Construction Law

You may have heard rumblings regarding the pause and cancellation of federal contracts.  Construction companies that typically perform work on federal contracts may look to the protections of the Federal Acquisition Regulation (FAR), but the effect of cuts to government funding will have far more reaching effects beyond federal projects.

For contractors that bid work on state and local public projects, spending cuts and freezes on federal projects may seem remote and not likely to affect their work, but federal grants and subsidies are the fuel that powers public projects at the state level and below. Governmental agencies at the state and local level are already facing restricted budgets due to the uncertainty surrounding the availability of federal subsidies and may look first to subsidized construction projects for more palatable cuts.

If your company is involved in a public construction project receiving federal funding, the time to begin taking steps to protect your company’s interests is already here. The first step in doing so is to review your contracts with the owner, contractor or subcontractors and pay close attention to the provisions that may affect your rights in the event that your project is cancelled or suspended.

Construction contracts typically contain termination for convenience provisions permitting a party to terminate the contract at any time for any or for no reason. The language of these provisions may designate the process and notice required for terminating a contract and the payment that a contractor or subcontractor is entitled to upon termination. Unfortunately, many of these provisions are an afterthought and leave the language deliberately vague. Is a contractor entitled to all costs stemming from the termination or only direct costs? If only direct costs will be paid, what is the definition of a direct cost? What about the cost of materials already obtained for the project?  Anticipated profit and overhead?

These are the kind of questions that arise when a project is cancelled. Knowing what your contract says and keeping adequate records of costs incurred is critical in requesting payment following a termination for convenience.

This process becomes even more complicated if your company has entered into contracts with subcontractors. It is critical the requirements of the prime contract flow down to your subcontractors and that your subcontracts contain reciprocal termination for convenience language. Your subcontractors will be looking to you for payment just as you will be looking to the owner or higher tier contractor for payment, so how do you protect your company upon receiving a termination notice? Some contracts contain provisions intended to ensure that payment by the owner or higher tier contractor is an absolute condition of payment to your subcontractors. However, depending on the pertinent state law, these “pay-if-paid” clauses may not be enforceable.

These issues become even more murky when a project is suspended. Does your contract permit suspension of a project? What is the maximum time a project can be suspended? Does your contract limit compensation for such delay to an extension of time? Is there a provision that negates a party’s obligations under the contract in the event of a suspension over a certain amount of time?

If a project is suspended, you may end up in a difficult situation where an owner or higher tier contractor expects your company to be prepared to mobilize at any time with little recourse under your contract. This uncertainty can interfere with other projects you may be involved with and increase costs with no right to reimbursement. Careful analysis of a contract prior to the commencement of a project is critical in avoiding that very issue.

Many construction contracts contain no damages for delay provisions, which prevent a contractor or subcontractor from requesting an increase to the contract price for costs incurred due to such delay. You may have submitted a bid for a project scheduled to begin work imminently only to learn that the start date is being pushed back months. Your bid may contain quotes that are only good for a limited time and assume material prices that may rise significantly during the period of suspension. By the time work resumes, the cost to perform the work may far outstrip your bid, and the language of your contract may prevent reimbursement of this cost.

In the event of a dispute, these provisions are often enforceable. In Pennsylvania, for example, no damages for delay provisions are enforceable to the extent that the owner did not act or failed to act in a manner that caused the delay in question. When a project is suspended due to lack of federal funding, this narrow defense may become more problematic.

Assessing the allocation of risk prior to bidding on a public project is critical to ensuring that your company avoids becoming mired in an expensive dispute. The construction attorneys at Bowles Rice have a vast array of experience in litigating disputes arising from badly drafted contracts and are ready to help you avoid costly litigation in the event a job goes bad.

If you are questioning language in a construction contract, please contact our Construction Team today.