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3. BEST PRACTICES IN CONSTRUCTION LAW PRESENTED BY: JENNIFER M. HORN, ESQUIRE & MARIA PANICHELLI, ESQUIRE

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6. BEST PRACTICES IN CONSTRUCTION LAW PRESENTED BY: JENNIFER M. HORN, ESQUIRE & MARIA PANICHELLI, ESQUIRE

7. 7  UNDERSTAND ESSENTIAL CONTRACT TERMS –Increase Scope of Work. Change Orders Constructive change directives Minor changes in work. BEST PRACTICE TIP NO. 1

8. PROACTIVE PROJECT MANAGEMENT 8  From Start to Finish –Pre-Contract Turnover Meeting Between Estimating and Project Management Team. –Contract Negotiation –Construction Performance

9. BEST PRACTICE TIP NO. 2 9 KEYS TO SURVIVAL –Adaptability – Understand how the Project is changing and be nimble enough to adapt to recognize new risks or opportunities.

10. WHAT IS A “CHANGE ORDER”? 10  AIA A201§7.2.1 A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor and Architect, stating their agreement upon all of the following: 1.a change in the Work; 2.the amount of the adjustment in the Contract Sum, if any; and 3.the extent of the adjustment in the Contract Time, if any.

11. OTHER PROVISIONS MODIFYING THE WORK 11  Constructive Change Directives  Minor Changes in Work

12. STANDARD AIA CONTRACT PROVISIONS – CONSTRUCTIVE CHANGE DIRECTIVES 12  §7.3.1 A Constructive Change Directive is a written order prepared by the Architect and signed by the Owner and Architect directing a change in the Work and stating a proposed basis for adjustment, if any, in the Contract Sum or Contract Time, or both. The Owner may, by Construction Change Directive, without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions or other revisions, the Contract Sum and Contract Time being adjusted accordingly.

13. STANDARD AIA CONTRACT PROVISIONS – MINOR CHANGES IN WORK §7.4.1 The Architect will have authority to order minor changes in the Work not involving adjustment in the Contract Sum or extension of the Contract Time and not inconsistent with the intent of the Contract Documents. Such changes shall be effective by written order and shall be binding on the Owner and Contractor. The Contractor shall carry out such written orders promptly. 13

14. BEST PRACTICE TIP NO. 3 14 KNOW THE LAW Many remedies exist for non-payment or untimely payment: –Mechanics’ Liens –Payment Bond Claims –Trust Fund Claims –Prompt Payment Act Claims –Litigation/Arbitration/Mediation to Enforce Contractual Payment Breaches

15. WHAT ARE PROMPT PAYMENT ACT CLAIMS? 15  Essentially: Claims created by state statute that impose unfavorable consequences on those who fail to timely pay for materials and labor provided by others.

16. STATES BEGAN ENACTING PROMPT PAYMENT ACTS IN THE EARLY TO MID-1990S AND CONTINUING INTO THE NEW MILLENNIUM This happened two ways:  States modified/bolstered existing acts (e.g., Delaware’s Construction Prompt Payment Act, which added prompt pay provisions to a much older trust fund statute).  Created entirely new acts (e.g., Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA)). 16

17. TODAY: All States (save for N.H.) Have Enacted Prompt Payment Acts for Public Sector Construction; and Most States Have Enacted Prompt Payment Acts for Private Sector Construction (19 Exceptions: Alaska, Arkansas, Colorado, Idaho, Indiana, Iowa, Massachusetts, Michigan, Nebraska, New Hampshire, North Dakota, Oklahoma, Rhode Island, South Dakota, Virginia, Washington, West Virginia, Wisconsin, Wyoming). 17

18. STATUTES:  Share Many Things In Common (e.g., require timely payment by persons in multiple construction tiers, impose unfavorable consequences such as statutory interest and penalties, etc.)  Have Many Differences (e.g., timing of payment; range of remedies including percentage of interest, penalties, attorneys’ fees; availability of remedies among tiers; ability to stop work; requirements of bad faith; etc). 18

19. YOUR GAME PLAN : A.Examine these statutes together, answering the following questions:  To what contracts does the Act apply?  To whom does the Act apply?  Who can make a claim under the Act?  To what payments does the Act apply? 19

20. TODAY’S GAME PLAN (CONTINUED )  What is untimely payment to a prime contractor?  What is untimely payment to a subcontractor?  What is a proper basis to withhold payment?  What is the consequence of untimely payment?  How does one make a claim under the Act? 20

21. BEST PRACTICE TIP NO. 4 21  PURPOSE OF BOND  Protects the Owner  Assures subcontractors and suppliers down the chain receive payment for their services via third party (surety) promise to pay

22. PARTIES Obligee (Owner or GC) 22 Principal/Obligor (Contractor or Sub) Surety

23. PARTIES 23 One More:  The Beneficiary = Subcontractors and Suppliers

24. BONDS ON FEDERAL PROJECTS: THE MILLER ACT 24  40 U.S.C.A. §3131 -34.  A bond is required for the "construction, alteration, or repair of any public building or public work of the United States for an amount greater than $100,000.”  Why?? Alternate security b/c no mechanics’ liens allowed

25. PROTECTED PARTIES 25 Federal Government Prime Contractor/Principal SupplierSubcontractor SubsubSupplier

26. PROTECTED COSTS 26  Labor = physical work –Not designers (unless perform on-site supervision) –Not warranty/corrective work

27. PROTECTED COSTS 27  Materials used or consumed on the project –Reasonable expectation that material will be “substantially consumed” –No utility or value to contractor after project –Delivery to site ≠ presumption of use

28. PROTECTED COSTS 28  What about delay damages? –Considered part of “sums justly due” UNLESS contract has no damages for delay  What about Payment Act damages? –Maybe (US ex rel. Don Siegel Const. v. Atul Const., 85 F. Supp. 2d 414 (D.N.J. 2000)

29. NON-PROTECTED COSTS 29  Punitive damages (unless there is bad faith by surety)  Attorneys’ fees (unless allowed by bonded contract to which claimant is a party or bad faith by surety)  Lost profit

30. WHEN MILLER ACT APPLIES 30  Contracts of more than $100,000 for construction, alteration, or repair of any public building or public work of Federal Government.  Alternates allowed for contracts more than $25,000 and less than $100,000: –Bond, Letter of Credit, Escrow Agreement, CD, Cash

31. WHEN MILLER ACT APPLIES 31  What is “public work”? –Not defined by Act –Government owns the building and hires Kor –Mere government funding not enough

32. HOW TO MAKE A MILLER ACT CLAIM (1ST TIER SUBS) 32  No notice required  Must wait 90 days from non-payment – waiting period to give bond principal a chance to make payments  Must file suit within 1 year of last work performed or materials supplied (statute of limitations)

33. HOW TO MAKE A MILLER ACT CLAIM (2ND TIER SUBS) 33 2nd Tier Subcontractor (i.e., a subcontractor with a direct contract with a 1st tier subcontractor): Same claim procedure as 1st tier PLUS: MUST provide notice to prime contractor (not the surety) within 90 days (strictly construed!) of supply of last labor or supplies

34. HOW TO MAKE A MILLER ACT CLAIM (2ND TIER SUBS) 34  Notice MUST state: –Amount claimed with “substantial accuracy” –Name of party to whom labor or supplies provided –Claim is being made against bond principal

35. HOW TO MAKE A MILLER ACT CLAIM (2ND TIER SUBS) 35  Purpose of notice provision for 2nd tier subs: –Allows prime to protect itself by withholding $$ –Avoids double payment by prime

36. HOW TO MAKE A MILLER ACT CLAIM (2ND TIER SUBS) 36  What is “substantial accuracy”: –Estimate is sufficient  What if notice says “several thousand dollars”? –Yes (U.S. ex rel. Pool Constr. Co. v. Smith Road Constr. Co., 227 F. Supp. 315 (N.D. Okla. 1964)

37. HOW TO MAKE A MILLER ACT CLAIM (2ND TIER SUBS) 37 When does 90 day time begin to run? Fed.R. Civ.P. 6(a) – day after last day Replacement goods does not extend Warranty work does not extend Service of notice v. receipt of notice

38. COMMON DEFENSES 38  Surety can assert all defenses of its principal (or the sub if a 2nd tier claimant), unless precluded by bond language: –Breach of contract –Recoupment/setoff –Failure to mitigate

39. COMMON DEFENSES 39  Pay-When-Paid and Paid-If-Paid Defenses –Paid-If-Paid shifts risk downstream –Paid-When-Paid is timing mechanism Arguments exist on both sides  Payment – no defense to 2nd tier claim even if principal paid in full –Contrast Pa safe harbor provisions

40. BEST PRACTICE TIP NO. 5 MEANWHILE, BACK ON THE PROJECT SITE… BEWARE DIFFERING SITE CONDITIONS Type One Different than contract indicates Examples: soils, utility lines, existing materials, inaccurate measurements 40

41. DIFFERING SITE CONDITIONS Type Two Contract is silent Could not be anticipated Examples: buried obstructions, layers of demolition Problems: nature of work, common knowledge, local practices Type Three Hazardous waste –Not responsible for any hazardous conditions at the site –Owner must remediate 41

42. DIFFERING SITE CONDITION CLAIMS Prompt notice to the public owner –Notice clauses upheld –Verify conditions –Modify plans Site inspection Clause: “Reasonably Prudent Bidder” test Withhold information: “Superior knowledge” Disclaimers: “As is” clause No DSC Clause: Risk on Contractor? 42

43. DIFFERING SITE CONDITION CLAIMS Notice requirements Claims for money Claims for time 43

44. BEST PRACTICE TIP NO. 6 WHAT IS A CLAIM? KNOW THE ANSWER TO THIS QUESTION AS IT PERTAINS TO YOUR PARTICULAR PROJECT. Look to your contract! § 4.3.1: A claim is a demand or assertion by one of the parties seeking, as a matter of right, an adjustment or interpretation of Contract terms, payment of money, extension of time or other relief with respect to the terms of the Contract. 44

45. KNOW YOUR NOTICE CLAIM Avoid notice provisions which require notice within a short period of time Avoid notice provisions which require the full amount and scope of the damages Know what the prime contract requires 45 BEST PRACTICE TIP NO. 7

46. NOTICE OF DELAY/TIME EXTENSIONS What does your contract require? § 4.3.3 Time Limits on Claims. Claims by either party must be made within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. Claims must be made by written notice. An additional Claim made after the initial Claim has been implemented by Change Order will not be considered unless submitted in a timely manner. 46

47. NOTICE OF DELAY/TIME EXTENSIONS §8.3 Delays and Extensions of Time § 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the work by an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner, or by changes ordered in the Work, or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes beyond the Contractor’s control, or by delay authorized by the Owner pending mediation and arbitration, or by other causes which the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine, provided Contractor gives written notice within 21 days of the first occurrence of any delay. 47

48. ADVERSE WEATHER §4.3.7.2 If adverse weather conditions are the basis for a claim for additional time, such claim shall be documented by data substantiating that weather conditions were abnormal for the period of time, could not have been reasonably anticipated and had an adverse effect on the scheduled construction. 48

49. BEST PRACTICE TIP NO. 9 WHAT IS YOUR DISPUTE RESOLUTION PROVISION Litigation Arbitration – AAA Rules Mediation Timing – not only when but what needs to happen before suit can be brought Avoid “choice of forum” clauses 49

50. AGAIN, KNOW YOUR CONTRACT RE: CLAIMS 1.Unfortunately, it is the rare construction contract that does not involve issues that ultimately lead to a claim, whether it be for more money, a time extension or both. 2.Recovery is dependent on the Contractor being able to substantiate and support the claim. 3.In order to substantiate and support a claim a.Create, locate and maintain all pertinent documents, records, correspondence, photos, etc. 50

51. CLAIMS 4.Claims are often important not only to recover money, but also to negotiate offsets against claims asserted by another party. 5.When deciding whether or not to pursue a claim a.The decision should be made by senior management and a.Look to economic and/or political reasons 6.Recognize potential claims early in order to take necessary steps to preserve and support the claim. 51

52. NOTICE OF DELAY/TIME EXTENSIONS What does the contract require? Questions for end of each month: –Are we following the original schedule? –If not, why not? –What should we do about it? –Take appropriate action Don’t assume! Protect! 52

53. DELAY CLAIMS  Nonexcusable Delay – fault lies with you and no compensation will follow. 2.Excusable but Noncompensable Delay – no one is at fault. You get more time, but no money. 3.Excusable and Compensable Delay – fault lies with the other party. You get time and money if you can prove it. 53

54. CAUSES OF DELAYS 1.Failure to provide access or limited access only 2.Unforeseen subsurface condition 3.Impossible to perform work 4.Design changes 5.Failure to have shop drawings and samples prepared and approved in a timely manner 6.Failure to have material and equipment delivered in a timely manner 54

55. CAUSES OF DELAYS 7.Acts of God – flood, storm, etc. 8.Weather 9.Strikes and labor disputes 10.Low productivity 11.Cash flow restrictions 12.Lack of project coordination 13.Labor mobilization 14.Delayed by another contractor on the project 55

56. COSTS ASSOCIATED WITH DELAY 1.Extended job supervision and field overhead 2.Extended equipment costs 3.Wage escalation 4.Inefficiency 5.Finance costs 6.Reduced job opportunities 7.Profits 56

57. QUESTIONS ABOUT DELAYS How do you notify Owner or General Contractor of delay? Should your notice identify specific areas of work impacted by delay? Should your notice identify the manner in which you are being damaged by delay? How do you quantify days of delay? 57

58. BEST PRACTICES TIP NO. 8 DAILY REPORTS – CRITICAL TO ESTABLISH WHAT ACTUALLY TOOK PLACE ON THE JOB Documentation Write clearly, avoid slang Note where crews are working and crew sizes Note delays and problems, including potential problems Note important conversations Document weather 58

59. DAILY REPORTS Document materials delivered Note discrepancies in plans Describe out-of-sequence work Make your company look good! Make your own schedule – preferably one that fits in the foreman’s back pocket. 59

60. CORRESPONDENCE Be an advocate – support your position. Notice letters don’t need to be adversarial to be effective (consider email). Object is to put other side on notice so they can deal with the problem. Answer every letter in writing and defend your position with facts. (Do not let inaccurate information remain unchallenged, it may come back to haunt you!) Keep signed copies and confirmations of fax transmittals. Date stamp all incoming documents. 60

61. MEETING MINUTES Review immediately for accuracy Supplement any minutes IMMEDIATELY that do not accurately reflect information at the meeting Do not allow inaccurate information to remain unchallenged. 61

62. 62 Jennifer M. Horn, Esq. Maria Panichelli, Esq. Cohen Seglias Pallas Greenhall & Furman PC 30 S. 17 th Street, 19 th Floor Philadelphia, PA 19103 Phone: 215.564.1700 jhorn@cohenseglias.com www.cohenseglias.com

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