Should we Defer Infrastructure Construction Until the Cost of Funds is 10 Percent?

 The yield on the US 10-year bond has just fallen to 1.6713%, another record low.  That's lower than inflation, which means if the government borrows $1 trillion today, they will repay ~$4 billion less than what they borrowed in 10 years.  And why is it that we are not building high speed rail, and roads, and bridges, and electric transmission lines, and funding basic research to beat the band this very minute?

Spearin Doctrine Permits California Contractor to Recover for Extra Work Despite Public Agency's Written Change Order Requirement

In Weeshoff Constr. Co. v. Los Angeles County Flood Control Dist., 152 Cal.Rptr. 19 (1979), a general contractor recovered compensation for extra work on a public works project based upon the court finding the public agency waived the requirement for written change orders.  The Weeshoff court based its ruling on precedence involving private parties.  In the last few years, California Courts of Appeal have precluded engineers performing work for public agencies from recovering for extra work because they failed to comply with the written change order requirements in their contracts.  See P&D Consultants, Inc. v. City of Carlsbad, 119 Cal.Rptr.3d 253 (2010); Katsura v. City of San Buenaventura, 65 Cal.Rptr.3d 762 (2007).

In a recent case, a general contractor, G. Voskanian Construction, entered into two construction contracts with the Alhambra Unified School District.  G. Voskanian Construction, Inc. v. Alhambra Unified School District, 139 Cal.Rptr.3d 286 (2012).  Under one contract G. Voskanian agreed to move portable buildings.  Under the other it agreed to install a fire alarm system in the relocated buildings.  The plans for the fire alarm contract, however, did not identify all the classrooms within the portable buildings, thereby necessitating extra work.  The school district refused to pay the contractor for extra work under both contracts based upon the contractor's failure to comply with the standard contractual requirement for issuance of written change orders before extra work is performed.

The G. Voskanian Court affirmed the contractor's recovery for extra work on the relocation contract because the school district had executed written change orders after completion of the work.  The timing of the issuance was held to be irrelevant.  The school district had not, however, issued any written change orders under the fire alarm contract.  The Court of Appeal permitted G. Voskanian to recover for the work because the school district's issuance of incorrect plans was a breach of the implied warranty of their correctness.  The school district's legal argument that oral modifications of a public works contract are unenforceable was simply irrelevant according to the Court of Appeal.

      

Federal Small Business Subcontracting Plans

Here is a recent and interesting article on small business subcontracting plans by my partner Reggie that I thought the group might find interesting.

Happy reading - Tamara McNulty


Federal Small Business Subcontracting Plans

by Reginald M. Jones

With limited exceptions, unrestricted federal procurements over $650,000 ($1.5 million for construction of any public facility) include Federal Acquisition Regulation (FAR) clauses 52.219-8 (Utilization of Small Business Concerns) and 52.219-9 (Small Business Subcontracting Plan), which require contractors and their first tier subcontractors to make a “good faith effort” to meet or to exceed the procuring agency’s small business subcontracting goals. Failure to make this effort could result in liquidated damages, default termination and negative performance reviews.

This requirement for small business contracting plans raises many questions. Can a contractor count a second tier 8(a) subcontractor even if the first tier is not a small business concern? Does it still count if a first tier service-disabled veteran-owned small business (SDVOSB) subcontractor subcontracts a large portion of its work to a non-SDVOSB?

What is a Small Business Subcontracting Plan?

The federal government encourages small businesses to participate in government contracts. Each year, the head of each federal agency establishes goals for the award of subcontracts to small business concerns. The president also establishes annual government-wide subcontracting goals that help the agencies formulate their own specific goals. Government-wide goals are 23 percent for small businesses, three percent for service-disabled veteran-owned businesses, five percent for small disadvantaged businesses and five percent for women-owned businesses.

In order to achieve those goals, FAR 19.702 requires prime contractors that are “other than small” to submit detailed small business subcontracting plans when competing for contracts exceeding $1.5 million for the construction of public facilities, and $650,000 for other contracts.

The subcontracting plan must describe how much subcontracting will be awarded to each of the specified small business categories. Solicitations typically identify the specific goal of the agency for a particular project. If the solicitation is silent, the prime and its subcontractors must determine the agency’s current goals, which may be listed online.

Under FAR part 19.704, a “flow-down provision,” large subcontractors must also formulate subcontracting plans if they receive a subcontract in excess of the monetary threshold. The higher-tiered contractor is responsible for obtaining, approving and monitoring the subcontracting plans of lower-tiered contractors.

The contractor is required to submit an Individual Subcontract Report (ISR) and Summary Subcontracting Report (SSR). The ISR is submitted semiannually with the procuring agency during contract performance and upon contract completion. The SSR is submitted annually with civilian procuring agencies, or semiannually with the DoD. Both forms are submitted through the Electronic Subcontracting Reporting System (eSRS).

Under the flow-down provision, other-than-small business subcontractors with subcontracting plans must also submit ISR and SSR. The higher-tier contractor is responsible for acknowledging receipt of the subcontractor’s ISR and ensuring the ISR is accurate. Lower-tier contractor SSRs are reported directly to the agency that awarded the prime contract.

Satisfying the Requirements

Small business concerns (SBCs), HUBZone businesses, women-owned businesses, small disadvantaged businesses (SDBs), veteran-owned small businesses (VOSB) and service-disabled veteran-owned small businesses (SDVOSBs) count toward achieving subcontracting goals. In addition, Alaska Native Corporations (ANCs) and Indian tribes satisfy subcontracting goals and, unlike other SBCs, they do not need to qualify as small to count toward subcontracting goals.

A common issue is how far down a contractor may go in order to satisfy its subcontracting goals. The FAR limits contractors to counting only next tier subcontractors toward achieving goals.

For example, general contractors are permitted to count only their first tier subcontractors towards the goals identified in subcontracting plans. A general contractor may not count a second tier subcontractor towards its goals, even when the second tier subcontractor is a qualified SBC.

Similarly, first tier subcontractors can count only next (second) tier subcontractors to satisfy subcontracting goals. Because of this limitation, a contractor may still achieve its goals even if a SBC subcontracts a large portion of its work to a non-SBC. The higher tier contractor receives its subcontracting credits, even if the SBC does not perform the equivalent amount of work.

Failing to Meet Subcontracting Goals Could Affect Your Performance Evaluation

The SBA issued a proposed new regulation (76 Fed. Reg. 193 at 61626) on October 5, 2011, requiring a large prime contractor on an unrestricted procurement to provide a written explanation if the large prime does not use a small business subcontractor, as identified in the federal small business subcontracting plan included in the bid or proposal. If the large prime does not submit a written explanation, or the contracting officer is dissatisfied with the explanation, it could adversely affect the large prime’s performance evaluation.

However, even failure to meet planned goals is acceptable if the contracting officer, who reviews all information, sees that the subcontractor made a good faith effort. For example, a prime contractor that failed to achieve its subcontracting goals in one socioeconomic category, but exceeded them by an equal or greater amount in one or more of the other areas may still be considered to have made a good faith effort.

In addition, while the contractor need not award contracts to small businesses if they do not make the best offers or are less qualified to perform, it must carry out SBA policy in the awarding of subcontracts to the “fullest extent consistent with efficient performance of the contract.”

Conclusion

Contractors interested in pursuing federal work must understand federal subcontracting plan requirements. This includes knowing what information and actions do – and do not – count toward meeting subcontracting goals, as well as the consequences for failing to make a good faith effort to achieve them. Only then will contractors be able to avoid unnecessary risk.

New BIM Standards Released by NIBS

James Cohen of Arup, has brought to our attention that the National Institute of Building Sciences (NIBS) has just released its National BIM Standard-United States™ (NBIMS-US™) Version 2 (V2).  This is a consensus based standard that covers the full life cycle of buildings—from planning, design, construction to operation.  It will govern building information modeling (BIM) for use in the United States, but it is also part of an international effort and will become the basis of new unified BIM standards to be adopted by a number of other countries around the world.  The United Kingdom, Ireland, Canada, Korea, Australia and New Zealand are all planning to take the NBIMS-US™ V2 as the basis for their own standards. Each nation will add more content as needed and then share their updates back with the United States.  There are plans to translate the standard into French and to convert the U.S. measurements into metric and to add a template for contract language.

NIBS was authorized by the U.S. Congress in the Housing and Community Development Act of 1974, Public Law 93-383.  The goal was to create an organization that could serve as an interface between government and the private sector. The Institute's public interest mission is to support advances in building science and technology in order to improve the built environment.  The Institute is headquartered in Washington, D.C. and is directed by a 21-member Board of Directors, 15 of whom are elected and six of whom are appointed by the President of the United States subject to the approval of the U.S. Senate. The Institute operates a number of councils which advise key aspects of many of the Institute's technical programs.

The Great Divergence--Construction Style!

ENR’s survey of the fortunes of the top 400 Contractors in 2011 is out.  It reflects a seemingly healthy 8.8% percent growth in revenue in 2011 over 2010.  But it's a mixed bag and the wealth is not evenly spread. Some sectors have recovered strongly:  manufacturing (up 82.7% in 2011), telecommunications  (up 28.7%), power (up 15.5%), petroleum (up 14.4%) and industrial process (up 13.8%).  Some have been lackluster:  transportation market rose 7.0%, hazardous-waste contracting rose 4.1%, and water supply work was up 3.6%.  And the domestic building market remains horrible.

Here’s the bad news:

The largest market for U.S. contractors is also the most problematic: Revenue for the Top 400 in the domestic general building market rose only 0.25% in 2011, to $109.4 billion. This uptick is a far cry—by 33%—from the $165.0 billion the Top 400 booked in 2008. Public buildings work is declining as revenue shortfalls and deficits widen among municipalities. Contractors wonder if the private sector will take up the slack.

Many contractors in the buildings sector are skeptical of any major turnaround soon. "The buildings market still is pretty flat, and that is down nearly 40% from its peak in 2007," says Nick Makes, senior vice president for Turner Construction. While there is some indication that architectural billing rates are up, Makes says he has not seen any significant pickup in hiring among architects. "That may be because they have been forced to be more productive, but I am not convinced there is any spurt in building construction."

The private developer market also remains tough amid tighter credit for project finance. "The commercial sector continues to be challenged except in build-to-suit cases," says Shaun Yancey, executive vice president of PCL. However, he does see some stirring in the entertainment market.

In addition, much of the growth that the top 400 ENR contractors enjoyed happened elsewhere.  Although revenue among the top 400 rose from $259 billion in 2010 to $289 billion in 2011, the majority of this growth (20%) was from overseas opertions.  Growth on the domestic side was realtively much more anemic (only 6% growth).

Continued public-sector spending constraints means continued interest in public-private partnerships.  Here's an interesting observation from Shaun Yancey of PCL about the U.S. P3 market:

"Canada adopted a standardized approach to P3s, where risks are shared by the various stakeholders. But in the U.S., every jurisdiction wants to reinvent the wheel and push risks down," he says. This problem has caused confusion and resistance among investors and contractors to engage in P3s in the U.S., he says."

Finally, more bad news . . . but is there a silver lining for construction litigators? 

Major contractors are increasingly worried about the financial health of their subcontractors. "I am afraid there is an oncoming wave of subcontractor defaults coming," says Van Cleave. While he has not seen many defaults over the past few years, "in the last four to five months there have been several major ones."

Van Cleave notes that, earlier this year, his firm had worked with Trainor Glass on several projects but then Trainor shut down. "When the market begins to turn around, that is the most fragile time for subcontractors [because] there is more work. But they do not always have the cash flow to support the work," he says.

For both subcontractors and general contractors, bid practices of the past couple of years are beginning to take their toll. "It's not just subs but some GCs that are beginning to struggle," says Yancey. He points out that many contractors survived well for a few years on backlog bid at higher margins during boom times. "But now contractors are beginning to burn off work that had been aggressively bid, and that has caused the stress you see with many contractors," he says.

Bid Errors and the Myth of Free Money

On May 7, 2012, the Minnesota Court of Appeals handed down its opinion in Rochon Corp. v. City of Saint Paul, Case No. A11-1271. The issues decided in that case highlight a problem that the courts frequently confront: how to handle bid errors in public, sealed-bid projects.

The City of Saint Paul advertised for bids for the development of The Lofts at Farmer's Market. When bids were opened, it appeared that Shaw-Lundquist had submitted the lowest bid---indeed, Shaw-Lundquist's $7.333 million bid was almost a million dollars lower than the next lowest bidder, whereas bidders two through four were within $600,000 of each other. Everyone in the bid room that day must have known what shortly became public knowledge: Shaw-Lundquist had made a mistake. In particular, Shaw-Lundquist had received a sub bid for a particular item of work in the amount of $688,000, but had entered that sum in its bid as $68,800. Upon discovering this error, Shaw-Lundquist notified the City of error in writing, and requested that its bid be reformed to correct this clerical error. With the correction, Shaw-Lundquist would still be the low bidder, albeit by a narrower margin. The City allowed Shaw-Lundquist to correct the error. For reasons unknown (to us, anyway), the City also allowed Shaw-Lundquist to further increase its bid by an additional $89,211. After these changes, Shaw-Lundquist was still the low bidder.

Rochon Corp., who had finished fourth in the bidding but became the second low bidder after bidders two and three were disqualified for failing to submit the required DBE paperwork, filed a declaratory relief action, challenging the City's decision to allow Shaw-Lundquist to correct its bid. The district court found that the change in Shaw-Lundquist's bid was not a material change, because Shaw-Lundquist was still low, and therefore ruled against Rochon. The Court of Appeals reversed.

Of primary importance here, the Court of Appeals made it clear that the City's decision to allow Shaw-Lundquist to correct the clerical error in its bid would, by itself, be a sufficient basis to overturn the award: "we hold that Shaw-Lundquist’s bid modification was a material change. It occurred after Shaw-Lundquist knew the next lowest bid, allowing it to make its correction fully aware of how much it could increase its bid while yet retaining its place in the ranking. This circumstance would be enough to align our holding with precedent, but we add that this change was particularly troublesome on two additional grounds that call the fairness of the process into substantial doubt. The city allowed Shaw-Lundquist to change its bid not only to fix its error but also to add another $89,211, giving it both cake and icing."

Virtually all construction industry participants would agree that allowing Shaw-Lundquist to add the mystery $89,211 was improper, and that change alone would have allowed the Court to invalidate the award without addressing the propriety of allowing contractors to correct clerical bid errors. Unfortunately, the Court threw both baby and bathwater out the window in its opinion. A number of jurisdictions have addressed the question of whether bidders should be allowed to correct clerical errors in their bids. It is fair to say that the growing trend is towards allowing the correction of such errors, although even jurisdictions that allow correction differ on how they define clerical errors (some require that the error be clear on the face of the bidding document, others allow the submission of evidence to demonstrate the error).

Those familiar with the construction industry know what happens when a contractor limps onto a project underwater from day one, and it is fair to say that neither the project nor the owner ultimately benefits from this arrangement. Those jurisdictions that continue to hold contractors to bid errors seem to be under the continuing delusion of free money: the government can make the contractor do $10,000,000 worth of work for $8,000,000. Put bluntly (and in the patois of my native Wyoming), that ain't gonna happen. Even while enlightened member of the construction community continue to explore delivery methods other than the traditional design-bid-build, it is useful to do what can be done to decrease the often adversarial tone inherent in D-B-B contracts. One solid step in that direction is to allow contractors to correct clerical errors rather than hold them to mistaken bids. Public policy is not best served by a forced project marriage, particularly where the groom lost a limb on the way into the chapel.

...Wherein Tom Rosenberg Swells with Pride for Division 4

Email just received from Tom: 

Roland-[...] I am sure you were as proud as I was of all the Division 4 personnel involved in the Las Vegas seminar. We had many speakers as well as program coordinators. Some of the speakers such as David Zimmerman and Julia Davis were first time speakers and they did very well.  Dan Drewry and Julia Muller were excellent first time program coordinators and I know they are ready to speak at future programs.  Division 4 personnel such as Arlan Lewis, Mike Tarullo and others spoke too.  They were all great and I feel honored to have worked with them.  Best regards and I will be in contact soon.

Politics and Infrastructure Spending

So let's get political for a moment ...

I attended the California Associated General Contractors Spring gathering in Monterey, California this past weekend.  A gorgeous weekend and a great time was had by all.  Also present was Steve Sandherr, CEO AGC of America.  He is active in the Romney election campaign and he gave a horserace report on the states expected to be in play this November.  Which raises the question, would Obama or Romney be better for construction?  The answer is not obvious and for this reason I believe it’s a mistake for an association president to be too overtly partisan political. 

Looking at economic policy more broadly, on Friday, May 4, 2012, another partisan, Greg Mankiew, professor of economics at Harvard and one of Romney’s economic advisors, gave a plug for an essay by his colleague Raghuram Rajan in the current issue of Foreign Policy magazine entitled “The True Lessons of the Recession.”  The article is interesting for its by-line “The West can’t Borrow and Spend it’s way to Recovery.”  The sub-title, however, is more provocative than the recommendations in the article.  Rajan suggests that government might usefully increase spending on education, worker retraining, technology, and innovation; he also seems favorably disposed to targeted safety net legislation, universal health-care, child-care, and he seems at least open to infrastructure spending in a down-economy.  It seems Nixon was right, “We are all Keynesian’s now!”  Rajan favorably cites Germany’s example of “austerity,” yet Germany’s tax burden is 50% higher than that of the U.S. and Germany’s spending as a percentage of GDP is higher as well.  We have large infrastructure needs that should be built now.  The good news here is that the best and brightest of both parties seem to be open to it.  The trick is to have Congress come along. 

Into the Deep

Nowhere can construction lawyers delve deeper into the substance and life of construction law than in the Forum.  The annual meeting in Las Vegas, presided over by our own Tom Rosenberg and Kerry Kester, and by Bill Franczek, was no exception.  If you missed it, look for these presentations in the materials which will soon be available on the Forum’s Knowledge Base. 

Plenary 1.  Jeff Applebaum came out blazing in plenary 1, talking fast and keeping us on the edge of our seats trying to absorb as much as possible of his unique wealth of experience in selecting project delivery options.  He spoke of educating owners, prioritizing project parameters, assembling all stakeholders, being cognizant of constraints, and identifying the optimal time for risk transfer.  Ross Altman spoke of transactional considerations from the Parthenon in 447 B.C., to the tricky replacement of a cable stay bridge by Transport Scotland.  He spoke of the single point of contact that lenders are looking for and how this might determine who is in the best position to finance a project.  On some projects this might not be the owner.  Finally, Jeff Gilmore spread before us a smorgarshboard of delivery systems. 

Plenary 2.  John Bulman, Joel Heusinger, and Allison Snyder delved into the intricacies of joint defense agreements.  If you are considering a joint defense agreement, or wondering about their pros and cons, check out their written materials, they are great. 

First workshops.  Too much to choose from!  I opted for Cathy Shanks’ and Danny Shaw’s discussion of dispute resolution provisions in IPD.  They had lots to say about the ConsesnsusDocs 300, and the AIA C191 agreements.  Check out their materials, and check out the materials on letters of credit vs. bonding presented by Jonathan Dunn and John Petro, and the materials on public private partnerships by Jayne Czik and Michael Sterling. 

Awards and Tributes.  “Insurance law is sexy!” so said Terry Galganski.  Jim O’Conner combined insurance law, Galganski lore, poetry, and some mighty fine prose in making a room full of trial lawyers lachrymose with his tribute to Terry.  George Meyer got all choked up too in his farewell speech.  What is it about this Forum that stirs such deep emotions? 

Plenary 3.  Adrian Bastianelli moderated a panel with John Carpenter, Judy Herman, and Chris Ng discussing fine points of the CM-agent vs. the CM-at-risk relationship.  What do Tishman and Kiewit look for in their CM agreements?  Check out the materials on the knowledge base and find out. 

Second workshops.  More riches.  I attended the workshop presented by Kim Hurtado and Michael Varadaro on negotiating contracts that incorporate BIM models.  Avoid placeholders in a BIM model, they can cause trouble!  What happens if a virus takes down the model?  Who is the gatekeeper for the model?  Who archives the record set of the model, and how?  For answers to these and many more questions check out the program CD, or check the knowledgebase.  And while you’re at it, don’t miss Robbi McPherson and Melissa Beutler’s paper on key issues to negotiate with different delivery systems, and Roberto Hernandez-Garcia and Wendy Venoit’s contribution on cross-border transactions. 

Plenary 4.  Eileen Diepenbrock and Michael Loulakis shared their insights on design build.  Look at the recent studies noted in the materials showing the rapid growth of this delivery model.  The Penn State study remains a large presence.  Check it out.

Plenary 5.  SBA’s implementation of the Mentor Protégé programs, minority, women, and veteran owned small business programs; read all about it in Patricia Meagher’s, Denise Farris’s, and Larry Harris’s (moderator) materials. 

Third workshops.  I admit, I was getting a little distracted by this time trying to download Division 4’s breakfast speaker podcast onto Dave Owens’ computer.  So I only listened with half an ear to the presentation by Julia Davis and Richard Stockenberg on alternate delivery models from the subcontractor perspective.  Sorry Julia!   But I will be sure to check out their materials.  And be sure to look at the materials prepared by Keith Bergeron and David Zimmerman on the role of design professionals on each delivery system, and Joel Gerber and John Miller  on the role of owners and lenders.  While you’re at it, click on our podcast of Jim McLamb’s talk at our breakfast forum about the Lean Construction tools they used, but with a traditional GMP contract, on the Disney Carsland Project.  This will be available on our Division 4 site.

Plenary 6.  Mike Tarullo moderated a great panel with Bill Gammon and Tom Gourlay, Jr. (chief trial lawyer for the Corps of Engineers) discussing federal contracting models:  MATOC (multiple award task order contracting), ID/IQ (indefinite scope, indefinite quantity) contracting under FAR 16.506,  and ECI (early contractor involvement contracting) using both CM-agent models and CM-at-risk models.   Check out their materials if you think you might get near one of these projects.

Plenary 7.  Joe Cleves and Lisa Dal Gallo came out breathing fire about “mere talk of IPD” vs. actually doing IPD.  Real IPD is a multi-party party agreement where people put their fee at risk.  Mere talk of IPD is salesmanship gloss over business as usual.  I’m paraphrasing, but come check out their materials and see what real IPD looks like. 

Plenary 8.  And no program would be complete without some ethics credit.  This one was a few cuts above:  Leslie O’Neal-Coble, Jim Scott, and Andrew Perlman presented the revisions to the ABA model rules coming out in light of the Ethics 20/20 commission. 

Friday night I joined a large group treated to a lovely evening at the Mob Museum by Hill International.  Everyone was in high spirits, elevated and bonded by two days of excellent programming (and some tasty pink grapefruit martinis—“suffig” the Swiss would say).  Getting off the bus on the way back to the Bellagio I had the good fortune to walk lock step with Doug Oles.  “Back to shallow,” he said.  I think I know what he meant.