The Department of Labor maintains a set of regulations that (a) are the basis for a large increase in enforcement activity, (b) apply to virtual all transportation contractors and subcontractors, and (c) most contractors and subcontractors are not complying with. Those regulations are found at 41 C.F.R. 60-4.1 and are the implementing regulations for Executive Order 11246, an LBJ era order seeking to end discriminatory hiring practices on federal construction projects.  These regulations are sometimes referred to as Affirmative Action regulations.

Why You Should Be Concerned.

The DOL’s Affirmative Action regulations apply to all contractors and subcontractors with a contract value exceeding $10,000 on an federally funded project or project receiving federal funding assistance.  This is critical because many contractors make several false assumptions about the applicability of the Affirmative Action regulations to them.  First, the regulations apply to any contractor or subcontractor working on a federal or federally assisted construction project and not just to those contractors maintaining a direct contractual relationship with the government agency letting the work.  Second, unlike many federal regulations, there is no employee threshold for the regulations to apply because it applies to any contractor or subcontractor holding a contract or subcontract in excess of $10,000 is subject to the regulations regardless of company size.  Third, it applies to any project receiving some sort of federal funding assistance, not just those solely funded by the federal government.  What this means is that it is hard to envision a public construction project that is not subject to the regulations.

Contractors should be concerned because after years of little enforcement activity the DOL’s Office of Federal Contract Compliance Programs is rapidly stepping up enforcement activities.  The regulations permit the DOL to conduct an on-site audit of your firm’s compliance with the regulations and permits the DOL to access a wide variety of records, including payment and payroll records for non-public private projects.  Moreover, unlike an OSHA investigation, this can all be done without a warrant.

What the Regulations Require You to Do.

Generally, the Regulations require you to use “good-faith efforts” to increase minority and female employment within your firm.  The Regulations set forth specific requirements that firms must do to help achieve this goal.  For example, the Regulations require you to keep a record of all female and minority applicants, to actively recruit female and minority employees through various community organizations, and to create and maintain a equal employment opportunity policy within your firm.  The OFCCP publishes a helpful “Technical Assistance Guide for Federal Construction Contractors,” which goes into to much greater detail on the requirements of the Regulations and should be required reading for contractors.  It can be found HERE.

Where Problems Occur.

First and foremost, problems occur because most contractors and subcontractors falsely assume the regulations do not apply to them so they are left completely flatfooted when they receive a letter from the DOL advising that them that they have been selected for EEO audit.

Second, while no doubt laudable, the Regulations (like many federal regulations) sometimes do not consider the real world.  For example, the Regulations require that contractors and subcontractors “provide written notification to minority and female recruitment sources and to community organizations when the Contractor or its unions have employment opportunities available, and maintain a record of the organization’s responses.”  For contractors signed to collective bargaining agreements, such an effort amounts to little more than a waste of time because all hiring must go through the respective union hall.  The regulations also require firms to develop “on-the-job training opportunities’ targeted females and minorities.  Again, this becomes cumbersome, at best, when firms hire through union halls that maintain their own apprentice and training programs.

The Consequence of Non-Compliance.

Beside the cost and expense of a lengthy DOL audit, non-compliant contractors run the risk of fines and sanctions, including debarment, for failing to follow the Regulations.

Because enforcement efforts are increasing, contractor and subcontractors working on public projects should become familiar with the Regulations so that they are fully prepared to respond to a DOL audit.

ENR Risk Review has a story about an engineer’s lawsuit for additional compensation for work that was not memorialized in a formal written change order.   The case brings to mind an often unknown rule in Pennsylvania regarding verbal change orders.

Claims for additional compensation where no written change order exists are common.  What comes as a surprise to many contractors is that even when a contract requires all change orders to be in writing, a court can still award a contractor additional compensation for work not memorialized in a written change order.  In Pennsylvania, this has become known as the Universal Builder’s Rule.

The Rule gets its name after the Pennsylvania Supreme Court decision in Universal Builders, Inc. v. Moon Motor Lodge, Inc.  In that case, Universal Builders entered into a contract with Moon Motor Lodge to construct a motel and restaurant.  The contract — typical of most construction contracts — required that all change orders be in writing AND signed by the architect.  After work was complete, Universal brought suit for additional compensation for work authorized but not formally memorialized in a written change order pursuant to the contract.

Notwithstanding the clear language of the contract, the Supreme Court refused to overturn the lower court’s refusal to enforce this contractual provision.  The Court explained that several legal theories supported the lower court’s decision.  First, verbal change orders can be considered agreements separate from the written contract.  Second, the written change order requirement could be consider waived by the parties actions.

Does this mean you can now ignore a contracts requirement that all change orders be in writing?   No. First, in Universal Builders, the fact that the work extra work was ordered to be performed does not appear to be disputed.  Other courts have held that when  extra work is verbally ordered by someone who does not have any authority to order the work, then a contractor may not be able to recover under the Universal Builders rule.  Second, Universal Builders was a private construction contract.  Courts, at least in Pennsylvania, have refused to extend the rule to public contracts.

There are two takeaways here.  (1)  Contractors need to evaluate the circumstances surrounding a claim for additional compensation before walking away from it; and (2) Owners and general contractors cannot simply assume that they will not be required to pay for additional work not confirmed by a written change order in a format set forth in the contractor or subcontract.

(Reminder — if anyone has any questions, comments, or disagreements about this blog post or any other blog, please feel free to comment below or to email me at wally@zimolonglaw.com)

ENR tipped me off to a story that somehow I completely missed.  The School District of Philadelphia has apparently filed a series of lawsuits against more than two dozen design professionals in connection with work performed on the School District’s Capital Improvement Program.

Because no formal complaints have not been filed – instead the School District filed a Writ of Summons against each design firm which basically tells each firm to expect a complaint to follow – we do not know specifics of the School District’s claims against each firm.  However, a spokesperson for the School District is seek “$2 million” in damages for “errors in the plans and specifications.”   We do know enough about design professional liability claims to wonder whether the School District has any idea what it is doing.

First, the School District has chosen to pursue design firms for cost overruns and design firms only.  The School District apparently has not implicated any of the contractors working on the projects.  Certainly poorly prepared plans lead to their fair share of budget busting change order and delay claims.  However, so do contractors that underbid projects and fail to incorporate design details into their bids.  It simply defies logic that the cause of overruns on everyone of these over two dozen projects projects is solely poorly prepared plans and specifications.  Therefore, the School District has a threshold causation issue it needs to overcome.

Second, to be liable for poorly designed plans and specifications the design firms must have either breached a duty owed under the agreement with the School District or committed professional malpractice.  Many owner-design professional agreements do not require the designer to prepare a set of plans and specifications that contain every detail necessary for construction.  Rather, the agreement will require the contractor to supplement the architects plans and specifications with shop drawings and submittals.  Moreover, architects do not warranty that the drawings represent a complete set of drawings that represent every detail necessary.  It is doubtful that the School District’s contracts with the allegedly liable design firms call for the design firms to prepare plan and specification with the level of detail which includes every element necessary for the work.  Thus, a sucessful breach of contract claim could be perilous.

Like doctors and lawyers,  design professionals are not required to be perfect, they need only act reasonably.  Therefore, a certain number of “errors” will always be found in plans and specifications.  The issue becomes whether the level of errors exceeds what is reasonable.  To prove that the School District will need to engage an expert.  However, because the School District has sued pretty much every well known design firm with experience on the types of projects the School District performs, it may have difficult finding an expert with any crediablity.  Moreover, Pennsylvania is a certificate of merit jurisdiction.  This means that in order to file a malpractice complaint the School District will have to obtain an opinion from a non-conflicted design professional that “there exists a reasonable probability that the care, skill or knowledge exercised or exhibited in the treatment, practice or work that is the subject of the complaint, fell outside acceptable professional standards and that such conduct was a cause in bringing about the harm.”

Finally, there remains the issue of the head scratching “$2 million” figure that the School District expects to recover.  Assuming that these two dozen design firms worked on separate projects that means each project experienced an average $83,333 in overruns.  This is hardly a smoking gun indicating wide spread defects in plans and specifications.  Furthermore, even if the School District recovered that amount what would it actually net?  The School District has hired outside counsel to prosecute these claims.  The counsel it chose is a respected and more than compentant firm that now doubt will charge the School District a fee comenserate with its abilities.  Therefore, it is concievable the School District will spend at least $83,333 pursuing each claim without any chance of recovering attorneys fees, especially if the claims are are doubtful as they appear.  Surely, the defense firms representing these design teams are not simply going to roll over in the face of such claims.

As has been discussed on this blog, the most common form of fraud involving the Department of Transportation’s disadvantaged business enterprise program, involves a “pass through” entity that performs little or no actual work on the construction project.  Under this common scheme, a general contractor hires a subcontractor that has been certified a DBE and uses the value of the work subcontracted towards the percentage of work it has agreed to perform using DBE firms, however, in reality, the DBE does not perform a “commercially useful function.”  Instead, the work is performed by a non-DBE firm or even the general contractor’s own employees.

Sometimes the fraud is one of willful ignorance of the scheme by the general contractor, who knows the pass through scheme is happening and simply winks, nods, and looks the other way.  Other times the scheme is more blatant and the firm guilty of DBE fraud willfully engages in the pass through scheme, like the one announced yesterday by the U.S. Attorneys Office in North Carolina.  There the U.S. Attorney filed a 29 count indictment against a North Carolina highway construction firm and its executives for taking part in a massive and complex DBE fraud scheme involving a pass through entity.  The case is troubling because of extent of the actions the firm and individuals involved took to try covering up the pass through scheme.

The indictment alleges that Boggs Paving, it’s President, Vice-President, CFO, and Chief Estimator violated federal mail fraud, wire fraud, and money laundering laws, by engaging in a massive scheme to obtain contracts through the North Carolina DOT by using a pass through scheme involving a DBE trucking firm.  (The DBE firm and its principal were also indicted.)

It is not criminal per se to violate the DOT’s DBE program.  What makes the violating the DBE program criminal is that it invariably involves violating federal mail and wire fraud laws.  An individual or corporation commits mail fraud when the U.S. mail is used in furtherance of a fraud scheme.  Likewise, wire fraud occurs when a telephone or the internet (i.e. the wires) are used in a scheme to obtain money from a person or entity through false or fraudulent pretense.  Mail and wire fraud occurs in the context of DBE fraud because mail, telephones, and the internet are used in submitting bids, payment applications, and DBE compliance reports all of which make false statements about the level of participation by DBE firms.  Moreover, because it is the use of the mail and wires that is the violation, firms and individuals can be indicted even though the DBE fraud involved a county or municipal DBE program.  Each mail and wire fraud count carries a maximum sentence of 20 years in federal prison.

Because all the government must show in a mail or wire fraud case is that the mail or wire was used in “furtherance of the scheme,” it is hard to imagine what defense the indicted individuals in this case will have to the government’s claims.  Here, without falsely claiming the level of DBE participation in writing there could be no DBE fraud because the NCDOT would never have paid Boggs for its work.

This case is a reminder that federal authorities are on the lookout for DBE fraud and the consequences for construction firms and their executives violating DBE rules.

Owners should never be “thrilled” with bids that come in substantially under budget because it usually means something is either wrong with their construction documents or their contractor intends to make up there thrilling under budget bid with scope related change orders.

According to ENR, Taisei Construction Company has filed a lawsuit against San Joaquin Delta College, which seeks $25 million, claiming the College “substantially increased the scope of work” on a project to construct a new math and science building.  The story goes on to say that the College estimated the cost of construction to be $65 million but was “thrilled” when Taisei bid just $35 million for the project.  Shockingly, the contractor is claiming that the actual cost of construction was close to the College’s original estimate.

Two things could have happened here.  Either, College’s construction documents (the drawings) were woefully inadequate for the contractor to accurately prepare its bid.  In other words, the contract document did not fully show the contractor what was intended to be constructed.  In which case, the College can proceed against its design profession (construction speak for the architect or engineer) who prepared the contract documents.  Or, the contract documents were in fact 100% complete and the contractor simply deliberately underbid the job in order to be awarded the contract with the intent to make up its price through change orders.

Either way, the College could have prevented this lawsuit.  First, it should have assured its contract with its design team required the design team to prepare a fully complete set of construction documents that were fit for construction, rather than simply preparing a set of documents showing the general intent of the architect, which is often the case.  The College apparently did not do that because College officials are quoted in the article as saying “here was no such thing as a perfect set of design drawings.”  Second, it should have assured that its contract with Taisei required that Taisei fully familiarize itself with the drawings and to raise any objections to the drawings prior to construction.  Finally, and perhaps most importantly, it should have asked why the Taisei’s bid came in $30 million under budget!

Three simply things that could have potentially avoided a $25 million lawsuit.

Now that the issue of sovereign immunity has been addressed, it makes City Hall’s response to the Market Street building collapse even more confusing and raises the question of whether Mayor Nutter either knows something the public does not know or that he does not want the public to know about the Market Street building collapse.  Because the City is immune from civil suits related to the collapse, why have City officials been so terse with their statements regarding the tragedy?

Besides stating what everyone already agrees on — that the collapse is a great tragedy — City Hall has said only that the City is not liable.  There has been no promise for a top down investigation of all of the parties involved with a vow to correct the way the City conducts business, if the way it current conducts business had even the slightest role in the tragedy.  There has been no call to investigate the culture at L&I or even to see if improvements could be made.   (It’s not as if L&I is a model agency that has never had issues over the years.  Furthermore, I doubt there is an agency at any level of government where improvements could not be made.)

Why not use the building collapse as an opportunity to make improvements at a agency as important as L&I is to the health, welfare, and safety of the citizens of Philadelphia?  Instead, Mayor Nutter has circled the wagons.

Yesterday, we saw what can best be described a by product of some sort of strange gentlemen’s agreement whereby City Council agreed to hold off on asking the really tough questions of L&I officials.  If you are not going to ask questions that need to be answered in an effort to effectuate change, why bother holding the hearing? Even the City’s official response the suicide of the L&I official, who apparently inspected the building, was bizarre:

I will state right here, right and now, this man did nothing wrong,” Everett Gillison, Mayor Nutter’s chief of staff, said yesterday. “The department did what it was supposed to do under the code that existed at the time, and we are proud of the department and its employees – period.”

Sounds a tad defensive if you ask me.  Moreover, before that statement was made had anyone suggested that the L&I official had done something wrong?  Is the investigation into whether or not he or anyone else in L&I already complete?  Certainly this is not the type of official statement that is made in response to the suicide of a City employee.

Either the Mayor is getting horrible public relations advice or there is much more to this story, specifically the City’s role in the collapse, that the public just does not know about.  The good news is the press is not letting this story go and they are starting to dig deeper.  Should make for a very interesting summer in the City of Brotherly Love.

The City of Philadelphia flagged eleven (yes this one goes to eleven) prime contractors for flaunting the City of Philadelphia’s DBE rules according to the City of Philadelphia Office of Inspector General.  According to the news release, the chief offender, William H. Betz, Inc., may have gotten off easy.  According to the OIG, Betz facilitated contracts between JHS & Sons Supply Company and ten prime contractors whereby:

providing JHS’ minority business certification and the supplies necessary to complete the job. As a result, Betz received more than $640,000 worth of business that was intended for legitimate minority-owned companies. JHS received at least $70,000 for acting as a pass-through.

As a result of a settlement agreement with the City, Betz agreed to repay the City $128,000 and is ineligible for City contracts for two years.  Why is this getting off easy?  Because the arrangement alleged by the OIG could have easily led to federal prosecution of Betz officials involved with the scheme.  For you to be indicted for DBE fraud, there is no requirement the project be owned by the federal government or be funded by it.  There is no actual crime known as “DBE fraud” and DBE regulations to not prescribe criminal penalties for violation of DBE rules.  Rather, DBE fraud almost invariable involves the federal crimes of mail fraud and wire fraud, which are the crimes that DBE fraudsters are prosecuted for.

Hall of Fame Philadelphia Eagles radio man Merle Reese once saw a play that seemed improbably — and perhaps against the rules — to which he disclaimed “he can’t do that!  Yes, he can do that!”  You might be thinking the same thing when you receive notice from your federal government client that the project is being shut down for lack of funding and you will be paid only for the work already in place.  This is a hard pill to swallow because your profit may not have come until a later part of the project that now will not be completed.

Almost all government contracts contain a termination for convenience clause that allows the government to terminate a contract without liability for breach of contract.  Such clauses owe their roots to military procurement contracts as a way for the government to avoid liability once a war ended. Under federal regulations, you may not recover anticipatory or consequential damages following a termination for convenience.  However, you are entitled to compensation for the work you performed at the time of termination and potential other costs delineated in your contract.

Yet, there are three exceptions to this general rule:  (1) when the government terminates the contract in bad faith; (2) the government abuses its discretion in its decision to terminate the contract; or (3) when the government enters into a contract knowing it will terminate it before it is completed.

Unfortunately, you burden of proving “bad faith” is a high. To establish a breach based on bad faith in this context, you must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.   The clear and convincing standard is stricter than the preponderance of evidence standard that is normally applied in civil cases.  In determining whether the government clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.

Termination for convenience clauses are just another factor you need to deal with in performing public work.  As is usually the case, yes the government can do that.

 

 

(This guest blog post from John Sullivan, Esquire, a Baltimore lawyer who specializes in DBE and MWBE disparity studies. John’s website is Croson Legal Services.  He can be reached via email at jcharlessullivan@yahoo.com)

For more than two decades it has been true that subcontracting goals – Disadvantaged Business Enterprise goals on federal work and Minority and Women Owned Business Enterprise goals on state and local contracts – must be supported by a disparity study. More than 300 of these studies have been completed around the country to support various DBE and MWBE programs.  Without a viable disparity study, DBE programs are subject to constitutional challenge.  However, just how credible are the disparity studies that state and local government rely upon?

Take for example the Austin, Texas based economic consulting firm, NERA, who finds itself is serious trouble for the disparity studies it produced.  NERA produced dozens of the disparity studies for state and local agencies such as SEPTA, the City of Baltimore, New York State, Hawaii DOT, and the City of Cleveland.

Cleveland awarded NERA a $758,000 no bid contract to complete a disparity study intended to support the city’s MWBE program. It turns out that large chunks of the study were cut and pasted from other NERA studies.In fact, the 36 page legal section of NERA’s Cleveland study is a word for word copy of the legal section done for the Missouri DOT. NERA did not conduct new surveys for Cleveland, instead relying on survey answers for a study done on behalf of the Northeast Ohio Regional Sewer District. One sentence in the Cleveland study referred to the “Houston market area” when the study meant to be discussing Cleveland.

The Cleveland Plain Dealer has run a series of articles on the NERA study. The president of the local Black Contractors Association announced, “Fraud has been perpetrated here.” The Plain Dealer dismissed the study as “slickly repackaged recycling.”

The heart of all disparity studies is the determination of availability – what percentage of contractors who are qualified, willing and able to complete public work are MWBEs or  DBEs? NERA disparity studies apply a headcount approach to availability. All construction firms, regardless of size, are considered the same. The reality that only big construction firms can complete the biggest construction contracts is ignored.

The NERA disparity study for Cleveland concluded that there was sufficient evidence of discrimination to justify continuation of the city’s MWBE program. The City Council agreed. Two lessons are to be learned here.

The first is that a disparity study cut and pasted together is not, or at least should not be, evidence of discrimination justifying preferences in public construction contracts. The law and a sense of fairness require that if there are to be preferences in local contracting, evidence of discrimination in local contracting is needed. Evidence from other parts of the country should not suffice.

The other lesson is that politicians voting on disparity study-based programs don’t really understand what they are voting on. To be fair, disparity studies are often long (the Cleveland study exceeds 700 pages) and complicated documents. Few decision makers have the time, interest, or expertise to read the studies.

My age makes me part of perhaps the last generation to go to college where computers, the internet, and email were not in widespread use.  Before the internet age, Villanova University, where I went to undergraduate and law school, would notify students of the time and location of final exams by posting several small print pages that you would need to decipher to find the date, time, and location of your final exam.  The date, time, and location of the final exam for every class Villanova offered appeared on these print outs.  You can imagine what they must  have looked like.  I can remember trying to find my class and then following the small print line over to find the date, time, and location when it would be held.

On one occasion, most likely attributable to a few Yuengling’s the night before, I wrote down the wrong place and time for my final exam.   I showed up on at the time and location when I thought the exam should begin only to find the classroom empty and locked.  Luckily, I was able to contact the professor, which required me to actually call or go see him in person — no email, and he agreed to let me take the final exam.  However, I still ended up with a C, in a class when I should have done much better.  The grade was no doubt influenced by my failure to show up at the right place and time.

Moral of the story – don’t be in the wrong place at the wrong time.  This adage applies to bid protest litigation involving the Commonwealth of Pennsylvania as well.   In Scientific Games Intern, Inc. v. Commonwealth of Pennsylvania, the Pennsylvania Supreme Court held that under the Pennsylvania Procurement Code the Commonwealth Court did not have jurisdiction over a successful bidder’s claim for specific performance.

The case involved an award of a bid for a computer system to monitor slot machine’s for the Department of Revenue.  The plaintiff, SGI, was submitted the winning bid and contract negotiations ensued.  Eventually, an agreement on terms was reached and the Office of Chief Counsel transmitted a copy to SGI for execution.  SGI signed the contract and returned it to the Commonwealth.  However, before the Commonwealth could fully execute the contract.  The Commonwealth cancelled the contract under Section 521 of the Procurement Code.  SGI then brought an action against the Commonwealth in Commonwealth Court seeking specific performance of the contract.  The Commonwealth raised preliminary objections challenging the Commonwealth Court’s jurisdiction to hear the dispute, which the Commonwealth Court overruled.  On appeal the Supreme Court overturned the Commonwealth Court and explained:

“The Procurement Code establishes administrative processes to address disputes arising in the procurement setting. On account of the doctrine of sovereign immunity, however, contractors, bidders, and offerors have limited recourse and remedies. Relative to controversies in matters arising from procurement contracts with Commonwealth agencies, the Board of Claims retains exclusive jurisdiction (subject to all jurisdictional prerequisites), which is not to be supplanted by a court of law through an exercise of original jurisdiction.As to challenges to cancellations of solicitations asserted under Section 521 of the Procurement Code, the Legislature did not implement any waiver of sovereign immunity and afforded no remedy to aggrieved bidders and offerors which have not yet entered into an executed contract with a Commonwealth agency. For those attaining the status of contractor—which we find should be deemed to occur at the time a contract is executed by all parties (as that event is also understood for purposes of Section 521)—the remedial procedure is via Section 1712.1, subject to review within the exclusive jurisdiction of the Board of Claims.”

As a result, the plaintiff’s claim was dismissed.  When dealing with a challenge to an action involving the Procurement Code it pays to file your claim at the right place at the right time.