It is critical to draft a liquidating agreement, that protects the general contractor and ties the claims of the subcontractor to the resolution achieved with the Owner/Designer. A liquidating agreement typically should state the amount the subcontractor is owed (i.e. liquidating the liability). The liquidating agreement should set forth how the costs of prosecuting the claim will be paid. It should also provide that the subcontractor will only get paid out of the actual recovery. Thus, there is one claim, one lawsuit and the subcontractor and general contractor maintain consistent positions. Consideration of a liquidating agreement must be made in light of default by the subcontractor and/or failure of conditions of preservation of claims by the subcontractor. This balance should be discussed with counsel.

These agreements are generally enforceable and have been used to comply with or dodge the Severin Doctrine since the 1960’s. The Severin Doctrine basically held that liability to a subcontractor must be liquidated before a claim can be recoverable against an owner. While the Severin Doctrine has largely eroded and been relegated to the legal dust-bin, liquidating agreements remain a great tactical tool in dispute resolution. Beware, in some states liquidating agreements can be difficult to draft due to arcane notions that these agreements violate privity of contract requirements (as distinguished from an assignment or subrogation rights).

One critical misconception is that a subcontractor’s bankruptcy means that it is going out of business. A bankruptcy by a subcontractor may actually be the method by which the subcontractor continues to operate. For many businesses, the legal process of bankruptcy may simply lead to a restructuring of debt, under Chapter 11 of the U.S. Bankruptcy Code, and operations rather than liquidation, under Chapter 7.

The real issue is what the subcontractor seeks to accomplish within the bankruptcy. For example, a subcontractor may seek to assign or transfer all of its obligations and rights, which, in turn would require the general contractor to assert its contractual rights relative to these actions.

Procedure and Timetable

The process is handled by a special federal court that considers both federal and state laws. The court reviews the fact pattern and considers a general contractor’s mechanics lien alongside all other creditors in light of the insolvency. Generally, creditors with valid liens are paid first (to the extent that the lien has equity), then creditors with claims related to the administrative costs of the bankruptcy and finally unsecured creditors.

The outcome to be determined by the court can range from full payment to the general contractor to a release of the subcontractor with regards to its duties owed to the general contractor. The timetable for this process is typically many months.

Depending on whether the bankruptcy is a Chapter 7 or a Chapter 11, the timetable for this process is typically five months to well over a year. General contractors may want to attend the 341 meeting of creditors, which is typically held 30 days after the bankruptcy filing. At that meeting, the general contractor may ask the debtor questions about the bankruptcy case, such as whether the subcontractor will continue his work.

The general contractor cannot pursue collections of any type while the case is pending without court approval. In some instances, the general contractor may be required to return payments made to it by the subcontractor within 90 days of the bankruptcy.

Automatic Stay

A general contractor faced with a subcontractor’s bankruptcy may not terminate the subcontractor agreement without court permission. This is true even if the contract between the parties says that the general contractor may terminate the relationship upon insolvency. This protection is an “automatic stay,” and courts treat it very seriously, including ssuing sanctions for violations, usually in the form of punitive monetary damages.

If the general contractor does not want to be bound by the subcontractor agreement, it should quickly file a motion to ift the stay to allow the general contractor to terminate the contract.

Accounts Payable

Most general contractors operate under the assumption that a subcontractor bankruptcy is defined as an event of default by the subcontractor based either on language in the owner contract or the subcontract. On this basis, general contractors often mistakenly believe that the subcontractor has no accounts payable at the point of the bankruptcy. This may not be the case.

A subcontractor’s accounts receivable from the general contractor are property of the bankruptcy estate. This means that the accounts receivable should be listed on the debtor’s schedules as an asset, and the bankruptcy trustee may attempt to collect them. In addition, clauses that trigger default upon a bankruptcy filing are generally not enforceable in bankruptcy.

Recoupment

To the extent that the bankrupt subcontractor owes the general contractor on a claim related to the accounts receivable (i.e., the general contractor’s cost to complete based on the bankrupt subcontractor’s failure to timely complete the project), the general contractor may deduct this claim from the accounts receivable owed to the bankrupt subcontractor. This result is called recoupment.

In order to pursue recoupment, the general contractor will need to list itself as a creditor, and thereby minimize claims by the trustee that the accounts payable are owed in full. General contractors list themselves as creditors by filing a proof of their claim with the court. A wise general contractor will do so immediately after it receives the form from the court.

Lien Waiver or Preference

One danger of bankruptcy is the prospect that a transaction by the subcontractor will be deemed a preference, which can then be set aside by the bankruptcy trustee. Consideration should be given to lien waivers and whether the subcontractor has executed an affidavit of non-payment as is required under certain states.

Although a lien waiver may not meet the statutory definition of a “preference,” there is a potential problem where a subcontractor executes the lien waiver, is not in fact paid and files for bankruptcy prior to filing the affidavit of non- payment.

There is some potential that a trustee could contend that an owner and/or general contractor would be receiving more than it is entitled to receive if it took advantage of the subcontractor and failed to pay the subcontractor. The trustee may contend that it has additional time to file the affidavit of non-payment.

Accordingly, general contractors may wish to discuss the preference issue with owners and evaluate lien waivers from bankrupt subcontractors.

Rights of Property, Business Owners

Owners of real estate or the owners of the business who have contracted with a general contractor may exercise “step-in” rights to pay for the obligations of the subcontractor. Such action will also prevent a general contractor from halting work due to the bankruptcy.

Conclusion

Many of the points listed above can be included in an amendment to the main subcontracting agreement. The general contractor should also review its contract to ensure that it may assume the role of the subcontractor if the subcontractor cannot perform. It should include language requiring the subcontractor to provide information promptly upon request about its ability to continue working as well as timing. It should also cover actions the general contractor will need to take with regards to other interested parties.

By Kevin H. Hudson and Jimmy C. Luke II

Kevin Hudson, is the chair of the Construction Practice at Foltz Martin and Jimmy Luke practices in the area of bankruptcy and real estate. The firm can be found online at www.foltzmartin.com

Reprinted from Southeast Construction, October/November 2010

Historically, the most successful green initiatives were those driven by tax abatements and credits, expedited permitting, density incentives, utility credits and other Owner based incentives..  The majority if these initiatives came through the U.S. Green Building Council rating system for Leadership in Energy and Environmental Design (LEED).  In the LEED framework, everyone “comes on board” a project from day one, but the project is ultimately evaluated by the benefits weighed against the costs for achieving those benefits.    The responsibility of a general contractor under these circumstances was detailed by the contract documents and precise specifications, which the general contractor priced and the Owner either accepted or rejected.  .  In turn, the Owner who paid higher premiums for a “green” project had the ability to minimize the extra costs of achieving this end result through value engineering and by dealing with a team of construction professionals who are used to operating in this environment.

2.                  Course Change: The “New Green” in Mandatory Building Codes?

In contrast to the prior contract based model, there are pending legislative proposals to make “green” standards mandatory as part of the building code with only narrow exceptions.  As early as 2003, Atlanta led the way in this paradigm shift, requiring city projects in excess of $2,000,000 or 5,000 square feet to reach a LEED Silver certified level.  Now, the self proclaimed leader in Southeast green standards is trying to push these and similar requirements on all commercial construction in Atlanta through the potential enactment of green standards into the building code.   As of July 2009, the Atlanta City Council is considering legislation that will directly affect developers and contractors by requiring all projects to achieve certain levels of environmental sustainability.   Spearheading this effort is a group called the Sustainable Building Task Force which has announced its mission is to amend Atlanta’s building code so that it responds to advances in building technology to protect the health, safety, and welfare of Atlantans and to safeguard Atlanta¹s long term comprehensive competitiveness.

While the Task Force has laudable goals, the question remains:  Should green standards rise to the level of building code requirements, and what impact will it have on the construction community as a whole?  Certain groups are concerned and are pushing for more time and a more in depth analysis regarding the prior framework of voluntary incentive based green construction.   the new framework pending before the City Council would remove the Owner’s ability to opt in or out on LEED, and would require  that the architect and general contractor implement the mandatory code based green standards.   Owners may face risking construction costs in an economic environment in which construction projects are already being shelved due to an inability to pay for existing construction standards.     General contractors and architects will have a new standard of care based on “sustainability” and “efficiency” standards which will be evaluated over years if not decades.  The risk control methods will need to evolve to address these heightened standards.  The new “green” standards and their interpretation in relation to the statute of limitations will likely be profound, as the sustainability and efficiency of a building or product can only be measured over time.  In those states that have statutes of repose, general contractors may be able to look to outside limits and shift risk appropriately.   However, in states, such as Florida, green standards may well present extended liability risks for decades.  These mandatory standards will continue to build upon the “LEED” disputes that are already arising in commercial construction and drive up costs, potentially resulting in what many have coined as the new age of construction “LEEDitigation.”

3.                  Bond and Insurance Issues:  Examples in the Residential Market and Potential For Future Problems.

Due to the nature of extended liability, it is likely that sureties and insurance companies will begin to encounter difficulties in addressing “green” standards.

Fireman’s fund policy which guarantees replacement of damaged goods and buildings with those that meet Green standards (IN USE IN GA FOR RESIDENTIAL AND ALSO USED ON COMMERCIAL PROJECTS).

By Kevin Hudson and Gregg Bundschuh

Click here to review “Order and Judgment”

Owners commonly use the American Institute of Architects’ documents as the blueprint for construction contracts with contractors. Yet, the blueprint continues to change and those changes appear more and more slanted against contractors, as demonstrated by the newest AIA 2007 documents.

In part two of our two-part series, we will examine defects and pitfalls in the claims process, and the likely result that contractors will lose valid claims – including claims for concealed conditions – based on a failure to follow procedure.

The Wrong Direction?

By now, most contractors have come to the conclusion that the AIA is headed in the wrong direction and there is advocacy building for “consensus documents” as an alternative to the AIA. However, the willingness of owners to change is not likely to be great and, thus, contractors need to understand the revisions to the 2007 AIA documents and areas that require revision within the framework. The AIA initially created and touted consensus documents that sought to fairly balance unavoidable risks in projects. Generally speaking, the risks of design errors was historically borne by the owner on the basis that the owner hired the architect and the owner’s remedies resided in the contractual relationship between both parties.

The AIA allows use of the 1997 version of the documents until May 2009, although the 2007 documents are currently available. It is important to understand the changes now because owners are entitled to begin using the 2007 documents as of January 2008.

Most practitioners and contractors previously dealt with the size of the AIA documents by having an understanding of where certain critical provisions were located in the documents. The claims process was no exception. For years, the claims process was dealt with in Article 4.3. The 2007 AIA moves the process to a new Article 15, but, the new AIA 2007 leaves out certain critical protections.

The new claims-related provisions in the AIA 2007 would:

■ Disrupt understandable examples of claims that were contained in the 1997 documents and change the long-understood procedure and treatment of concealed claims

■ Alter the method and timing for claims resolution in general, making it more confusing

■ Fail to provide for joinder of the architect, etc., without consent

Section 4.3.1 and 4.3.6 of the AIA 1997 general conditions contained precise and understandable examples of claims, which are now deleted by the 2007 Article 15. For example, all of the examples listed in 4.3.6 as a basis for a claim by the contractor for additional costs are removed. A claim is no longer defined to include “adjustments or interpretation of contract terms.” The net effect of the 2007 revisions is a step backward in the certainty previously provided to contractors about claims that allowed adjustment to costs.

New Conditions

The 2007 documents also alter the previously clear provisions for addressing concealed conditions claims. Put simply, a contractor should be entitled to more money and time if a condition on the site differs from the assumptions underlying the plans or the expected job site conditions. The 2007 documents now address concealed conditions in the same manner as any other claim, and therefore, the contractor must presume that a claims process has begun upon the identification of a concealed condition or otherwise risk prejudicing its rights. There is no grace period for allowing the parties to consult and review the situation identified by the contractor to be a concealed condition.

Additionally, the 2007 documents alter the method for claims resolution through the use of vague and trap-laden provisions addressing mandatory mediation as a condition to pursuing any claim. The most obvious example involves Section 15.2.6.1, which modifies the general rule that mediation may be filed at any time and deals with how the parties proceed after an initial decision. This section provides that in the event one party demands mediation within 30 days of receiving an initial decision on a claim, then the party receiving the demand may avoid mediation and obtain a waiver of the claim by failing to file for mediation within the time required. Incredibly, Section 15.2.6.1 would require that a contractor take no action for 30 days of an initial decision because an owner could avoid the contractor’s claim merely by failing to file for mediation within 60 days of the con- tractor’s demand. Given the urgency of having prompt claim resolution, the 2007 revisions provide a trap to the contractor who is merely attempting to move a process forward.

Finally, the 2007 documents fail to provide for joinder of the architect or others involved in the project, without the consent of such parties and without an agreement between the owner and the other parties that authorizes arbitration. Of course, the architect is not likely to provide consent if it bears responsibility, and the contractor has no control over provisions in a contract between the owner and another. As detailed in part one of this series, there is a disturbing trend by the AIA to eliminate or make more difficult claims against architects, and, instead, shift an increasing amount of responsibility onto the contractor.

By Kevin Hudson and Matthew Spivey

Reprinted from www.Construction-Today.com, April 2008

Beginning with the 1987 set of construction documents, which were generally viewed as acceptable to most contractors, the American Institute of Architects (AIA) began a process of revising its construction documents every 10 years. Each revision has yielded more provisions that were unacceptable to contractors, and the 2007 set is no exception.

As part one of a two-part series, we will evaluate the 2007 AIA documents from the contractor’s perspective. Concerns are divided into two main areas. Part one examines the responsibility shift in the 2007 documents from risk previously placed on the architect to risk that is now placed on the contractor. Part two will examine defects and pitfalls in the claims process, and the likely result that contractors will lose valid claims, including claims for concealed conditions, based on a failure to follow procedure.

AIA will allow the use of the 1997 version of the documents until May 2009, even though the 2007 documents are now available. It is important to have an understanding of the changes now because owners were entitled to begin using the 2007 documents as of January.

Creating Consensus

The AIA initially created and touted consensus documents that sought to fairly balance unavoidable risks in projects. Generally speaking, the risk of design errors was historically borne by the owner on the basis that the owner hired the architect and the owner’s remedies resided in the contractual relationship between both parties.

This allocation of risk was further supported by the well-known Spearin doctrine. This is the proposition that when an owner’s contract prescribes specific design performance requirements, it carries with it the implied warranty that if the plans and specifications are followed, the construction will be adequate and the contractor does not bear the liability if it is not. (See United States vs. Spearin, 248 U.S. 132 (1918).

Coordination and Design Issues

The revisions to the consensus documents, or coordination and design issues on the contractor and, most certainly, place a greater burden on the contractor when attempting to avoid liability for any damages. The recent settlement of claims on the Boston Central Artery/Tunnel project, or Big Dig, illustrates the problem.

The contractor contended that the collapse was a design error. The architect contended that the contractor, as a professional, was responsible for understanding whether the proposed construction would work. Ultimately, responsibility was split between both in varying degrees. The result would likely be very different under the 2007 revisions.

A201-1997 section 3.2.1 details various requirements related to a contractor’s obligation to review contract documents and site conditions, and to report any “errors, inconsistencies or omissions discovered by contractor … to the architect as a request for information.” The stated purpose is to facilitate “construction by the contractor.” Under Section 3.2.3 of the 1997 version, a contractor was not responsible for a design error unless the contractor “recognized such error, inconsistency, omission or difference and knowingly failed to report it to the architect.”

A201-2007 Section 3.2.2 revises Sections 3.2.1 and 3.2.3 significantly. First, the stated purpose is changed to “coordination and construction by the contractor,” which is a design concept and ordinarily the responsibility of the architect. Next, Section 3.2.2 imposes a “negligence standard on the contractor for failing to report any error, inconsistency or omission.” Under the 2007 documents, the question will now become whether the contractor should have known that the design documents were insufficient for the task.

In the Big Dig example, the 2007 documents would have supported the exact contentions that were advanced, making the contractor’s efforts to hold the architect responsible for design errors much more difficult. Instead of the issue being whether the contractor actually knew that the design documents would not support the work, the question will become whether a sophisticated contractor, who has built tunnels for years, should have known that the design documents were insufficient.

Negligence Standard

The impact of a failure to comply with the new negligence standard of the 2007 documents is brought home by the revisions made to Section 3.2.3, which makes the contractor liable for violating the standard of care imposed by the contract. It should be noted that a contract can alter the standard of care that would be imposed by case law, and that standard would generally hold the architect – not the contractor – responsible for design errors.

The 2007 documents, however, take one more step to exculpate the architect and impose liability on the contractor. A201-1997 Section 4.2.2 included an obligation on the architect “to endeavor to guard the owner against defects and deficiencies in the work.” The purpose of this provision was to facilitate involvement by the architect during construction in ensuring that the design would produce non-defective work. Even if the architect was negligent in the design, he or she was given an opportunity to evaluate the work during construction and stop the work as necessary to correct the negligence. For example, if a light tower was designed inadequately, such that it was incapable of carrying a load, an architect would have the opportunity during the construction to observe the light tower and the fact that it was out of plumb, and then take corrective action.

A201-2007 Section 4.2.3 removes the obligation to guard against defects and deficiencies, and makes the architect responsible only to report “known deviations” from the contract documents. The 2007 documents are precisely the opposite of a correct allocation of risk. Instead of the architect being responsible to coordinate work during actual construction and confirm during that process that his or her work was sufficient and accurate, the risk of defects and deficiencies from the architect’s work during the construction now appears to be shifted to the contractor. Incredibly, the architect now receives the protection afforded by “actual knowledge,” while the contractor is charged under penalty of negligence with evaluating the design of another.

Take Time to Evaluate

The architect is a licensed professional and is in the best position to control the risk of an error, inconsistency or omission in design documents relative to the actual site condition. The historical role of the contractor was meant to reflect the fact that as a professional, if the contractor actually knew of an issue with the design documents, then it was his or her responsibility to report that knowledge. The 2007 revisions arguably free the architect/owner from blame, and allow blame to be placed on the contractor for any error, inconsistency or omission that contractor should have discovered.

The practical implications are such that either the contractor will take on this responsibility with such zeal that constant and unnecessary communications pointing out possible errors and inconsistencies will ensue, or the contractor will instead risk being measured on a negligence standard by the owner if the project progresses with delay or other problems caused by design specifications. Further, the revisions, as well as recent case law, seem to imply a higher hurdle for the contractor who seeks compensation for delays or changes in work related to defective design in the plans and specifications.

By Kevin Hudson & Matthew Spivey

Reprinted from www.Construction-Today.com, March 2008

The wireless revolution is in full force, and to meet growing demand for cellular phones and data devices, wireless companies are scrambling for new cellular tower sites. Power companies are also scrambling to keep up. The surge of new construction related to power lines and cell towers does not, however, come without its fair share of risks. After all, the leading causes of death in construction are falls and electrocution. The Department of Labor’s Bureau of Labor Statistics for 2006 found that those working on cell towers and other communication structures have “the most dangerous job in America,” citing 115.2 deaths per 100,000 workers.

As recently as April 13, a construction worker fell nearly 150 feet during construction of cell tower. Prudent owners and contractors must allocate the risk ahead of time, before the project begins. Dealing with such risks through a steady balance of both insurance and indemnification agreements is a good place to start.

Insurance vs. Indemnification

When allocating risk, the difference between indemnity and insurance is subtle but important. Insurance agreements provide for payment to the insured by the insurance company when a certain insured event occurs. Indemnity agreements require the indemnitor to pay the indemnitee if that indemnitee has to pay a third party.

For example, if a person is injured due to the negligence of a contractor, and that person sues the owner of the property and wins, the owner may have to pay that person money. However, the owner may be able to get that money back from the contractor if he or she has an indemnity agreement with the contractor wherein the contractor agreed to pay the owner for losses the owner suffered pursuant to the contractor’s negligence.

Indemnity agreements should be drafted carefully because many courts will hold them to be void or unenforceable if they are not drafted correctly. For instance, if a party seeking indemnification wishes to be indemnified for his own negligence, some states will hold this is unenforceable, while others will require very clear language in the indemnity agreement. Most courts enforce indemnity agreements that provide indemnity for the sole negligence of the party seeking indemnification.

Carefully drafted indemnity agreements can still provide a means of protection for contractors or owners seeking to limit their liability. In fact, indemnity agreements can be quite helpful to cover situations that may be “excluded” from coverage under an insurance policy. For example, an insurance policy (i.e., it may exclude certain environmental contamination from its coverage it may refuse to reimburse a contractor for loss due to pollution of the worksite). In that situation, a carefully drafted indemnity agreement would be very helpful and could avoid such an exclusion.

On the flip side, insurance policies can provide protection in situations where indemnity provisions are found to be insufficient or void. In the case of Ryder vs. BellSouth, an insurance agreement provided protection where an indemnity agreement was found to be invalid. That case involved a Ryder employee who was seriously injured while working on a project for BellSouth, the property owner. The Ryder employee filed a lawsuit against BellSouth, alleging that he was injured as a result of BellSouth’s sole negligence.

BellSouth ended up with some protection, however, through an insurance agreement that it had with Ryder. The same contract between BellSouth and Ryder that contained the indemnity agreement also required Ryder to add BellSouth to Ryder’s insurance policy as an additional insured. Thus, Ryder’s insurance company had to pay Ryder’s employee for the injuries suffered due to BellSouth’s negligence. BellSouth was held responsible for the amount owed to Ryder’s employee that went above and beyond Ryder’s $1 million policy limit.

The above scenario illustrates the importance of carrying enough liability insurance to cover all potential losses. In today’s climate, a cellular tower or power line contractor should obtain at least $5 million in liability insurance for a small project and $10 million for a large project. Before deciding that a project is too small to justify $5 million in insurance, remember, it is not the size of the tower that matters, it is the size of the accident.

High-Voltage Safety Acts

Many states have enacted high-voltage safety regulations to protect owners and operators of utilities and well as workers and contractors who perform work around utilities. These regulations add another wrinkle to the ability of a cellular tower or power line contractor or subcontractor to limit his or her liability. These regulations require any person who intends to perform work near utilities to notify the owner or operator of the utilities so that the owner or operator can take proper safety precautions before the work begins. If the contractor fails to provide notice, often these statutes will hold the contractor solely responsible for any injuries that occur pursuant to the contractor’s work or for any damage to the utilities. The contractor will be required to indemnify the owner or operator for all claims resulting from the contractor’s work, including claims for personal injury, wrongful death, property damage and service interruptions. The contractor may also be required to pay for the owner or operator for its costs to defend those claims.

Additionally, if a contractor’s employee is electrocuted, and the contractor pays the employee worker’s compensation, that is not the end of the contractor’s potential liability. If the contractor’s employee sues the owner or operator of the utilities (which he or she probably will), then the owner or operator of the utilities can come back after the contractor if he or she failed to give the utilities notice of the performed work.

The contractor may try to argue that he or she does not owe the owners or operator of the utilities for the money the owner or operator had to pay to the injured worker because the contractor’s liability is limited by worker’s compensation. This argument will fail. Worker’s compensation acts typically do not prevent owner or operators of utilities from seeking indemnity from contractors whose worker’s were injured and received worker’s compensation but later sued the owner or operator of the utilities. This is because the indemnity is provided for by statute and specifically allows an owner or operator of utilities who has not been given notice of work to go after a contractor for the amount the owner or operator of the utilities had to pay to the contractor’s injured employee.

In Georgia, for example, the High-Voltage Safety Act (HVSA) provides for this type of indemnity despite worker’s compensation payments paid to injured employees. That scenario played out in Flint Electric vs. Ed Smith Construction. In that case, an employee of Ed Smith Construction was injured on the job when a crane came into contact with a high-voltage line owned by Flint Electric. The employee received worker’s compensation but also sued Flint Electric. Flint Electric then sought indemnification from Ed Smith Construction. Ed Smith Construction argued that the exclusivity provisions of the Worker’s Compensation Act precluded Flint from seeking indemnification, but the court held that the exclusivity provisions of the Worker’s Comp Act did not prevent Flint from seeking indemnification because the indemnity action was based on the HVSA.

When a contractor or subcontractor seeks to undertake work on or around utilities, or seeks to perform work constructing a cellular tower, the risk in performing such work is high. Owners, contractors and subcontractors must be aware of risk and plan for it in advance. Such planning mechanisms include detailed and comprehensive insurance and indemnification agreements.

By Kevin Hudson and Matthew Spivey

Reprinted from  www.Construction-Today.com, June 2008

When It Comes to the Work Force Shortage, Is Immigration Reform a Viable Solution?

The construction industry has a long and true history of promoting minorities in the workplace. Despite troubled economic times, many areas of the construction industry continue to expand rapidly and some estimates suggest that construction constitutes 10 percent of the gross national product. Construction is one of the top employers in the country, and there is a critical need for skilled and qualified labors, regardless of skin color. Efforts to obtain workers through high school and college job fairs and through public advertising have not addressed the dramatic shortfall in workers. The question becomes whether there is a viable solution that can be had through immigration reform measures. The answer is “No” and we will outline some of the impediments.

Federal and state governments have not fashioned a solution that allows both work force immigration and secures borders. Instead of targeting underground operations, – which are dedicated to providing illegal aliens with documentation necessary to give the false appearance of residency or citizenship – governments are shifting the burden to the private sector to take responsibility for verifying the status of a worker and to bear a heavy cost for workers with false documentation. The government’s action, in turn, becomes a vehicle of opportunity for the long-term union/non-union debate.

Unfair Standards?

The construction unions are quick to claim that illegal immigration is a leading cause of unfair labor standards. Thus, the unions divide their political representatives by arguing for stringent employment of penalties and processes that are virtually impossible to meet.

For example, a recent reform in Georgia and other states imposes a vast civil tax penalty on any private employer who is employing any illegal alien. Contractors or subcontractors cannot enter into a contract or subcontract with a public employer for the performance of services within the state of Georgia unless they register and participate in the federal work authorization program to verify all new employees.

Under Georgia’s Section 48-7-21.1, as of Jan. 1, wages of $600 or more per year for labor services (meaning the physical performance of labor services in the state of Georgia) provided by an individual cannot be claimed and allowed as a deductible business expense for state income tax purposes unless the individual is an authorized employee (meaning that the individual is authorized for employment in the United States). Under Section 48-7-21.1, a withholding agent is required to withhold state income tax at a rate of 6 percent of the amount of compensation reported on Form 1099 when the individual filling out Form 1099 has (1) failed to provide a taxpayer ID number, (2) failed to provide a correct taxpayer ID number, or (3) provided an IRS taxpayer ID number issued to non-resident aliens.

As for the implications of Georgia’s law, consider the general contractor, who is responsible for a multitude of subcontractors and suppliers on any given project. Under the law, the totality of the work force is the responsibility of the general contractor. The general contractor becomes charged with providing a correct taxpayer identification or facing audits and tax penalties. The traditional method of obtaining a copy of materials and/or sworn statements from the employee as to his or her status are not sufficient if the documentation turns out to be wrong and the statements turn out to be false. There is no credit given for intent to comply.

Facilitating Compliance

Despite the drastic penalties imposed by the government’s framework, the same government has failed to take efficient and complete action to allow compliance. The National Identification Program was enacted by the federal government to standardize identification and provide greater assurances. It sounds great on paper. In practice, however, it appears untenable and the federal government failed to provide sufficient funding for the program.

As a result, several states have rebelled against the program, and even those states that have signed on to the program acknowledge that it may not be financially possible to comply with the program. The risk to contractors to comply with the law remains. The likely result will be a dramatic increase in contract provisions to shift the risk and construction costs to address risks that cannot be changed. Unions understand this point and are quick to seize the competitive advantage by marketing themselves as fully vetted and better able to prevent the employment of illegal aliens. Contractors become conflicted with the historical low-bid approach weighed against the costs of compliance.

The dilemma created appears to be based on fuzzy research that draws no lines between the intentional employment of an illegal alien and the good faith employment of an illegal alien with falsified paperwork.

The ability to evaluate the issue fairly is further complicated by pundits of hate, who play to audiences that embody racist attitudes and stereotypes. Although the matter should be particularly economic in its discussion, the opportunity to garner support for an agenda is fueled by direct and indirect efforts to appeal to emotion.

Examples of misconduct by an illegal alien are easily cited as justification for the magnitude of the problem. These types of arguments confuse the real issue and make fundamental and important change less possible. Politicians can become frozen by the threat of an angry constituency.

Advancing Immigration Reform

Nonetheless, the Associated General Contractors (AGC) of America and other prominent construction agencies continue to advance proposals for comprehensive immigration reform. According to the AGC, “it is important to approach this issue rationally and to develop a fair system that does go after the bad actors, but does not seek to harm all businesses in the process.”

Like all difficult tasks, the first step is a correct understanding of the issues and an objective assessment of the causes of the real problems. Despite a historic presidential campaign season, there has been little to no effort to address the immigration issue. A continued collective voice is necessary to bring about real change in this area, and this article seeks to draw attention to the need for the ongoing effort.

By Kevin Hudson and Matthew Spivey

Reprinted from www.Construction-Today, July 2008

We may use other, less academic terms to refer to them, but we all deal with infrastructure problems on a daily basis. We all hate sitting in traffic or driving on deteriorating roads. How many times have you thought, “If only the public transportation was safe, convenient and reliable, I would be happy to hop aboard?”

Each new day brings a new price for a barrel of oil and we constantly hear about the energy crisis. Not only do we hear about it on the radio, we feel it in our pocket each time we go to the pump to fill up our vehicles. At the same time, everyone worries about where to send their children to school, hoping that they will be served a healthy lunch in a safe and modern building. One would be hard-pressed to find a common citizen here or abroad who doesn’t want quality healthcare and the most modern, efficient and cost-friendly management systems for their community. Although no one talks about it, we expect that our tax dollars will ensure that our trash will be picked up and that our drinking water will be clean.

Regardless of our expectations, the infrastructure deficit is evident worldwide. Citizens around the world cope with congested roads; bridges in need of repair; deteriorating hospitals, schools and other public facilities; as well as understaffed and poorly maintained public transportation systems. National, state and local governments are forced to deal with soaring budget deficits, yet still attempt to combat these problems. This results in job cuts and the need to reorganize and prioritize the main services they provide to their citizens.

Incentives, Outcome and Results

Infrastructure problems impact citizens everyday as evidenced by a reduced quality of life, increased transaction costs in personal and business relationships, and a reduction in competitiveness worldwide. In general, we all hope and should expect that the money we put towards government is being spent wisely and producing the results that deal with these everyday infrastructure problems. That being said, Rome wasn’t built in a day and what citizens expect isn’t always what they get.

The use of public-private partnerships (P3) can serve as a tool to help combat these problems. While experts are free to argue about the proper definition of what a P3 is, its true effects on the economy and its possible role in fixing these problems, it is clear that P3 is one of the most popular new reform tools in the last decade related to financial management.

Given the state of many government purse strings and the frustrations of the common citizen, the use of these partnerships to finance infrastructure projects at the very least has the opportunity to save valuable time and energy for individual citizens and governments. Instead of dealing with the common format of procuring contracts – and the infrastructure neglect and deficits which many would argue are the cause of congested urban areas, mismanagement of hospitals and dilapidated schools – governments using the P3 model in differing variations are able to focus on their core business of outcomes and results. These models, in varying forms, provide important economic and civic advantages, including, but not limited to:

■ Construction and maintenance risks are transferred to the private sector – Given the shifting whims of public officials during budget crunches and election years, infrastructure maintenance is the likely area to be neglected. In this regard, many people view the infrastructure as, “if it isn’t broke, don’t fix it.” There are not many politicians or governments who want to push boring projects dealing with infrastructure when a more pressing issue arises to help them win votes. However, such deferral of maintenance results in huge costs over the long run. Through P3s and by placing the design risk, standards of delivery, the underlying costs and other market risks on the private partner, proper maintenance can take place sooner rather than later.

■ The private sector has an established track record of on-time and on-budget delivery and disciplined project management – While some may laugh at this statement, compared to solely public projects, the P3 used from the United Kingdom to Canada has a fairly solid track record of on-time delivery. Can the same really be said for solely public projects here and abroad?

■ Public-private infrastructure projects are often completed faster than “pay-as-you-go” financing – Because investment costs are spread over the lifetime of the asset, there is less chance that the problems seen with pay-as-you-go financing will arise. In today’s market, we have all seen the danger of projects stalling out as the funds dry up.

■ An orientation toward better customer service – The arrangement seen in many P3s allows for a type of checks-and-balances relationship between the customer, the private sector and the public sector, with each having incentives that can help lead to better customer satisfaction. For example, in many cases, the private sector relies on user fees to generate revenue and therefore has a strong incentive to maintain a good relationship and provide efficient customer service. Likewise, as it is no longer directly involved in management, the public sector can serve to ensure that the private provider is doing its job from a less-biased perspective.

For Future Consideration

The United Kingdom, through the use of the Private Finance Initiative (PFI), was the first country to truly explore the concept of P3s on a large scale. The PFI, introduced in 1992 and further developed in 1997, is generally used for hospitals, prisons, roads and accommodation projects. The contracts are usually for long time periods, lasting anywhere from 25 to 30 years and use output-based specifications.

Similarly, Australia has financed much of its infrastructure through Partnership Victoria, a variation of the P3 discussed above. In the United States, examples can be seen on various road projects, one of the most recent being in Washington, D.C., where the partnership between the Virginia Department of Transportation and Fluor-Transurban on the high-occupancy toll lane projects has the goal of improving the traffic flow on the Capital Beltway.

P3s are unlikely to replace the traditional infrastructure financing model altogether, the above-mentioned problems and possible benefits of using P3s make them an appealing option for the future. The major sectors where P3s provide the most potential for success are schools, public housing, prisons, defense, hospitals, waste management, water treatment and management and transportation. Next time you’re stuck in traffic, contemplate whether the traditional model of procurement and financing to maintain and build infrastructure is effective.

By Kevin Hudson and Matthew Spivey

Reprinted from www.Construction-Today.com, August 2008

Preconstruction Planning and Cost to Industry

For success and safety, this team approach is developed and implemented on a daily basis through the general contractor or construction manager on the project. In this regard, successful general contractors share a common approach to safety that works—daily meetings with the workforce to remind them of the need for safety, the need for a team approach to safety and to address particular safety concerns related to the work to be performed that day. Such statements and advice seem so basic, but are rarely executed perfectly and in such case, accidents will, and do, occur.

Why should this matter to the owner, contractor or subcontractor? The legal implications of safety non-compliance are borne out in OSHA requirements and penalties, civil lawsuits that arise from accidents and other problems. In addition, safety non-compliance results in lost productivity, scheduling problems and in the worst case scenario, a media nightmare (e.g., “The Big Dig” settlement).

Work-related injuries and lost work-days cost the construction industry billions of dollars on an annual basis. While sick days from the common office environment are costly, injuries and damage on a construction project affect not only the worker or trade at issue, but all aspects of the project at hand. As with any other costs involved in construction, prudent owners and contractors should not ignore the significant costs arising from such injury and lost productivity.

The best way to address this is through a team approach which begins at the earliest stages of the project and continues until all materials are removed. The approach to safety and team organization begins, in large part, prior to the first dirt being moved during the review of documents and choice of project delivery methods.

The design of the project and choice of technology to reach the desired result will largely drive the safety measures that need to be in place on any given project. Next, and often overlooked or minimized during bid evaluation, is pre-qualification of contractors and sub-contractors with regard to safety. This may start with review of past work and reputation, but can also be accomplished through careful review of the bids submitted to determine whether adequate time for safety and training are provided for the scheduled work and whether the contractor has sufficient manpower and the ability to adequately train and transition new trades on an active job site. Finally, after all of this planning and review, the rubber truly meets the road during the onsite application of this team approach.

Daily Meetings and Training Bridge the Gap

The amount of coordination that is required for a successful and safe construction project requires not only daily reminders among a trade group, but site-wide instruction on the use of new tools, the ever-changing project schedule and the work to be performed that day. OSHA requirements and construction industry standards are a helpful guide in this regard, but practical realities demand that truly successful general contractors insist upon even higher standards and review the “standards” as they apply to the particular project realities. Pre-planning and reviewing the contract documents can help to ensure that proper personal protective equipment is in place and is managed in an efficient manner. The prudent owner, construction manager or general contractor will always ensure that these activities are thought out in advance. The cost of purchasing proper personal protective equipment for each phase of the project is miniscule when compared with the costs of delays, lawsuits and OSHA violations.

Similarly, to decrease the false sense of security in workers, each new activity and phase of a project requires new training and on-the-job site demonstration. This means that at the beginning of work involving new tools, or different types of tools, new training is required. Personal protective equipment, as required by OSHA, is only helpful if a worker is using a tool properly in the first place. For instance, safety goggles will not prevent an accident when a grinding tool that is designed for 300 rpm’s is used with a spinning wheel designed to rotate at only 150 rpm’s. The spinning wheel that is improperly sized and rotating well in excess of designed speeds will disintegrate and damage the worker’s face and eyes.

Many owners and general contractors take for granted that the different trades are skilled and should understand these issues without further instruction. However, the practical realities of the modern construction environment with language barriers, documentation issues and the pressing demand to “get the job done” result in workers of varying skill and experience levels on the same jobsite, placing not only their own safety, but the safety of others, at risk.

”The cost of purchasing proper personal protective equipment for each phase of the project is miniscule when compared with the costs of delays, lawsuits and OSHA violations.”

Therefore, after the workers have received the proper safety training on the new equipment and/or activity, they should receive a safety sticker to place on their hard hat. It is imperative that all project superintendents themselves are aware of the safety stickers required for each new activity and that the workers have adequate personal protective equipment in place and properly functioning. If a worker does not have the required sticker, they should not be allowed to work. If a worker does not have the appropriate personal protective equipment in place and functioning properly, they should not be allowed to work. If for instance, a worker is dealing with steel and working and moving the same, they may be required to have “appropriate footwear” under some industry standard. In some cases, this may not actually require “steel-toed boots,” but the prudent general contractor would require the same, as any tool or other equipment used in conjunction with the steel itself, or the steel, could easily break a worker’s foot or toes.

How do successful owners and general contractors deal with the language barrier that is present on today’s project? The answer is through coordination and direct involvement in day-to-day training, meetings and demonstrations. First, the general contractor should ensure that there are a sufficient number of multi-lingual workers in attendance at each safety meeting. These multilingual workers should demonstrate the proper use of tools, safety equipment and other jobsite requirements to the workers in their primary language. It is imperative that actual demonstrations of the work, use of the tool or proper use of the personal protective equipment be demonstrated both visually and translated in the worker’s primary language.

Finally, coordination between the different trades and suppliers on a jobsite where the only thing that remains the same is “change,” requires that the general contractor ensure that all of these activities are properly documented on a daily basis.

How do the above guidelines practically apply to contractors and owners in today’s construction environment? The following real life example demonstrates how the above standards would have helped to prevent the ultimate result.

Concept Application to Reality: Preventing Onsite Injury

A young project manager with less than a year of experience, is in charge of ensuring training on safety issues for the day’s work on a large construction project. Part of his job is to ensure that all workers report to the trailer to receive instruction on proper uses of personal protective equipment and general jobsite safety. No new worker is supposed to begin work on the project until receiving this training. At 7:30AM, a new Hispanic worker arrives on the job site and proceeds to the training trailer. The meeting began at 7:15AM, and, as he is late, he is nervous about receiving training and losing time on the job. The young project manager tells him to come back at 8:15AM for the next training session. The young project manager assumes the new worker understands he cannot work during this downtime.

At 7:40AM the new worker, confused and worried about losing hours, sees a friend he knows and follows him to work on moving equipment to a new phase of the project. The new worker is eager to begin work, but has not received any safety stickers and is wearing acceptable “work boots,” without steel toes. The onsite superintendent stops the worker and asks whether he has had the appropriate training. The worker, not completely understanding the question, nods and points at the trailer where training is held. Assuming he simply forgot the sticker, having no other multi-lingual worker present and with his crew already behind schedule, the superintendent allows the new worker to proceed in moving the equipment.

Within an hour, the new worker has a broken foot, the young project manager in charge of safety training is being chewed out and the project superintendent is being questioned as well.

This example actually happened and all of the basic guidelines above would have helped to prevent it. The individual worker in each instance had the right thoughts in mind, but each failed to meet the safety standards that need to be in place. This example demonstrates how simple and sound procedures, which seem self-explanatory, can prevent larger problems when strictly followed.

Had the young project manager had sufficient multi-lingual support or adequate training facilities, the new worker may not have wandered off. Had the superintendent required proper safety stickers or looked into whether the new worker had received training, the accident would not have happened. Had the general contractor gone above the standard of sufficient footwear and required steel toed boots, the new worker’s foot may not have been injured to the same degree.

Successful owners and general contractors will strive to reach beyond the OSHA requirements and industry standards for personal protective equipment and planning purposes early in the project. They will further ensure that safety procedures are implemented on a day-in and day-out basis, requiring daily meetings and properly documenting the same. In the end, strict compliance with a structured plan, centered on daily training and coordination on each new phase of the project, among the trades will help to prevent the individual worker from causing a much larger problem, both for himself and the project in general.

By Kevin Hudson and Matthew Spivey

Reprinted from Construction Business Owner, May 2008