March 30, 2015
By Gregory T. Spalj
I recently attended the 70th Annual Power & Communications Contractors Association (“PCCA”) convention, “unfortunately” located in Aruba. It was quite the hardship. Construction industry experts were assembled to discuss market opinions, trends, outlooks and forecasts for 2015 and beyond. One of the presenters, W. Chris Daum, President of FMI Corporation (a management consulting, investment banking, and leadership development firm serving the construction industry) presented a detailed and thorough picture of projected construction spending for various sectors in the industry. Based on market research, Mr. Daum opined that except for the oil sector, 2015 will bring an increase in construction spending for the power, energy, telecom, and municipal water and sewer markets. Between now and through 2019, FMI thinks, based on industry sources and statistics and barring an unforeseen recession, growth rates should average in the low to mid-single digits for the water, sewer, telecom, and power industries.
The forecast for the communications industry is robust. Think about the number of devices that connect to the internet. Ten years ago, one may have had a Blackberry, a desktop computer, and perhaps a laptop. Now, it is not uncommon to have additional access to the internet in the planes in the skies, on your iPad, on your personal exercise or sleep tracker, on your television, from your company vehicles, for your home thermostat and security system, and in your car. That translates into more bandwidth being consumed. Technology suggests this demand will continue to escalate. Some think that mobile network bandwidth will expand 500% over the next half decade.
Power transmission and distribution construction spending will top $108 Billion in 2015 according to FMI. Power transmission spending is estimated to increase up to 20% or more for the next 3-5 years. Distribution line construction may reach 25-50% over the next 5-7 years.
Many gas utilities in the eastern part of the country have launched multi-billion dollar capital expenditure programs for distribution line replacement that will consume much of the construction resources available for that work.
With water resources dwindling, construction spending is likely to increase for water “re-use” plants. Plants that treat wastewater to convert it to drinking water, plants to treat contaminated industrial water to convert it to drinking water, and desalination plants are likely to spur construction in these segments because of the finite source of drinking water in the world. Old infrastructure, including wastewater plants, will necessitate additional construction spending just to keep pace with the environmental regulations restricting the discharge of contaminated water into our surface water resources.
All this projected growth means contractors must pay attention to three things that arise at the intersection of where construction transects the law: risk allocation, risk allocation, and risk allocation. Contractors may have the luxury of being more “picky” in choosing the customers with whom they wish to work and the terms under which they will work. Construction contracts will continue to play the most important role in liability shifting between owners and contractors, and between contractors and subcontractors or suppliers. Case law and statutory mandates play a role, but purposely leaving the future of your company in the hands of the courts and legislatures is, well, let’s just say imprudent.
As technology improves, suppliers may have more of an “upper hand” in the bargaining marketplace because of the proprietary rights to specialized equipment necessary for some of the unique projects such as desalination and, wastewater to water plants. Contractors act at their peril when they do not review suppliers’ terms and conditions (usually printed in small print on the back of a purchase order) issued by suppliers. The supplier, even though it may have lobbied hard to write its equipment (or its equivalent) into the owner’s specifications, routinely takes exception to the warranties the owner requires, perhaps the tolerances specified, and argues for limitations on the damages available if its products do not match up to its representations.
Contractors should take care to insist whatever equipment is ordered from suppliers be done on a bargained for basis with the fundamental precept that the equipment must strictly conform to the plans and specifications. Additionally, the supplier should assume all of the warranty and guarantee obligations that the owner demands of the Contractor.
At a minimum, the contractor’s subcontracts should provide risk allocation that mirrors the allocation in the contract between the contractor and the owner, as it pertains to the subcontractor’s work. There is nothing unfair in insisting that the subcontractor be bound by the same rules and is limited in same ways as the general contractor. Language such as this should be included in the contractor’s agreement with its subcontractors:
Except for the performance of work on the Project that is outside the scope of this Subcontract, Subcontractor agrees to be bound to Contractor by all terms of the General Contract. In that regard, Subcontractor assumes toward Contractor and agrees to all obligations, responsibilities, liabilities, and limitations on rights, that Contractor, by the General Contract, has assumed toward or agreed to with Owner. If any provision of the General Contract is inconsistent with any provision of the Subcontract, then the provision that favors Contractor shall govern.
As the market heats up, if one does end up in a dispute, there will be a premium to have it resolved quickly; for as anyone who has been down this road knows, construction disputes eat up valuable time and resources that should be devoted to generating construction progress and money. Arbitration is less formal than, quicker than, and generally less costly than litigation in the Courts. Therefore consider adding language such as this to your lower tier contracts:
Any dispute between Contractor and Subcontractor or claim related to, or arising out of, this Subcontract, including the making thereof, shall be resolved exclusively through final and binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Any arbitration shall be brought in [county, state before a retired judge or an individual with no less than ten (10) years experience in the construction industry.
In the public construction setting, negotiating is generally prohibited in design, bid, build procurement processes. Even in the private sector, the contractor has little ability to negotiate terms with an Owner and that ability always appears to be inversely proportional to the size of the project. Nevertheless, one should try to eliminate as many of the “Murder Clauses” as one can and in so doing one will become educated on where the land mines are in the contract. Provisions such as the following should be rejected:
Contractors must be ready for the anticipated construction boom. Preparation is the key to “good luck” on construction projects. Now is the time to have your contracts, purchase orders, and subcontracts reviewed and cleaned up. Even if you cannot get what you want, you may get what you need if you start at the right negotiating point with a good form contract. A good construction lawyer will attempt to shift the contractual risks to the party that controls the conduct that might give rise to the risk. Make the party who causes the problem pay for the problem. One can buy insurance for some of these risks and in that way quantify them by an insurance premium. Be an educated and informed contractor, know what you are signing up for and reject that knee jerk tendency to take what you are offered based solely on the number of digits to the left of the decimal point in the contract.
Tom Vollbrecht is a Program Chair for the upcoming American Bar Association/TIPS Fidelity and Surety Law Committee’s 2015 Spring CLE Meeting, “Performance Bond Claims Handling,” to be held on May 7-8, 2015 in La Jolla, California. In conjunction with the program, the ABA will be publishing the BOND DEFAULT MANUAL, 4th Ed., for which Tom is a co-editor. For more information on attending the 2015 Spring CLE Meeting, contact Tom at 612.359.7659 or email@example.com.
Mark Becker will be speaking in a video webinar on “Changes, Delays, and Defects: Handling Contentious Construction Disputes” on May 11, 2015 through the National Business Institute. For more information, please contact Mark at 612.359.7620 or firstname.lastname@example.org.
Fabyanske, Westra, Hart & Thomson, P.A. is pleased to announce the election of its new President and Executive Committee. The following six attorneys now comprise the Fabyanske Executive Committee: Kyle Hart, President, Scott Anderson, Mark Becker, Gary Eidson, Paul Ratelle and Katie Welsch.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2015 FWH&T.