COVID-19: Where is Construction an “Essential Business”?

With states and municipalities taking additional measures to limit the spread of COVID-19, including “shelter in place” and “stay-at-home” orders, which require non-essential businesses to close physical locations and limit operations to telecommuting the question for construction is, Are you an “essential business”? The answer will differ based on location and may change as states and cities continue to work in this fluid situation. It is important to verify before you proceed.

Essential Business

Some guidelines are available to assist businesses making this determination. First, the Cybersecurity and Infrastructure Security Agency (CISA) released a guidance document to assist state and local governments as well as businesses to determine which sectors’ workers should be considered essential, critical infrastructure workers. CISA has identified 16 sectors:

  • Healthcare / Public Health
  • Transportation and Logistics
  • Information Technology
  • Water and Wastewater
  • Food and Agriculture
  • Nuclear Reactor, Materials & Waste
  • Energy
  • Government Facilities
  • Defense Industrial Base
  • Emergency Services (Law Enforcement, Public Safety, First Responders)
  • Financial Services
  • Communications
  • Critical Manufacturing
  • Dams
  • Chemical
  • Commercial Facilities

The CISA Guide is a recommendation and ultimately is optional for states and location governments to use when adopting their own stay-at-home or workforce reduction orders. It is notable that, currently, there are six states that are following CISA guidance on the “essential business” definitions, nine CISA-modified, and eight with their own state-issued guides; the remaining states have not (yet) issued a stay-at-home order.

One of the most comprehensive assessments of the application of the CISA guidelines for an “essential” business has been compiled by MultiState Associates in its COVID-19 Policy Tracker. MultiState Associates’ Summary is a quick, ready-reference guide that also drills down in many instances to the local level.

However, there is still confusion as to whether and what types of construction projects fall under the “Essential Business” categorization.

A few states have made it very clear, but each local county and city may have their own regulations and restrictions. For example, in California, Governor Newsom’s Executive Order has clarified that construction (including residential construction) is an essential business, but the State has confirmed that the local governments may impose more restrictive measures. Each county and local jurisdiction is handling construction in its own way and therefore it is imperative to check before you proceed with your projects. On the other hand, New York has been more specific and limited the approved construction to include: skilled trades such as electricians, plumbers; and other related construction firms and professionals for essential infrastructure or for-emergency repair and safety purposes.

Gordon & Rees’ COVID-19 Task Force has been closely following each of the states’ and many key local jurisdictions’ guidance and stands ready to assist clients with compliance with the orders and determining where and what type of construction projects can continue.

Visit our COVID-19 Hub for ongoing updates.

COVID-19 Resources for the Construction Industry

The Gordon & Rees Construction team has been closely watching all of the developments with COVID-19 and the impacts on our construction clients. We have compiled various resources that may be useful for you and will continue to update our COVID-19 Hub with information as it is released.

General Resources:

California Resources:

Please contact our Construction COVID-19 Task Force for assistance in regard to interpreting your force majeure clauses, ensuring that you are getting out the proper Notice letters of potential delays, and in negotiating your new contracts to ensure that you are protected.

Force Majeure and COVID-19 in Construction Contracts – What You Need to Know

“Force Majeure” – While most construction contracts contain these provisions, they are often not understood  in relation to the implications they may have on construction projects. With the onset of the COVID-19 pandemic, we are all taking a closer look at many portions of our contracts.  The following is a brief primer on how to understand your construction contract and its potential implications on your business in this season of change.

What is a Force Majeure?

Construction contracts usually take into consideration that the parties want to agree at the outset on who bears the risk of unforeseen incidents that may affect the project’s progression.  These issues are generally handled in a “force majeure” clause.  Force majeure, according to Mariam Webster’s Dictionary is a “superior or irresistible force; or an event or effect that cannot be reasonably anticipated or controlled.”  To be deemed a force majeure, generally the circumstances must be outside of a party’s control which makes performance impossible, inadvisable, commercially impractical, or illegal. In addition to being unforeseeable, the circumstances must have external causation, and be unavoidable.  However, the key to understanding if COVID-19 will be deemed a condition that will excuse a contractor’s performance is the specific language in the provision.

Generally force majeure events are unavoidable events such as “acts of God,” most notably weather conditions including hurricanes, tornadoes, floods, earthquakes, landslides, and wildfires, as well as certain man-made events like riots, wars, terrorism, explosions, labor strikes, and scarcity of energy supplies.  However, there is not much case law or specifics on conditions similar to COVID-19.

What are the Key Aspects of a Force Majeure Clause?

While force majeure is a recognized concept in most legal systems, it usually does not have a precise legal definition. As a result, parties must generally look to the specific language used in the contract. Most contracts include a definition of force majeure and often include a non-exhaustive list of both illustrative force majeure events and events that do not constitute force majeure.  The contract interpretation will often turn on how the event of force majeure is characterized.

First, to be classified as a force majeure event, the event must be beyond the control of the contracting parties, it cannot be anticipated, foreseeable, or expected, and the event must be unavoidable.  The circumstances must also be found to be externally caused, unforeseeable, and unavoidable.  The specifics that you are looking to call the force majeure are important — what is the claimed impediment to performance?  Is the circumstance the outbreak of the disease, an order by the government trying to contain the spread of the disease, or lack of materials or manpower.  Once the event is determined and the specific force majeure is clarified, there must be found to be a sufficient causal link between the alleged force majeure and the claiming party’s non-performance. Finally, even if the declaration of force majeure is validly given, the amount of time that performance should be excused and the time at which the force majeure has ceased to exist will need to be addressed.

Can I trigger my Force Majeure Clause due to impacts from COVID-19?

The most secure means of ensuring that you can trigger your force majeure clause to excuse performance, or extend time for performance, is if your provision specifically calls out a pandemic or other similar serious disease, epidemic, or public health issue. However, most contract provisions do not contain that level of specificity.  The next step would be to see if the terms in your contract include sufficient examples that can be found to be analogous to a public health crisis such as we are currently experiencing. In many instances, the risk will rest on the contractor and not the owner for increased costs for material shortages and/or price increases unless another provision (such as price escalation clauses) apply.

The best course of action is to ensure that you negotiate as specific and clear language as possible to define the scope and effect of a force majeure clause to protect against unexpected liabilities. The following elements should be addressed in a force majeure clause:

  • What events are considered force majeure?
  • Who is responsible for suspending performance?
  • Who is allowed to invoke the clause?
  • Which contractual obligations are covered by the clause?
  • How should the parties determine whether the event creates an inability to perform?
  • What happens if the force majeure event continues for more than a specified period of time?

If you already have force majeure clauses in your standard contracts, we recommend a review of those provisions to ensure the terms provide clear, comprehensive, and adequate protections for the company and consider whether terms such as “widespread epidemic,” “pandemic,” and/or “public health emergency” should be added.  We have seen courts loathe to extend the interpretation of force majeure clauses beyond what is specifically listed in the contract.  While the impact of the COVID-19 pandemic is likely to be found to be unforeseen and externally caused, the key issue will likely be whether the impact was unavoidable.

You also should review the terms of your existing force majeure clauses in preparation for potentially needing to invoke them for COVID-19-related issues. In the event you are unable to assert a force majeure clause when faced with such events, the doctrine of impossibility and impracticability may be your next best bets. The common law doctrine of impossibility “allows a party to suspend or avoid performance when a supervening event beyond its control makes performance of the contract no longer capable of being performed.” (17A Am. Jur. 2d Contracts § 655 (2010).)  For example, where unforeseeable severe material shortages or an embargo render the materials necessary to complete a construction contract completely unavailable, impossibility is probably a viable defense. However, the more likely effect of an embargo or a material shortage is that it will significantly increase the cost of completing a contract, but not render it impossible. In such a scenario, a party’s best defense may be the doctrine of commercial impracticability. However, the terms of the contract must be carefully consulted to determine whether any waiver or assumption of these risks were included.

Many courts have moved beyond the requirement of “absolute impossibility” and recognize the doctrine of commercial impracticability, which allows a party to be excused from performance where, although performance of the party’s contractual obligations is technically possible, changed circumstances have rendered performance commercially unreasonable.  The doctrine of commercial impracticability is codified in the Uniform Commercial Code § 2-615 “Excuse by Failure of Presupposed Conditions” (however, the U.C.C. only applies to commercial goods). When deciding U.C.C. cases involving commercial impracticability, in addition to U.C.C. § 2-615, courts often also expressly discuss the Restatement of Contracts (Second) § 261, which sets forth the common law application of the doctrine of commercial impracticability.  Thus, the holdings of these U.C.C. cases should be generally applicable to non-U.C.C. construction contracts involving the provision of services.  (15 J.L. & Com. 213, 214-15 (1995).)

Generally, in order to prevail on a defense of commercial impracticability, a party must show the following: “(i) a supervening event, either an ‘act of God’ or an act of a third party, made performance impracticable, (ii) the non-occurrence of the event was a basic assumption upon which the contract was based; (iii) the occurrence of the event was not the party’s fault; and (iv) the party did not assume the risk of the event’s occurrence.”  (L.W. Matteson, Inc. v. U.S., 61 Fed. Cl. 296, 320 (2004).)   Whether non-occurrence of a particular event “was a basic assumption” generally depends upon the foreseeability of the event. (15 J.L. & Com. 213, 214-15 (1995).)   “If a disruptive event was foreseeable and the promisor failed to protect himself by means of an express provision in the contract (a force majeure clause), then the promisor will be deemed to have assumed the risk of the disruptive event.” (Id.)

However, “a severe shortage of raw materials or of supplies due to a contingency such as a war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost” or prevents performance altogether is likely sufficient for an impracticability defense under the U.C.C. (See U.C.C. § 2-615.)  The Restatement’s comments echo those of the U.C.C. and provide that such circumstances would also probably be sufficient for an impracticability defense in a contract for services.  (See RESTATEMENT (SECOND) OF CONTRACTS § 261 (1981).)   Accordingly, it appears that the doctrine of impracticability can relieve a party from its contractual duties when faced with price increases caused by severe material shortages or an embargo, or even arguably when faced with a health pandemic affecting global commerce.

In conclusion, there may be steps you can take now to protect yourself and to negotiate an agreement with your contracting partners as to how to weather this storm as well as to ensure that you comply with any notice requirements or mitigation efforts required. At a minimum, consult with an experienced construction lawyer to evaluate your risk and determine what risk management and mitigation steps you should be taking while this situation unfolds.

Visit our COVID-19 Hub for ongoing updates.

Reporting Requirements for Architects under California Business and Professions Code Section 5588

Below is an overview of the changes to California Business and Professions Code Section 5588 and its effect on the reporting requirements, for architects, in the construction industry.

Section 5588 Prior to 2005 Legislative Changes

Section 5588 of the California Business and Professions Code sets forth the reporting requirements for many business professionals including architects. Since 1979, Section 5588 has required architects and their insurers to report to the California Architect Board (the Board) “any settlement or arbitration award in excess of five thousand dollars ($ 5,000) of a claim or action for damages caused by the license holder’s fraud, deceit, negligence, incompetency, or recklessness in practice.”1

The language of the code section left open for interpretation the question of what types of settlement claims must be reported to the Board. Thus, in 2004, the Attorney General of the State of California published an opinion stating that a reportable settlement includes “any agreement resolving all or part of a demand for money which is based upon an insured architect’s alleged wrongful conduct.”2 He then went on to conclude that the only qualifications placed on the term “claim” for purposes of Section 5588 is that “(1) the demand be premised on the license holder’s alleged ‘fraud, deceit, negligence, incompetency, or recklessness in practice,’ and (2) the value of the claim, as measured by the settlement amount or arbitration award, exceeds $5,000.”3

The Board’s Recommendation to Amend Section 5588

In response to the Attorney General’s opinion, the Board directed the Regulatory and Enforcement Committee (REC) to determine the standard for reportable events. On December 7, 2004 the REC met and the consensus was that the Board should use “formal action (i.e., actions associated with any civil action judgment, settlement, arbitration award, or administrative action) as the standard for reportable events”.4

In order to set forth the standard for reportable events, the REC recommended, and the Board approved, amending section 5588 to require that “only settlements precipitated by legal action or arbitration awards that exceed $5,000 and allege wrongful conduct (fraud, deceit, negligence, incompetence, or recklessness) with respect to the architectural services being provided must be reported to the Board.”5

Thus, in 2005 Section 5588 was amended to states that “A licensee shall report to the board in writing within 30 days of the date the licensee has knowledge of any civil action judgment, settlement, arbitration award, or administrative action resulting in a judgment, settlement, or arbitration award against the licensee in any action alleging fraud, deceit, negligence, incompetence, or recklessness by the licensee in the practice of architecture if the amount or value of the judgment, settlement, or arbitration award is five thousand dollars ($5,000) or greater.”6

The Impact the Changes to Section 5588 has on Reporting Requirements

An enforcement analyst of the Board stated that “it is the policy of the California Architects Board to only require reporting of formal settlements. That is, settlements reached through court action, arbitration or administrative action. Settlements reached through informal compromise or through voluntary mediation are not reportable.” Furthermore, he concluded that this interpretation “follows from the intent expressed by the Board while considering its response to the 2004 AG opinion.”

Thus, whether a settlement is either formal or informal is one of the necessary factors to consider when determining whether the Board will require a settlement to be reported. Therefore, although the amendment to Section 5588 occurred in 2005, the distinction between reporting requirements for informal and formal settlements continues to remain relevant within the construction industry.

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1 REVIEW AND APPROVE BPC SECTION 5588/5589 TASK FORCE RECOMMENDATION REGARDING MODIFICATIONS TO BPC SECTIONS 5588 AND 5589, REPORT OF SETTLEMENT OR ARBITRATION AWARD
2 87 Ops. Cal. Atty. Gen. 121
3 Id.
4 REVIEW AND APPROVE BPC SECTION 5588/5589 TASK FORCE RECOMMENDATION REGARDING MODIFICATIONS TO BPC SECTIONS 5588 AND 5589, REPORT OF SETTLEMENT OR ARBITRATION AWARD
5 REVIEW AND APPROVE BPC SECTION 5588/5589 TASK FORCE RECOMMENDATION REGARDING MODIFICATIONS TO BPC SECTIONS 5588 AND 5589, REPORT OF SETTLEMENT OR ARBITRATION AWARD
6 Cal. Bus. & Prof. Code § 5588

Standard of Care

One of the key concepts at the heart of Board complaints and civil claims against a design professional is whether or not that design professional complied with the applicable standard of care. In order to prevail on such a claim, the claimant must establish (typically with the aid of expert testimony) that the design professional deviated from the standard of care. On the other side of the coin, to defend a design professional against a professional malpractice claim, defense counsel attempts to establish that – contrary to the claimant’s allegations – the design professional, in fact, complied with the standard of care. Obviously, it becomes very important in such a claim situation to determine what the standard of care is that applies to the conduct of the defendant design professional. Often, this is easier said than done. There is no dictionary definition or handy guidebook that identifies the precise standard of care that applies in any given situation. The “standard of care” is a concept and, as such, is flexible and open to interpretation. Traditionally, the standard of care is expressed as being that level of service or competence generally employed by average or prudent practitioners under the same or similar circumstances at the same time and in the same locale. In other words, to meet the standard of care a design professional must generally follow the pack; he or she need not be perfect, exemplary, outstanding, or even superior – it is sufficient merely for the designer to do that which a reasonably prudent practitioner would do under similar circumstances. The negative or reverse definition also applies, to meet the standard of care, a practitioner must refrain from doing what a reasonably prudent practitioner would have refrained from doing.

Although we have this ready definition of the standard of care, in any given dispute it is practically inevitable that the parties will have markedly different opinions as to: (1) what the standard of care required of the designer; and (2) whether the defendant design professional complied with that requirement. The claimant bringing a claim against a design professional typically will be able to find an expert reasonably qualified (at least on paper) who will offer an opinion that the defendant failed to comply with the standard of care. It is just as likely that the counsel for the defendant design professional will be able to find his or her own expert who will counter the opinion of the claimant’s expert and maintain that the defendant design professional, in fact, complied with the standard of care. What’s a jury to think?

The concept of standard of care is intertwined with the legal concept of negligence. In the vast majority of law suits against design professionals, a claimant (known as the plaintiff) will assert a claim for negligence against the design professional now known as the defendant.1 As every first year law student learns while studying the field of “Torts,” negligence has four subparts. In order for a defendant to be found negligent, the claimant must establish four elements: (1) duty; (2) breach; (3) causation; and (4) damages. In other words, to establish a claim against a defendant design professional, a plaintiff must demonstrate that the defendant owed the plaintiff a duty of care but breached that duty and, as a result, caused the plaintiff to suffer damages.

This formulation of a negligence claim is universal – it applies to claims against reckless drivers as well as claims against design professionals. In a situation in which a claimant is bringing a claim against a design professional the concept of the standard of care applies in the first two elements (i.e., duty and breach). Take for example a typical construction accident in which a worker is injured during the construction phase of a project. Depending upon the severity of the injury, a lawyer for the injured worker will sue some or all of the participants in a construction project.2 Imagine a situation in which an iron worker falls off a beam during construction, drops ten feet to the floor below, and breaks some bones. This worker will have a worker’s compensation claim against his employer regardless of fault. Even if the worker fell from the beam as a result of his dancing drunk, he is entitled to receive worker’s compensation benefits. After processing the workers compensation claim, the injured worker’s enterprising lawyer will often look to other participants in the design and construction process and assert what is known in the industry as a “third party claim.” If this lawyer sues either the architect or engineer (typically structural), he will make an argument that the design professionals owed the worker a duty (i.e., the first of the four negligence elements) to ensure that the work site was reasonably safe. The lawyer will craft an argument that the design professionals failed to meet this duty by either designing an unsafe building (a difficult argument to make especially if the accident happened during the construction phase) or will argue that the design professionals breached their duty by “allowing” a dangerous condition to exist on the site. In either case, to prevail on his claim, the plaintiff’s lawyer will have to establish that either one or both of the design professionals owed a duty to the worker as a result of application of: (1) the standard of care; or (2) as a result of contractual obligations.

As most design professionals would agree, it is extremely rare throughout the country that a designer is responsible on a project for site safety or for controlling the means, methods, sequences, techniques, or procedures of construction. Thus, it would be extremely difficult for a plaintiff’s counsel to locate a qualified expert who would venture an opinion that the standard of care required an architect or engineer to protect the injured iron worker.

This example of the injured iron worker highlights an important aspect of the concept of duty. As most design professionals understand and appreciate, standard form agreements typically emphasize the fact that design professionals have no obligation to ensure construction means and methods or to ensure site safety during the construction phase. Typically, the contactors (i.e., the entities most capable of controlling construction and site safety) are exclusively responsible therefore. What this means in practical terms is that in any construction accident case the best defense for a design professional is typically found in the construction agreements for that project.

Just as contractual provisions protect a design professional; the wrong provisions can also inadvertently create exposure for a design professional by, among other things, heightening the standard of care. This issue is not present in most cases in which standard form agreements are used. In cases in which an owner has modified a standard from agreement or uses his or her own contract language, be wary of contractual provisions that specifically increase the standard of care applicable to a design professional. For example, some owners insert in their contracts provisions requiring that the design professional perform its services consistent with the “best” practices employed in the design community or must use “superior” or “maximum” efforts. Contract provisions such as these are problematic for a number of reasons. First, such provisions can effectively increase the standard of care applicable to a design professional over and above what would apply in a specific situation. Looked at using the legal terms referenced above, by agreeing in a contract to use “best” or “superior” efforts, a design professional will increase or heighten the duty which he or she owes on a particular project. In such a situation, it is no defense to a negligence claim to argue that a design professional complied with the applicable standard of care and did exactly what a reasonably prudent practitioner would and should do. If by contract a design professional is obligated to use “best” efforts, then anything less (even if it complies with the standard of care) would represent a breach of the contract and, as a result, would create exposure for the design professional.

These types of contract provisions which heighten the standard of care are also problematic as they may inadvertently jeopardize insurance coverage. Most professional liability policies cover a design professional’s negligence. As noted above, generally speaking, a design professional is negligent when he or she fails to comply with the standard of care. When a claimant asserts a claim against a design professional, the insurance company will review the allegations in the complaint to determine if the claimant is alleging that the insured design professional was negligent or is alleging something else such as an intentional wrong (not covered), breach of contract (not covered), or violation of a consumer protection act such as chapter 93A (not covered). If a claimant asserts a claim that the design professional failed to comply with its contractual obligations to use “best” or “superior” efforts, then the insurance company has a valid argument that there is no insurance coverage. An insurance company in such a situation could deny coverage on the basis that the design professional is not being accused of negligence (a covered claim) but, instead, is being accused of breaching its contract (not covered). In this regard, most professional liability policies include a provision specifically excluding from coverage any obligation assumed by the design professional in its contract.3

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1 For reasons that are not entirely clear, in the context of an arbitration proceeding, the person asserting the claim is the claimant, while the target of the claim is the respondent.
2 Unfortunately, there is typically a direct relationship between the severity of an injury and the number of parties whom the plaintiff will sue. In other words, the greater injuries, the more defendants will be included in the law suit.
3 Other examples of such exclusion are indemnity provisions. Design professionals have to be extremely careful when agreeing in a contract to defend or indemnify the client or a third-party. Unless the indemnity provision is carefully written, it can create an obligation on the part of the design professional which is not covered by professional liability insurance.

California’s Skilled and Trained Workforce Requirements: Public Works and AB 3018, What You Need to Know

Do you have the proper skilled and trained workforce for your construction projects? If you take on public works projects in California, you may not be in compliance with the new changes in the law. To avoid civil penalties or nonpayment and potentially being precluded from future bids on public works contracts, you must critically review your team and proposal prior to accepting an award. Once awarded a public contact requiring a skilled and trained workforce, diligent reporting practices and oversight are required to maintain compliance.

Compliance with California’s skilled and trained workforce requirements for contractors, engineers, architects, design professionals, and suppliers competing for public works construction projects in California is mandated through enforcement with the enactment of AB 3018. Signed by Governor Brown in his last legislative session, AB 3018 dramatically increased the penalties for non-compliance with the existing skilled and trained workforce requirements in California. The new penalties include civil fines by the Labor Commissioner up to $10,000 per month per non-compliant contractor, disqualification from bidding on future public works contract, and withholding of payment for delinquent contractors. This update provides information on California’s skilled and trained workforce requirements, identifies key issues on compliance to avoid penalties, and discusses the impact of enforcement on construction professionals’ business practices.

Who Needs to Comply with California’s Skilled and Trained Workforce Requirements?

Fast Facts

  • Not every public works contract in California is required to have skilled and trained workforce requirements.
  • If you are required to be listed as a contractor in the proposal or bid, you likely need to comply. If you are not listed as a contractor in the proposal or bid and your contract price does not exceed 0.5% of the prime contract, then you are not required to comply.

Existing California law (Public Contracts Code section 2600, et seq.) authorizes a public entity to require a bidder, contractor, or other entity to use a skilled and trained workforce to complete a contract or project, and requires that the commitment to use a skilled and trained workforce be made in an enforceable agreement that meets specified requirements discussed below.

Existing law requires all public works contracts “relating to school facilities” and “design-build contracts” to comply with the aforementioned trained and skilled workforce requirements.

For other types of public works contracts requiring skilled and trained workforce requirements, if a public works contracting party is not listed on the bid as a contractor or subcontractor and its total contract price is less than or equal to 0.5% of the prime contract, then it is not required to comply with the skilled workforce percentages.

If the contract price exceeds 0.5% of the prime contract, and the contracting party is not required to be listed on the bid or proposal, Labor Code section 1722.1 defines who is treated as a “contractor” and “subcontractor” as “a contractor, subcontractor, licensee, officer, agent, or representative thereof, acting in that capacity, when working on public works pursuant to this article and Article 2.” Article 2 generally requires certain subcontractors who work on public works projects to register with the Labor Commissioner.

Finally, if the contract price exceeds 0.5% of the prime contract and is required to be listed on the bid or proposal, then existing law generally requires these entities to comply with the skilled and trained workforce requirements above. In addition, the contractor or subcontractor need not meet the requirements if, during the calendar month, the contractor or subcontractor employs skilled journeypersons to perform fewer than 10 hours of work on the contract or project. There is not likely to be further clarification on which entities will be treated as “contractors” and “subcontractors” for the skilled and trained workforce requirements until the Labor Commissioner provides additional clarification.

What are the Criteria to Determine whether a Skilled or Trained Workforce Requirement is Met?

Fast Facts

  • Contracts that require skilled and trained workforces can be satisfied by either: (1) employing the requisite percentage of apprenticeship graduates on a qualifying project; or (2) staffing apprenticeship graduates to meet the requisite percentage of hours on a qualifying project.
  • If a contractor is required to be listed on the proposal or bid for a public works contract requiring a skilled and trained workforce, then the contractor must comply with the skilled and trained workforce requirements.

California law defines a “skilled and trained workforce” to mean a project workforce that meets certain qualifications, specifically “graduates of an apprenticeship program for the applicable occupation.” The following table provides a breakdown of the increasing apprenticeship graduation requirements for a public works workforce under existing law:

Year Percentage Graduates Required
2017 30%
2018 40%
20191 50%
2020 60%

Alternatively, for the hours of work performed by skilled journeypersons employed by the contractor or subcontractor on the contract or project, the percentage of hours performed by skilled journeypersons who met the graduation requirement is at least equal to the required graduation percentage.

California Labor Code section 3075 provides details on the required apprenticeship programs to satisfy the graduation requirements for a public works workforce. The apprenticeship graduation requirements can be satisfied by a union or merit shop program including those provided by the Associated General Contractors and Associated Builders & Contractors. These programs can be used by journeyman who have not graduated from an approved apprenticeship program in order to test up or out of a traditional apprenticeship program, but still require the journeyman to participate in, at minimum, a six-month apprenticeship program in order to receive certification for the trade. An apprenticeship program can be administered by a joint apprenticeship committee, unilateral management or labor apprenticeship committee, or an individual employer. A new apprenticeship program can be approved for circumstances where any of the following conditions are met:

(1) There is no existing apprenticeship program approved under this chapter serving the same craft or trade and geographic area;

(2) Existing apprenticeship programs approved under this chapter that serve the same craft or trade and geographic area do not have the capacity, or neglect or refuse, to dispatch sufficient apprentices to qualified employers at a public works site who have requested apprentices and are willing to abide by the applicable apprenticeship standards, as shown by a sustained pattern of unfilled requests; or

(3) Existing apprenticeship programs approved under this chapter that serve the same trade and geographic area have been identified by the California Apprenticeship Council as deficient in meeting their obligations under this chapter.

How do you Demonstrate Compliance with California’s Skilled or Trained Workforce Requirements?

Fast Facts

  • Contractors subject to the skilled and trained workforce requirements are required to submit monthly reports demonstrating compliance with the graduation requirements that are subject to audit and investigation by the Labor Commissioner.

Existing California law requires a successful bidder subject to the skilled and trained workforce requirements to provide monthly reports demonstrating compliance with the aforementioned skilled and trained workforce requirements to the public agency or other awarding body.

Effective January 1, 2019, AB 3018 provides that the public agency or other awarding body must forward a copy of the monthly report to the Labor Commissioner for issuance of a civil wage and penalty assessment and a copy of the plan, if any, to achieve substantial compliance with skilled and trained workforce requirements and the response to that plan, as prescribed, if the monthly report does not demonstrate compliance with skilled and trained workforce requirements.

AB 3018 also amended Public Contract Code sections 2601 and 2602, and added new section 2603, shifting some responsibility for skilled and trained workforce compliance to subcontractors. If the prime contractor fails to comply with the monthly reporting requirements as a result of one noncompliant subcontractor, the public entity or awarding body is required withhold 150% of the value of the monthly billing for that subcontractor until that subcontractor demonstrates a plan to achieve substantial compliance, or until the subcontractor is substituted out in accordance with applicable law. The prime contractor is permitted (but not required) to withhold payment from the subcontractor. The public entity will be permitted to pay the prime contractor for the other work on the project performed by the prime contractor or by other compliant subcontractors.

What are the Penalties for Non-Compliance with California’s Skilled or Trained Workforce Requirements?

Fast Facts

  • Non-compliant contractors can be hit with up to $10,000 in fines per month, disqualification for future public works contracts, withholding of payment for non-compliant service rendered, and subject to additional reporting requirements.

AB 3018 empowers the Labor Commissioner with authority to investigate suspected violations of the skilled and trained workforce requirements and impose civil penalties up to $10,000 per month per non-compliant contractor. In situations where the Labor Commissioner finds that violations of the skilled and trained workforce requirements are willful, the contractor or subcontractor may be temporarily disqualified from bidding on public works projects. Prior to AB 3018, enforcement of the skilled and trained workforce requirements was left to the awarding bodies with no specified penalties.

AB 3018 also empowers the public agency or awarding body and prime contractor to withhold up to 150% of the value of the monthly billing for a non-compliant subcontractor who fails to timely submit the required information or does not demonstrate compliance. Non-compliant prime contractors and subcontractors are subject to additional and onerous reporting requirements to the Labor Commissioner, including declarations as to the accuracy of the information provided under penalty of perjury.

The Labor Commissioner shall publish on its website a list of contractors who are ineligible to bid on or be awarded public works contract, or to perform work as a subcontractor on a public works project pursuant to this section.

What can California Contractors, Engineers, Architects, Design Professionals, and Suppliers Competing for Public Works Projects do to Comply with AB 3018?

Fast Facts

  • Maintaining compliance with the skilled and trained workforce requirements will likely result in increased labor costs for contractors bidding on public works contracts.
  • Increased penalties and enforcement for non-compliance will require additional investment into reporting and compliance work.
  • Staffing and hiring decisions for public works contracts requiring skilled and trained workforces should be made at the time bids and proposals are submitted.

The increased penalties and investigation provided for under AB 3018 turned California’s skilled and trained workforce requirements from an aspirational goal to a present-day reality for contractors working on public works contracts. Given the limited number of apprenticeship graduates in the journeyman workforce, competition for those candidates with the required experience is expected to increase, putting additional upward pressure on labor costs. This is in addition to the already-limited number of qualified workers in the construction industry.

Indeed, in certain locales with public contracts requiring a skilled and trained workforce, apprenticeship graduates may need to be sourced from other locations in order to meet the skilled and trained workforce requirements. In the alternative, employers may need to start their own apprenticeship program.

In addition to increased labor costs, the severity of the penalties for non-compliance will also result in additional compliance-related expenses to ensure that the required information is accurately reported and supported with the Labor Commissioner. This includes costs associated with retaining an attorney familiar with California’s skilled and trained workforce requirements prior to an investigation or enforcement action by the Labor Commissioner to ensure compliance. Thus, contractors bidding for public works contracts subject to trained and skilled workforce requirements will likely be forced to pass these additional costs along to public agencies seeking affected Requests for Proposals which may further winnow out the contractors who are able to earn awarded bids.

Contractors submitting bids and proposals on public works contracts in California requiring skilled and trained workforce requirements should invest additional resources into staffing and hiring decisions before bids or proposals are submitted after California’s passage of AB 3018. Additional preparation well prior to submission of bids, including retaining qualified legal counsel in advance of preparing the bid, should ensure that contractors can maintain compliance throughout the life of a project without being subject to the penalties and fines discussed above.

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Gordon & Rees’ Construction Group consists of more than 150 lawyers across the United States who focus their practice on the comprehensive range of legal service required by all participants in the construction industry.

Brenda Radmacher is an experienced Partner at Gordon & Rees, and noted expert in construction law in California. She is called on as a counselor, litigator, and noted speaker in regard to issues involving land owners, general contractors, developers, and builders, including public works contracts. She has a varied practice with significant experience in representing companies to address risk management issues, handling their litigation, and drafting critical documents and procedures. Nicholas Krebs is an associate in the Los Angeles office and member of the Construction Group. Please contact Ms. Radmacher for all inquiries regarding California’s AB 3018.

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1 AB 3018’s penalties and enforcement become effective January 1, 2019.
The materials presented in this article are intended for informational purposes only. These materials should not be used as legal advice applicable to the reader’s specific situation. In addition, the provision of this information to the reader in does not constitute nor form an attorney-client relationship. No action should be taken on information provided within this website without retaining counsel from a professional attorney. The request or receipt of any information from this website or resulting communications does not constitute an acceptance to represent the recipient of this information. This information is subject to change without notice and should not be relied upon for accuracy and pertinence to the reader’s specific circumstances. This article may constitute attorney advertising.

Limiting Liability: Three Clauses to Consider in your Next Construction Contract

In your next contract, consider including some (or all!) of the following clauses to limit your liability and maximize your profits.

Waiver of Consequential Damages

While a proven breach of contract will leave a design professional or contractor exposed to direct or compensatory damages, a waiver of consequential damages will help “stop the bleeding” and protect the design professional or contractor from paying every damage that might flow from the breach. Consequential damages include those damages which indirectly flow from the breach of contract, for example, lost rents, lost profits, lost use, lost opportunity, loss of employee productivity, and damages to reputation.

The American Institute of Architects (AIA) has included a mutual waiver of consequential damages in its sample A201 for over 20 years. The AIA provision includes a definition of consequential damages which are waived, including many of the examples cited above. However, the AIA waiver of consequential damages clause carves out an exception for liquidated damages to the owner. Prudent design professionals and contractors will strike this exception so as not to render the clause meaningless. A well-drafted waiver clause will be mutual, will define which damages are consequential versus direct, and will not contain exceptions.

Limitations of Liability

Imagine a scenario where a design professional holds $1,000,000 in insurance coverage per occurrence and the owner alleges over $2,000,000 in damages. The design professional is concerned about personal liability beyond the limits of the available insurance, particularly because they netted less than $200,000 on the project at issue.

This common scenario is easily avoided with a clause limiting liability. The parties can agree to any limit of liability, but common limits include:

  • The design professional or contractor’s anticipated profits on the project (most often stated as a dollar figure);
  • A percentage of the insurance required under the contract; or
  • The total insurance required by the contract.

When liability limits are based on insurance, it’s important to identify if the policy limits are per occurrence or aggregate for the policy period (usually one year). For example, you would never limit liability to the total available insurance on an aggregate policy, as you would risk exhausting your available insurance for the entire policy period on a single claim.

Percentage Clause

This practical clause acknowledges the realities of construction: errors will occur but errors are not always the result of a deviation from the standard of care. This clause allows a design professional or contractor to increase construction costs through change orders without facing potential liability from the owner. For example, the parties may agree that the owner releases the design professional from liability so long as the design professional’s “errors” do not increase construction costs by change order by more than three percent (3%). In a $5,000,000 project, the owner will have released the design professional for the first $125,000 in errors, as defined by the contract. The owner, in turn, can anticipate these costs by including a reasonable percent contingency in its budget for errors.

Ninth Circuit Rules Supreme Court’s Two-Part Test of Implied Certification under the False Claims Act Mandatory

For those contractors in the government arena, read on.

The False Claims Act (“FCA”) was enacted to deter knowingly fraudulent actions by contractors which resulted in a loss of property to the Government. Intent to defraud with resulting financial hardship was required. Contrary to popular misconception, the statute was not designed to punish all false submissions to the Government simply because those submissions, or claims, are later found to be false. The statute’s inclusion of the requisite element of knowledge is consistent with this notion:

(1) A defendant must submit a claim for payment to the Government;

(2) the claim must be false or fraudulent;

(3) the defendant must have known the claim was fraudulent when it was submitted (also known as scienter); and

(4) the claim must have caused the Government to pay out money.

See 31 U.S.C. § 3729(a).

Despite these explicit elements (in addition to common law elements of fraud), over the last two decades, contractors have seen ever-expanding theories of FCA recovery presented by qui tam plaintiffs and the Government. For example, under the FCA, the false “claim” evolved over time: the claim no longer needs to be an express false claim (i.e. the truthfulness of the claim is a direct condition of payment); the claim can be “implied” misrepresentation or “half-truth”.

The United States Supreme Court in its paramount 2016 Escobar decision dealt squarely with the issue and interpretation of “implied” false certifications. The High Court, in pertinent part, ruled that implied certification is a viable theory of FCA liability at least where two conditions are met: (1) first, the claim does not merely request payment, but also makes specific representations about the goods or services provided, and (2) second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.” Escobar went on to provide an exact test for the FCA’s materiality requirement, clarifying that, even when a provision is labeled an express “condition of payment”, not every violation of that requirement will give rise to liability. Instead, materiality looks to the effect on the likely or actual recipient of the alleged misrepresentation; i.e. the Government. Put another way, the Government’s designation of compliance with a particular statutory, regulatory, or contractual requirement is not dispositive on the issue of materiality.

On August 27, 2018, the U.S. Court of Appeals for the Ninth Circuit, in U.S. ex rel. Scott Rose, et al., v. Stephens Institute, No. 17-15111 (9th Cir. August 24, 2018), affirmed both express and implied certification theories under the FCA, finding that falsity can be had by (1) an express certification; i.e. where the contractor seeking payment falsely certifies compliance with a law, rule, or regulation as part of the process for which its claim for payment is made/submitted, or (2) an implied false certification; i.e. the contractor has previously undertaken to expressly comply with a law, rule, or regulation (but does not do so as to the instant claim), and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required as part of the process in submitting the claim in question.

With respect to the later, the Ninth Circuit mandated Escobar’s two-part test for implied certification, but only where the two conditions enumerated in Escobar are satisfied: again, (1) the claim makes specific representations about the goods or services provided, and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.”1

The take away: the Ninth Circuit’s latest opinion is generally helpful for some defendant contractors: in cases where the now-mandatory two-part test is not met, absent appeal, the defendant may be absolved of FCA liability. That being said, government contractors and others participating in federally-funded programs must be prepared to defend against FCA suits based on an implied certification theory, which still very must exists.

The opinion in U.S. ex rel. Scott Rose, et al. v. Stephens Institute was issued by a three-judge panel. The Ninth Circuit left open the possibility that the issue may be revisited en banc.
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1 Although beyond the scope of this article, “misleading half-truths” are often found when the withholding of certain data by the defendant from the Government caused, or was material to, the Government’s decision to purchase the goods or services; i.e. the data was a condition of payment even if not designated an express condition of payment. For example, when the defendants had knowledge that the degradation of bullet-proof vests which they sold to the Government contradicted the defendants’ misrepresentations about the superiority of those vests. Note, the inquiry is highly factual and must be analyzed on a case-by-case basis.

Using the Prevention Doctrine

The following scenario happens regularly in the construction industry. A contractor on a project reaches out to a subcontractor to perform work. Excited about the prospect of performing the work, the subcontractor signs a contract and puts it nose to the grindstone. After dutifully completing the work the subcontractor turns to the contractor and asks to be paid. But, the contractor refuses saying that there is a provision in the subcontract that says the contractor is only obligated to pay the subcontractor if the contractor receives payment from the owner. So the contractor has completed the work, but has no money to show for it.

One potential remedy for a subcontractor in this situation is the use of the prevention doctrine. “Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused.’” Cox v. SNAP, Inc., 859 F.3d 304, 308 (4th Cir. 2017) (quoting Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 7171, 725 (4th Cir. 2000)). “Put simply, ‘where a party to a contract is the cause of the failure of the performance of the obligation due him or her, that party cannot in any way take advantage of that failure.’” Haddon Hous Assocs v. United States, 711 F.3d 1330, 1338 (Fed. Cir. 2013) (quoting Restatement (Second) of Contracts § 245; Williston, § 39:4).

So let’s add to the scenario above that the contractor failed to request payment from the owner for the subcontractor’s work. The contractor’s failure to request payment could be deemed a violation of the prevention doctrine, which would bar the contractor from being able to raising the contract terms as a defense. Alternatively, let’s say that the contractor had committed significant errors on the project and that as a result, the owner was withholding funds. Here too, the subcontractor could contend that the contractor’s mistakes on the project, which led to the owner withholding payment, should excuse contract terms that would otherwise bar payment. Basically, the contractor should not be allowed to benefit from its mistakes and failures to not pay an innocent party.

While the prevention doctrine is not a sure-fire solution to a problem with a contractor who won’t pay, it is a useful tool that we should be ready to use when the situation warrants.

Important New Reporting Requirement for Some Construction Defect Settlements

In response to a tragic balcony collapse incident where the public later learned the contractor had paid millions to settlement defect cases in the preceding years, the California legislature passed, the state contractor’s license board is now implementing, a public disclosure requirement for certain construction defect claims. The disclosure requirement is triggered by a judgment (which is not a new requirement), an arbitration award, or a settlement of certain construction defect claims. These requirements are codified at California Business & Professions Code sections 7071.20-22.

What types of Projects: This requirement applies only if all of the following apply:

A) Residential
B) Multi-Family; and
C) Rental property

Limitations on Claims – The reporting requirement only applies if all of the following are true:

A) The claim is against a CSLB licensee (not a design professional) acting in the capacity of a contractor;
B) The claim is for a structural defect;
C) The total claim is valued at $1 million (not including investigation costs);
D) SB800 does not apply;
E) The action was filed after January 1, 2019; and
F) If a lawsuit, the case was designated complex by the courts (which may not apply if only contractor is sued).

Who has to report: Any licensee (general or sub-contractor) and any insurer for a licensee is required to report the settlement, in writing. If any particular licensee is found to owe $15,000 or less, they are not required to individually report.

When to report: Within 90 days of judgment or arbitration award or within 30 days of payment of a settlement.

Consequences of Reporting: The CSLB will automatically open an investigation into the licensee’s license utilizing their existing complaint process. The license board may take further action but it also has the option of determining that the civil case resolution was sufficient to protect the public and take no further action.

Consequences of Not Reporting: The licensee is in violation of their license requirements and is subject to licensure discipline.

Unanswered Questions:

If the gross settlement for a licensee exceeds $1 million but no individual insurer’s share exceeds $1 million, are the insurers still obligated to report? Section 7071.21 can be read to require that an insurer is obligated to report if they pay any portion of a reportable settlement. [Notably the licensee has to report the settlement either way.]

The CSLB is still developing its implementation protocols. Exactly how to report is not clear but at this time, it would appear that a minimum requirement would be written notice to the CSLB’s complaint intake processing office.