In Oregon, a Criminal Conviction Alone Is Not Enough for the CCB To Assess a Civil Penalty

Allied Structural v. Construction Contractors Board, 311 Or App 40, — P3d — (May 5, 2021)

Recently, the Oregon Court of Appeals, in an en banc decision, held that the Construction Contractors Board (“CCB”) exceeded its authority when it assessed a $5,000 civil penalty against a licensee based on its unfitness for licensure on criminal conviction grounds. In Allied Structural v. Construction Contractors Board, the majority held that a criminal conviction alone is not sufficient grounds upon which to assess a civil penalty against a licensee.

The underlying case arose when Allied Structural and its principal owner applied to the CCB for a construction contractor’s license. In 2006, while holding a previous license, Allied’s owner was convicted of various sex-related crimes, including first-degree sexual abuse, attempted sexual abuse, and public indecency. Allied’s owner served a prison sentence for these crimes and was released subject to terms of parole. In 2014, Allied’s owner applied for a new construction contractor license. Under CCB rules, a license applicant must disclose criminal convictions if the convictions are less than five years old. In applying for the license for Allied in 2014, more than 5 years after the convictions, Allied’s owner did not disclose the convictions, and the CCB issued a license to Allied. After the license was issued, Allied’s owner violated the conditions of his parole, which prompted his parole officer to inform CCB. The CCB investigated the matter, which investigation culminated in the revocation of Allied’s contractor’s license and a $5,000 civil penalty.

The Allied court reasoned that the applicable statutory scheme and the relevant CCB rules relate to whether a person is presently fit to be a construction contractor, and not whether the prior conduct of the applicant was in violation of a relevant statute or rule.

Oregon statute authorizes the CCB to “revoke, suspend or refuse to issue or reissue a license and the board may assess a civil penalty” under some circumstances, including sexual abuse convictions.1 In the Allied opinion, the majority of the court held that the CCB appropriately revoked Allied’s license because the principal did not report his conviction during the period that his prior license was in effect and also because he violated the conditions of his parole. The majority opinion further held, however, that the CCB could not assess a civil penalty when the licensee had not also violated a statute or rule. The majority and dissent opinions disagreed as to what constituted a “violation.” The dissent stated that “[t]he text of ORS 701.098 could not be more plain that each of the myriad of circumstances and misconduct described in ORS 701.098(1)(a) through (n) can constitute the basis for the assessment of a penalty.” The majority opinion disagreed, holding that the CCB did not have the authority to impose a civil penalty when a licensee was determined to be unfit to hold a license due to criminal convictions. In reaching this opinion, the court analyzed the text and context of the statute, reasoning that the operative part of the statute allows the imposition of a civil penalty only if a licensee “violated” a provision of ORS chapter 701 or a CCB rule.2 The majority opined that a person does not “violate” any provision of ORS chapter 701 or a CCB rule simply because he or she was convicted of a crime. A fitness inquiry and a penalty inquiry are two separate inquiries, to which different rules apply. Therefore, the court held that the CCB exceeded its authority by assessing a civil penalty against Allied absent statutory authorization.

 


1 ORS 701.098(1)
2 ORS 701.992(1)

Nevada Supreme Court Clarifies Retroactive Nature of 10-Year Statute of Repose for Construction and Design Defects

Does a legislative extension of a statute of repose for construction and design defect claims allow a claim to proceed even if the repose period in effect when the claim was filed barred that claim?

On October 28, 2021, the Nevada Supreme Court answered this question in the affirmative when it denied the appellants’ petition for rehearing in Dekker/Perich/Sabatini Ltd. v. Eighth Jud. Dist. Ct. in & for Cty. of Clark, 137 Nev. Adv. Op. 53 (2021) (“Dekker”).

Dekker was the culmination of an evolution of Nevada Revised Statute (“NRS”) 11.202, Nevada’s statute of repose for claims based on construction and design deficiencies. Prior to 2015, a claimant had from 6 to 10 years from the date of substantial completion of a property to file a construction or design defect action, depending upon the type of defect (6 years for “patent” defects, 8 years for “latent” defects, 10 years for “known” defects with no repose period for fraud).

However, on February 24, 2015, Nevada Assembly Bill 125 (“AB 125”) went into effect. AB 125 did away with the different repose periods for different types of defects in favor of a single six-year repose period for all defects (including claims for fraud) commencing from the date of substantial completion of a property. AB 125 dramatically shortened the time in which a claimant could bring a construction or design defect claim in Nevada.

Attorneys representing contractors and design professionals took advantage of the shorter statute of repose. For example, attorneys in GRSM’s Las Vegas office obtained dismissal of a $3,555,690.14 construction defect claim for a general contractor client based on a claimant’s failure to bring an action within 6 years based on the new statute of repose.1

However, on October 1, 2019, Nevada Assembly Bill 421 (“AB 421”) went into effect, extending the statute of repose back to ten years. AB 421 also made the 10-year limitation period retroactive to actions in which the substantial completion of the property occurred before October 1, 2019.

The new, longer statute of repose and its retroactive nature created some uncertainty. Did retroactivity mean that a claim that had already expired under the previous six-year repose period comes back to life after passage of AB 421?

The Dekker Court addressed this specific question. In Dekker, the City of North Las Vegas (“CNLV”) brought an action for construction defects against a contractor that built a fire station for the City. The fire station was substantially completed on July 13, 2009. On July 11, 2019, after the AB 125 six-year repose period had expired, but before the 10-year repose period (AB 421) went into effect, CNLV brought an action against the contractor for construction defects.

The Contractor moved to dismiss the action, arguing that CNLV’s claims were time-barred under the six-year repose period. The district court heard the motion on September 30, 2019, the day before A.B. 421’s amendment to the repose period took effect. On October 14, 2019, the court issued an order dismissing CNLV’s complaint based on the six-year statute of repose.

CNLV moved to alter the judgment under NRCP 59(e), arguing that the ten-year statute of repose was now in effect and governed its claims. The Contractor countered that the claims were statutorily barred when the complaint was filed and thus void ab initio and could not be revived. The Contractor also asserted that granting CNLV’s motion would violate its due process rights.

The district court granted CNLV’s motion to alter the judgment, determining that NRS 11.202 applied retroactively and constitutionally, and reinstated CNLV’s claims. The Contractor filed a writ of mandamus or, alternatively, prohibition with the Nevada Supreme Court challenging the district court’s order.

The Nevada Supreme Court framed the issue as follows:

[W]hether NRS 11.202’s 2019 amendment extending the repose period allows a claim to proceed even if the repose period in effect when the claim was filed barred that claim.

The Nevada Supreme Court held that such a claim may proceed:

[A]s amended [in 2019], the plain language of NRS 11.202 allows a claim to be brought so long as it was filed within ten years after the date of substantial completion of the construction work, regardless of whether the claim would have been barred under the previous six-year statute of repose at the time the complaint was filed.

In other words, an otherwise time-barred claim may be brought back to life based on the retroactive nature of the new 10-year statute of repose. The Court observed that the Nevada Legislature lengthened the statute of repose because the shorter repose period prejudiced Nevada residents, and the Legislature clearly intended the amendment to apply retroactively.

Dekker provides some much-needed clarity to the recently evolving nature of Nevada’s statute of repose for construction and design defect claims.

Federal Judge Enjoins Section of New Florida Insurance Reform Law Relating to Advertising and Solicitation by Roofing Contractors

On July 1, 2021, Florida’s Senate Bill 76 (“SB 76”), which modified several provisions that impact Florida’s property insurance litigation, went into effect. This bill was Florida’s latest attempt to stabilize the rising insurance premiums and reduce the burden on Citizens Property Insurance Corporation by encouraging private carriers to write new policies on homes in Florida due to double-digit insurance rate increases, restricted coverage, or being forced to turn to the state’s insurer of last resort, Citizens. More specifically, Florida homeowner’s insurance lawsuits accounted for 76% of all litigation against insurers across the country in 2019. “When Florida accounts for only 8 percent of the nation’s property insurance claims but 76 percent of national property insurance litigation, you know there is a problem,” said Mark Wilson, president and CEO, Florida Chamber of Commerce. The new law also includes changes to the state’s one-way attorney fee statute, and imposes deadlines to file claims. It also placed new requirements and restrictions on roofing contractors, prompting several roofing companies to challenge constitutionality of the new law and new restrictions.

Part of the new law was an attempt to curtail the proliferation of solicited roof insurance claims. The frequency of roof claims and costs of those claims has increased dramatically in Florida over the past several years. Members of the insurance industry argue that solicited roof claims essentially have turned the homeowners’ insurance policy into a maintenance contract. The new law was designed to limit the ability of roofing contractors to use various forms of advertising to solicit jobs that entail insurance claims. However, roofing contractors challenged the new law and argued its restrictions violate their First Amendment rights. The state countered that the new law is a reasonable restriction on commercial speech in light of the state’s interest in combating consumer exploitation and fraud.

On July 11, 2021, a federal district judge sided with the roofing contractors and enjoined the portion of SB 76 dealing with advertisements by roofing contractors. In a 90-minute hearing, Chief U.S. District Court Judge, Mark Walker, of the United States District Court, Northern District of Florida, heard the companies’ argument for injunction that the law violates its free speech rights and is a “thinly veiled attempt to prevent anyone from assisting homeowners from making valid insurance claims to repair their homes.” The judge noted that the state identified substantial interests worthy of protection, but found those interests are not directly implicated by contractors advertising their roofing repair services to homeowners and informing homeowners that they may have storm damage that may be covered by insurance. As of this date, the injunction remains in effect and the case before Judge Walker is proceeding.

When Parties Arbitrate: The Powers and Limitations of Discovery in Arbitration under the Federal Arbitration Act

More and more architects, engineers, and other design professionals have the ability to perform and work remotely—often times far from the actual construction site. COVID-19 has forced general contractors and owners to experiment with using and communicating with professionals who may reside outside of the state where the construction is occurring. Even though the parties’ contract may have a general choice of law provision, if the parties engaged in interstate commerce, then the Federal Arbitration Act (“FAA”) may apply to the parties’ arbitration clause.

When Does the Federal Arbitration Act Apply?

Section 2 of the FAA, 9 U.S.C. § 2, provides that the FAA applies to “[a] written provision in any….contract evidencing a transaction involving commerce to settle by arbitration. . . .” Section 2 goes on to provide that such an agreement is largely “valid, irrevocable, and enforceable . . . .” The FAA doesn’t have to be mentioned in the contract or arbitration provision in order to apply. Generally, if a contract provides for one party to provide services in another state, and a dispute is to be resolved through arbitration, then the arbitration is subject to the FAA.

This is because the FAA “rests on the authority of Congress to enact substantive rules under the Commerce Clause.” Southland Corp. v. Keating, 465 U.S. 1, 11, 104 S. Ct. 852, 858 (1984). Accordingly, the FAA applies to all arbitration agreements “involving commerce.” Comanche Indian Tribe v. 49, L.L.C., 391 F.3d 1129, 1131 (10th Cir. 2004). The “involving commerce” requirement is typically met where the parties are from different jurisdictions and the materials/services at issue came from outside the forum state. Id.; see also Parm v. Nat’l Bank of Cal., N.A., 835 F.3d 1331, 1333-34 (11th Cir. 2016); Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 282 (1995).

The FAA could also apply in situations where the “intrastate aspect” is unclear. In Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S. Ct. 2037, 2040 (2003), the U.S. Supreme Court found that because the FAA provides for “the enforcement of arbitration agreements within the full reach of the Commerce Clause,” the FAA encompasses a wider range of transactions than those actually “in commerce,” which means that the FAA will apply “if in the aggregate the economic activity in question would represent ‘a general practice . . . subject to federal control.’” Id. at 57-58.

Does it Matter Whether the FAA Applies to Your Arbitration Provision?

As a matter of public policy, discovery in an FAA arbitration proceeding is intentionally limited in scope compared to litigation. The U.S. Supreme Court has stated that “by agreeing to arbitrate, a party trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31 (1991). In practice, this means that the Federal Rules of Civil Procedure aren’t necessarily applicable to arbitration. For example, Rule 45 of the Federal Rules of Civil Procedure permits third parties to be subpoenaed to either or both appear for a deposition or produce documents and things during fact discovery. However, there is nothing under the FAA that authorizes an arbitrator to issue third-party subpoenas during fact discovery.

Section 7 of the FAA does permit an arbitrator to “summon in writing any person to attend before them or any of them as a witness, and in a proper case to bring with him or them any book, record, document or paper which may be deemed material as evidence in the case.” 9 U.S.C. § 7. Section 7 also states that an arbitrator may compel a witness “in the same manner provided by law for securing the attendance of witnesses.” Id. However, the Second, Third, Ninth, and Eleventh Circuits have interpreted Section 7 as only allowing subpoenas in connection with the actual arbitration hearing—and not for pre-hearing discovery.

According to those courts, “[a] plain reading of the text of section 7 reveals that an arbitrator’s power to compel the production of documents is limited to production at an arbitration hearing. The phrase ‘bring with them,’ referring to documents or other information, is used in conjunction with language granting an arbitrator the power to ‘summon . . . any person to attend before them.’ Under this framework, any document productions ordered against third parties can happen only ‘before’ the arbitrator. The text of section 7 grants an arbitrator no freestanding power to order third parties to produce documents other than in the context of a hearing.” CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 706 (9th Cir. 2017); see also Managed Care Advisory Grp., LLC v. CIGNA Healthcare, Inc., 939 F.3d 1145 (11th Cir. 2019); CVS Health Corp. v. Vividus, LLC, 878 F.3d 703 (9th Cir. 2017) (pre-hearing document subpoena found invalid); Life Receivables Tr. v. Syndicate 102 at Lloyd’s London, 549 F.3d 210 (2nd Cir. 2008) (document subpoena invalidated); Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3rd Cir. 2004) (invalidating document subpoena). These courts routinely reject “any argument in favor of ignoring the literal meaning of the FAA in the name of efficiency” because “efficiency is not the principal goal of the FAA.” Hay Group, Inc., 360 F.3d at 410. However, the Fourth Circuit has held that an arbitrator has the power to issue a subpoena to a nonparty for pre-hearing discovery “under unusual circumstances” and “upon a showing of special need or hardship.” COMSAT Corp. v. Nat’l Science Foundation, 190 F.3d 269, 275-76 (4th Cir. 1999).

Even an arbitrator’s authority to issue a subpoena to appear at the arbitration hearing may be limited. Under Rule 45, a federal district court’s power to compel appearance at trial is limited to within one hundred miles of where the non-party resides, is employed or regularly transacts business. But, the Eleventh Circuit has stated that “Section 7 [of the FAA] does not authorize district courts to compel witnesses to appear in locations outside the physical presence of the arbitrator, so the court may not enforce an arbitral summons for a witness to appear via video conference.” Managed Care Advisory Group, LLC v. CIGNA Healthcare, Inc., 939 F.3d 1145, 1160 (11th Cir. 2019); see also Roundtree v. Chase Bank USA, N.A., 13-239 MJP, 2014 WL 2480259, at *2 (W.D. Wash. June 3, 2014). There may also be a question as to whether Section 7 permits nationwide service of process. See Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89, 94 (2d Cir. 2006) (stating that Section 7 does not permit nationwide service of process).

One important consideration is that many states have granted authority to arbitrators in a manner much broader than what Congress granted under the FAA. For example, under the Uniform Arbitration Act, adopted by Arizona, Utah, Colorado, Nevada, New Mexico, Oregon, Washington, and over fifteen other states, the arbitrator has the power to issue subpoenas for discovery “to the extent a court could if the controversy were the subject of a civil action in this state.” A.R.S. § 12-3017(D); see also Utah Code Ann. § 78B-11-118; CO Rev Stat § 13-22-217; NRS 38.233; NM Stat § 44-7A-18; Or. Rev. Stat. § 36.675; RCW 7.04A.170.

However, when the state law contradicts the FAA, the contradicting law “is displaced by the FAA.” AT & T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011). However, this may not mean that the FAA prohibits the parties from explicitly stating in their arbitration clause that a particular state’s arbitration laws (or the Federal Rules of Civil Procedure) shall apply to the parties’ agreement to arbitrate. This is because the U.S. Supreme Court has stated that parties are free “to arbitrate under different rules than those set forth in the Act itself,” because “[a]rbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.” Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989). This appears to be consistent with the Supreme Court’s recent decision in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), where the Court held that “when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.” Previously, some courts had pointed to the FAA to justify mandating that courts—not arbitrators—resolve any “gateway questions of arbitrability” prior to compelling arbitraiton.

Right to Repair Past, Present & Future

Now that we are several years into a legislative implementation of Right to Repair statutes in many states, here are the highlights of the key practical and legal issues for consideration non right to repair efforts as a tool for resolution of your construction dispute.

I. Practical Issues of Pre-Litigation Repairs – Scope of Project, Coordination, Design Issues and Product Manufacturers

A. Use of Right to Repair Approach as Effective Tool for Claim Resolution

Are pre-litigation repairs the solution or the problem as a resolution option in our tool- box of resources to handle construction claims? Our industry has been encouraged for years to engage in early, “practical resolutions” of construction issues in various contexts that provide effective and productive means to handle these types of claims. Most states across the country have enacted right to repair legislation and have various risk transfer statutes aimed at encouraging these resolution efforts. All but 16 states currently have pre-litigation repair statutes and each have its own technical compliance and issues to consider so please refer to your current state statutes for these requirements and deadlines. We have attached our 50 State Survey of the Right to Repair Legislation which references the relevant statues for each jurisdiction.

B. Enforcement of Right To Repair Pre-Litigation Resolution For Construction Claims

Many states REQUIRE the use of the right to repair in advance of initiating litigation and right to repair requirements are now incorporated in numerous construction contracts. Right to repair legislation is also favored for code compliance and health/ safety including claims under licensing board statutes. Indemnity statutes that allow for risk transfer exist in nearly all states to shift responsibility for workmanship issues to the indemnitor when allocating legal costs and expenses for handling these claims. Carriers do favor these types of approaches and have different positions in their policies for property damage that now include policy language on warranty and pre-litigation repair coverages. However, there are often unidentified risks that accompany the process which cause frustration and rejection of the process. The statues often preclude a release for the work performed, they may not be covered under the applicable insurance programs, they are often evolving and can end up costing more than projected at the time of resolution and can impact or extend the statutes of limitation.

C. Concerns to Address with Parties in Pursing the Right to Repair Process

The answer to whether a pre-litigation repair is the best course of action for a specific construction claim invariably depends on who is asked the question and is usually different depending upon the experience of the individual in trying to navigate the tricky aspects of the process. The claimant lawyers are often opposed to the approach and the insurance carrier may not want to participate in a pre-litigation repair resolution plan. Each claim should be considered on a case -by -case basis examining the numerous ramifications from a business, legal and insurance perspective. One of the most significant threshold questions to answer is determining which parties or companies should participate in the process that requires an assessment of the role in repairs for the developer, design professionals, general contractor, subcontractor and product manufacturers. Also, for each claim the parties need to understand how extensive the repairs will be, the risk transfer options in the process, the role of the insurance carrier involved and whether there is a final resolution in the process. In many cases the right to repair presents an expensive temporary patch to a bigger problem which leads to further litigation in the future and potential extensions of the deadlines to file claims and unending liability exposure to legal issues for the project.

II. Legal Issues Impacting Pre-Litigation Repairs: Risk Transfer, Funding Sources, Release of Claims, Coverage Obstacles

All but 16 states currently have pre-litigation repair statutes. Many states REQUIRE the use of the right to repair procedures in advance of initiating litigation and this requirement is mirrored in numerous contracts. Right to repair legislation is also favored for code compliance and health/ safety including claims under licensing board statutes. Anti-indemnity statutes are prevalent but many allow for risk transfer to shift responsibility for poor workmanship to the indemnitor when allocating legal costs and expenses for these claims. Many insurance carriers do favor pre-litigation resolution approaches and have different positions based on the specific provisions of the policy language pertaining to pre-litigation repair coverages in the applicable insurance policy. However, recent trends show a preference toward litigation over pre-litigation resolution where there are risk transfer options for the parties. This is an issue to be addressed at the beginning of the matter and with the key legal issues under constant watch over the course of the process.

Under certain statutory schemes, developers and general contractors can obtain contractual defense and indemnification from implicated subcontractors during this pre-litigation process by placing subcontractors on notice of the claim during the Pre-Litigation Process. See, Cal. Civ. Code Section 916(e); Crawford v. Weather Shield Mfg., Inc., 44 Cal. 4th 541 (2008); Centex Golden Ins. Co. v. Dale Tile, Inc. Co., 78 Cal. App. 4th 992 (2000).

Contractual defense and indemnity obligations of subcontractors in third party claims are covered in some states under the “insured contract” coverage within commercial general liability policies. See, Golden Eagle Ins. Co. v. Insurance Co. of the West, 99 Cal. App. 4th 837 (2001) which holds an insured with contractual liability coverage would reasonably expect that the indemnitee’s attorney fees and costs are sums the insured becomes legally obligated to pay as damages because of covered tort claims. Indeed, in California an indemnity against claims and liability “embraces the costs of defense against such claims” unless “a contrary intention appears.” Golden Eagle Ins. Co., 99 Cal. App. 4th at 851-852.).

Depending upon the language of an indemnity provision, developers and general contractors may be able to make repairs and seek contractual indemnification from implicated subcontractors on a first party basis without a lawsuit or claim having been made by a homeowner, homeowner’s association or commercial landowner. See, Zalkind v. Ceradyne, Inc., 194 Cal. App. 4th 1010 (2011)) (holding that provision indemnifying party from damages arising from counterparty’s breaches of agreement applied to direct, as well as third-party, claims; scope and extent of duty to indemnify are to be determined from contract itself); Spencer Sav. Bank, S.L.A. v. Bank of Am. Corp., 2018 U.S. Dist. LEXIS 217785 (New Jersey, 2018).

III. Strategy Considerations for Right To Repair

The approach to each of these projects is very case specific and carrier participation can impact the approach to a pre-litigation resolution plan. The process takes longer than parties would like and may not save time or be as efficient as people hope in the beginning of the process, but can avoid the expense and costs of formal discovery which has its own challenges. The pre-litigation approach does provide many advantages and can be a useful and creative solution for construction disputes and is most favored where a release of future claims is provided as part of the process. The best outcomes are obtained in situations with counsel who have worked through the challenges and addressed the issues in prior projects with a successful final outcome.

For a copy of our 2021 Right to Repair 50 State Survey, click here.

What You Need to Know About Delay Claims and How to Prove or Defend Against Them

It is inevitable that a steel fabricator will be delayed or be accused of delay on a project.  There are many considerations that go into proving and defending delay claims.  From a legal perspective, several issues must be addressed: (1) the type of delay; (2) proof required for delay claims; and (3) types of damages.  This article addresses the legal implications of proving and defending delay claims.

Overview of Delay Claims

Delay damages may be awarded when the defendant has caused the period of performance to be extended.[1]  Delay damages can fall into any of the three general categories of contract damages: (1) expectation; (2) reliance; or (3) restitution.[2]  To prove any delay claim, expert testimony is generally necessary.

A. Elements and Types of Damages

To prove a delay claim, the delayed party must show: (1) the defendant was responsible for the delay; (2) the delays caused a delay in completion of the contract (eliminating overlapping or duplication of delays); and (3) the plaintiff suffered damages as a result of those delays.[3] Once contract time becomes impacted, the impact must be analyzed to determine: [4] [5]

  1. Its cause;
  2. Whether the cause is within the “control” of either party;
  3. Whether the cause impacted the contract’s “critical path” for completion and; if so,
  4. By how much.

The party alleging delay has the burden of proof and must prove each of the elements listed above.  To do so, the delay itself will need to be analyzed to establish the cause of the delay and who was responsible for the delay.  Importantly, the delay must impact the critical path of the project.  Further, the alleged damages must be proven by a reliable method.  Each of these components requires the use of a delay expert to analyze the project schedule so as to determine whether there was a critical path delay and the responsible trade.  Further, the delay expert will need to conduct a detailed analysis to prove and/or defend against alleged damages.

B. Types of Delay

There are multiple types of critical path delays. Whether a delay is compensable depends on the nature of the delay.  Additionally, the contract terms will also be considered in determining whether a delay is compensable or if the delayed party is only entitled to a time extension.

1. Excusable and Compensable

In order to be compensable, a delay must be caused solely by the delaying party to qualify as compensable.  However, third-party delays may be compensable as well depending on the provisions of the contract.  For compensable delay, one must prove that the scheduled completion date of the project has been extended.[6]

Courts turn their focus first to the contract language to determine the scope of excusable and compensable delays.  For example, in Kiewit Power Constructors, the court determined the contract defined excusable delays to be “those resulting from circumstances beyond the reasonable control and without the fault or negligence of the [delayed] party.”[7]

While the general rule is that there can be no recovery for concurrent delays, in some cases where multiple subcontractors or multiple prime contractors are simultaneously responsible for delay, the delayed party may still be able to recover its costs split between the responsible parties as long as the claiming party had no fault or responsibility for delay during the period claimed.[8]

2. Excusable But Not Compensable

Excusable, but not compensable delays typically result from “third-party events, force majeure events, unusually severe weather, and owner-caused delays.”  The compensability of these types of delays depends on the provisions of the contract.  If the delay is outside the control of both the owner and the contractor, it could be “excusable but non-compensable.”[9]

Courts have found that concurrent delays generally are not compensable: “[i]f a period of delay can be attributed simultaneously to the actions of both the [Owner] and the contractor, there are said to be concurrent delays, and the result is an excusable but not a compensable delay.”[10]

3. Not Excusable[11]

Delays are not excusable when the delay results from an act or neglect of the contractor, or its subcontractors or suppliers at any tier, or is the result of a risk assumed by the contractor pursuant to contract.  Because these delays may be caused by negligence or poor performance of the contracting parties, they are controllable.[12]

Non-excusable delays are usually rooted in at least some of the following causes: improper scheduling, ineffective site management, incorrect methods of construction, delayed performance in overall activities, and poor monitoring and control.[13]  Many commentators address this type of delay as a defense to a contractor’s claim for an extension of time, but the theories that apply also implicate the government or owner’s entitlement to assess liquidated damages.[14]

C. Methods of Proving Delay Damages

A damage award must not be based on mere speculation, guess, or conjecture.  Courts have interpreted this to mean that time impacts and resulting damages must be measured with a heightened “degree of certainty,”[15] leading to judicial skepticism of theoretical time impact analyses and damage presentations based on unsegregated “total cost” methods.[16]  Damages must be proven by reliable expert testimony or the delayed party runs the risk of not being awarded damages.

1. Measured Mile Analysis

A measured mile analysis compares the actual labor costs or labor productivity of performing work during a time period in which the work was not impacted by the actions causing labor inefficiency to the actual labor costs or actual productivity rate for performing work during a period that was impacted by the delay.[17]  A measured mile analysis has the ability to “isolate the productivity loss during an impacted period from all other project factors via achieved progress in an un-impacted period” and is considered the preferred method of proving damages.[18]  By and large, a measured mile analysis is the most “reliable,” and therefore, preferred method.

2. Total Cost Method

The total cost method involves subtracting the contractor’s bid estimate from the total of all project cost incurred, producing a total cost attributable to the owner’s breach.[19]

The total cost method has been applied by some courts only under exceptional circumstances and even then, only as a last resort.[20]  In those cases, courts may allow proof of damages by the total cost method when there is no other alternative method of computing damages.[21]

3. Modified Total Cost Method

The modified total cost method is allowed only when the evidence suggests proving damages by any other means might be impracticable.[22]  To prove a modified total cost claim, the plaintiff must prove “that (1) the nature of the particular losses make it impossible or highly impracticable to determine them with a reasonable degree of accuracy; (2) the plaintiff’s bid or estimate was realistic; (3) its actual costs are reasonable; and (4) it was not responsible for the added expenses.”[23]

If successful, the modified total cost method will result in an award of the total cost of the contract minus the bid price, with adjustments made for a contractor’s inability to satisfy the four elements, such as excluding costs associated with delays the contractor caused, or adjusting the bid price for miscalculations.[24]

D. Common Breakdowns of Delay Damages

Damages from delay can come in various forms.  Impacts include increased labor costs, increased material and equipment costs, overhead, and loss of efficiency or productivity.  When asserting a delay claim, it is important to adequately track any direct costs (labor, material, or equipment) with appropriate backup when a project is delayed.  Conversely, when defending a delay claim, it is crucial to ensure that damages are supported and, for loss of efficiency or productivity claims, supported by reliable expert testimony.

1. Labor Costs

Extended or additional labor costs impact nearly every party in connection with project delay.  Delays to a project can force the contractor to perform work out of sequence, under different labor conditions, or at a later time.  Each of these will impact the work and result in an increase in labor costs.  For example, a delay that pushes work into a later period can result in stacking of trades, disruption of trades, and slower progress.  If pushed to a later time, work that previously had no shortage of trained labor could face shortages or unrest as labor agreements are impacted.  However, not all labor costs should be considered part of damages due to delay. Rather, the damages are for the labor actually impacted by the delayed work.

2. Material and Equipment Costs

Equipment standby damages usually “take the form of lost opportunities to rent idle equipment to others or the plaintiff’s inability to use the equipment at an earlier date on another job.”[25]  Such losses—when foreseeable—are “a natural consequence of the . . . delay, and, thus, are compensable.”[26]  Courts may award the plaintiff its lost profits and unavoidable costs (namely, its equipment leasing costs).[27]  The court will examine the damages to place the plaintiff in the position it “would have occupied had [the delaying party] performed the contract.”[28]

3. Direct and Indirect Overhead

“Unabsorbed overhead” may be recoverable as part of delay damages.  “[I]f the delay prevented the contractor from obtaining contracts during the delay period that would have ‘absorbed’ the ongoing overhead expenses,” the unabsorbed overhead is recoverable.[29]

4. Loss of Efficiency/Productivity Claims

In construction delay claims, disruption can be compensable when it results in: (i) a “loss of productivity; (ii) caused by a change in working conditions; (iii) for which the owner is responsible.”[30]  Whether a contractor is entitled to recover the increased costs of disruption “depends on the nature of the disruption, the cause of the loss of productivity, and on the terms of its contract as may be interpreted in the light of industry practice.”[31]  Of particular note, timing factors are common causes affecting project productivity and efficiency.  For example, acceleration,[32] out-of-sequence work,[33] schedule compression,[34] and simultaneous operations.[35]

Disruption is a separate and distinct phenomenon from delay.[36]  Federal courts have noted that “[t]here is a distinction in the law between a delay claim and a disruption or cumulative impact claim. Although the two claim types often arise together in the same project, a delay claim involves the time and cost of not being able to work, while a disruption claim involves the cost of working less efficiently than planned.”[37]  Indeed, in order to “succeed on a disruption [or loss of productivity claim]” a claimant “need not establish delay to overall contract completion.”[38]

Finally, courts have articulated that a high level of proof is required to prove loss of productivity or efficiency.[39]  Mere assertions of delay or changes in a project fail to constitute adequate proof.[40]  A party asserting loss of productivity must firmly establish the elements of liability and causation, or that disruptions or inefficiencies on the project were caused solely by the alleged project delays or changes.[41]

Courts generally require the testimony of a properly qualified expert witness to prove the amount or impact of lost productivity.  In Luria Brothers & Co. v. United States, the court stated:

It is a rare case where loss of productivity can be proven by books and records; almost always it has to be proven by the opinions of expert witnesses.  However, the mere expression of an estimate as to the amount of productivity loss by an expert witness with nothing to support it will not establish the fundamental fact of resultant injury nor provide a sufficient basis for making a reasonably correct approximation of damages.[42]

Indeed, the failure to use an expert has resulted in many courts finding the claimant unable to meet the required burden to prove inefficiency.[43]

Conclusion

Practical tips to consider when met with delays include: (1) conducting a critical path delay analysis to determine the party responsible for the delay; (2) retaining a delay expert to consult regarding schedule issues; (3) being mindful of deadlines set forth in the contract for requesting change orders, including requests for time extensions; (4) requesting a time extension when impacted by delays; (5) including additional days for completion of change orders in each change order; (6) tracking all labor, material, and equipment expenses with a separate job cost code; and (7) keeping supporting backup for all expenses organized by expense.

Unfortunately, delays on construction projects are commonplace.  If it has not happened yet, it is only a matter of time until a steel fabricator will incur substantial damages due to delay or be accused of delays alleging millions of dollars in damages.  Understanding delay claims and proactively monitoring the project schedule, as well as enlisting legal counsel and delay experts early in the process will assist in development of proof to prove or defend delay claims.


[1] See Colorado Environments, Inc. v. Valley Grading Corp., 779 P.2d 80, 84 (Nev. 1989) (citing Zook Bros. Constr. Co. v. State, 556 P.2d 911 (Mont. 1976)).

[2] See Dynalectric Co. of Nevada, Inc. v. Clark & Sullivan Constructors, Inc., 255 P.3d 286, 289 (Nev. 2011).

[3] See Plato General Const. Corp./EMCO Tech Const. Corp. v. Dormitory Authority of State, 89 A.D.3d 819, 825 (N.Y. App. Div. 2011).

[4] See Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 15:29 (Thomson Reuters, 2018) [hereinafter Bruner & O’Connor].

[5] See Haney v. U. S., 230 Ct. Cl. 148, 168 (1982) (“[S]ome items of work are given no leeway and must be performed on schedule; otherwise the entire project will be delayed. These latter items of work are on the “critical path.” A delay or acceleration of work along the critical path will affect the entire project.”); Appeal of Southwest Marine, Inc., A.S.B.C.A. No. 36854, 95-1 B.C.A. (CCH) ¶ 27601, 1995 WL 139424 (Armed Serv. B.C.A. 1995) (“The critical path is crucial to the calculation of delay damages because only work on the critical path has an impact upon the time [in] which the project was completed; the Government delay must have interfered with the project’s critical path.”); see also Safeco Ins. Co. Of America v. Cty. Of San Bernardino, 347 Fed. Appx. 315, 318 (9th Cir. 2009) (citing treatise and opining that because the owner “has not shown that any of the insignificant delays [the contractor] caused were on the project’s critical path . . . whatever delays [the contractor’s] improper actions caused do not impact the amount of delay damages”); see also Cty. of Galveston v. Triple B Services, LLP, 498 S.W.3d 176 (Tex. App. 2016) (citing treatise regarding the distinction between “delay” damages and “disruption” damages, and concluding that both types of damages fell within the statutory waiver of sovereign immunity and thus were recoverable).

[6] See Robert M. D’Onofrio et al., ASCE Standard 67-17, Schedule Delay Analysis, 4.7 [hereinafter Schedule Delay Analysis].

[7] Kiewit Power Constructors Co. v. City of Los Angeles by and through Dep’t of Water and Power, No. CV 16-02590-AB, 2018 WL 5880919, at *7 (C.D. Cal. Mar. 22, 2018).

[8] JMR Constr. Corp. v. Envtl. Assessment & Remediation Mgmt., Inc., 198 Cal. Rptr. 3d 47, 60 (2015) (citing William F. Klingensmith, Inc. v. U.S., 731 F.2d 805, 809 (Fed. Cir. 1984) (“contractor generally denied recovery for government-caused delays where there are concurrent delays and absent ‘proof a clear apportionment of the delay and expense attributable to each’.”).

[9] See Schedule Delay Analysis, supra note 6, at 4.5.

[10] Morganti Nat., Inc. v. U.S., 49 Fed. Cl. 110, 132 (2001); see, e.g., R.P. Wallace Inc. v. U.S., 63 Fed. Cl. 402 (2004).

[11] See, e.g., Appeal of Kirk Bros. Mechanical Contractors, Inc., A.S.B.C.A. No. 43738, 93-1 B.C.A. (CCH) ¶ 25325, 26188, 1992 WL 197581 (Armed Serv. B.C.A. 1992) (“Where the delay is caused solely by the Government, it is compensable; where the delay is caused solely by the [contractor], [the contractor] is responsible . . . Where the delay is prompted by inextricably intertwined concurrent Government and contractor causes, the delay is not compensable.”); Andrew D. Ness, Delay, Suspension of Work, and Acceleration, in Federal Government Construction Contracts 413, 424–27 (Bastianelli et al. eds., 2003).

[12] Nev. Rev., Causes of Non-Excusable Delays in Construction and Remedies, (May 2020), https://thenevadaview.com/non-excusable-delays-in-construction/.

[13] Id.

[14] See W. Stephen Dale & Robert M. D’Onofrio, Construction Schedule Delays § 1:4 (Thomson Reuters, 2018) [hereinafter Construction Schedule Delays].

[15] Appeal of Dawson Const. Co., Inc., V.A.B.C.A. No. 3306, V.A.B.C.A. No. 3307, V.A.B.C.A. No. 3308, V.A.B.C.A. No. 3309, V.A.B.C.A. No. 3310, 93-3 B.C.A. (CCH) ¶ 26177, 1993 WL 243270 (Veterans Admin. B.C.A. 1993), aff’d, 34 F.3d 1080 (Fed. Cir. 1994); Dawson Const. Co., Inc. v. Brown, 34 F.3d 1080 (Fed. Cir. 1994) (holding contractor bears the burden of proof and broad generalities of government delay are insufficient). See also Fire Security Systems, Inc. v. General Services Admin., G.S.B.C.A. No. 12120, G.S.B.C.A. No. 12163, G.S.B.C.A. No. 12175, G.S.B.C.A. No. 12349, G.S.B.C.A. No. 12351, G.S.B.C.A. No. 12403, G.S.B.C.A. No. 12406, 97-2 B.C.A. (CCH) ¶ 28994, 1997 WL 251389 (Gen. Services Admin. B.C.A. 1997), on reconsideration, G.S.B.C.A. No. 12403-R, 97-2 B.C.A. (CCH) ¶ 29186, 1997 WL 473205 (Gen. Services Admin. B.C.A. 1997) (contractor’s base allegation that liquidated damage rate imposed by government was unreasonable did not shift the burden to the government to prove its reasonableness). See also Patrick M. Kelly & William E. Franczek, Clearing the Smoke: Forensic Scheduled Analysis Method Selection for Construction Attorneys, 33 Construction L. 30 (2013).

[16] Morrison Knudsen Corp. v. Firem’s Fund Ins. Co., 175 F.3d 1221 (10th Cir. 1999) (discussing burden of proof in the context to a challenge in jury instructions and finding harmless error as contractor bore the burden of not simply showing excusable delay so as to avoid a default termination, but also that such delay delayed the overall completion of the job, i.e., was to the critical path).

[17] See Construction Schedule Delays, supra note 14, at § 19:1.

[18] Construction Schedule Delays, supra note 14, at § 19:1.

[19] Rubin, The Total Cost Method of Computing an Equitable Adjustment – An Analysis, 26 Fed. B.J. 303 (1966) (stating the total cost method is “generally disfavored.”); see Amelco Electric v. City of Thousand Oaks, 38 P.3d 1120, 1130 (Cal. Ct. App. 2002) (citing Servidone Constr. Corp. v. U.S., 931 F.2d 860, 861 (1991) (“A trial court must use the total cost method with caution and as a last resort.”)); Ames Constr., Inc. v. Clark Cty., No. 2:18-cv-00299-JCM-EJY, 2020 WL 3488736, at *3 (D. Nev. Apr. 6, 2020) (citing Elte, Inc. v. S.S. Mullen, Inc., 469 F.2d 1127, 1131 (9th Cir. 1972); Raytheon Co. v. White, 305 F.3d 1354, 1365 (Fed. Cir. 2002)); Youngdale & Sons Const. Co., Inc. v. U.S., 27 Fed. Cl. 516, 541 (1993) (“Use of [the total cost] method is highly disfavored by the courts, because it blandly assumes…that every penny of the plaintiff’s costs are prima facie reasonable, that the bid was accurately and reasonably comp[uted], and that the plaintiff is not responsible for any increases in cost.”) (emphasis added).

[20] New Pueblo Constructors, Inc. v. State, 696 P.2d 185, 203 (Ariz. 1985); AMEC Civil, LLC v. DMJM Harris, Inc., No. 06–64 (FLW), 2009 WL 1883985, at *7 (D.N.J. June 30, 2009) (citing North Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158, 213 (2007) (“The United States Court of Appeals for the Federal Circuit and the Court of Federal Claims have emphasized that ‘the preferred way for a contractor to prove increased costs is to submit actual cost data because such data provides the court, or contracting officer, with documented underlying expenses, ensuring that the final amount of the equitable adjustment will be just that–equitable–and not a windfall for either the government or the contractor.”)); but see Kansas Gas & Elec. Co. v. United States, 685 F.3d 1361 (Fed. Cir. 2012) (allowing total-cost allocation method when contractor “used an internal accounting system which coded costs to specific projects, the allocation rates were re-examined on a regular basis in order to reflect actual capital project costs, and the total-cost allocation method complied with required FERC accounting regulations.”).

[21] Boyajian v. United States, 423 F.2d 1231 (Ct. Cl. 1970).

[22] See Ames Constr., 2020 WL 3488736 at *4 (The way for a claimant to demonstrate this is by using a four-part test “to offset the methodology’s deficiencies.”). See Insulation Contracting & Supply, Inc., 131 Nev. 1302 (2015).

[23] Raytheon Co., 305 F.3d at 1365.

[24] See Propellex Corp. v. Brownlee, 342 F.3d 1335, 1339 (Fed. Cir. 2003); Boyajian, 423 F.2d at 1240.

[25] Colorado Environments, Inc. v. Valley Grading Corp., 779 P.2d 80, 84 (Nev. 1989) (citing L.L. Hall Constr. Co. v. United States, 177 Ct. Cl. 870 (1966)).

[26] See id. (citing Restatement (Second) of Contracts § 347(b)).

[27] Id.

[28] Id.

[29] Yacht West, Ltd. v. Christensen Shipyards, Ltd., 464 Fed. Appx. 626, 629 (9th Cir. 2011) (citing Golf Landscaping, Inc. v. Century Constr. Co., a Div. of Orvco, Inc., 39 696 P.2d 590 (Wash. Ct. App. 1984)).

[30] Wunderlich Contracting Co. v. United States, 173 Ct. Cl. 180, 198 (1965).

[31] Construction Schedule Delays, supra note 14, at § 18:2.

[32] See, e.g., Appeal of George A. Fuller Company, E.N.G.B.C.A. No. 1957, 1962 WL 225 (Corps Eng’rs B.C.A. 1962) (“The speed-up of the work was accomplished by adding workmen to the force and by increasing the hours of work per day and the days of work per week. When men work longer daily hours and weekends, much beyond the normal, their efficiency is impaired resulting in less production for a given number of man hours of work.”). See also Angelo Iafrate Constr. Co. v. Commw. of Pa., No. 3654, 2006 WL 2585021, at *23 (Pa. Bd. Claims June 13, 2006) (“Iafrate’s work productivity was adversely affected by Iafrate’s agreement to accelerate the completion of Phase II which caused the stacking of activities, working areas being over-crowded because multiple tasks were being performed out of sequence and because there was present extra workers and equipment, and the inability to move equipment, manpower and materials efficiently within the work zone.”); Tony Depaul & Son, No. 1452, 1993 WL 764322, at *18 (Pa. Bd. Cl. Oct. 28, 1993) (“Acceleration of work, including out of sequence work, start and stop operations, stacking of trades, simultaneous operations, additional manpower and equipment and additional work, causes a loss of efficiency and productivity in a contractor’s work efforts. Working in winter weather conditions, including rain, cold and freezing conditions, also causes a loss of efficiency and productivity in work efforts.”).

[33] See, e.g., Appeal of DANAC, Inc., A.S.B.C.A. No. 33394, 97-2 B.C.A. (CCH) ¶ 29184, 1997 WL 484579 (Armed Serv. B.C.A. 1997), on reconsideration, A.S.B.C.A. No. 33394, 98-1 B.C.A. (CCH) ¶ 29454, 1997 WL 763050 (Armed Serv. B.C.A. 1997), dismissed, 168 F.3d 1318 (Fed. Cir. 1998) (“We have long recognized that lost efficiency caused by a disruption of a contractor’s planned sequence of work may be compensable.”). See also Southern Comfort Builders, Inc. v. U.S., 67 Fed. Cl. 124, 145 (2005) (stating out of sequence work allegedly caused by waiting for RFI’s caused loss of productivity but was contractor’s responsibility for failure to prepare coordination drawings); Appeal of Parsons of California, A.S.B.C.A. No. 20867, 82-1 B.C.A. (CCH) ¶ 15659, 77418, 1982 WL 7041 (Armed Serv. B.C.A. 1982) (out of sequence of work in construction contract caused by drawing defects); Central Ceilings, Inc. v. Suffolk Const. Co., Inc., 2013 WL 8721044 (Mass. Super. Ct. 2013), aff’d 91 Mass. App. Ct. 231 (2017) (where prime required a sub “to constantly de-mobilize, re-mobilize, and alter the natural sequence of its work under the Subcontract” found loss of productivity). But see Electrical Contractors, Inc. v. Pike Co., Inc., No. 3:11–cv–01449, 2015 WL 3453348, at *20 (D. Conn. May 29, 2015) (agreeing that “just because work moves to a different area, a different time frame, doesn’t mean that it’s going to be less productive, [that] the contract was going to be automatically incurring loss of productivity. It means you’re doing it at a different time frame.”).

[34] See, e.g., Central Ceilings, Inc., 75 N.E.3d 40.

[35] See, e.g., Tony Depaul & Son, 1993 WL 764322 at *18 (“Acceleration of work, including out of sequence work, start and stop operations, stacking of trades, simultaneous operations, additional manpower and equipment and additional work, causes a loss of efficiency and productivity in a contractor’s work efforts. Working in winter weather conditions, including rain, cold and freezing conditions, also causes a loss of efficiency and productivity in work efforts.”).

[36] Construction Schedule Delays, supra note 14, at § 18:3.

[37] Bell BCI Co. v. U.S., 72 Fed. Cl. 164, 168 (2006).

[38] Sauer Inc. v. Danzig, 224 F.3d 1340, 1348 (Fed. Cir. 2000).

[39] Aetna Cas. & Surety Co. v. George Hyman Const. Co., 155 F.R.D. 113, 115 (1994) (citing various adjudications as to loss of productivity claims).

[40]  Id. (citing Southwest Marine, Inc., DOTBCA No. 1663, 94-3 B.C.A. (CCH) P27, 102 (1994)).

[41] Id. (citing Dawson Constr. Co., VABCA No. 3306-3310, 93-3 B.C.A. (CCH) 026, 177, aff’d 34 F.3d 1080  (Fed. Cir. 1994)).

[42] Luria Bros. & Co., Inc. v. U.S., 177 Ct. Cl. 676, 696 (1966) (emphasis added).

[43] See, e.g., U.S. ex rel. Salinas Constr., Inc. v. W. Sur. Co., No. C14-1963JLR, 2016 WL 3632487 (W.D. Wash. July 7, 2016) (vacating a jury verdict award because damages for inefficiency require expert testimony not lay testimony under Federal Rules of Evidence 701 and 702); Norment Sec. Group, Inc. v. Ohio Dept. of Rehabilitation and Correction, 2003-Ohio-6572, 2003 WL 22890088 (Ohio Ct. Cl. Dec. 2, 2003) (holding expert testimony not provided and inefficiency claim failed for lack of proof); Appeal of Dawson Const. Co., Inc., V.A.B.C.A. No. 3306, V.A.B.C.A. No. 3307, V.A.B.C.A. No. 3308, V.A.B.C.A. No. 3309, V.A.B.C.A. No. 3310, 93-3 B.C.A. (CCH) ¶ 26177, 1993 WL 243270 (Veterans Admin. B.C.A. 1993), aff’d, 34 F.3d 1080 (Fed. Cir. 1994) (ruling project manager’s testimony of inefficiency percentage insufficient to prove inefficiency); Havens Steel Co. v. Randolph Engineering Co., 613 F. Supp. 514, 540 (W.D. Mo. 1985), (finding that the court did not accept witness as a loss of productivity expert for lack of training or expertise); Appeal of Preston–Brady Co., Inc., V.A.B.C.A. No. 1892, V.A.B.C.A. No. 1991, V.A.B.C.A. No. 2555, 87-1 B.C.A. (CCH) ¶ 19649, at 99,520, 1987 WL 41248 (Veterans Admin. B.C.A. 1987), clarified on denial of reconsideration, V.A.B.C.A. No. 1892, V.A.B.C.A. No. 1991, V.A.B.C.A. No. 2555, 87-2 B.C.A. (CCH) ¶ 19925, 1987 WL 46592 (Veterans Admin. B.C.A. 1987) (“A general statement that disruption or impact occurred, absent any showing through use of updated CPM schedules, logs or credible and specific data or testimony, will not suffice to meet that burden.”).

Understanding Acceleration – The Basics

Although acceleration claims may arise in connection with project delays and many of the impacts are the same as those with delay claims, it is important for the steel fabricator to understand the basics of acceleration in order to preserve rights to costs associated with acceleration and to ensure that acceleration claims are preserved.

While the discussion below addresses the legal concepts involving acceleration, the importance of compliance with contractual acceleration and notice provisions cannot be ignored.  To be sure that claims for impacts due to acceleration are not waived, the steel fabricator must first comply with the contract.

Overview of Acceleration Claims

Acceleration typically refers to an effort to increase the pace of work to meet a project milestone, to overcome delay, to comply with an owner’s request, or some other justification for progressing the work faster.[1]  Acceleration is generally segregated into three categories:

  1. Voluntary acceleration
  2. Directed acceleration
  3. Constructive acceleration

Acceleration differs from delay. In the case of acceleration, a contractor “speeds up his work so that he is performing the job at a faster rate than prescribed in the original contract.”[2]  With delay, “there is a slowdown in work” and may be caused “by either party to the contract.”[3]  Acceleration is also different from disruption, though disruption is a normal consequence of acceleration.[4]  

A. Elements

For an acceleration effort to be compensable, the owner must, either directly or implicitly, order a contractor to speed up its efforts on the site in an attempt to complete the work in a period shorter than allowed by the contract.[5]

B. Directed Acceleration

Directed acceleration occurs when a contractor or owner exercises the “changes” or “change order” provisions of the contract to instruct, or direct, the performing party to complete all the work earlier than the original contract date.  Additionally, the parties may also mutually agree to the acceleration, outside of utilizing the changes provisions.[6] [7]

So long as the contractor is directed by unilateral change order or agrees via informal demand to complete the work ahead of schedule—and does so without relinquishing its rights—the contractor may recover its extra costs incurred in carrying out the acceleration directive.[8]  However, an owner’s “demand that ‘the contract be completed on time’ [does] not constitute an order to accelerate.”[9]

To recover from a directed acceleration, the contractor seeking the adjustment “bears the burden of proving liability, causation, and resultant injury.[10]

Since directed acceleration normally adds obligations through the change order process, “it is almost uniformly compensable.”[11]  Courts will award damages upon a finding, based on sufficient evidence, that a “subcontractor sustained additional cost on account of accelerated performance of [the] subcontract required by prime contractor.”[12]  Directed acceleration is “seldom litigated.”[13]  When it is litigated, it is usually because of a problem with the “direction to accelerate.”[14]

The best practice when there is a directive to accelerate is to agree on costs upfront and have the directive acceleration memorialized in a change order.  However, if not memorialized via a change order, it is imperative that the steel fabricator preserve any claim for directed acceleration by following the notice and claim procedures in the contract and ensuring that the directed acceleration claim is not waived by any lien waivers or progress payments.

C. Constructive Acceleration

Constructive acceleration occurs when an owner/contractor has failed to recognize delays to the project and adjust the contract time accordingly, while at the same time demanding completion of the work by the unextended contract completion date.[15]  An affected party must prove the following in order to be entitled to recovery of increased costs due to constructive acceleration: [16] [17] [18]

(1) the contractor experienced an excusable delay entitling it to a time extension;

(2) the contractor properly requested the extension;

(3) the project owner failed or refused to grant the requested extension;

(4) the project owner demanded that the project be completed by the original completion date despite the excusable delay; and

(5) the contractor actually accelerated the work in order to complete the project by the original completion date and incurred added costs as a result.

It is crucial that the steel fabricator request the time extension in order to be able to pursue a constructive acceleration claim.  If a time extension is not requested and denied, a constructive acceleration claim will fail.  As with directed acceleration claims, care should be taken to follow the notice and claim procedures of the contract, as well as preserving the claim in relation to any progress payment or lien waiver.

In addition, the contractor must show and prove its damages stemming from the constructive acceleration.  Often, courts require acceleration damages to be supported by written requests, consistent with contractual requirements, for extensions of time and/or price.[19]  Further, all support for any necessary extra equipment rentals or man-hours must be provided and substantiated with supporting documentation and time sheets.  Failure to do so will greatly reduce or even eliminate the ability to recover on a properly preserved constructive acceleration claim.

D. Voluntary Acceleration

Voluntary acceleration arises when a party performs ahead of schedule for its own purposes or motives, not because of the directives of another party.[20] [21]  In this situation, the accelerating contractor generally does not have a claim for acceleration damages—because the additional costs were incurred to meet the contractor’s own goals and objectives, making it inequitable to hold another party liable for such costs.[22] [23]

Voluntary acceleration is often used as a project tool “and can be used to effectively manage the work.”[24] [25]  “Voluntary acceleration to advance personal interests or to overcome ‘inexcusable’ delay results in acceleration costs being non-compensable.”[26]  Indeed, “[a] contractor may accelerate on his own initiative to assure completion within the contract schedule or for other purposes.”[27]  However, the contractor cannot recover for acceleration unless it was ordered to accelerate.[28]

To prove voluntary acceleration, one must establish that a contractor accelerated on its own prerogative.[29]  Additionally, if a contractor falls behind “in meeting its own accelerated schedule and devotes additional resources to recover the lost time, the contractor typically remains responsible for the cost of those resources.”[30]

Courts generally recognize that a contractor is not entitled to recover damages arising from voluntary acceleration.[31]

E. Proving Acceleration Damages

As with delay claims, proving acceleration damages requires substantiation of labor and equipment costs.  Acceleration claims may involve a component of lost productivity, which will require expert testimony to support the damages using a reliable method such as a measured mile.  For further discussion regarding lost productivity claims and methods of proof, please refer to the following article:  What You Need to Know About Delay Claims and How to Prove or Defend Against Them.

Conclusion

Even though projects may involve both delay and acceleration, acceleration is a different concept requiring consideration be given to the type of acceleration at issue.  Close attention should be paid to contractual acceleration and change order requirements, as well as proper documentation of acceleration impacts.  If the steel fabricator is directed to accelerate, the steel fabricator should be entitled to compensation for the acceleration, and it is advisable to reach an agreement on the amount of compensation via the change order process to avoid a dispute later.  Where the steel fabricator is constructively accelerated, it is imperative to request a time extension as failure to do so will likely result in waiver of a claim for acceleration.  Finally, remember that voluntary acceleration is not considered compensable.  Acceleration claims can be waived if the notice and claim procedures of the contract are not followed, as well as if they are not reserved in connection with progress payments and lien waivers.

Finally, some practical tips to consider when accelerated are: (1) be mindful of deadlines set forth in the contract for requesting change orders associated with acceleration impacts; (2) request a time extension when constructively accelerated; (3) if directed to accelerate, reach an agreement up front that you have been directed to accelerate and that you will be paid for all labor, equipment, and materials; (4) track all labor, material, and equipment expenses with a separate job cost code; (5) keep supporting backup for all expenses organized by expense; and (6) retain a delay expert to consult regarding schedule issues.


[1] W. Stephen Dale & Robert M. D’Onofrio, Construction Schedule Delays 150 (Thomson Reuters, 2018) [hereinafter Construction Schedule Delays].

[2] Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 15:90 (Thomson Reuters, 2018) [hereinafter Bruner & O’Connor].

[3] Id.

[4] See id.; see generally Natkin & Co. v. George A. Fuller Co., 347 F.Supp. 17 (W.D. Mo. 1972).

[5] See generally John Cibinic, Jr., Ralph C. Nash, Jr. & James F. Nagle, Administration of Government Contracts 445–58 (Wolters Kluwer, 4th ed. 2006) [hereinafter Administration of Government Contracts); see also Norair Engineering Corp. v. U.S., 229 Ct. Cl. 160 (1981); Fru-Con Corp. v. State, 50 Ill. Ct. Cl. 50, 93 (1996) (“Acceleration occurs when a contractor is forced to perform the work in a shorter period of time than is called for in the contract. Acceleration can take different forms. A constructive acceleration occurs when the government denies or unreasonably delays in granting the contractor a time extension which is justified, and at the same time holds the contractor to the original completion date.”); Contracting & Material Co. v. City of Chicago, 314 N.E.2d 598, 604 (Ill. App. Ct. 1974), rev’d, 349 N.E.2d 389 (Ill. 1976) (stating that a contractor must prove that it has encountered an excusable delay for which it is entitled to a time extension; it specifically requested an extension of time; the government failed or refused to grant the extension; the government caused the contractor to complete the work within the un-extended contract period, and it actually accelerated the performance.).

[6] S. Leo Harmonay, Inc. v. Binks Mfg. Co., 597 F. Supp. 1014, 1021 (S.D.N.Y. 1984) (“[The subcontractor] was asked to increase its crew sizes, put on a second shift, and work both crews overtime. In addition, the crews were required to sometimes work on weekends and holidays throughout the acceleration period.”); see also Northway Decking & Sheet Metal Corp. v. Inland-Ryerson Constr. Products Co., 426 F. Supp. 417 (D.R.I. 1977); General Insurance Co. v. Commerce Hyatt House, 85 Cal. Rptr. 317 (1970).

[7] See Bruner & O’Connor, supra note 2, at § 15:92; Conti Corp. v. Ohio Dept. of Admin. Servs., No. 88-14568, 1992 WL 12009509, at *13 (Ohio Ct. Cl. 1992) (“Directed acceleration occurs whenever the owner directs the contractor to finish the project in advance of the time for completion.”).

[8] Bruner & O’Connor, supra note 2, at § 15:92; see Bat Masonry Co., Inc. v. Pike-Paschen Joint Venture III, 842 F. Supp. 174, 182 (D. Md. 1993) (finding that a contractor’s informal letter directing its subcontractor “to increase your manpower and equipment to facilitate working in [certain] areas” constituted the contractor’s “request of [its subcontractor] to accelerate the work and an agreement to negotiate in good faith the payment of any additional costs incurred by [the subcontractor] as a result of that acceleration”).

[9] Construction Schedule Delays, supra note 1, at § 3:14.

[10] See, e.g., CEMS, Inc. v. U.S., 59 Fed. Cl. 168, 189 (2003); Ralph L. Jones Co., Inc. v. U.S., 33 Fed. Cl. 327, 331 (1995); Servidone Constr. Corp. v. U.S., 931 F.2d 860, 861 (1991) (“To receive an equitable adjustment from the Government, a contractor must show three necessary elements—liability, causation, and resultant injury.”); Wunderlich Contracting Co. v. U. S., 173 Ct. Cl. 180 (1965) (“leniency as to the actual mechanics of computation does not relieve the contractor of his essential burden of establishing the fundamental facts of liability, causation, and resultant injury.”).

[11] Faegre Drinker, Fast and (Sometimes) Furious: Acceleration and Compensability in Construction Contracts, (Sept. 07, 2017), https://www.faegredrinker.com/en/insights/publications/2017/9/fast-and-sometimes-furious-acceleration-and-compensability-in-construction-contracts.

[12] See Baker & Ford Co. v. U.S. for Use & Benefit of Urban Plumbing & Heating Co., 363 F.2d 605 (9th Cir. 1966).

[13] See Barry B. Bramble & Michael T. Callahan, Construction Delay Claims, § 6.02 (Wolters Kluwer 5th 2013).

[14] Id.; see also K.P. Meiring Constr. v. La Quinta Inns, No. 04-02-00425-CV, 2003 Tex. App. LEXIS 1048 (Tex. App. Feb. 5, 2003).

[15] See Bruner & O’Connor, supra note 2, at § 15:94.

[16] Murdock & Sons Constr., Inc. v. Goheen Gen. Constr., Inc., 461 F.3d 837, 840 (7th Cir. 2006)

[17] See also Fraser Constr. Co. v. United States, 384 F.3d 1354, 1360–61 (Fed. Cir. 2004). Cf. Norair Engineering Corp. v. U.S., 229 Ct. Cl. 160 (1981) (three elements); Appeal of McNutt Const. Co., Inc., E.N.G.B.C.A. No. 4724, 85-3 B.C.A. (CCH) ¶ 18397, 1985 WL 17278 (Corps Eng’rs B.C.A. 1985). See generally Administration of Government Contracts, supra note 5, at 445–56 (2006); see also Sherman R. Smoot Co. v. Ohio Dept. of Adm. Serv., 736 N.E.2d 69, 78 (Ohio Ct. App. 2000) (“Constructive acceleration occurs when a contractor has a justified claim for an extension of time, but is required to incur additional expenses because the project owner refuses to grant the extension and requires the contractor to complete the project by the original completion date.”).

[18] Bruner & O’Connor, supra note 2, at § 15:94.

[19] See Azure v. U.S., 129 F.3d 136 (Fed. Cir. 2016).

[20] See Bruner & O’Connor, supra note 2, at § 15:89

[21] See also Siefford v. Hous. Auth. of City of Humboldt, 223 N.W.2d 816 (Neb. 1974); Mobil Chem. Co. v. Blount Bros. Corp., 809 F.2d 1175 (5th Cir. 1987).

[22] See, e.g., Robert F. Cushman et. al., Proving and Pricing Construction Claims § 4.03 (3d ed., 2020) [hereinafter Proving and Pricing Construction Claims].

[23] See also Iconco v. U.S., 224 Ct. Cl. 692 (1980); O’Hair Constr. Co., AGBCA No. 82-115-1, 89-1 B.C.A. (CCH) ¶ 21,384 (1989).

[24] Construction Schedule Delays, supra note 1, at §3:8

[25] Bruner & O’Connor, supra note 2, at §15:101.

[26] Id.

[27] O’Hair & O’Hair Construction Co., AGBCA 82-115-1 (1988).

[28] Id.

[29] Dep’t of Transp. v. Anjo Constr. Co., 666 A.2d 753, 758 (Pa. 1995).

[30] Proving and Pricing Construction Claims, supra note 22; O’Hair Constr. Co., ¶ 21,384 (1989).

[31] See Envirotech Corp. v. Tennessee Valley Auth., 715 F. Supp. 190, 192 (W.D. Ky. 1988) (holding contractor who worked at maximum pace to earn a bonus was not entitled to damages because the Owner did not order the contractor to accelerate); Nello L. Teer Co. v. Washington Metro. Area Transit Auth., 695 F. Supp. 583, 592 (D. D.C. 1988) (ruling acceleration damages were not compensable where record did not support a finding the Owner ordered the contractor to accelerate); Allen L. Bender, Inc., PSBCA No. 2324 (1991) (finding no recovery where there was no directive from the government to accelerate); O’Hair & O’Hair Construction Co., AGBCA 82-115-1 (1988) (“We find the subcontractor’s decision to change his method of performance, so as to complete the project in one season despite acknowledged overruns, to be a business judgment.”); Iconco v. U.S., 224 Ct. Cl. 692 (1980) (holding contractor not entitled to recovery where there was no denial of a request for time extension); Solar Foam Insulation, ASBCA No. 46278 (1993) (holding no recovery where acceleration was not directed); McNutt Construction Co., Inc., ENGBCA 4724 (1985) (finding contractor with motives to complete the work aside from directives from the owner was not entitled to compensation); Mobil Chemical Co. v. Blount Bros. Corp., 809 F.2d 1175, 1179 (5th Cir. 1987) (ruling contractor stood to gain by accelerated completion of the project and holding contractor “was the perpetrator and not the victim of the acceleration.”).

Illinois Appellate Court Rejects Building Manager and Elevator Company’s Arguments That They Had No Duty to Upgrade Their Elevators With the Latest Safety Equipment

In Greenhill v. Reit Mgm’t & Research, LLC (2019 IL App (1st) 181164), the First District reversed the trial court’s entry of summary judgment in favor of two defendants in a construction accident lawsuit, finding that the defendants and the trial court improperly defined the scope of their duty of care too narrowly and conflated the concepts of duty and breach.

The lawsuit arose out of an incident involving a freight elevator at a construction site. The plaintiff and his coworker were riding the freight elevator with an unrelated worker from a separate contractor, when the plaintiff and his coworker mistakenly got off on the wrong floor. The plaintiff and his coworker tried to get back on the elevator, but the unrelated worker did not notice and pressed the button to close the elevator. The gate on the elevator (which moved up and down from the ceiling) came down as the plaintiff was entering the doorway and hit him on the head.

The Plaintiff sued the manager of the building, as well as the elevator maintenance company, alleging that they negligently failed to install adequate safety mechanisms to prevent the elevator gate from closing while someone was standing in the doorway. The plaintiff relied on the witnesses’ conflicting testimony regarding whether the elevator’s audible alarm for a closing gate was functioning at the time of the occurrence. The plaintiff also emphasized two prior incidents involving freight elevators at the same project, after which the elevator maintenance company installed upgraded sensors in the elevator doorways. The elevator company had requested, and the building manager had approved, installing the upgraded sensor in the subject elevator, but the elevator company had not yet installed it at the time of the occurrence. The elevator company introduced evidence that the subject elevator was equipped with an earlier version of the sensor, but the elevator company acknowledged that the upgraded version was more effective.

The building manager and the elevator company argued that they did not have any duty to install the latest upgrades in their elevators, that the hazard of the closing gate was open and obvious, and that the worker who pressed the close button was the sole proximate cause of the occurrence. The trial court agreed with the defendants on the issue of duty and granted summary judgment in their favor.

Regarding duty of care, the appellate court found that the trial court and the defendants improperly framed the question as whether the defendants had a duty to install the latest upgrades. The appellate court explained that the defendants improperly conflated duty and breach. Rather, the court explained that the defendants had a duty to exercise reasonable care as a matter of law, and whether the defendants breached that duty in particular by failing to install the upgraded sensor was a question of fact for the jury.

Regarding the open and obvious defense, the appellate court found that there were questions of fact regarding whether the hazard was obvious. Notably, the court explained that the hazard was not simply the closing gate, but the fact that the Plaintiff did not know that the unrelated worker inside the elevator had pressed the close button.

Regarding proximate cause, court rejected the defendants’ argument that the man who pressed the close button was the sole proximate cause of the occurrence. The court found there were questions of fact regarding whether the audible alarm was functioning and whether a functioning alarm or the upgraded sensor could have prevented the occurrence.

Greenhill v. Reit Mgm’t & Research, LLC, 2019 IL App (1st) 181164

Biden’s Buy American Policy & What it Means for Contractors

On January 25, 2021, President Biden signed an Executive Order (EO) “Ensuring the Future is Made in All America by All of America’s Workers”, which seeks to bolster U.S. manufacturing through the federal procurement process. Note that, just six day earlier, on January 18, the Federal Acquisition Regulation (FAR) Counsel issued a final rule implementing former President Trump’s July 2019 EO, titled “Maximizing Use of American-Made Goods, Products, and Materials” (EO No. 13881) on the then-current Buy American standards. For context, Trump’s proposed revisions – adopted and implemented by the FAR Council earlier this year – imposed three (3) significant changes worth noting: (1) increasing the percentage of domestic content (other than iron or steel) from 50% to 55% that an end product must contain in order to qualify as a “domestic end product”; (2) implementing an even higher increase in the domestic content requirement for iron and steel products to at least 95% U.S. “predominately” iron or steel product; and (3) increasing the price evaluation preference for domestic offerors from 6% to 20% (for other than small business) and 30% (for small businesses). The FAR’s rule became effective January 21, 2021, and applies to solicitations issued on or after February 22, 2021, and resulting contracts let. Biden’s EO rescinds Trump’s EO No. 13881 “to the extent inconsistent with [Biden’s] EO.” However, when dissected, it is clear Biden’s Buy American plan does little to modify thresholds inconsistent with the Trump Administration; rather, the White House’s latest EO implements changes in the form of BA administration. Nonetheless, Biden’s EO does expressly note that it supersedes and replaces Trump’s EO on the same issues.

Notably, Biden’s EO creates a Made in America Office (MAO) under the Office of Management and Budget (OMB)1 for the purpose of overseeing domestic preference laws and waivers by federal agencies. The EO, further, directs the FAR Council to consider replacing the component test requirements currently found at FAR Part 25 to ensure that domestic end products contact the requisite domestic content required. Biden’s EO goes on to request that the FAR Council (1) “increase the numerical threshold for domestic content requirements for end products and construction materials” and “increase the price preference for domestic end products and construction materials.” The Biden Administration’s EO, however, does not specify numbers for domestic content requirements or price preferences (i.e. greater than 55% domestic content or more than a 30% price preference for small businesses). It is unclear if – or by how much – these percentages will increase from those adopted by the FAR Council’s latest rule per the Trump administration’s July 2019 EO on these very issues. Biden’s EO also increases transparency in the exemption and waiver process, requiring waivers and their respective justification be available for public view via MAO’s website.

For now, it is clear our new Administration has done little to substantively change Buy American laws, as the EO focuses on waiver oversight, enforcement, and transparency. Government contractors and suppliers should closely monitor formally-approved changes to ensure compliance As the FAR Council may opt to revisit its recently adopted regulations and/or “consider” replacing the component test itself, affected contractors should keep abreast of any component test related revisions.
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1 In comparison, the Trump EO “directed each agency to go back and look at their own processes and strengthen them where necessary.”

Will Subcontractor Default Insurance Still Have Value in the Recovering Economy?

The COVID-19 pandemic has burdened subcontractors with workforce shortages, supply chain issues, and financial difficulties. Therefore, as states lift their stay-at-home orders issued to limit the spread of COVID-19 and construction projects resume, subcontractors’ ability to complete demanding, time-sensitive projects might be impacted. Subcontractor default is already a common and costly problem for general contractors. When subcontractors fail to complete their contractual obligations, a general contractor’s profitability and reputation are greatly impacted. Effectively managing the risk of subcontractor default will be increasingly important for general contractors in the post-pandemic economy. Buy a new car can be a very difficult decision, for that reason before buy a car is very important that you do a good research in articles like the 7 Things About New Electric Vw Transporter T6.1 Your Boss Wants to Know.

Subcontractor Default Insurance (“SDI”) is a non-traditional insurance product which can minimize a general contractor’s damages resulting from a subcontractor’s default. According to the boomlift specialist It is a two-party indemnity agreement between a general contractor and insurer. It was created as an alternative to surety bonds, with the idea that the general contractor controls the default process and remedy to help keep projects on time and within budget. Under a SDI policy, a general contractor enrolls prequalified subcontractors for either a specific project or policy term. Then, the general contractor is indemnified by the insurance company for any covered costs incurred if one of the subcontractors defaults. Typically, SDI claims stem from labor, work delay and quality issues, as well as financial-related defaults, which are not covered under general liability insurance policies.

In addition to direct costs, SDI coverage usually includes indirect expenses such as liquidated damages, acceleration of other subcontracts, increased overhead and the like. The insurer shares the risk with the general contractor through a deductible and co-pay; the general contractor absorbs some of the costs associated with a subcontractor’s default, usually up the deductible amount. SDI coverage extends to the limits of the individual policy rather than being limited to the value of the subcontract.

In order to lessen their risk, SDI carriers require general contractors to prequalify subcontractors before they can be enrolled on the policy. General contractors are in charge of this process. In order to evaluate a subcontractor both operationally and financially, subcontractors must submit the following types of information: financial statements, proof of available lines of credit, safety record, and history of claims and litigation. For subcontractors, the prequalification process is not different than that for surety bonds, except that it is executed by the general contractor instead of a professional surety underwriter.

After the COVID-19 pandemic, insurance carriers will necessarily adjust their outlook on subcontractors due to the increased risk of loss. Therefore, it will likely be more difficult for general contractors to find subcontractors able to prequalify for SDI policies and, in any event, the process will become more tedious. In addition to the aforementioned information, general contractors will probably be interested in subcontractors’ business continuity plans and specific plans to mitigate impacts like loss of employees and/or project shutdowns.

General contractors must be large and sophisticated enough to have the resources necessary to properly pre-qualify subcontractors, including assessing the financial risks of accepting subcontractors, and monitor their schedules and performance for the duration of the project. While the pre-qualification process is necessary, it is insufficient to thoroughly manage the risk. Even a subcontractor who is prequalified at the outset of a project must be managed throughout the entire course of work. A general contractor’s oversight of subcontractor performance will be even more critical in the post COVID-19 economy as subcontractors are more likely to be operationally and financially stretched thin.

In order to even qualify for SDI insurance, a general contractor typically needs minimum annual subcontractor volume in the $50-$100 million range. In fact, for SDI to be cost-effective, carriers say that annual subcontracted values must exceed $75 million. This is because SDI is expensive, usually ranging from 0.4 to 0.85 percent of total subcontract values.

Given the increased risk of subcontractor default, SDI policies will likely be even more expensive as the economy recovers from the COVID-19 pandemic. Deductibles, which are already high, are likely to increase. Currently, it is not unusual for a deductible to be in the $500,000 range. In addition to that, SDI policies have a co-pay which is paid up the retention aggregate—often three to five times the deductible. That said, SDI will still have value and provide cost savings under the right circumstances. For very large jobs, it would be worth taking on part of the financial risk of default for general contractors to accept SDI’s high deductibles because it would cost much less (now typically 50% less) than subcontractors bonding and passing along costs within their bid. Another consideration is whether the costs can be absorbed by the project. General contractors can also strategically utilize SDI to target high-risk subcontractors.

Cost will not be the only determinative factor in evaluating SDI’s value after the pandemic. It is possible insurers will write more exclusions into policies to manage their own risk associated with impacts associated with mandated shutdowns similar to what the United States recently experienced. Accordingly, subcontractor default stemming from such a shutdown (including impacts like workforce shortages and supply chain backlogs) would unlikely be covered. SDI policies also generally do not cover defaults, which result from the following: misrepresentation, fraud, defaults occurring prior to the policy period, material breach of warranty by the contractor, contracts acquired from other entities, war and losses arising from providing professional services.

To determine whether or not SDI is a worthy investment, a general contractor must separately evaluate each project, and carefully weigh the cost, potential savings and risk involved.

For more information on the efficacy of subcontractor default insurance in a recovering economy or other construction law topics, please contact Nicole Lentini and Becky Juhl.