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Allocating the Risks and Benefits of Green Construction

Sustainable (or “green”) construction practices and the trend toward green buildings are here to stay, driven not only by federal, state, and local legislation, tax credits, and incentives, but also by consumer, corporate, and shareholder demand.  If they haven’t already, owners, architects, developers, and construction companies will be required to make use of new technologies, new materials, and new practices to keep pace with increasing demand for green construction – and to reap the economic and reputational benefits of green construction.  It is estimated that residential and commercial buildings account for approximately 40% of U.S. carbon dioxide emissions, and that figure does not include other building-related emissions, such as those from the manufacture, transport, and assembly of building materials such as wood, concrete, and steel. 

Simply put, climate change strategies must and will continue to involve finding ways to reward green construction practices and green buildings and discourage or penalize environmentally inefficient practices and features. 

A variety of incentives are already in place to encourage green construction, such as tax credits and carbon offsets.  Who receives the benefits of these types of incentives is a matter that often can – and will – be subject to contract negotiation.  Similarly, certain types of risks that are common to all construction contracts may be increased when certain standards are required, or when new materials or practices are being used. 

Risk and reward travel together.  It is critical, therefore, when dealing with all these new and continually evolving issues, to make sure you carefully consider and negotiate your construction contracts to ensure that the risks and benefits of green construction are properly allocated amongst the parties.

  • Who gets the incentives?

At the federal level, billions of dollars in incentives are being made available to encourage and reward projects and buildings that meet recognized green building standards.  For example, the Inflation Reduction Act of 2022 created new tax incentives for energy efficiency and clean energy investments for both residential and commercial buildings.  It also made available tens of billions of dollars in grants, rebates, and various forms of financing. 

Other programs allow the purchase of carbon credits or offsets to permit companies to exceed otherwise applicable caps on carbon dioxide emissions.  And the incentives to go green do not stop with the federal programs.  An array of incentives are being offered at state and local levels. And the positive publicity that comes with meeting green building standards continues to increase.  

This wide array of incentives and benefits raises the issue of who gets to claim them, particularly where, as in the case of carbon offsets, the benefits can be bought and sold, or otherwise allocated by contract.  Carefully considering who should get the benefit of a subsidy, offset, or other benefit is both a matter that requires an understanding of the applicable law and regulations, and should, where more than one party to a transaction might claim a right to the benefit, be clearly spelled out during the contracting process.

  • Be mindful of the supply chain.

One lesson learned from the COVID-19 pandemic, the invasion of Ukraine, and ongoing instability in the United States’ relationship with China, is that allocating the risk of cost and availability of building materials is of paramount concern.  This point is particularly relevant for green construction, where domestic production may not presently be able to meet the supply demands. 

Solar panels are a prime example.  China controls more than 80% of the solar panel supply chain, and while there is much discussion about increasing production in the U.S., current domestic production simply cannot keep up with demand.  This can result in limited supply, and at times, gridlock, like those experienced recently in connection with the implementation of the Uyghur Forced Labor Protection Act (UFLPA), banning the importation of goods made with forced labor.

The problems that supply chain issues can cause are well known and cannot be ignored when entering into construction contracts.  Who bears the risk of delays, unforeseen circumstances, and price escalation, must be carefully negotiated with an understanding of the particular materials and technologies that must be used to complete a project.  Failing to plan is planning to fail when it comes to supply chain instability.

  • Defining the scope and reach of certifications and warranties.

Supply chain concerns may be further complicated if a contract requires a building to meet certain certification standards.  Examples of common certification standards applicable to construction projects and building products include Energy Star certification (appliances), FSC Certification (lumber), GreenGuard Certification (building products and indoor fixtures), and GreenSeal Certification (building products and materials).  Procuring building materials that meet specified certification requirements, and ensuring that a structure is designed to satisfy certification standards, requires careful coordination and planning amongst all parties to a construction project.

Additionally, all parties to a construction contract need to carefully review the warranties being offered, or demanded, before signing a contract.  For green construction, that may include defining – and understanding – the scope of the warranties for new and emerging technologies.  It is critical to define the consequences of breaching a warranty, what actions will void a warranty, which party has the right to enforce the warranty, and the consequences if a warrantee attempts to self-repair. 

* * *

These are just a few examples of issues to consider when entering into contracts for green construction. The key point is that when implementing new technologies, new practices, and new standards, it is important to carefully review your contracts and make sure that the terms of your standard forms account for the risks and rewards of green construction.  Good contracting practices do not stop with good forms, however, so it is also important that those who are responsible for negotiating and implementing your contracts are trained and understand how to use and when to revise those forms to meet the particular needs and demands of each project. 

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On August 1, 2023, U.S. Citizenship and Immigration Services (USCIS) released a revised Employment Eligibility Verification form, commonly referred to as the I-9 form. To download a copy of the new I-9 form click here. While the new I-9 form may be used immediately, employers have until October 31st to implement changes necessary for the use of the new I-9 form. After October 31, 2023, employers who fail to use the new I-9 form will be subject to penalties enforced by U.S. Immigration and Customs Enforcement and the Department of Justice. Employers should not ask current employees who have a properly completed I-9 form on file to complete the new I-9 form.

Changes to the I-9 form make the form much more user friendly. Immediately noticeable is that Section 1, completed by the employee, and Section 2, completed by the employer, have been reduced to a single sheet. The Preparer and/or Translator Certification now appears on a separate Supplement A that employers can use when necessary. Similarly, Reverification and Rehire, formerly Section 3, appears on a separate Supplement B that employers can use when necessary. Separating the Preparer and/or Translator Certification and Reverification and Rehire from Sections 1 and Section 2 should significantly reduce unnecessary completion and stray marks and signatures.

Also, with the new I-9 form, fields may be left blank when they do not apply or are not appropriate. This includes in Section 1, for which employers are subject to fines for failing to ensure that an employee entered “N/A” in an inapplicable Section 1 field on prior versions of the I-9 form. Another helpful revision is the identification on the Lists of Acceptable Documents page of acceptable receipts which may be presented in lieu of certain documents for a temporary period.

In addition to the release of a new I-9 form, USCIS announced a final rule permitting an optional alternative procedure to the physical examination of documents presented by employees to establish their identity and employment authorization. Starting August 1, 2023, employers who are participants in good standing in E-Verify have the option of conducting a “remote” review of an employee’s documents. The “remote” review procedure requires that employers (or a third party on the employer’s behalf):

  • Examine the front and back of the document(s) (one document from List A or one document from both List B and List C) transmitted by the employee to ensure that the document(s) presented reasonably appears to be genuine;
  • Conduct a live video interaction with the employee, who presents during the live video interaction the same document(s) they transmitted to ensure that the document(s) relates to the employee;
  • Indicate on the I-9 form by completing the corresponding box that an alternative procedure was used to examine the document(s). This is done by marking the checkbox found under Additional Information in Section 2 on the new I-9 form and by writing “Alternative Procedure” in the Additional Information field on the existing I-9 form (issuance date of October 21, 2019); and
  • Retain a clear and legible copy of the document(s) submitted by the employee (front and back sides if the document is two-sided).

Employers who are participants in good standing in E-Verify may, but are not required to, use this alternative document review procedure; however, if an E-Verify employer chooses to offer the alternative procedure to some employees at a hiring site, it must do so for all employees at that site.

USCIS previously announced that employers who performed a remote examination of an employee’s document(s) under the COVID-19 flexibilities between March 20, 2020 and July 31, 2023, are required to physically examine the employee’s I-9 documents in the employee’s physical presence no later than August 31, 2023. With the announcement of the final rule, employers enrolled in E-Verify are not required to complete the physical examination if they (1) were enrolled in E-Verify at the time they performed the remote examination; (2) created an E-Verify case for that employee (except for reverification); and (3) performed the remote examination between March 20, 2022 and July 31, 2023. Employers who conducted remote examinations under the COVID-19 flexibilities and who do not meet these requirements must complete the physical examination of I-9 documents (and notate the I-9 form accordingly) no later than August 30, 2023, as previously announced.

If you have questions regarding your I-9 form obligations, please contact a member of Hahn Loeser’s Labor and Employment Practice Group.

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Under Ohio’s Prompt Pay Act, a general contractor could end up paying more for the subcontractor’s attorneys’ fees than the general contractor owed to the subcontractor. That was the ruling by the Ohio appellate court in Atlas Piers NEO v. Summit Construction Co., Inc., 2021-Ohio-2024 (9th Dist.). In Atlas Piers, the general contractor hired a subcontractor to provide “services that help stabilize buildings constructed in poor soil conditions.” Id. at ¶ 2. In particular, the subcontractor installed helical screws and piers in a series of buildings to be built for the Akron Metropolitan Housing Authority. Id.

A dispute later arose regarding the piers and the subcontractor’s work on the piers. The subcontractor sought a change order for work that the general contractor instructed the subcontractor to perform. But the general contractor refused to issue a change order because “it believed one was not necessary.” Id. at ¶ 9. When the subcontractor refused to act without a change order, the general contractor terminated the subcontract.

The subcontractor then filed a lawsuit against the contractor, seeking “money for lost time, extra work performed, lost profits, and” retainage that had not been paid by the contractor. Id. at ¶ 10. The subcontractor also sought damages and attorneys’ fees under Ohio’s Prompt Pay Act because the general contractor “failed to timely pay” the subcontractor in violation of Ohio Rev. Code § 4113.61. Id. at ¶ 11. Following a bench trial, the trial court found that the contractor owed the subcontractor approximately $20,000, plus 18% interest, as well as attorneys’ fees. Id. at ¶12.

Next, the court held a hearing to determine the amount of attorneys’ fees that should be awarded to the subcontractor. The court rejected the contractor’s arguments that the subcontractor “failed to satisfy the factors in the” Prompt Pay Act and that the subcontractor should only recover fees relating to the Prompt Pay Act claim. All told, the court awarded the subcontractor $64,974.88 in attorneys’ fees—more than three times the amount owed to the subcontractor.

On appeal, the contractor raised several arguments in an attempt to throw out the attorneys’ fees award. But the appellate court rejected each of those arguments. In particular, the court disagreed with the contractor’s argument that the attorneys’ fees award was “disproportionate and unreasonable in light of the sum recovered by” the subcontractor. Id. at ¶ 34. The appellate court explained that “[n]othing in the statute . . . indicate[s] that it is per se unreasonable for an award of attorney fees to substantially exceed the funds recovered by the prevailing party. While it is true that [the subcontractor] did not recover a large proportion of the money it sought, it was nonetheless successful in its litigation.” Id.

The Moral of the Story

Attorneys’ fees could make a Prompt Pay Act claim much more costly for a contractor. Those fees could greatly exceed the actual amount owed to the subcontractor. Plus, courts could assess those fees even when the subcontractor does not recover the total amount that it claims that it is owed. Therefore, contractors should pay particular attention to Prompt Pay Act claims made by their subcontractors and consider the potential award of attorneys’ fees in evaluating those claims.

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Are you a contractor that would like to employ 16 or 17-year-olds (“minors”)? House Bill 33 (establishing the state budget for 2023-25) permits minors to work on construction sites in certain limited situations.

Note! There is nothing in the new law that requires contractors to hire minors – or to engage subcontractors who hire minors – to work on construction sites; the bill only prohibits the Director of Commerce from passing any rule that would prohibit minors from working on construction sites in certain situations. Owners and contractors that do not wish to have minors on the jobsite should explicitly state their desires in the contract/subcontract.

Employer Responsibilities
What does the new law mean to those who wish to employ minors on construction sites? Legally, minors can be employed on certain construction sites if they meet certain criteria relating to
(1) Age requirement
(2) Enrolment in a mentoring program in compliance with Ohio’s labor laws
(3) Compliance with the Fair Labor Standards Act (“FLSA”)

First, minors may be employed on construction sites provided they are at least 16 years old.

Second, minors may be employed on construction sites so long as they are employed under the Ohio construction mentorship program. Among other requirements, the program requires the employment duration be defined, a mentor be assigned to the minor, and the minor be given specific training. 

Third, minors may be employed on construction sites so long as they are performing tasks that either (a) are permissible under the FLSA, or (b) fall into an exemption. For the minor to qualify for the exemption they must be enrolled in an approved program.

For example, listed below are two jobs the Department of Labor has deemed to be dangerous and has prohibited minors from performing under the FLSA.  However, a minor may perform these tasks if the minor falls into an exemption by virtue of being either a student-learner or apprentice, including being employed under the Ohio construction mentorship program.

(1) Roofing operations and work performed on or about a roof—bans most jobs in roofing operations, including work performed on the ground and removal of the old roof, and all work on or about a roof.
(2) Trenching and excavation operations—bans most jobs in trenching and excavation work, including working in a trench more than four feet deep.

A company’s employment of minors through the Ohio construction mentorship program creates an opportunity to boost minors’ interest in construction and train the next generation of skilled labor. To determine if your policies are in compliance with the new law, please reach out to Hahn Loeser & Parks LLP.

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Original article in June 2023 issue of Properties Magazine

According to the Pew Research Center, the majority of Americans view climate change as a major threat and two-thirds believe that the government and corporations should be doing more to address climate change. Young Americans, in particular, are interested in curbing their carbon footprint and living sustainably. A 2022 Bentley-Gallup Force for Good study found that it is “extremely important” to 77% percent of Americans aged 18-29, that businesses operate in a sustainable manner. Moreover, 80% of young Americans say they are willing to pay more for sustainable products than less sustainable competitors, according to the Business of Sustainability Index by Greenprint. Can this translate into premium rent and an increased construction price for “sustainable” new housing? 

The number of renters in this demographic will continue to grow over the next decade. After renting, many will become future homebuyers, so, setting aside any political argument over the importance of reducing emissions, there may be a financial incentive to develop green and sustainable housing. Simply put, according to the research, sustainability sells, and there are many ways that property developers can start making their properties more sustainable, and receive return on their sustainability investment, beyond just the savings achieved by reduced utilities or tax credits.

The LEED Program

Fortunately, there are programs like Leadership in Energy and Environmental Design (LEED) available that provide guidance and certification to those wishing to make their existing or future buildings green and sustainable. The LEED program relates to all aspects of real property development, from roofing to landscaping. It is a way to confirm sustainability credentials to the marketplace. Additionally, there are methods outside of LEED to make your property more sustainable and therefore more marketable to those who make choices based on environmental issues. A self-sustaining project, which only uses the energy it creates, water it captures (and recycled grey water), and as much heat from the ground as possible, is the future goal and vision, but intermediate steps can be taken now. Reducing or eliminating dependence on outside electricity providers is slowly maturing with the use of solar power in sunny climates. However, solar alone may be inadequate, considering the late afternoon need for air conditioning and electric car owners plugging in after work, necessitating battery storage as part of any solar system. Many Americans have already adopted solar power in some capacity, including solar outdoor lighting or solar panel powered security cameras. The technology is readily available, and solar panels are becoming more efficient, less expensive, and easier to obtain. Governments may continue to subsidize and encourage solar energy. While solar power is a great start to sustainability and an amazing selling point, there are several other areas that consumers will look to when evaluating a building for sustainability.

For existing structures, updating landscaping to a more environmentally friendly model can be an easy way to make the property more sustainable. There is currently a controversial “anti-lawn” movement, and even the City of Cleveland Heights adopted a “no-mow-May” policy to encourage pollinating insects. On TikTok, the hashtag #anti-lawn has 2.3 million views and #antilawn movement has 1.9 million views. Devotees claim that grass lawns are horrible for the environment. Sustainability influencers on social media promote alternatives to grass including micro clover, moss, and creeping groundcover plants. Other social media influencers advocate allowing their property to return to a natural prairie like state or landscape using only native pollinator plants. These changes are relatively inexpensive, but can send an immediate message to potential customers as the media focuses on the impact landscaping has on overall sustainability. Customers may consider initial landscaping and maintenance of the same in their purchasing decisions. Replacing grass and other high maintenance and non-native plants with more sustainable options, or even with space for community gardening for multi-family uses, can make your property more attractive to certain consumers.

Going Forward

There is no singular path to sustainability and the definition will evolve with time, technology and cost. Additionally, significant barriers still exist including limited sun for solar panels in Ohio, and many local zoning codes that restrict solar panels (if only for aesthetic reasons). The Ohio General Assembly is trying to reduce solar resistance, including the signing of Senate Bill 61, which prevents homeowners associations from banning solar panels. Municipalities will also need to reconsider regulations on external appearance of residential and commercial properties. Zoning codes that require front lawns of manicured grass may need to be left in the past.

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Original article in April, 2023 Properties Magazine

Stakeholders in the construction industry are managing the increasingly complex and costly challenges associated with major projects, facilities, skilled labor forces, suppliers, and real estate.

The acceleration of public infrastructure projects, together with other government manufacturing initiatives throughout the Midwest, is creating healthy demand — and exerting some longstanding pressures — on the construction industry in Ohio.

Skilled labor shortages, supply chain difficulties, and shortages of certain raw materials continue to create significant project challenges and threaten long-term productivity of the industry.

Against this challenging backdrop, sweeping construction projects are underway in Ohio. Two of the biggest employers in Northeast Ohio plan major investments — the Cleveland Clinic (63,190 full-time employees worldwide) and the Sherwin-Williams Company (57,231 full-time employees worldwide).

In May 2022, the Cleveland Clinic announced a $1.3 billion capital investment in its main campus. Projects include a 1 million-square-foot Neurological Institute building, expansion of the Cole Eye Institute building, and significant growth of research facilities by way of the Clinic’s $300 million investment in the Cleveland Innovation District (a collaboration with universities and other hospitals to create jobs and an educated workforce). Also on the drawing board: adding a 400,000square-foot research center to position Northeast Ohio at the forefront of the pathogen research vital to preparing for the next pandemic.

The Clinic also is collaborating with community partners to bring a $52.8 million Meijer grocery market and apartment complex aimed at lessening food insecurity and revitalizing its surrounding neighborhood.

Sherwin-Williams is building a new headquarters tower in downtown Cleveland, with an attached multi-level garage, as well as a research and development center in the suburb of Brecksville.

The 36-floor headquarters will house more than 4,500 employees — professional staff, engineers, technicians, and chemists — with room to accommodate future growth. Sherwin-Williams says the project will entail a minimum investment of $600 million over the next few years.

Major projects are making headlines elsewhere in Ohio, as well. Intel plans to spend $20 billion on two advanced chip factories in Licking County, just outside Columbus. The project is the largest single private-sector investment in Ohio’s history. It’s expected to create 3,000 Intel jobs and 7,000 construction jobs over the course of the build. The nearly 1,000-acre site has room for approximately eight chip factories. If it reaches full capacity, the investment could grow to as much as $100 billion over the next decade, making it one of the largest semiconductor manufacturing sites in the world.

The J.M. Smucker Co., a leading food manufacturer headquartered in Northeast Ohio, plans a 29,000square-foot research and development lab at its campus in Orville. Abbott selected a site in Bowling Green for a new manufacturing plant for nutritional products. And the clinical research company, Medpace, plans a $150 million operations and office expansion at its Cincinnati headquarters.

Automakers, meanwhile, are doubling down on Ohio in anticipation of an electric vehicle future. Ford Motor Co. is planning a massive expansion to make electric vehicles at its Ohio assembly plant in Lorain County. The $1.5 billion project is expected to add 1,800 jobs, twice the plant’s current workforce. General Motors plans a $760 million investment in its Toledo transmissions plant as it gets the facility ready to manufacture drive units for GM- EV trucks. Honda is building a $3.5 billion joint-venture electric vehicle battery factory at a site in Fayette County.

The Bipartisan Infrastructure Law, signed in late 2021, has identified over 150 specific Ohio projects for funding. Across the state, there are 1,377 bridges and over 4,925 miles of highway in poor condition. Ohio is set to receive more than $4.3 billion to invest in roads, bridges, public transit, ports, and airports, and over $240 million for clean water projects.

As more projects are announced in coming months, the federal investment in Ohio roads and bridges is projected to ramp up to $9.8 billion. Ohio also is in line for a minimum of $100 million to help ensure high-speed internet coverage across the state. And more than $131 million was allocated to Ohio in 2022 for pollution cleanup, such as capping orphaned oil and gas wells and reclaiming abandoned mine sites.

Going forward, the jury is out with respect to the extent to which an uncertain economy and high interest rates will impact the more ambitious project plans in Ohio, especially in the private sector.

Government funding from the Bipartisan Infrastructure Law, the Chips and Science Act and the Inflation Reduction Act, however, will likely keep the construction industry in Ohio on steady ground for now.

Businessman propose to sign paper, give silver pen to make deal on document

When reviewing a contract, how often have you had the following thoughts: “That provision is so one-sided, there’s no way it will be enforced the way it’s written!” Or “I won’t worry about negotiating that provision; a court would never enforce it as written.”

A recent decision from Ohio’s Tenth District Court of Appeals illustrates the risks of that kind of thinking.  The procedural history of the dispute is complex, but worth digesting for one important reminder: it’s always better to negotiate troublesome provisions yourself rather than counting on a judge or arbitrator to do it for you in the future

THE CASE AND ITS OUTCOME

In Cleveland Construction, Inc. v. Ruscilli Construction Co., Inc., 10th Dist. Franklin No. 18AP-480 and 21AP-375, 2023-Ohio-363, the Tenth District confronted a long-running construction dispute between a general contractor and its subcontractor. For ease of reference, we’ll call them GC and Subcontractor. The subcontract at issue contained an indemnification provision that stated, in relevant part, that Subcontractor would “indemnify and hold harmless [GC] from any against claims, damages, losses and expenses, including but not limited to its actual attorneys’ fees incurred, arising out of or resulting from performance of” the subcontract.  Id. at ¶ 23 (emphasis added). The provision further stated: “This indemnity shall include, but not be limited to, the following: . . . The prosecution of any claim by [GC] against [Subcontractor] or any of its subcontractors or suppliers for breach of contract, negligence or defective work [or] . . . The defense of any claim asserted by [Subcontractor] against [GC] whether for additional compensation, breach of contract, negligence, or any other cause.”  Id. (emphasis added).

Stated plainly: Subcontractor agreed that if it ever brought a claim against GC, or GC brought a claim against Subcontractor, Subcontractor would pay all of GC’s attorneys’ fees. Surely no court or arbitrator would ever enforce such a provision, right? Well, dear reader, do you think you’d be reading this article right now if that were the case?

Various disputes arose between the parties and the case was ultimately tried to a three-member arbitration panel. GC asserted claims against Subcontractor for over $900,000 in damages resulting from Subcontractor’s alleged breach of contract, while Subcontractor asserted various counterclaims totalling just under $1.4 million. Of particular note, both sides requested an award of attorneys’ fees. 

The arbitration panel ultimately determined that Subcontractor was entitled to an award of just over $100,000 on its claims but was not entitled to an award of attorney fees. However, the panel determined that GC was entitled to such an award. Relying on the indemnification language quoted above, the panel reasoned that “[t]he Parties are two sophisticated commercial entities that entered into a negotiated, lengthy Subcontract agreement that included several specific provisions that shifted the risk of [GC’s] attorneys’ fees and costs onto [Subcontractor] in any dispute between the parties.” (Emphasis added.) Interestingly, while the indemnification provision provided for fee-shifting in GC’s favor for both prosecuting and defending claims, the panel’s award specifically cited only the provision for prosecuting claims. Accordingly, the panel directed GC to submit a petition for fees. GC submitted a total of $837,387 in attorneys’ fees, expert fees, and related costs, of which the panel awarded $624,087.45 to GC.  After several years of further post-arbitration proceedings which are too complex to summarize here, GC was awarded an additional $86,805.96 by a magistrate judge. 

Both the arbitration panel and the magistrate judge’s rulings were ultimately upheld by the Tenth District. Despite Subcontractor’s insistence that the post-arbitration attorneys’ fees did not “arise out of or result from performance of the Subcontract,” the court did not agree that the provision was limited to fees incurred in the arbitration proceedings themselves.  Id. at ¶ 26.  The court also relied on the broad phrasing of the provision that Subcontractor’s indemnity obligations “shall include, but not be limited to,” the listed categories. Id. at ¶ 27. The net result? Subcontractor was awarded just over $100,000 on its claims but ordered to pay over $700,000 in GC’s attorney fees

LESSONS LEARNED

While the history of the case is convoluted, one thing is clear: Subcontractor certainly wishes it had negotiated to remove—or at least put limitations on—the troublesome indemnification provision in the subcontract. What can a party do if it is confronted with an indemnification provision similar to the one in the GC-Subcontractor subcontract? There are several options. Most obvious would be to remove an obligation for either party to pay the other’s attorneys’ fees in any claims brought by one party directly against the other, but that is not always feasible. As a compromise, the obligation to cover attorneys’ fees could be limited in various ways.  For instance, the obligation could be limited to paying attorneys’ fees incurred in defending claims that are ultimately determined to be frivolous, or if the other party prevails on more of the claims than the claimant does.  Certainly, a common and reasonable compromise in any fee-shifting provision is to limit the obligation to “reasonable” attorneys’ fees, as opposed to any and all “actual” fees.  Subcontractor was fortunate that the arbitrators only awarded GC its reasonable fees, despite the subcontract’s allowance for actual fees. 

Above all, parties should remember that even if a provision seems unfair, unreasonable, or perhaps even unenforceable, there is always a risk that a judge or arbitrator will enforce it as written.  This is especially true for sophisticated players (such as Subcontractor and GC in this case), who may or may not be represented by in-house or outside counsel in the contract negotiation process. It is always better to confront such provisions head-on, rather than simply hoping they will not be an issue in the future or that a merciful judge or arbitrator will not enforce them as written. No one wants to find themselves in the situation of Subcontractor: winning the battle (at least in part) but paying the other party for the privilege of doing so.

Construction Contracts

Owners and contractors should be knowledgeable in the various contract forms and their associated risks. Among the most common construction forms are 1) lump sum, 2) cost plus a fee and the hybrid, 3) cost plus a fee with a guaranteed maximum price. Each allocates risk differently and has different benefits for the parties.

A lump sum or stipulated sum contract is common. In this contract form, an owner has a set price for all work contained in the contract. In its simplest form, the owner knows the price of the contract work, and that the owner will receive the building described in the contract in the time stated in the contract. Assuming no owner changes or other basis for the contractor to claim extra or additional costs or time, the contractor has to complete its work for the contract price and within the contract time. The owner obtains the best price by competitively bidding the work, so contractors compete to provide the best lump sum price. That mitigates the risk of excess profit or too large a contractor contingency as part of the lump sum price.  If an owner is concerned about the contractor’s ability to perform for the contract price, then the owner can require the contractor to obtain and provide performance and payment bonds. In a lump sum contract, unless there is a dispute, there is rarely the ability for the owner to audit the contractor’s books or know the contractor’s profit margin.

When the owner wants more information, cost plus contracts may be proper. These are especially useful where a project starts before design is complete, making it difficult to provide a lump sum price.  Open book cost plus is also useful when the owner wants a say in selection of subcontractors and materials and wants to know the cost of each. In these situations, the contractor receives a fee on top of the amount expended, sometimes based on the original budget amount.  To incentivize thrift, there may be a shared savings provision where the owner and contractor split any savings. The risk of this method is that once the shared savings are over budget, there is little incentive for the contractor to control cost. The owner then bears all of the additional cost. 

One benefit of cost plus over stipulated sum is in change order work. With a stipulated sum contract, change orders are also in stipulated sum, with the owner lacking access to all information on how the change order is calculated.  In an open book format, the owner participates in the price selection process.

Audit rights are common in a cost-plus contract. The owner needs the ability to review everything to confirm costs being passed from the contractor. 

The hybrid form of this is a cost-plus fee with a guaranteed maximum price (GMP). In this instance the contractor assures the owner, subject to the contractor’s assumptions, qualifications, and conditions (the devil is always in those details), that the project will be completed for a price under the GMP.  The owner still sees all costs and records, but the risk of price increases beyond the GMP is generally on the contractor, subject to adjustment as otherwise permitted in the contract. These contracts may lead to disputes, however. For example, disagreements often arise over issues such as what is or is not properly included in the GMP.

While these are most common, other types of construction contracts and variations exist, such as time and material contracts (typically used for projects without a well-defined scope of work), and unit price contracts (sometimes used for repetitive construction tasks where the work to be completed is divided up into separate units). Indeed, as owners and contractors continue to struggle with severe supply chain issues, labor shortages, and other unusual levels of market risk in the wake of the COVID-19 pandemic and shutdowns, a variety of modifications, revisions, and strategies for shifting or avoiding risk have been creeping into construction contracts. Contract provisions reflecting allocation of these risks are prudent.

Each form has different risk/reward profiles. Carefully thought through, and negotiated contracts, can help mitigate risk of surprise costs for either side. Now more than ever, owners and contractors need to carefully review their options – and their contracts – to make sure they are selecting the arrangement that best suits their tolerance for risk, and that there are no hidden surprises in the final agreement. 

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Non-compete clauses in employment contracts are subject to a wide variety of state laws that limit their effectiveness, but often leave room for reasonable restrictions when an employee leaves. A proposed new rule from the U.S. Federal Trade Commission (FTC) would bring uniformity to the law – by banning employers from entering into non-compete clauses with their workers, including independent contractors.

This massive sea change would go even further than simply banning non-compete clauses in future contracts.  As proposed, the new rule would require employers to rescind existing non-compete clauses and actively inform employees and independent contractors that their agreement is no longer in effect.

According to the FTC, non-compete clauses bind around one in five American workers. At a time when labor costs have been rising, the FTC estimates the proposed rule would increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.

The rule is currently subject to a public comment period, with the FTC seeking input regarding issues such as whether franchisees, senior executive, and high-wage workers should be covered by, or treated differently, under the rule. 

Employers who currently rely on non-compete provisions will want to monitor this proposed rule and be prepared to respond to whatever final form it might take. Navigating the proposed disclosure requirements, potential exceptions to the rule, and its impact on hiring and retention of employees will require careful consideration and counsel. 

Other measures to protect trade secrets and proprietary information may also become of even greater importance if non-compete clauses are banned. The FTC has indicated that other types of restrictive employment covenants, such as non-disclosure agreements and client or customer non-solicitation agreements, will generally not be covered by the proposed rule. 

Whether the proposed rule becomes final, as currently written, or revised, the FTC’s action suggests that now is a good time to review your options for protecting your business’s critical information and resources – and perhaps taking advantage of a potential increase in labor mobility.

If you have questions or need assistance, our construction team is here to help. Jeffrey Yeager can be reached at jyeager@hahnlaw.com.

By most accounts 2022 was supposed to be a year of growth for the construction industry.  Many forecasted that the Infrastructure Investment and Jobs Act would be the primary source of that growth across health care, public safety, and generally in the public infrastructure arena. High inflation, increased energy costs, and material shortages, however, have turned what were originally forecasted to be mild headwinds into a full-scale weather event likely to extend well into 2023. Those issues, combined with an economy teetering on the brink of recession and an unprecedented shortage of skilled labor, have made managing project risk critical to project success and profitability.  

Proactive and cost-conscious contractors are managing risk by:

Supply Chain.  Maintaining good relationships with suppliers, prioritizing orders, and utilizing sound contract negotiation and enforcement practices. 

Material Escalation.  Modifying designs to utilize available materials and locking in raw material prices by ordering materials early and storing them until needed.

Skilled Labor.  Broadening recruitment efforts, endeavoring to better engage workers, and developing new policies to attract and retain employees.  Indeed, the skilled labor shortage has been particularly tricky for employers to navigate in virtually all sectors.  The cornerstone of any organization is its talent, and the market for and retention of skilled labor has changed dramatically since the pandemic.  Companies must think differently about how they go about attracting, managing, and retaining their workforce.  Gone are the days when there was a surplus of skilled labor, and an employer could project an attitude of “you are just lucky to have a job here.”  In today’s world, in addition to expanding talent searches beyond traditionally targeted groups, construction employers are implementing innovative policies and practices for maintaining and developing their employees.  For example, some companies are offering career development programs designed to chart a path for professional growth, providing childcare, and offering regular family visits to project sites to better engage both employees and their families.

But despite the broader economic challenges facing all sectors of the industry, the single most effective way to manage project risk remains proactive and diligent contract negotiation and enforcement.  The contract remains the greatest tool for containing risk and maximizing profit in the face of uncertainty.  Negotiated improperly, however, or simply thrown in the project file and ignored, the contract can also present a hindrance to project success and profitability. 

Although there is no one-size-fits-all approach to mitigating risk on a construction project, contractors should pay close attention to the following critical provisions:

  • Cost Escalation Clauses:  Specific cost escalation clauses increasingly are becoming the go-to mechanism for a contractor to pass through to the owner – at least partially – increases in material costs in lump-sum or GMP contracts.  Although such clauses are not found in many “form” agreements, ConsensusDocs publishes an amendment to the standard lump-sum contract that allows owners and contractors to agree up front on permissible cost adjustments to specific baseline cost and schedule elements, and similar cost-escalation clauses can be crafted to meet the particular needs of any given project.
  • Allowances:  In a lump sum or GMP contract where the parties are required to determine a set price at the time of contracting, allowances enable the parties to address the “known-unknowns.”  Allowances may be used to permit flexibility in material selection or where a scope of work is anticipated, but the associated cost is unknown at the time of contracting.  Allowance clauses can also be tailored to address specific supply disruptions.  But allowances are not escalation clauses in the strictest sense and do not provide nearly the same flexibility to address mid-stream material and labor cost market fluctuations.
  • Contingencies:  Contractor contingency clauses specify an amount in a contractor’s anticipated price for the “unknown unknowns” that cannot otherwise be accounted for in a schedule of values.  Similar to a force majeure clause, a contingency provision can cover any number of unknown risks (strikes, accidents, weather, interest rate increases, etc.), but likely does not provide the same measure of flexibility as a cost-escalation clause.
  • Substitution Provisions:  Substitution provisions allow contracting parties to agree up front on acceptable substitutions in the event of material scarcity, cost increases, or newly available products, and can forestall significant disputes down the line.
  • Force Majeure Clauses:  The pandemic brought force majeure closes to the fore.  In general, this clause is designed to protect contracting parties if they are delayed or prevented from performing because of causes outside the parties’ control.  But force majeure provisions come in all shapes and sizes, and Ohio courts typically construe them narrowly, so they must be drafted with care.  And beware: Typically, these clauses only provide additional time to perform and do not allow for the recovery of additional costs.

Final point:  None of these contract provisions, standing alone, represent a cure-all for the nearly limitless set of circumstances that could give rise to project risk or cost escalation.  But when taken together, and thoughtfully negotiated and managed across the contract as a whole, these provisions provide critical tools to limit risk and maximize profit in uncertain times.

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