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Construction Law

Construction Business in Challenging Times

Robert Miletsky | July 7, 2023

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Construction is booming across America after the pandemic and supply chain issues of the past few years. However, with more work comes more risk. This article explores some of the challenges currently facing construction companies, particularly as respects fulfilling construction contracts and being paid and the challenge of undocumented and underpaid workers. Now, more than ever, when funds are being reallocated because of the cross-border crises, construction companies must ensure they protect their rights to payment and not run afoul of the law.

Workforce: Cross-Border Crisis

The influx of persons across the southern border is creating a significant amount of issues for the construction industry. However we phrase it ("illegal aliens" or "political refugees" or "undocumented workers") or look at it, and whatever our political views, the border issues are creating unforeseen and unintended challenges for the construction industry that you should consider and anticipate to better protect your rights and remedies.

Avoid the temptation of hiring folks who are not properly authorized. While there may be individuals who will work for far less than the minimum wage or applicable prevailing wage (I really should say it more plainly—while there will be individuals who will work for less), hiring them can present a significant risk to a construction company. First, the individuals may not be trained adequately and can represent a safety risk to everyone else on the site. Second, at least as of now, hiring them is not legal, so the hiring company can be fined. Third, these workers may not be insurable. If they are injured or cause an injury, that claim may not be covered by workers compensation or other insurance due to their undocumented status.

Finally, failing to pay the minimum wage or prevailing wage puts the business at a direct financial risk. If the workers are not disclosed on certified payroll projects, or if they are disclosed but their wages are misrepresented, that is extremely dicey. Also, the vultures are circling above in the form of the ambulance chasing law firms, eagerly waiting to pounce and start class action lawsuits against companies that do not pay the appropriate wage. This has already begun in the East, where lawsuits were filed against bike messenger companies and restaurants that hired those folks but paid them off the books at salaries lower than the minimum wage. It's just not worth the risk.

Financial: Getting Paid for Work

Major cities and states have reallocated their resources in a manner that directly impacts construction projects and work and the ability of the public agencies to make prompt or timely payments to contractors and vendors for work performed or material supplied. I see this firsthand in New York City and New York State where our construction clients are not getting paid and the city and state agencies are creating barriers and impediments to the even and continued flow of money for work.

I've represented general contractors and subcontractors on city projects for decades. The recent misconduct by some cities has become pretty extraordinary—even for my once beloved New York City—bordering on extreme malfeasance. This includes simply refusing to make payments or slow-walking administrative work to reneging on previously agreed-upon change orders and requisitions and overturning authorizations made in the early stages of projects. I am guessing that other governmental agencies in various areas of the country are engaging in similar types of misconduct, perhaps not on such an egregious level but improper just the same.

So, the question becomes how best to protect your interests when facing these obstacles?

Get Back to Basics

General contractor and construction managers need to be sure to comply with the notice and backup document requirements in the contract. Most contracts on public projects have detailed sections on timing and a procedure for reserving your rights to make claims and then making the claims. These contracts also make clear that the failure to comply with those requirements will be considered a waiver of your rights. This is critical since the courts generally enforce the requirements and rules against contractors that fail to follow the procedures to a tee. So, it is worthwhile to go back to the contract documents and highlight the claim sections to have a fresh understanding of what needs to be done.

Subcontractors and suppliers on a public contract need to be familiar with the claims procedures in the subcontract or purchase orders. However, also make sure you are aware of the process that the upper-tier general contractor or construction manager must follow to protect and submit your claim. Typically, a lower tier on public work must give the upper tier notice and backup so that the upper tier can pursue the claim with the public agency and do so in the time and manner required in the prime contract.

Typical Construction Claims

The claims that generally require notice and backup are the following.

  • Delay claims. If there is an event that is causing delay, generally, notice is required within a very short period after the delay starts. The contents of the notice vary but typically include a description of the issue, the time when started, the projected duration, and a suggested strategy that can be taken (if possible) to avoid major impact. The notice is needed to reserve the right to request an extension of time. The notice is also needed to reserve the right to make a delay claim. Keep in mind, though, that if you intend on making a delay claim, there likely will be additional timing requirements and other submissions that have to be met, such as daily back up for increased costs, daily time and materials slips, and other related items. If you are going to request an extension of time, typically there is a short window in which to do so, so be sure to be familiar with that.
  • Acceleration claims. The notice and backup documents required for making a claim for acceleration are usually similar to those for delays, so be sure to be familiar with them.
  • Extra work. If you've been directed to perform extra work but have not received a formal change order or cannot agree on how the change order work will be priced, then public contracts usually have a notice procedure that must be followed to address this.
  • Protest work. If you are directed to perform work that you believe is outside of the contract scope but which the public owner claims (legitimately or not) is within the scope, then generally there are two notice requirements that must be met. The first is written notice stating that you believe the work is outside the scope and asking for a formal decision. The second notice requirement must be met if the owner decides against you and says that the work is within the scope. At that point, you generally have to send a second notice saying you are doing the work under protest. You will also have to keep the backup noted in the contract, which is usually time and materials slips and related documents.

Options after Making Claims

Once a claim is made, what options are available to the construction firm to ensure payment?

  • Actively pursue claims even while the project goes forward. Once the proper notices are given, actively pursue the claim. Generally speaking, there is no need to wait until the work is complete to have the claim addressed or adjudicated/resolved. There may be different options depending on where the project is located, but they can include filing the claim with a disputes board (as with New York City) or starting a separate lawsuit in court. Either way, I think that an aggressive position is the best strategy and shows that you will not sit idly by as the public owner fiddles. Actively following up also helps to get other owner personnel involved and may be useful in getting the specific issues (and others) addressed and resolved more quickly.
  • Request adequate assurances. Most public projects have specified budgets and allocations for the work, but sometimes a public agency will direct work that does not have a set-aside. Consider requesting "adequate assurances" that a fund exists for payment for the work. Under the law in certain states, if you do not get adequate assurances, you may be allowed to refuse to do that work.
  • Apply to court for relief. This is probably the least effective option—although, it still should be considered. In my experience, courts typically do not want to get involved in the day-to-day administration of a public project. There may be more extreme circumstances where a court may get involved; for example, a federal court may consider issuing an injunction to force payment already approved or find that a contractor's due process rights have been violated by extreme malfeasance.
  • Suspend or terminate work. This should only be considered in the most extreme scenarios. I come from the school that says that a contractor should complete the work no matter what. If you don't, then you risk a termination for default and that can haunt your company for ages. As a result, suspension or termination should only be considered in rare circumstances. We had one of these a few years ago: The client wanted to walk off since he was not getting paid. I recommended against it—but his reply was, "There's no more money." So, he had no choice.

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