moreover, the Dragani Court also held that a defect is not waivable “when the specifications provide that the bid will not be considered if that particular requirement is not met.” Id at 33.  (citing Glasgow v. Pennsylvania Department of Transportation, 851 A.2d 1014 (Pa.Cmwlth.2004)).  The Court noted that the bid specifications at hand stated that no bid would be considered if a confirming performance bond was not posted.  Therefore, the Court held that the municipality removed any discretion it had in waiving the defect in the performance bond.  The Court concluded that the awarded bidder’s failure to provide a consent of surety with an underwriting capacity of $20 million or more was a “legally disqualifying error.”

The Dragani holding is important to both municipalities and contractors bidding on public work.  Municipalities should make sure their bid specifications are not ambiguous.  If the municipality wishes to reserve the right to waive defects in the bid, then it should exclude language from the bid specifications that state bids will not be accepted if certain criteria are not met.  While a defect may ultimately not be deemed waivable, the municipality can assure itself that it will not face an argument that under Dragani it waived the right to waive.  From a contractor’s perspective, the Dragani court once again demonstrates the need not to deviate from any of the bid requirements when bidding on public work.

 

 

 

 

 

 

 

 

The New Highway Spending Bill and the Construction Manager Project Delivery Method

By Wally Zimolong on Posted in Contracts, Public Bidding

Most of the attention given to the  Moving Ahead for Progress in the 21st Century Act (“MAP-21″) highway spending bill that the Senate recently passed has been focused on the potential stimulating effect the bill with have on the construction industry in terms of dollars that will be allocated to certain projects.  Of interest to contractors working on Pennsylvania transportation project is the Bill’s potential effect on Pennsylvania’s competitive bid laws.

Section C of the bill is dedicated to “Acceleration of Project Delivery” and states that is “policy of the United States” that various recipients of Federal Transportation funds “accelerate project delivery and reduce costs.”  The Bill charges the Secretary of Transportation to develop best practices to achieve the goal of accelerating project delivery.

In order to achieve the goal, the Bill amends section 23 U.S.C. 112(b), which regulates bidding on Federal Highway projects, to allow for the use of the “Construction Manager/General Contractor” form of project delivery.  The Construction Manager / General Contractor (CM/GC) project delivery method allows an owner to engage a construction manager during the design process to provide constructibility input. The Construction Manager is generally selected on the basis of qualifications, past experience or a best-value basis. During the design phase, the construction manager provides input regarding scheduling, pricing, phasing and other input that helps the owner design a more constructible project. At approximately an average of 60% to 90% design completion, the owner and the construction manager negotiate a ‘guaranteed maximum price’ for the construction of the project based on the defined scope and schedule. If this price is acceptable to both parties, they execute a contract for construction services, and the construction manager becomes the general contractor. The CM/GC delivery method is also called the Construction Manager at-Risk (CMR) method in some states.

Because the CM/GC method of project delivery does not strictly comply with the lowest responsible bid requirements of Section 112, currently, the CM/GC project delivery method can only be used with the permission of the Federal Highway Administration under its “Special Experiment Project No. 14 – Innovative Contracting” program.”

Of note to contractors performing transportation work in Pennsylvania is the potential effect on how PENNDOT projects are bid.  Currently, the Pennsylvania Procurement Code requires PENNDOT to award a construction contract to the lowest responsible bidding in a competitive bid process.  See Pa.C.S.A. Section 512.   However, under the CM/GC delivery method, PENNDOT can negotiate a contract with the CM without utilizing the competitive bid process.  Moreover, the Highway Bill states that in selecting the CM PENNDOT can award the contract on the basis of (a) qualifications; (b) experience; (c) best value; or (d) any combination of these factors.

Therefore, under the Highway Bill, PENNDOT could theoretically solicit bids for construction management services and award the CM contract based upon a “best value” approach which Pennsylvania law does not currently allow.  Moreover, once the CM is engaged it can negotiate a construction contract with that CM with utilizing the Procurement Code’s competitive bid requirements at all.

Importantly, the new provisions of Section 112 do not create a carve out permitting state law to limit the use of the CM/GC project delivery method as it does with the design-build delivery method.   In light of the challenges to PENNDOT’s “Innovative Bidding” procedures in Brayman Construction Corp. v. PENNDOT, 13 A.3d 925 (Pa. 2011), it will be interesting to watch how this newly authorized project delivery method effect bidding on PENNDOT projects should the Highway Bill be signed into law.

Two Blows Dealt to Project Labor Agreements

By Wally Zimolong on Posted in Project Labor Agreements, Uncategorized

Opponents of project labor agreements are no doubt cheering two recent developments concerning wasteful PLA’s.

In New York, a state court has ordered the NYDOT to cancel an interchange project because NYDOT violated New York competitive bidding laws by requiring a PLA on the project.  According to ENR, at issue was a $72.4 million Orange County interchange project.  NYDOT awarded the project to A.Servidone/B. Anthony Construction Corp., a joint venture.  The JV’s bid complied with the PLA but was higher than the low bid, which did not comply.

However, NYDOT originally advertised the bid without the PLA.  However, after receiving a “proposal” from a “union group,” NYDOT changed its mind and 11 days prior to the date, revised the bid specification to include the PLA.

The objecting low bidder, Lancaster Development, bid the project without the PLA.  Although its bid was lowest, NYDOT rejected the bid because it did not comply with the bid specification requiring compliance with the PLA.

However, the Court overturned NYDOT rejection of Lancaster’s bid and ordered NYDOT to rebid the job.  No word on whether the rebid job will include a PLA from the outset.

In Washington, ENR reports that Metropolitan Washington Airports Authority has canceled a PLA for the extension to the Metrorail system to Dulles airport.  The article states that the design build team that will be selected for Phase II of the project can “voluntarily” sign the PLA, which will now only apply to the prime contractor.  The article does not elaborate to what impact the elimination of the PLA to all but the prime contractor will have on the overall participation of merit shop contractors on the project.  If the design-build team anticipates entering into a single contractor with the prime contractor for all of the work, presumably the PLA would have the same effect overall.

7 Essential Construction Contract Clauses: Design v. Performance Specifications (Part 6 of 7)

By Wally Zimolong on Posted in Contracts

The contract specifications will often instruct the contractor to do more than simply build a particular building element using certain materials. While sometimes the specifications will simply instruct the contractor to build an element in a particular fashion, other times the specifications will instruct the contractor to construct a building element in a manner that achieves certain objectives. The difference between these two types of specification is important because it dictates the level of risk a contractor is assuming.

A performance specification sets forth the standard of performance to be achieved. The contractor is expected to exercise it judgment in how best to achieve the performance standard. A basic example of a performance specification is if a specification states that the contractor shall construct a HVAC system shall maintain a certain level of temperature and humidity level, but leaves the design of the system necessary to achieve the required temperature and humidity levels up to the contractor performing the work.

Conversely, a design specification describes in detail the materials and equipment the contractor must use and the manner in which the work must be performed. As one court put it, “design specifications state how the contract is to be performed and permit no deviations. Performance specifications, on the other hand, specify the results to be obtained, and leave it to the contractor to determine how to achieve those results.”

This distinction is critical because when a contractor agrees to design a system to meet a performance specification, it warrants that the system will perform as promised. Conversely, a contractor that designs a system simply to meet the design specification guidelines makes no warranty that the system will perform in any particular way. In fact, under the so called Spearin Doctrine, which gets its name from a 1918 Supreme Court decision United States v. Spearin, a contractor who has constructed a system according to a design specification has a defense to any claim that the system is not performing as intended.

The Spearin Doctrine applies onto to design specifications. Often, determining whether a specification is a performance versus design specification is difficult as a specification may blend elements of both. In order to differentiate between performance versus design specifications, courts look to the level of discretion that exists within the given specification. A contractor arguing that a specification is a design specification – and thus subject to the Spearin Doctrine – must show that the specification “does not permit meaningful discretion.”

Specifying a certain manufacturer of a product alone is not depositive of whether a specification is design rather than performance, especially when a specification permits substitution of a specified product with “an approved equal.” In determining whether a specification is design over performance, courts also look to how much oversight the owner exercised over the contractors work and whether the specifications lay out the contractors means and methods of contraction.

Additionally, the difference between design and performance specification and the liabilities each creates is of particular importance to design builders because specifications in design build contracts are performance specifications. Therefore, design-build contractors should not only confirm that the system is capable of being constructed to perform as required, but also that it can be constructed a price acceptable to the design-build contractor. A design-build contractor that learns after contracting that although the system is capable of construction, albeit at an exorbitant price, will not be entitled to an adjustment in the contract price. Moreover, if they are financial incapable of constructing the system at the price necessary for it to perform, it is at risk for a bond claim.