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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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Copy of Awards Congratulations (6)

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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The concept of collateral for real estate. The word LIEN on toy cubes, a house made of wooden blocks and a woman's hand with dollar bills in the palm of her hand

The Ohio General Assembly is considering a revision to Ohio private lien law to make it clearer when projects start and end and enable title to be clear on lien rights. Under 1311.04, a Notice of Commencement (NOC) is to be recorded before a project commences and remains in place for six years (1311.04(S)). That long time period made it more difficult for buyers and lenders, who purchased or refinanced property less than six years following the recording of an NOC, from knowing the impact of the NOC.

Proposed revisions to 1311.04 will:

  • Add to the NOC a “default” statement that it remains pending for three years (and not six)
  • Permit the NOC time statement to be modified, shorter or longer depending on the anticipated length of the project
  • Permit the owner to record an affidavit at the conclusion of the project, noting the project is over and notice of commencement is terminated

These potential changes will permit a title company to record a project-ending affidavit and require that the chain of title shows the Notice of Commencement is terminated. It will provide certainty where before there was a lingering issue, solved in different ways by different buyers, lenders, and title companies, and sometimes rejected by local recorders.

There is, however, the potential for abuse if an Owner records the termination affidavit before all lien time frames have run, for example before 75 days from last work. In that instance, if the notice of commencement was terminated, under the existing statute lien claimants work would relate back to first visible work rather than the Notice of Commencement recording. Contractors would also need to consider filing amended NOCs to keep the project protected in the event the work remains active past the time frame stated in the original NOC.

Copy of Awards Congratulations (1)

Contractors learned many lessons from 2020-2022 on material/labor availability, price escalation, and contractual allocations of risk.  Prudent contractors will consider this in contracts moving forward.

Show Me the Money

Long gone are the days of large projects that are simply private or public.  Large projects are multi-layered when it comes to funding.  Federal, state, and local funds may be part of the funding for the development, adjacent infrastructure, and nearby improvements.  Municipalities are using tax incentives, or forgivable grants, to spur development in their communities.

Contractors need to investigate the source of funds for both potential lien rights and to ensure they understand the project cash flow.  Is payment a combination of government funding, company funding, and bank financing?  Do upper tier contracts condition payment on release of funds by the lenders and/or government distributions?  This requires both contractors to evaluate how long they may be required to perform without payment.  Contractors should consider if a “right to stop work” exists relative to delayed payment.  If work is suspended or stopped due to payment delays, will the contractor be paid for the delay?  Contractors want to ensure such delays are both excusable and compensable.

Understanding the contract/ownership tree is also important to preserve lien rights.  Names on contracts may not match actual names of owners.  Conversely, owners may be single asset entities to shield the master entity from liability if the project fails.  To ensure lien/attested account rights are preserved, contractors’ tiers should evaluate the scope of required Notices of Furnishing and make sure they are served to everyone up the contract chain.

Evaluations must be made of funding sources, including a senior bank mortgage, that have priority over lien claimants.  Regardless, even when it appears project equity is limited, liens can still be powerful tools to ensure eventual payment – or at least a seat at the table when litigation or payment discussions ensue.  For example, contractors who placed liens on stopped projects, during the 2008-2009 Great Recession, found their phone ringing several years later when the economy improved, projects restarted, and liens needed to be resolved and released.

Keep Your Mouth Shut

Contractors involved with the significant projects may see confidentiality provisions in contracts.  Confidentiality provisions are becoming more commonplace.  Contractors signing contracts with confidentiality provisions must take steps to follow them.  It is not simply enough to tell your staff to keep things confidential; instead, the contractor must be proactive to protect information.

Protecting electronic information, including e-mails, in a password-protected database is a critical consideration.  Contractors must also investigate their obligations to secure physical copies of documents in a secure manner.  Contractors should strictly adhere to contract requirements and, at a minimum, treat confidential information as carefully it protects its most valuable secrets.  If contractors fail to do this and information leaks out, contractors may face litigation over the ensuing damages.

Contractors may have to ensure their lower tiers and suppliers follow similar restrictions.  Contractors who simply sign and take no action to protect confidential information or trade secrets, do so at their peril.

Do You Understand Me?

The construction labor shortage is well documented.  Ohio contractors are finding more diverse work forces from southern areas, including many native Spanish speakers.  Already clients are reporting the need to have Spanish-speaking HR and hiring staff to both attract workers, manage them, and retain them.  Non-local workers also incur additional housing and travel costs, and issues such as time for crews to visit their families are a consideration.

Contractor and specialty trades that master the use of available labor will find themselves ahead of those who resist it.  With many projects around the state there is risk of cannibalization of workforces from one city in favor of another.  Prudent contractors will start recruiting nationally now to ensure adequate workforces.

Material Delays and Price Escalation

The impact of delayed materials is evident in many industries, including construction and automotive.  The inability to obtain material (including replacement materials) is generally considered a “force majeure” delay, subject to the specific terms of the contract.  Owners, contractors, and specialty contractors are getting more sophisticated in allocating these risks in contracts.  Consideration must also be given to these delays on third parties.  Contract clauses that are clear and consistent are far more likely to be enforced.

For example, if a fundamental piece of material is unavailable due to a supply chain delay, how will it impact the various parties?  The responsible contractor will claim a force majeure delay; generally excusable but not compensable.  The general contractor will pass this delay up to the owner, also seeking time.  But what if the owner cannot tolerate a delay due to manufacturing schedules?  If a substitute product is available, who must pay for the additional cost of that material?  This should be evaluated and put into the contract.

Finally, there is the obvious risk of material cost escalation.  General contractors cannot always lock in the full supply of materials needed at the time of contract, especially where a project is large.  Certain contracts are clear – the contracting party owns all the risk of escalated pricing.  That forces the contracting party to include a contingency to account for and carry the risk, raising the price.  Other contracts include a contingency that is available to parties to account for some portion of the risk.  Still others split the cost of this risk along percentage lines.  This should be clearly negotiated in the contract.  Inadequate contingencies risk the inability (or unwillingness) to perform by lower tiers, forcing general contractors to supplement and then seek reimbursement; that situation is not ideal – better to negotiate and plan for the risk ahead of time.

It’s a Lot to Synthesize

Contractors and owners need to understand all contract obligations at all levels.  Lower tier subcontractors need to have copies of all upper tier contract documents to understand all notice time frames, risk allocations, and the flow of project proceeds.  Owners, in turn, want to ensure all upper tier contract requirements are incorporated down to lower tiers.

When we are asked to assist, we create binders with highlighted and tabbed provisions, summaries on key issues, and use that as the primary means to review requirements.  Prudent owners, contractors and subcontractors will master these requirements and use them to ensure smooth performance.

Hahn Loeser has Ohio offices in Cleveland and Columbus. Aaron Evenchik is a partner in the Cleveland and Columbus office. Jud Scheaf is a partner in the Columbus office. Andy Natale is a partner in the Cleveland office.  Hahn Loeser’s construction practice has been recognized by Chambers USA, Construction Executive (top 50 nationwide) and US News and World Report (National Tier 1).  Aaron can be reached at aevenchik@hahnlaw.com. Jud can be reach at jscheaf@hahnlaw.com. Andy can be reached at anatale@hahnlaw.com.

Bridge square

Supply chain interruptions are reaching critical levels and suspending work on projects. Shortages of bridge coating materials is the most recent area of concern and could be potentially catastrophic to unprepared contractors and owners. The inability to obtain materials may force painting contractors into a position where they cannot advance painting work, cannot retain painting crews, and may be asked to perform work in 2023 they had bid and scheduled for 2022.

What Can The Industry Do To Manage Risks?

Pre-bid, contractors must evaluate the availability of specified coatings and options for advance purchase and storage, confirm and lock-down material delivery timing, and account for any time and cost impacts associated with securing the materials.  Additionally, contractors may condition their performance obligations on the ability to obtain materials. Owners should consider breaking projects into small tranches, cooperating with contractors on advance purchase/storage, and be flexible and reasonable as additional disruptions and delays occur.  Owners should also take steps to ensure the bridge contractors are able to continue to operate, including providing change orders for increases in material, labor, and additional mobilization costs for work performed long after the initial schedule date. Ohio needs its skilled painting contractors in place and viable to mobilize and protect our bridge assets once materials are available.

For projects under contract, now more than ever it is imperative that contractors strictly follow the notification provisions in their contracts, including the ODOT C&MS, to preserve their entitlement to an extension of time. Under ODOT C&MS Section 108.06(B) Contractors are entitled to an excusable, non-compensable delay for: “Extraordinary delays in material deliveries the Contractor or its suppliers cannot foresee or avoid resulting from freight embargoes, government acts, or area-wide material shortages.” See ODOT C&MS 108.06(B)(3). However, the Contractor must notify the Engineer in compliance with ODOT C&MS Section 108.02(F). That means immediate oral notification and Written Early Notice within two days. Failure to follow these timelines can prejudice the contractor’s rights.

If you have questions or need assistance, our construction team is here to help.

Untitled design (3)

In March of 2022, the U.S. Supreme Court was asked to consider revisiting an August 2021 decision made by the U.S. Court of Appeals for the Eighth Circuit (Designworks Homes, Inc. v. Columbia House of Brokers Realty, Inc., Case No. 19-3608 (8th Cir. 2021)). The Eighth Circuit decision is presented as upsetting a long held real estate industry practice of relying on reproductions of architectural floor plans in their marketing and sales materials. While architectural copyrights are seen as having the narrowest scope of protection of all copyrights, the implications of the Eighth Circuit decision may have far-reaching implications of expanding these protections across many industries such as, in real estate, construction, and building development.

In August 2021, the U.S. Court of Appeals for the Eighth Circuit issued its decision indicating pictorial floor plan reproductions, of an otherwise constructed building, may be found liable for copyright infringement as architectural copyrights. In the case in question, a builder created floor plans for homes that included architectural copyright protected features (i.e., triangular atrium design with stairs). Owners of the homes later hired real estate professionals to sell their homes. When listing the homes, multiple realtors created sketches reproducing the floor plans of the homes. These sketches were provided in marketing materials for the sale of the homes. The builder brought suit against the realtors for infringing the architectural copyrights by reproducing and publishing the floor plans without authorization. The 1990 statute, establishing architectural copyrights, provides an exception (which narrows the protection for architectural copyrights) that states “[t]he copyright in an architectural work that has been constructed does not include the right to prevent the making, distributing, or public display of pictures, paintings, photographs or other pictorial representations of the work, if the building in which the work is embodied is located in or ordinarily visible from a public place.” See 17 U.S.C. §§ 120(a). The realtors believed their reproductions of the floor plans were protected from suit for infringement by this exception – but the Eighth Circuit has decided otherwise.

From the real estate industry’s perspective, the Eighth Circuit incorrectly decided that the above-mentioned defense to infringement of an architectural copyright is much narrower than first believed. While the implications of this decision are rooted in realty practices the decision may have far reaching implications for related activities in the construction industry such as, for example, developers or contractors who may generate or rely on pictorial reproductions of floor plans for building improvements, marketing, and sales. It is still uncertain how far this decision will reach. The petitioners argued it will upset the use of floor plan reproductions in appraisals for mortgages, tax assessments, property evaluation documents, insurance documents, commercial leases, building improvements, etc.

The issue in dispute is based on the statutory interpretation of the above exception for architectural copyrights. The Eighth Circuit found that the words of the exception (e.g., pictures) possess a narrower meaning, under the statute, than an ordinary meaning that might otherwise be supported by a dictionary definition. The Eighth Circuit drew a distinction between granting this exception for “artistic” reproductions as opposed to “functional” reproductions. As the Eighth Circuit decided, functional reproductions appear to not be covered by the exception while artistic reproductions are. The Eighth Circuit does not necessarily draw a clear line as to what would be deemed functional over what would be deemed artistic, other than to indicate the floor plans in question were functional – letting this nuance remain subject to future litigation. The Eighth Circuit does leave the door open for other fair use exceptions as a mechanism to avoid liability. However, this has created an uproar and uncertainty surrounding the use of a floor plan as outlined in the context above.

At this moment in time, the Eighth Circuit decision stands. A lot of industries are watching whether the U.S. Supreme Court will take on this question. Alternatively, if the Supreme Court does not take on this question, a lot might also be told by the District Court who must revisit their prior decision in view of the Eighth Circuit’s decision. For the time being, it will be important to take these details into consideration before reproducing floor plans otherwise protected as architectural copyrights.

Vaccination Mandate
Hahn Loeser's Steven Seasly, Ann Knuth, Julia Denmeade and Colten Siedlarczyk provide tips on achieving good faith ETS compliance and complying with private contractual obligations.

With OSHA’s Emergency Temporary Standard (ETS) hanging in the balance of a special January 7, 2022, U.S. Supreme Court session, your organization should nonetheless prepare to comply with a Vaccine-or-Test COVID-19 policy. As it stands, the current OSHA ETS requires private businesses with at least 100 employees to ensure that their employees are either vaccinated against COVID-19 or tested weekly. Compliance requires a well-developed, written policy monitoring vaccination status among employees and a dialog with employees regarding exemptions based on disability, religion, and other state-required reasons.

An employer who implements a weekly COVID-19 testing program for unvaccinated employees may fear compliance challenges beyond its control. Namely, the limited number of testing resources in the face of ever-increasing demand. To address this issue, OSHA has provided guidance to covered employers on how to remain compliant with the ETS in the event of testing shortages or delays.

OSHA expects that most screening testing will be antigen testing that is conducted at point-of-care locations due to the reduced cost and faster processing time when compared to NAAT testing in laboratories. Most NAATs need to be processed in a laboratory with variable time to results (approximately 1–2 days). In contrast, most antigen tests can be processed at the point of care with results available in about 15-30 minutes. Rapid point-of-care tests are administered in various settings, such as: physician offices, urgent care facilities, pharmacies, school health clinics, workplace health clinics, long-term care facilities and nursing homes, and at temporary locations, such as drive-through sites managed by local organizations.

Employers should be cautioned about self-administered COVID-19 tests. Tests that are both self-administered and self-read do not meet the definition of “COVID-19 test” in the ETS (unless observed by the employer or an authorized telehealth proctor) and do not satisfy the testing requirements. Importantly, because unobserved, self-administered COVID-19 test results are not acceptable under the ETS, the current shortage of at-home tests does not directly impact compliance.

Currently, it is OSHA’s position that there is a sufficient supply of COVID-19 tests available and adequate laboratory capacity to meet the anticipated increased testing demand related to compliance with the ETS. However, if an individual employer is unable to comply with the testing requirement of the ETS due to inadequate test supply or laboratory capacity, OSHA will look at efforts made by the employer to comply, as well as the pattern and practice of the employer’s testing program and consider refraining from enforcement where the facts show good faith in attempting to comply with the standard.

OSHA also recognizes that where the employee or employer uses an off-site laboratory for testing, there may be delays beyond the employee’s or employer’s control. If there is a delay in the laboratory reporting results and the employer permits the employee to continue working, OSHA may refrain from enforcement where the facts show a good faith attempt at complying. To determine whether a good faith attempt has been made, OSHA will look at the pattern and practice of the individual employee or employer’s testing verification process.

Tips to Help Achieve Good Faith ETS Compliance

  • Develop a written policy that outlines the testing protocol and procedures in great detail.
  • Strictly follow and enforce your policy.
  • Keep thorough records – including past test results, dates, times, and correspondence.
  • Document any issues with obtaining test supplies or timely results.
  • Confirm the factual accuracy of any test supply or result issues raised by an employee.
  • Remain in contact with OSHA and other local government agencies.
  • When in doubt, contact a member of HLP’s Labor & Employment group. We are here to help and can assist with documentation of testing and result issues beyond your organization’s control.

Vaccine-or-Testing Contractual Obligations

Regardless of how the U.S. Supreme Court may rule on the January 7, 2022, arguments, employers in the construction industry may still find themselves having to comply with similar vaccine-or-test COVID-19 policies as contractual requirements. A trend may develop where project owners and employers are incorporating such policies into their contracts and sub-contracts, likely citing the impact COVID-19 has on project delays and manpower.

However, uniform guidance on how to comply with such requirements in the event of a testing shortage is not likely to exist in private contracting like it does for employers covered by the ETS. Additionally, methods and levels of enforcement are also likely to vary from project to project. Such variables may present unique compliance challenges and can lead to a failure to perform as obligated. Failure to strictly comply with a vaccine-or-test contractual requirement could constitute a breach, and if not cured, may result in extensive costs and damages. If your contract contains one of these private vaccine-or-test provisions, you may consider suggesting that any testing supply or results issue beyond your organization’s control should be handled in accordance with the claims, delays, or dispute provisions contained in your contract.

Tips to Help Avoid Breaching Private Vaccine-or-Test Contractual Obligations

  • Develop a written policy that outlines the testing protocol and procedures in great detail.
  • Strictly follow and enforce your policy.
  • Keep thorough records – including past test results, dates, times, and correspondence.
  • Document any issues with obtaining test supplies or timely results.
  • Confirm the factual accuracy of any test supply or result issues raised by an employee.
  • Consult notice provisions contained in your contract and contract documents.
  • Provide notice of testing issues beyond your control pursuant to the requisite time and manner contained in your contract and contract documents.
  • Demand guidance and or resolution.
  • Remain in communication with the project owner, general contractor, or contracting party.

When in doubt, contact a member of HLP’s Labor and Employment Group. We are here to help and can assist with documentation of testing and result issues beyond your organizations control. Timely notice is vital.