Welcome to the fall edition of our Under Construction newsletter. We hope that you are enjoying the emerging fall weather and colors across our many states.
In this newsletter, we explore a variety of topics and discuss issues related to current construction trends and legal news that may be relevant and helpful to you and your business.
We offer timely and useful information regarding the prevalence and challenges of loss of productivity claims, a good reminder for contractors to review their contract terms regarding change order requirements, and how arbitration may be available without an express direct agreement in Utah. This edition also addresses the Colorado Court of Appeals' recent expansion of the definition of “residential property” in connection to the Homeowner Protection Act, and an article applicable to all – a contract checkup for the construction industry.
We hope you will find these articles informative and enlightening. Please let us know if we can address a specific construction issue in a future newsletter. We hope the rest of the season and year is profitable, busy, and safe for you, your company, and your family!
Jim Sienicki, Editor
Losses of labor productivity issues and claims seem to have taken on more prominence in the last few years due to labor shortages, material shortages, and the quickly changing economics and supply change issues affecting the construction industry. As a result, loss of productivity is one of the key issues faced in construction arbitration and litigation. But what is a loss of productivity claim, when might you have such a claim on your hands, and what challenges are faced in making a successful claim, or in defending against such a claim?
Productivity is defined as a measurement of output per unit of time or effort, usually measured in labor hours or equipment hours. Thus, when a contractor’s work on a project is impacted due to delay or disruption, or was otherwise more inefficient than planned, the contractor may consider bringing a claim to receive additional compensation for the negative impact.
Contractors must balance prevalent but sometimes competing goals of advancing work to finish projects according to schedule, while protecting the health and safety of workers and the public, dealing with other trades on the project site, labor or material shortages, or other issues that may affect a contractor’s efficiency on the jobsite. Many of these issues may be outside the control of the contractor. To deal with these issues and work to stay on schedule as best as possible, contractors often must utilize more labor hours on a project than originally reasonably anticipated—resulting in losses of productivity. Successfully identifying, quantifying, and proving such losses is critical for the reimbursement of such costs, and in turn, the financial success of these contractors. On the other hand, successfully and promptly identifying all available defenses to a loss of productivity claim is essential for an owner.
It is important to remember that the construction industry is still feeling the effects from the COVID-19 pandemic and other worldwide events, and their resulting fluctuations in the availability of both labor and materials. Moreover, with the uptick in natural disasters and inclement weather occurring across the country, changes affecting construction projects may only become more common. The impacts are still seen now in disrupted supply chains, and have caused owners, contractors, and subcontractors to make difficult decisions as to how to proceed on projects. For example, instead of accepting that an unforeseen disruptive event has necessitated a complete work stoppage, which would cause the owner to bear the financial exposure, it sometimes may be more beneficial for owners to instruct their contractors, and in-turn instruct subcontractors, to proceed with the project, be as efficient as possible, and work around the impediments.
Notably, with loss of productivity claims, it is irrelevant whether the impacted activities lie on the critical path—although the loss of productivity is often a consequence of a delay. Instead, loss of productivity is only concerned with unanticipated increases in costs to perform the subject work. Thus, to bring a successful loss of productivity claim, one must show liability, causation, and damages. On the other hand, an owner will want to point out that the contractor did not meet its burden of proof with respect to proving liability, causation, and damages.
Liability sometimes arises out of a change that impacted the claimant’s work on a project. For example:
Causation is the link showing that liability issues led to unavoidable damages for the claimant. In effect, the claimant must establish cause and effect. For example:
To be compensated, claimants must be able to measure and demonstrate how the changes adversely affected productivity.
Although the right to recover for losses of productivity is well-settled, there is no universal standard for calculating damages for these claims. And so, while the claimant must provide a reasonably accurate estimate of losses, this estimate may not necessarily be a precise calculation. That said, claimants and their experts should utilize a methodology recognized by the courts and/or arbitrator in reaching their estimation.
Some methodologies that have been used for quantifying damages are:
As a quick tip, a contractor/subcontractor loss of productivity claim can be doomed by a lack of prior and proper planning and execution. To avoid this downfall, a general contractor or subcontractor may want to:
Manage the job with precision—list changes and their impact on the workforce. Email these records to the client so that they are aware of the lost production contemporaneously.
Loss of production, though especially prevalent in current construction projects, can be difficult to prove in a reimbursement claim due to the difficulty quantifying and proving damages. That said, the law is settled regarding one’s entitlement to reimbursement if such damages are proved and the economic success of contractors who are impacted by production loss depend on these claims. Thus, if you believe you have a loss of productivity claim, it is important to discern a reasonable estimate of your losses at the outset of the project. Contractors may want to consult their legal counsel early to make sure that you are timely documenting these claims and complying notice provisions that may be applicable pursuant to the subcontract or law in the jurisdiction where your project is located, and owners may want to consult their legal counsel early to identify the defenses that may exist to the loss of productivity claim. [BACK TO TOP]
A recent unpublished opinion from the Washington Court of Appeals serves as a good reminder that contractors should carefully review their contract terms, especially when it becomes clear that there will be additional expenses or delays in performing their work caused by others. In Cascade Civil Construction, LLC v. Jackson Dean Construction (September 25, 2023), Division I of the Washington Court of Appeals issued an unpublished opinion concerning an excavation subcontractor’s (Cascade Civil Construction) claim for approximately $3.5 Million above the original subcontract price.
The additional costs appear to be largely due to a change to the construction schedule. Under the new schedule, dewatering the soil occurred at the same time as the excavation work, instead of prior to the excavation work as originally planned at the time of contracting. Cascade asserted this caused the excavation to be more time consuming and more expensive to haul (because of the extra water weight of the soil). Cascade also argued that having both scopes of work done simultaneously caused delays because the dewatering work was being performed in the same physical space as the excavation work.
Cascade sent multiple communications to the general contractor referencing the issue and expected cost increases. In the communications, Cascade notified the prime contractor that it would need additional compensation and time and requested commensurate change orders. It appears that no change order, however, was ever issued to approve the extra cost or time.
The Washington Court of Appeals found that although Cascade communicated the issues to the prime contractor, Cascade’s communications did not follow the notice of claim procedures under the parties’ subcontract. The court also found that Cascade’s communications did not provide details of the portions of its work impacted, or potential solutions to the problem, as would have been required under the subcontract notice provisions.
The subcontract, as many do, required Cascade to obtain a change order before commencing changed work, or else it would not be entitled to compensation related to such changes. Ultimately, the court held that once Cascade was aware that it was required to perform changed work for which it had not received a change order, it had a “claim” for which it should have immediately followed the claim notice procedures under the contract. The court held that by failing to do so, Cascade was not entitled to the claim for the additional cost or time.
In reaching its decision, the court rejected Cascade’s arguments that the general contractor waived the notice or claim provisions in the subcontract, or that Cascade was entitled to relief under the change directive provisions of the prime contract (which apparently was incorporated into the subcontract).
Although not published, this case certainly should serve as a cautionary tale for contractors who are often caught in the crosshairs of being asked to perform additional or changed work without delay, even when the contract requires that signed change orders must precede such changed or extra work. To the extent a contractor is being pressured to imminently perform changed work without a signed change order, that contractor should immediately review its contract and should strongly consider consulting with counsel to determine whether the situation triggers the obligation to follow the contract’s claim provisions as a condition precedent to being entitled to additional compensation. [BACK TO TOP]
Construction transactions are characterized by many contracts involving multiple parties. While the terms of the parties’ individual contracts generally govern their relationships, parties should be aware that, intentionally or not, other parties may be in a position to enforce dispute resolution clauses in other agreements. For example, the Utah Court of Appeals recently demonstrated that the court’s strong policies favoring arbitration may allow third parties to enforce arbitration clauses. Parties may be forced into arbitration or mediation to resolve disputes even though there is no such agreement between the parties.
In that recent case, purchasers of real property sued a title company for allegedly participating in a fraudulent real estate scheme. That title company, who was not a party to the purchase and sales agreements (“PSAs”) at issue, filed a motion to compel arbitration, arguing that it was entitled to invoke the arbitration clause of the PSAs because it was a third-party beneficiary of the contract. In opposition, the purchasers argued that the title company had not established entitlement to invoke the arbitration clauses. The trial court agreed with the purchasers on all fronts and the title company appealed.
The Utah Court of Appeals first examined the choice of law. To determine which states’ laws, apply, the law of the forum state governs. Under Utah law, courts first look to whether there was an effective choice of law by the parties. Here, the PSAs provided that the contracts would be governed by the laws of the State of Colorado. Ironically, the Utah Court of Appeals explained that while there was no Colorado case law on point, a Colorado court would likely look to Utah’s jurisprudence in this instance for guidance. The Utah Supreme Court held in Orlando Millenia, LC v. United Title Services of Utah, Inc., 2015 UT 55, that the lender was “expressly named in special escrow instructions” and that the escrow agreement required “specific actions” from the lender before the escrow agent could disburse the funds to the seller. Therefore, the court concluded that the lender was “no mere incidental beneficiary” of the escrow agreement, but that the lender was “for all practical purposes a party” to the escrow agreement. A third-party beneficiary can enforce a contract when the contract intended to confer a benefit on the third party. Here, the PSAs contain a provision under which “the balance of the purchase price shall be wired, or otherwise transferred to the title company within twenty-four hours of closing.” The PSA did not just contemplate the use of an escrow agent; it required the parties to use that specific title company. The Court of Appeals found that there was nothing “incidental” about that title company’s involvement in the transaction, but that instead, the contracts placed that title company in a key role in the transactions.
Like the lender in Orlando, the title company was expressly named in the contract, and those contracts had specific actions for that title company to take before the transactions could be completed. Colorado’s strong preference that ambiguities be resolved in favor of arbitration factored into the Utah Court of Appeals’ ruling to allow the title company to invoke the arbitration clauses of the PSAs.
Because many agreements in a construction transaction include “flow-down” and “incorporation” provisions by and between them, parties with disputes who did not insist upon an ADR provision in their own contracts may, in certain circumstances, be able to latch on to a mandatory arbitration or mediation clause in another agreement in the chain. This may be bad or good news, depending on your perspective on resolving disputes outside of a traditional court filing, but it’s certainly an option on the table in Utah. [BACK TO TOP]
Colorado’s Homeowner Protection Act (“HPA”), C.R.S. § 13-20-806(7)(a), renders void as against public policy a contract’s limitation or waiver of a “residential property owner’s” rights and remedies provided under Colorado’s Construction Defect Action Reform Act (“CDARA”). Void provisions include any restrictions to a statute of limitations or a statute of repose with regard to residential properties.
In 2017, the Colorado Court of Appeals held that a senior living center, operated as a commercial business by a commercial business owner, was a “residential property” for the purposes of the HPA because it was designed and zoned for residential use under a plain language interpretation of the term “residential” as a “structure where people live.” Broomfield Senior Living Owner, LLC v. R.G. Brinkmann Co., 413 P.3d 219 (Colo. App. 2017). In Broomfield, the relevant contract provided that “accrual” of claims was triggered by the substantial and final completion dates. However, the CDARA provides that “accrual” of claims is not triggered until actual discovery (or, alternatively, when the claim should have been discovered through the exercise of reasonable diligence). C.R.S. § 13-80-104(1)(b)(1). Acknowledging that the CDARA did not define “residential property,” the court employed the tenants of statutory construction and considered the common usage of the phrase, residential property, holding that “residential” plainly means “using or designed for use as a residence” and a “structure where people live.” The Court noted that the CDARA appears to define “commercial property” as “property that is zoned to permit commercial, industrial, or office types of use.” C.R.S. § 13-20-802.5(4). The Broomfield court interpreted this definition to mean that the legislature considered a property’s zoning relevant to its intended purpose. As the subject building was specifically designed for multi-family residential use and was zoned for residential uses only, including senior housing, the Court deemed the property “residential property.”
More recently, in May 2023, the Colorado Court of Appeals seemingly expanded application of the HPA when it found a senior facility on a parcel zoned for commercial or mixed use as “residential” and subject to the HPA. In Heights Healthcare Co., LLC v. BCER Eng’g, Inc., 534 P.3d 939 (Colo. App 2023)1, the relevant contract included a limitation of contractor’s liability equivalent to its fee. The contractor argued the provision was enforceable and not void as against public policy since plaintiff’s property was “commercial” as defined by CDARA, and therefore the HPA did not apply. The Court, however, concluded that the senior living facility was “residential” notwithstanding the applicable zoning designation. The Court held the definition of “commercial property” contained in C.R.S. § 13-20-802.5(4), was not applicable because the definition was within and thus only applicable to the definition of “construction professional.”
The court found that the definition of “commercial property” in C.R.S. § 13-20-802.5(4) was thus not applicable to the entirety of CDARA and only applicable to the subsection defining “Construction professional” for the purposes of CDARA.
The decision in Heights Healthcare Co., and more specifically, the Court’s commentary regarding the limitation of the definition of a “commercial property” creates, at a minimum, some ambiguity in the reading of CDARA’s notice and timing requirements as between residential and commercial projects. C.R.S. § 13-20-803.5 sets forth the notice of claim process and distinguishes between residential and commercial properties. For example, timing for the inspection process under CDARA is 45 days for commercial property and 30 days for non-commercial property.
Although the ruling in Heights Healthcare Co. explicitly limits the definition of “commercial property” to the definition and context of “construction professional” in C.R.S. § 13-20-802.5(4), it does not offer any additional guidance as to whether mixed use properties, residential projects on properties zoned as commercial, or other not-squarely-commercial properties are considered residential or commercial with regard to provisions of CDARA aside from the HPA.
Accordingly, construction professionals should continue to keep a close eye on any case law challenging the Court’s decision in Heights Healthcare Co. or further guidance from the legislature or Courts. In the meantime, construction professional should consider developing strategies with their construction attorney with regard to CDARA claims, especially for mixed use projects. [BACK TO TOP]
1. No appeal or petition for writ of certiorari is pending in this matter.
We began the year discussing an insurance checkup for those working in the construction industry. Now, we are following up with a discussion of issues for a contract checkup, specifically for your ongoing long-term projects. As the year ends, this may be a good time to pull your contracts out and ensure they reflect what has happened on the job since work began. If they do not reflect reality, it is often better to try and fix things now – or document the changes now – than to wait until a problem arises.
One thing you should consider checking is the scope of the work the contract requires. For example, if you are the owner, does the contract require your builder to provide the building you expect? It can be issues as small as ensuring fixtures are properly included to as significant as including an additional wing for the hospital. While it is common for jobs to evolve with additions (or deductions) over time, it can be critical that the contract documents reflect what the parties are building. You may have had many meetings where the changes were discussed. Though meeting minutes will be helpful to determine the scope of work, if there is a dispute down the line, the better practice is to document scope changes consistent with your contract’s requirements.
Another related issue is price. If you are a contractor building a project on a lump sum or fixed price, you want to ensure that all scope additions are included. Likewise, if you are an owner and have cut a room or wing from the final project, you want to ensure you are paying less. Timely change orders are a common way to change lump sum or fixed project pricing to reflect scope changes. But this contract review is not limited to lump sum pricing. If you are a contractor billing a job on a cost of the work basis, the end of the year can be a good time to ensure the prices you are charging reflect your actual costs.
Another important issue is schedule, and it is the same question for owners and contractors: are you on schedule? If not, why not? If you are the contractor and behind schedule, are your delays excused, compensable, and properly documented? It is often better for everyone involved in the project to catch any schedule slippage early on so that the parties can implement a recovery plan (or not) and begin to determine who will bear the cost of the slippage.
Finally, there are a number of administrative issues you should consider examining. Who does the contract list as your company’s point of contact or person to receive any notices? Is he or she still with the company? If not, now may be the time to ensure you’ve complied with the contractual requirements to update that role. Other issues for contractors can include ensuring you have submitted any claims you may have for the owner’s review. Many contracts require the contractor (and its subcontractors) submit claims within a certain number of days of discovering the claim. Since strict compliance with such a requirement may become an issue raised during litigation, claimants are generally better served getting their claims in earlier rather than later, in order to avoid arguing about whether the claims and notice procedures were followed.
To close, owners and contractors often only think about their project’s contract at the beginning of a job, or at its end, or when there is a high-pressure dispute. As this year closes, you should consider bucking that trend and review your contracts to ensure they reflect what you are doing on the job. [BACK TO TOP]