The Construction Advantage

Contractors and Subcontractors Required to Disclose Previous Labor Law Violations

By Connor Shankman

On August 25, 2016, the Department of Labor (“DOL”) published guidance to assist the Federal Acquisition Regulatory Counsel and Federal contracting agencies in the implementation of President Obama’s Fair Play and Safe Workplaces Executive Order (the “Order”). The Order requires contractors and subcontractors bidding for new federal contracts worth $500,000 or more to disclose any findings of violations of 14 Federal Labor laws and executive orders, as well as equivalent state laws, issued in the past three years.

Contractors with prior violations are required to self-identify during the bidding process. Finalists are required to then disclose the specifics of the violation(s) on a public website. A history of violations does not necessarily disqualify a contractor; after disclosure, the federal officer in charge of the project will determine if the disclosed violation qualifies as “serious, repeated, willful or pervasive” and provides opportunity for the contractor to present mitigating factors.

Starting September 12, 2016, concerned contractors can voluntarily participate in a pre-assessment process with the DOL before making disclosures.  This process is intended to assist contractors in determining which prior findings of labor violations require disclosure.  It remains unclear whether pre-assessment is advisable, and if the safe-harbor provisions provided by the Order and DOL guidance are sufficient to justify participation.

The DOL also provided guidance on implementing the Order’s paycheck transparency provisions. The Order requires bidding contractors and subcontractors to provide workers with wage statements and information concerning their hours worked, overtime hours, pay, and any additions to or deductions made from their pay. It also requires contractors and subcontractors to provide their independent contractors with proper documentation confirming their independent contractor status. Contractors must intermittently provide documentation demonstrating compliance while working on Federal jobs over $500,000.

Given the broad scope of the Order and recent clarity provided by the DOL’s guidance, contractors and subcontractors that anticipate bidding for Federal contracts should begin preparations now. At a minimum, contractors should meet with counsel to determine whether the pre-assessment program is appropriate and to learn about the risks involved. They should also work with counsel to identify which prior violations require disclosure before they are made public.

Costs to Remediate are not Property Damage

By Asha Echeverria

In Insurers Drake-Williams Steel, Inc. v. Continental Casualty Company, 294 Neb. 386 (2016), the Nebraska Supreme Court ruled that the cost to remediate the insured’s failure to provide a product as specified by the contract documents, is not in and of itself “property damage” under a commercial general liability policy, unless and until the defective component causes physical injury to other tangible property.

In this case, Drake-Williams Steel (DWS) had entered into a purchase order with the general contractor to supply rebar for Pinnacle Bank Arena. The rebar had been improperly bent when it was fabricated by DWS and therefore it did not conform to the terms of the purchase order. The incorrect radius of the bends in the rebar was determined to be a result of machine and operator error during fabrication. This resulted in an approximately 50% reduction in reinforcing capacity. It was determined that approximately half of the pile caps that had been cast with the improperly bent rebar were incapable of providing the required structural support. The most cost-effective solution was to install a reinforcing band around each of the compromised pile caps at a cost of over $1.3 million. DWS sought insurance coverage.

The Nebraska Supreme Court held that costs of remediation were not “property damage” unless the defective component causes damage to other tangible property. Property damage is not established simply by a components failure to perform as intended, it requires actual damage. Therefore since the rebar in the pile caps served their intended purpose, albeit with modification, there could not be a finding of property damage.

Commercial general liability policies provide coverage for accidents caused by faulty workmanship only if there is bodily injury or property damage to something other than the insured’s work product. The economic cost to repair and replace defective workmanship is a business risk carried by the contractor that is not covered by insurance.

Pennsylvania Supreme Court Concludes that Attorney Fees and Penalties are Discretionary under Prompt Payment Act

By Mike Bosse

In late July of this year, the Supreme Court of Pennsylvania passed down a major ruling affecting Pennsylvania’s Public Prompt Payment Act concerning penalties and attorney fees. In A. Scott Enterprises v. City of Allentown, the Pennsylvania Supreme Court held that statutory penalties and attorney fees may be awarded under the Prompt Payment Act for public projects on a discretionary basis by the trial court. In other words, an award of this kind to the non-breaching party is not mandatory in Pennsylvania.

The City of Allentown contracted with A. Scott Enterprises (“Scott Enterprises”) to construct a new public road. Arsenic contaminated soil was discovered at the work site and the city suspended work on the project. When a remediation plan was formulated, Scott Enterprises declined to proceed because of substantial additional costs due to the contaminated soil. Although the parties attempted to reach an agreement, they were unable to and Scott Enterprises sued the city to recover its losses on the project. After a trial, the jury reached a verdict that the city breached its contract and had withheld payments in bad faith. Scott Enterprises filed a post judgment motion to have statutory penalties and attorney fees assessed under the Prompt Payment Act for public projects. The trial court then concluded that it had discretion to award attorney fees and penalties but declined to do so in this case given conflicting testimony about the reasons for the nonpayment.  The intermediate appellate court reversed the trial court and found that the award of penalties and attorney fees were mandatory, and the case then found its way to the Pennsylvania Supreme Court.

The Pennsylvania Supreme Court concluded that because the statute in question used the word “may” in assessing penalties and attorney fees, an award of penalties and fees was permissive and would not be construed as mandatory. The court stated that, only in circumstances where the ends of justice or constitutional requirements dictate would they construe permissive language such as “may” to mean “shall.” The court then remanded to the trial court for consideration of its ruling. The court also held that it could still retain an appellate function in determining whether the trial court’s decisions were correct. The decisions on fees and penalties could be reversed if the trial court abused its discretion in making a decision.

This is an informative decision concerning Pennsylvania’s Prompt Payment Act. Under ME’s Prompt Payment Act, attorney fees are mandatory to the prevailing party in litigation. Thus they appear to be mandatory, although the court does have some discretion in ME to determine whether any party was the prevailing party given the particular facts of the case. Whether attorney fees have the potential to be reimbursed as part of litigation is an important factor for some litigants in determining whether and how aggressive they want to litigate construction cases where they have not been paid in a timely fashion for work completed.  In Pennsylvania, the decision of whether to litigate on public projects just got more difficult.