Much of the Eastern United States is just now emerging from a historic two week cold snap.  In much of the Northeast and Mid-Atlantic, the temperature stayed below freezing for 15 days straight.  Cities recorded the lowest temperatures in a quarter century.  Winter Storm Grayson reeked havoc along the Eastern Coast bringing snow to places like Charleston and a crippling blizzard to Boston.

The record cold snap also impacted the construction industry.  Delivery delays, the inability to apply weather sensitive applications (like cast in place concrete), and the unavailability of labor are just a few things that extreme weather can cause on a construction project.  If they happen at the wrong time, delays can destroy project schedules and make previous delays even worse. Delays cost money and can mean the difference between a profitable project from both the owner and contractors perspective.

In order to determine what relief you are entitled to because of the Little Ice Age’s impacts to your project, you need to determine three things.  First, is the delay compensable. Second, is the delay excusable.  Third, is the delay critical.

Is it compensable?

Many contractors contain so called “no damages for delay” clauses that limit a contractor’s right to recover for project delays to an extension of time only.  That means a contractor will be entitled to relief from the agreed upon substantial completion date but is not entitled to additional money for the delay.  There are exceptions to no damages for delay clause, as I discussed in this blog post, back in the day.  But, you need to prove those exceptions first.

Is it excusable?

Weather related delay are rooted in the common law rule of impracticability or impossibility of performance.  This means that the weather delays are only compensable when they are so unusual that neither party could have reasonably anticipated them at the time of contract.  Of course, it is reasonable to assume that one should expect cold weather in the Northeast during the winter.  However, what about extreme cold weather for two weeks, like we just had.  Better yet, what about the extreme cold in the Southeastern Conference portion of the United States?

Where weather related delays often become an issue is when they compound other delays.  For example, a general contractor may have anticipated cold weather in the winter when it agreed to the schedule.  However, it did not anticipate that other project delays would cause its ready mix contractor to have to pour in the winter rather than the fall, as it was anticipated.  In that situation, the delay because an issue both for the general contractor and the subcontractor.

Is it critical?

From the prime contractor’s perspective, the delay must be on the critical path for it to matter. For example, a delay by an interior painting contractor will probably not impact the schedule to a large extent.  However, a contractor whose completion is critical to multiple follow trades, like a structural steel contractor, is almost certainly on the critical path.

What about notice?

Assuming the delay is excusable and it is critical, you need to assure that you are giving proper notice to your counter party.  Even if your contract contains a no damages for delay clause, you still want to seek an extension of time to avoid a liquidated damage claim.  Many contract, however, require you to give notice within a certain amount of time of first learning about the delay.  That means if the weather has impacted your schedule and you believe you will require additional time to perform YOU NEED TO GIVE WRITTEN NOTICE IMMEDIATELY.  Otherwise, you will end up waiving your right to claim additional time or additional compensation.

The United States Court of Appeals for the 5th Circuit has been asked to review OSHA’s twenty year old “controlling employer” policy.  As many contractors are surprised to learn, under OSHA’s controlling employer policy, you can be given an OSHA citation even when your own employee is not exposed to the alleged hazard.

A.  The Controlling Employer Policy

OSHA’s current controlling employer policy has been effective since 1999.  That policy applies to multi-employer worksites, which means virtually all construction sites.  Under the policy, OSHA can cite the creating, exposing, correcting, or controlling employer.  A creating employer is one who creates the hazard to which workers are exposed.  The exposing employer is one who permits his employees to be exposed to the hazard, whether it created the hazard or not.  The correcting employer is one who is responsible with correcting known hazards. Finally, the controlling employer is one “who has general supervisory authority over the worksite, including the power to correct safety and health violations itself or require others to correct them.”  Most general contractors and CM’s are controlling employers.

Under OSHA’s policy, a contractor’s OSHA safety obligations hinges on whether it is a creating, exposing, correcting, or  controlling employer.  The creating, exposing, and correcting contractors obligations are fairly straightforward.  However, the controlling contractors obligations are more nuisanced.

If an employer creates a hazardous condition, it must immediately and effective steps to keep everyone away from the hazard and notify the party responsible for correcting the hazard.  If the creating employer is also responsible for correcting the hazard, then it should immediately take steps to correct it all while creating folks away from the hazard.  Pretty basic.

If the employer is the exposing employer, then a normal OSHA citation analysis applies.  The employer will be cited for exposing its employees to the hazard and OSHA must show that (a) the employer knew or should have known of the condition; (b) that the specified OSHA standard applies; and (c) that the employees were actually exposed to the hazard.

If the employer is the correcting employer, then, as common sense would suggest, it should correct hazards that are made known to it.  Also, the correcting employer should regularly inspect the site to make itself aware of hazards that it could correct.

The controlling employers duties are more subjective.  OSHA admits that the controlling employer’s “duty of reasonable care is less than what is required of an employer with respect to protecting its own employees.”  OSHA lists several factors evaluating whether a controlling employer exercised reasonable care.  The one constant is that a controlling employer should take some form of affirmative steps to (a) make itself aware of hazards and (b) enforce a policy to make sure known hazards are corrected.  In other words, the controlling employer cannot make controlling OSHA violations someone else’s problem.  This attitude is more prevalent than you think.

What should the controlling employer do?  Walk the site at regular intervals to inspect for obvious hazards, engage subcontractors with a strong record of safety, maintaining a worksite safety policy and enforce it.  In other words, just having a manual is not enough.

These steps really make all the difference. I recently navigated my client through an OSHA investigation which resulted in OSHA declining to issue a citation.  As much as I would like to say that my legal acumen saved the day, it was really what my client did long before my involvement, which is to credit. It regularly walked the site, it pointed out obvious hazards, it maintained a safety manual and program which it followed, and it hired subcontractors with strong safety records.  We were able to present all of this to OSHA during the investigation and it is what made the difference.

B.  Criticism of the Policy

The chief criticism of the policy is that it extends beyond the Congressional mandate that OSHA cite employers who expose employees to hazards.  Therefore, OSHA lacks the authority to cite a contractor when those exposed to the hazard are employed by someone else.  In 2007, in Sect. of Labor v. Summit Contractors, Inc., the OSHRC struct down the controlling employer policy. However, the 8th Circuit Court of Appeals overturned that decision and reinstated the controlling employer policy.  Now, the 5th Circuit is asked to review the policy.

C.  Takeaways

The bottom line is that every contractor on a construction site needs to be vigilant about safety in order to avoid ending up in OSHA’s cross-hairs.  Even if your employees are far from the hazard, the best approach is that if you see something say something and of course document it in writing.

Disadvantaged business enterprise (DBE) fraud in the construction industry is a topic frequently covered on this blog.  My posts on DBE fraud are some of my most read posts and the ones that generate the most questions from readers and inquiries.  Many of the posts cover the increased pace of criminal prosecutions involving DBE fraud. One case I blogged about involved the indictment of the steel erection contractor on the new World Trade Center project, DCM Erectors, Inc.

Earlier this month, a federal jury found the defendant in that case and DCM’s owner, Larry Davis, guilty of one count of wire fraud and one count of conspiracy to commit wire fraud for allegedly operating a DBE pass-through scheme for steel erection services on the WTC project.  Then, in a remarkable (to say the least) turn of events, the Judge granted the defense’s motion for acquittal and overturned the jury’s guilty verdict against Mr. Davis.

The Judge’s decision to acquit Mr. Davis hinged on the nuisances required to prove a wire fraud and conspiracy to commit wire fraud.   The case also cast doubt on the ability to prosecute individuals for DBE fraud not involving federally funded projects, like DOT, FTA, FAA, and VA projects.

I.  The Background

The scheme Davis was alleged to have engaged in was a fairly straightforward DBE pass through scheme.  As I have talked about before, a pass through scheme is where a certified DBE does not perform any commercially useful function and the work is actually performed by a non-DBE firm.  That is what prosecutors alleged Davis did.

The WTC project was subject to the New York and New Jersey Port Authority’s DBE program.  Like most DBE programs, the Port Authority’s program had a goal of seeing that DBE firms performed a certain percentage of the overall dollar value of the prime contract.

DCM executed two separate steel erection subcontracts for two different buildings at the project.  DCM was not a DBE firm.  However, on one contract it certified that it had subcontracted with a DBE firm to perform its payroll and survey services.  On the other contract, it entered into a joint venture with a DBE firm.

According to the indictment, no employees of the DBE firm performed work on the JV project.  On the other project, the indictment alleged that the DBE firm performed no survey work and the work and DCM employees actually performed the work.

The indictment alleged DCM and Davis defrauded the Port Authority by “fraudulently claimed MBE credit for One WTC and the WTC Hub in excess of $70 million based on the value of work Solera/DCM purportedly performed” on the World Trade Center project; and b) “fraudulently claimed WBE credit for $6.3 million of surveying and payroll management work GLS purportedly was performing as a subcontractor to DCM on One WTC and the WTC Hub.”

II.  The Wrinkle

There are some critical wrinkles in case that ultimately were important in the Judge acquitting Davis.  First, unlike the DOT’s program, the Port Authority’s DBE program was not the law, i.e. a legislative mandate.  Rather, the Port Authority’s program was its own self-created independent program.  Second, unlike many DOT contracts, compliance with the DBE program was not expressly made a material term of DCM’s contract.  The consequences of a contractor’s failure to comply with the program were apparently limited to potentially not being invited to bid on future projects or having its bid rejected as non-responsive.

III.  The Decision

The Court began its analysis by laying out the elements of a wire fraud claim: “(1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or wires to further the scheme.”  The Court focused on what Courts have determined amounts to a “scheme to defraud” that satisfies the first element and its nuisances. The Court concluded that “where the purported victim received the full economic benefit of its bargain, an essential element of the bargain is not implicated, and thus the wire fraud statute does not apply.”  Therefore, the Court’s decision hinged on is whether DCM’s compliance with the Port Authority’s DBE requirements “was an essential element of the contracts.” 

The Court then stated that wire fraud goes to an essential element of the contract when (a) the fraud causes economic harm, or (b) where defendant fails to comply with an underlying law.  The Court cited several cases where the defendant’s conduct violated a law independent of the mail and wire fraud statues and where compliance with that law was incorporated into the contract.  The Court also cited several cases where the counter party “did not get what they paid for.”

The decision in U.S. v. Davis is interesting in two regards.  First, it provides one of the most thorough analysis of wire fraud as it related to DBE fraud that I have seen.  Second, it is a bit of an outliner.   Indeed, it is in opposite to Circuit Court opinions that have concluded that non-compliance with a DBE program, by itself, can satisfy the essential element prong of a wire fraud count.  However, those cases provide a much less detailed discussion than Davis.  And, those cases involved DBE programs that fell under the DOT’s DBE program, which, unlike the Port Authority’s program, is the law or where the contracts made compliance a material term of the contract.  Then again, those cases conclude “you used deceit to obtain the contract and payment and therefore the evidence is sufficient for a conviction.”  But, as Davis makes clear the analysis is more nuisanced.

While the Davis decision is significant, it still is only a District Court opinion.  So, it has no precedential value. Furthermore, it would appear to be limited to cases alleging DBE fraud involving a independent DBE program administered by a regional transportation authority, like the Port Authority, a county government, or local municipal government.  Those programs are not typically the result of some legislative action requiring them.

Also, even where program is not the result of a legislative mandate the contract language itself is important because the contract may still made compliance with a DBE program an essential element of the contract.  Many contracts do make compliance a material term.  Also, most construction contracts contain some general duty clause that states the contractor will perform its work according to all applicable codes, laws, and regulations.  It would be interesting to see if the Davis Court would reach the same decision if the DBE fraud were pursuant to a contract which made compliance mandatory (I think it would) or if the prosecution raised a the contract’s general duty clause, which I am sure existed.

It is nonetheless important for attorneys representing defendants in DBE fraud cases to (a) understand the legislative scheme (or lack thereof) giving rise to the program; and (b) to understand whether the contract or subcontract makes compliance with the program a material term.

It is also important, perhaps, more important, for appellate lawyers arguing that a conviction under for wire fraud is not supported by sufficient evidence where the defendant provided the essential services that were bargained for, which in mostly what happens in DBE fraud cases.

Probably.  Based on the City’s 2016 Disparity Study the City DBE program is no longer being used to remedy past discrimination but to further a political agenda designed to direct maximum public funds to female and minority owned businesses.  In doing so, the City’s current program runs afoul of the Supreme Court’s seminal decision in City of Richmond v. Croson Company, 488 U.S. 469, (1989) and its progeny, which blessed such programs.  However, they blessed them only when (a) there is evidence of discrimination, (b) the program is narrowly tailored to remedy that discrimination, and (c) all race neutral alternatives have been exhausted.

What are DBE Programs?

Like many public agencies, the City of Philadelphia maintains a program that is designed to funnel public fund to female and minority owned firms.  These programs are usually called “disadvantaged business enterprise” programs or DBE programs for short (Sometime they are referred to D/M/WBE the “M” standing for “minority” and the “W” for “woman.”)  DBE programs require that a prime contractor use its best efforts to subcontract a certain percentage of the contract price to DBE firms.  In certain cases, the public authority can restrict bidding to only DBE firms.

The DBE contracting goal will appear in the bid specifications.  (I have seen goals range anywhere from 4% to 30% of the contract.)  So, if a prime contractor is awarded a $1,000,000 contract and the DBE goal is 15%, the prime contractor will have to subcontract $150,000 of the prime contract to DBE owned firms.  In replying to the bid, the contractor will have to list the DBE owned firms it intends to enter into subcontracts with to meet the DBE goal.

The History of DBE Programs

One of the first DBE programs was the Department of Transportation’s DBE program, which is basically the godfather of all DBE programs.  All state and local DBE programs more or less track the DOT’s DBE program rules. The DOT’s DBE program started almost 40 years ago.  The program requires State Transportation agencies to establish a DBE program as a condition of receiving federal highway and transportation funding.

The DOT’s DBE program is an interesting paradox.  It is almost 40 years old.  It was designed to remedy past discrimination in the construction industry.  However, many of the firms and people that would have played a role in that discrimination are long gone.  Moreover, if the purpose is to remedy past discrimination and 40 years later discrimination still exists (dispute a rigorous regulatory scheme against it) then the program is doing a lousy job of achieving its goal.  Yet, DBE programs are more entrenched than ever.

City of Richmond v. J.A. Croson Co.

In Croson, the United States, Supreme Court provided the rules which all state and local DBE programs must be judged against. Richmond’s DBE plan required that prime contractors subcontract at least 30% of the dollar amount of the prime contract to certified DBE firms.  The Plan declared that it was “remedial” in nature, and enacted “for the purpose of promoting wider participation by minority business enterprises in the construction of public projects.”

The Supreme Court struck down Richmond’s program holding that Court’s must apply strict scrutiny to any racial preference program.  To survive strict scrutiny, a local or state authority advancing a DBE program must show that there exists a compelling state interest in the form of actual racial discrimination in the construction industry.  The agency must support its interest by evidence and it cannot be merely anecdotal.  Once the agency puts forth sufficient evidence of existing discrimination, then the remedy must be narrowly tailored to remedy that discrimination.  Finally, the agency must demonstrate that it exhausted race neutral means to remedy the discrimination.

In Croson, the Supreme Court first found that the City of Richmond introduced no evidence that there was racial discrimination in the Richmond area construction industry.  However, the Court said that if Richmond could show that there existed a significant statistical disparity between available minority owned firms and the percentage of subcontracts award to such firms that may support a finding of discrimination.  Second, the Supreme Court found that the 30% figure had no rational connection to the the alleged discrimination that it sought to remedy.  Indeed, the Court found the figure to be arbitrary.

Following Croson, state and local agencies that did not introduce statistical evidence of racial discrimination in the construction industry saw their DBE regimes struck down.  (One of those local government agencies that saw their DBE program struck down for lack of evidence was the City of Philadelphia.  Contractors Ass’n of E. Pennsylvania, Inc. v. City of Philadelphia, 945 F.2d 1260 (3d Cir. 1991))  Therefore, borrowing from Croson’s holding that a statistical disparity could be evidence of discrimination, local and state government began commissioning disparity studies to use as evidence to support their DBE program.  Preparing disparity studies has become a cottage industry.

While disparity studies come under attack for faulty methodology, if they tend to show a disparity between the number of minority firms available for subcontracting and the actual amount of subcontracted work, Courts tend to uphold them.  Thus, disparity studies showing an actual disparity usually satisfy the first prong of strict scrutiny that the government show that discrimination exists.  With the first prong satisfied, the government must then show that the subcontracting goal is narrowly tailored to remedy the discrimination.

Is it time to revisit Croson?

This bring us to the City of Philadelphia DBE program.  The program shows that it has been a resounding success in remedying any past discrimination that may have existed at least for public works (construction) projects.  For public works contracts, the City’s showing that there is an over-utilization of DBE firms.  This means the percentage of prime contract subcontracted to DBE firms exceeds the number of firms available.  The study makes no effort to hide this fact and highlights it in several areas.  This over-utilization is not an anomaly.  In fact, the over-utilization of DBE firms on public works contracts has now existed for several years.

However, if there is an over utilization of DBE firms on public works projects, what evidence does the City have to show that there is discrimination in the Philadelphia construction industry?  There appears to be none.  Without that evidence, the program would fail the first prong of strict scrutiny miserably.  Indeed, its hard to see how the program would survive a challenge applying Croson.

Yet, that has not stopped the City.  To the contrary, the City wants to increase the percentage even more. The City calls them “stretch” goals.  While maximizing DBE contracting might be good social policy, it is not “good constitution,” at least according to Croson.  Using a DBE program as a means to achieve a policy of increasing DBE participation to the maximum extent becomes untethered from Croson’s mandate that such programs be designed to remedy past discrimination and narrowly tailored to achieve those ends.  Croson rejects any percentage aimed towards “outright racial balancing.”  Other courts have held that the goal needs to be at the lower end of what is needed to bring the disparity into balance.  Thus, it is hard to see how the City’s current “stretch goals” could survive the narrowly tailored prong of strict scrutiny.

Conclusion 

The reality is while it appears to be completely unconstitutional and susceptible to a challenge, the City’s DBE program will likely remain in place.  The major players in the industry are too political entrenched to bring a case challenging a program designed to assist minority and female owned firms.  They risk being called “racist” at best and being blackballed by the City at worst.  However, if a brave enough firm wished to challenge the program it is ripe for the taking and would be likely see the Court require the City to pay its attorneys fees.

Yes, c-mail. Let me explain.

I am part of a certain segment that came of professional age at the dawn of the internet revolution.  We spent the first 18-20 years of lives completely – or mostly – detached from the internet, and the other half completely immersed in it.  I guess that gives us a unique perspective on the whole thing.

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