Enjoy the post from I'Ashea Myles-Dihigo:

Money for Women and Minority Owned Contracting Businesses… An Introduction to Winning Government Contracts - Part 1: Certifying as a Small Business

 

            I can’t help but think of the song by The O’Jays, “For the Love of Money” when writing this piece, so let that soundtrack play in your mind’s ear as you read this.

 

I get together with a group of my friends about every 6-8 weeks for “Wine and Woodworking,” the brain-child of my talented friend, Natalie.  As a construction lawyer, I felt the need to be able to at least attempt to build something with my hands.  I get to interact with a cross-section of women. We laugh, drink wine, use table saws and various other tools and build amazing furniture pieces.  At one of these events, a friend of mine approached me about starting her own construction company. I was all about helping her out.  The information I found in walking her through the process is useful for any general contractor or sub-contractor that is looking to start or grow her or his business.    

 

            The current administration spoke very boisterously on the campaign trail about its plans to “revitalize” the country’s infrastructure.  There is also a large push in many areas of the country for housing and new construction as affordable housing shrinks across the nation.  This series will be used to introduce minority and women owned contractors, and those aspiring contractors to the United States Small Business Administration (SBA).  It will provide a broad overview of the programs it offers to small businesses and specifically the certifications and set-asides for women and minority owned businesses which are in place to position those companies to win some of those government contracts.

 

            In 2016, the U.S. Bureau of Labor Statistics reported that women in construction related fields represented about 9% of the workforce.  Latinos and/or Hispanic Americans 28.9%, African Americans made up 5.8% and Asian Americans 1.9%. These statistics are shocking, especially when new construction is booming in almost every quadrant of the country.  As the statistics show, construction is an often missed and lucrative field for minority and women owned businesses.  According to the SBA, the U.S. government awards about $500 billion in contracts annually, and at least 23% of those contracts are awarded to small businesses.  There are additional federal mandates that some of those dollars and contracts must flow to businesses that are owned by women and minorities.   

 

Size Matters: Certifying as a Small Business

            The SBA has identified various programs to encourage women and minorities to enter into federal government contracting.  For the record, the business registration process for minorities, women and service-disabled and/or veterans does not differ at all from the standard process that all businesses must follow.  You will need to register your business with the state, choose a name for your business, obtain a federal tax identification number, and secure any pertinent certifications and/or permits for your business to legally operate under the rules and laws of your state.

 

            You must also ensure that your business is a small business as defined by the SBA.  For most industries, small business is defined by either the average number of employees over the past 12 months or average annual receipts over the past three years. U.S. Small Business Administration (October 2, 2017), available at http://www.sba.gov.  This is the definition used for the construction industry. This information will be used in the System for Award Management (SAM) when you register as a government contractor in addition to your self-certification as a small business. Id. Additionally, the SBA defines a small business as one that:

 

 

• Is organized for profit;
• Has a place of business in the U.S.;
• Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor;
• Is independently owned and operated;
• Is not dominant in its field on a national basis.  Id.

 

All federal agencies must use the SBA defined size standards for contracts identified as small businesses. Once you have gone through the process to determine if you’re in fact a small business, you may register and certify your business as such.  The small business standards are the ceiling on how large your business can be and still remain classified as a small business under the SBA guidelines.

 

NAICS for General Contractors

            Once you’ve determined your business size, you have to determine the classification under which your service would fall.  The North American Industry Classification System (NAICS) is a system used to classify businesses to collect, analyze and publish statistical data related to the U.S. economy. United States Census Bureau (October 2, 2017), available at https://www.census.gov.  The NAICS industry codes define establishments based on the activities in which they are primarily engaged in and services and/or goods a business produces. 

 

            The 2017 NAICS code for new single-family construction is 236115. Id. This code is used for general contractor establishments that are responsible for the entire construction of new single-family housing that is separated from neighboring houses by a ground-to-roof wall and has no housing units constructed above or below the unit.  This code would cover firms working in single-family design for firms handling the construction management for single family homes.

The 2017 NAICS code for commercial and industrial construction is 236220. Id. This code is for contractors focused on the construction of commercial and institutional buildings and related structures, such as parking garages, airports, office buildings and schools.  This code would also cover design firms and commercial and institutional construction management firms.  There are also specialty codes within the construction subsection for contractors that specialize in trades like flooring (238330), electrical (238210), structural and foundation (238190) and roofing (238170).  Id. The NAICS defines the size of the business by monies earned in annually in millions of dollars. Id. For instance, if you are a framing contractor (23810), your size standards are calculated in either the number of employees or average annual receipts; therefore, if your business, inclusive of subsidiaries and affiliates, makes less than $15 million in receipts annually, then you are considered a small business. Many small start-up to mid-sized construction companies would qualify under this definition of small business.  So, some of the governmental contracts for construction work on roads, infrastructure, natural disaster relief and many other areas could go to businesses of this size.

 

            Next time, I will talk about the government set-asides that are specifically designed to be awarded to businesses that self-certify to be women and minority owned and how to qualify for those contracts.

 

For more information on the SBA visit www.sba.gov.

I'Ashea Myles-Dihigo            

In a matter of first impression, California Court declares subcontractor's CGL coverage includes subcontractor's work & delay to general contractor

https://www.steelconstruction.info/Modular_construction

In Glob. Modular, Inc. v. Kadena Pac., Inc., 222 Cal. Rptr. 3d 819 (Cal. Ct. App. 2017) the underlying dispute concerned construction of 53 roof-less modular units for a rehabilitation center.  The Plaintiff-subcontractor constructed the units and another contractor planned to install the roofs. The subcontractor sued for non-payment and the general contractor counterclaimed that the units were defective. After a partial settlement, the remaining issue was whether the subcontractor's commercial general liability (CGL) insurer must cover the general contractor's claim for water damage to the tarp-covered, but roof-less units caused by heavy rains or if exclusions barred recovery.

The California Appeals Court concluded that the CGL insurance policy was not limited to risk of damage to third party property. The Court explained that the policy language referred to ‘property damage‘ without any reference to who owned the property.  Also there was no impediment to coverage due to the exclusion for "faulty workmanship." There was no indication that the exclusion applied broadly to any damage to the subcontractor's work before project completion.

More specifically, and as a matter of first impression, the Court held that the CGL policy's exclusion for damage to property on which the subcontractor is “performing operations” applied only to damage caused during the subcontractor's physical construction activities. Therefore, this exclusion did not bar coverage for the repair or replacement costs incurred to the units from rain and flooding damage to the units after they were delivered to the site.  Although the units were unfinished, because the subcontractor was not working on the units once delivered to the site, the subcontractor was not performing "active physical construction activities." Accordingly the exclusion did not apply.

As for the exclusion of "[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it,” the Court held that "your work" referred only to the specific part of subcontractor's work, not broadly to the general area of the construction site where the subcontractor was working. The Court explained that this exclusion "applies only to the particular component of the insured's work that was incorrectly performed and not to the [subcontractor's] entire project. Here . . .the only arguably defective components or parts of [subcontractor's] work are the plastic tarps, as they failed to keep the water out." Importantly, "there was no allegation the items for which [general contractor] sought repair and replacement costs—the drywall, insulation, framing, and ducting [inside the units]—were defective.  [Rather,] those items were acceptable until it rained and they suffered water damage."  Accordingly the exclusion did not apply.

In addition, the Court determined that delay damages for the 131 days the general contractor spent remediating the water damage did constitute “property damage” within meaning of insuring clause of CGL policy.  The Court explained that the remediation was extra time that general contractor spent. And had the units not been damaged, the general contractor would not have needed to spend that time and instead could have been working to finish the project.  The delay therefore constituted a consequential loss and was deemed part of the damages insurer must pay “because of” the property damage.

---------------------------------------
The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Federal Court Rules Presence of “Orange Saw Horses” During a Site Visit was Sufficient Notice to Contractor that Worksite was Structurally Deficient

The Naval Facilities Engineering Command (NAVFAC) issued a solicitation (Solicitation) for bids for a project at the Naval Stations in Newport, Rhode Island (Newport Naval Station) on May 18, 2009 and later conducted site visits with prospective bidders in June of 2009.  The solicitation contained bid documents for the demolition of an existing bulkhead (Bulkhead, Wharf)  between two piers, removal of underwater obstructions, and then the construction of a new bulkhead and parking area to support ship berthing.  Missing from the bid documents were two reports (Report, Reports) NAVFAC was in possession of, one from 2005, the other from 2008 which both identified the Bulkhead had deteriorated to the point that it was structurally deficient and not able to support vehicles.  The Report identified that the Bulkhead concrete deck showed signs of deterioration along with the presence of a sinkhole at the adjacent shoreline.  The Report further identified that the marine H-piles and concrete encasement has significantly deteriorated and required replacement because “catastrophic collapse was possible”.  

RDA Construction Corp (RDA) of Canton, Massachusetts attended the site visits but did not submit any RFI’s to NAVFAC on the condition of the Bulkhead and Wharf, despite its testimony that is paid special attention to the condition of the H-piles at the site visit.  RDA was ultimately awarded the project due to an extremely low price as compared to other bidders and NAVFAC’s estimate.  After asking RDA to confirm its pricing, NAVFAC executed a contract with RDA on October 13, 2009.  On November 18, 2009, NAVFAC furnished the Reports to RDA in response to RDA’s submitted demolition plan in which it planned to utilize the Wharf as platform to set excavators and cranes on and then demolish working outside in from either direction.  Eventually after much back and forth on this and other schedule issues, RDA submitted a certified claim to NAVFAC in the amount of $1.9 million to reflect the additional costs to change its demolition means and methods from its bid.

After a contentious project and other certified claims filed by RDA against NAVFAC, RDA’s contract was ultimately terminated for default on February 21, 2013 and on April 15, 2015 NAVFAC determined that RDA was responsible for $2.2 million in liquidated damages.  On May 7, 2015, RDA filed a complaint that alleged, among other counts, NAVFAC breached its duty to disclose material information regarding the extreme deterioration of the Wharf that was known by NAVFAC but not disclosed to RDA.  RDA further alleged:

1)   The Report concluded the existing Wharf could not support the weight of equipment, thus affecting work activities and added cost.

2)    NAVFAC was aware of the Wharf’s deterioration which could only be observed from an underwater inspection.

3)  The solicitation did not reference the poor condition of the Wharf, H-piles, and  Bulkhead.

4)  NAVFAC only advised RDA on the existence of the Report until the contract was executed.

RDA argued that as a result of NAVFAC’s failure to disclose the above, it violated the implied duty to disclose the existence of the Reports and was in material breach of the contract at the time of its signing in October 2009.  Accordingly RDA argues the termination for default should be converted into a termination for convenience.

NAVFAC responded that it had no duty to disclose the Reports and the Solicitation did include notice to inquire about the current condition of the wharf through the inclusion of the comment that the Wharf, “was likely not in good condition.” Furthermore, structural deficiencies were identified in the bid documents and should have been readily identifiable during the pre-bid site visits.  Finally, NAVFAC contended that RDA’s means and methods were inconsistent with the bid document’s direction that the Wharf was to be completely demolished before work could commence on the Bulkhead.

The Court began its analysis by presenting the standard for a violation of the implied duty to disclose “superior knowledge” by the government. An implied duty to disclose is violated when:

1)    A contractor undertakes to perform [the contract] without vital knowledge of a fact that affects performance costs or duration;

2)    The government was aware the contractor had no knowledge of and had no reason to obtain such information;

3)    Any contract specification supplied misled the contractor or did not put it on notice to inquire; and

4)    The government failed to provide the relevant information.

Hercules Inc. v. United States, 24 F.3d 188, 196 (Fed. Cir. 1994)

The Court then found that NAVFAC had indeed violated both the first and fourth elements of the test by not furnishing the Report to RDA until a month after the contract had been executed. The record showed and NAVFAC personnel confirmed that NAVFAC did not disclose to RDA the Wharf was subject to severe load restrictions until November 2009.  Therefore, the first element was met when the Court concluded that RDA undertook to perform the project in October 2009 without “vital knowledge” of the load restrictions which effected performance costs and duration. The Court found the fourth element was also satisfied because NAVFAC admitted it did not provide that knowledge until after the contract was executed.

The Court next examined the second element of the violation test and presented RDA’s argument that a bidder could only learn of structural deficiencies of the Wharf through the bid documents or through a site visit.  RDA contended the bid documents were silent on the extent of the Wharf’s deterioration and the only means to truly view it during the site visit would be through an underwater investigation.  The Court rejected RDA’s arguments by pointing to the fact that during the site investigation, there were “indicia of the Wharf’s limited loading capacity” through “orange saw horses and concrete barriers lining the perimeter of the wharf indicating that vehicles could not drive there.”  The Court further pointed to the presence of large sinkholes adjacent to the Bulkheads “suggesting the land around the Wharf was not stable.”  Therefore, despite the fact that NAVFAC was aware RDA had no knowledge of the Report, the physical condition of the Wharf during the inspection should have given RDA “reason to obtain [additional] information” about the structural capacity of the Wharf through an independent engineer’s report or underwater investigation.  Accordingly, the Court found that the second prong was not satisfied and RDA’s claim failed the test.

Despite the Court’s finding that the second element of the “superior knowledge test” was not met, thus rejecting the violation of the duty to disclose, the Court continued its analysis reviewing the third element. RDA argued that the bid documents affirmatively misrepresented that the Wharf could be used to support the weight of cranes and excavators required for demolition because the bidders were instructed to “locate demolition equipment” throughout the structure so as to not overload the framing.  The Court stated that even though RDA defined “demolition equipment” to mean cranes and excavators, the bid documents do not define that term.  Instead, the bid documents did contain the American Society of Safety Engineer's 2006 Safety and Health Program Requirements for Demolition Operations which stated demolition equipment that “each structure can withstand should be determined by the contractor.”  The Court stated this definition contained within the bid documents required due diligence by RDA to perform an engineering analysis before it placed equipment on the wharf and RDA was on notice to inquire about the structural integrity of the Wharf.

Accordingly,  the Court ruled that NAVFAC did not have a duty to disclose the Reports prior to entering into a contract with RDA and dismissed the count. 

RDA Construction Corp. v. The United States  

---------------------------------

The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA.  He may be contacted at 781.786.8916 or carter@agcmass.org.

Thanks to Benjamin J. Morris from the San Diego office of Foley & Lardner LLP for his contribution to the Dispute Resolver: 

California Court of Appeal Affirms Finding that Additional Insured Endorsements in Subcontractors’ Policies did not Clearly Exclude Completed Operations Coverage for an Additional Insured (Developer/Contractor) and the Insurer Acted in Bad Faith in Denying Coverage and Defense

Pulte Home Corp. v. American Safety Indemnity Co., No. D070478, 2017 WL 3725045 (Cal. Ct. App. Aug. 30, 2017)

The California Court of Appeal recently issued a broad coverage decision in favor of a developer/contractor and affirmed punitive damages against the insurance carrier for its bad faith denial of a defense. The case arose from Pulte’s development of two residential projects in Southern California beginning in 2003. The homes were sold in 2005-2006. Pulte was named as an additional insured on certain subcontractors polices issued by American Safety in 2003-2006.

After residents of the developments filed construction defect suits against Pulte in 2011 and 2013, Pulte tendered the claims to American Safety, which denied Pulte’s request for a defense based on a position (among others) that the AI endorsements excluded the subcontractors’ completed operations. Pulte then filed suit against American Safety. The trial court found that the language of the AI endorsements on the relevant policies was ambiguous on the potential for coverage of the alleged claims; therefore, American Safety was required to provide a defense to Pulte. Pulte was awarded $455,238.45 for defense fees, costs, and prejudgment interest for the defense of the two underlying construction defect suits. The trial court also awarded $500,000 in punitive damages against American Safety finding that its decision to deny coverage was unreasonable and in bad faith. On appeal, the Pulte court affirmed the trial court’s award of contract damages and Pulte’s entitlement to punitive damages.[1]

The relevant subcontractors’ insurance policies all identified the aggregate limit for “products-completed operations” as $1 million; however, the policies contained multiple manuscript AI endorsements—that American Safety and Pulte agreed were substantially similar. The key AI endorsement cited in Pulte granted AI coverage, “but only with respect to liability arising out of ‘your work’ which is ongoing and which is performed by the Named Insured for the Additional Insured on or after the effective date of this Endorsement.”[2]

Relying on Pardee Construction Co. v. Insurance Co. of the West, 77 Cal. App. 4th 1340 (2000), the Pulte court stated that “the initial issue for policy interpretation is whether the additional insured endorsements explicitly exclude coverage for the subcontractors’ completed operations.” After reviewing the relevant policy language and endorsements and the parties’ arguments, the Pulte court held that the AI endorsement did not clearly exclude “completed operations” coverage for the AI because liability for harm caused by the subcontractors “completed operations” could arise from the work performed after the policy was effective.  Moreover, the specific language of the AI endorsement did not clearly limit the coverage to liabilities which arose while the subcontractors were performing construction work. American Safety had “failed to expressly limit covered completed operations as to time or particular project in their policy and endorsement language.” 

Writing for the panel, Justice Huffman stated that “[b]oth sets of insureds could reasonably have expected that if the subcontractors had bought completed operations coverage for the work, it also applied to vicarious liability of the developer, if property damage problems appeared.” He further noted that“[t]hese AIEs do not clearly restrict coverage to only ongoing operations, simply by linking the ongoing operations phrase to the ‘liability arising out of the work’ clause.” Based on the facts surrounding the preparation of the manuscript AI endorsements and applicable legal precedent, doubts about whether a duty to defend existed should have been resolved in favor of Pulte.

After addressing whether American Safety had a duty to defend, the Pulte court went on to review the trial court’s finding that the insurer had acted unreasonably and in bad faith when it denied Pulte coverage for the alleged defects. The court affirmed the trial court’s decision finding there was substantial evidence that American Safety: (1) knew the policies were purchased to satisfy contractual requirements to provide completed operations coverage; (2) had a “pattern and practice of using every conceivable argument to deny coverage, whether the arguments are weak or strong, valid of invalid”; (3) routinely issued form letters denying AI coverage without reasonable case-by-case investigation; (4) denied coverage despite awareness of prior federal court decisions against its coverage interpretation; and (5) had continued these practices over a course of years. Justice Huffman concluded that “[s]uch conduct showed the company was primarily protecting its own interests in refusing to defend its additional insureds in construction defect cases.” Based on the above conduct, the Pulte court approved of Pulte’s entitlement to a punitive damages award, which would be recalculated on remand using an approximate one-to-one ratio after the trial court recalculated Pulte’s Brandt fees and costs.

_______________

The author, Benjamin J. Morris, is a senior counsel in the San Diego office of Foley & Lardner LLP. His practice focuses on representing owners, developers, engineers, lenders, contractors, subcontractors, and consultants throughout all phases of construction projects and construction litigation.

---

[1] The amount of punitive damages was remanded for adjustment following the trial court’s recalculation of Brandt fees, which were remanded only as to amount, not entitlement.

[2] Two other noted versions of the AI endorsements stated that the AI was insured: (1) “but only with respect to liability arising out of ‘your work’ and only as respects ongoing operations performed by the Named Insured for the Additional Insured on or after” the endorsement’s effective date; and (2) “but only with respect to liability arising out of ‘your work’ which is performed at the project designated above. This Endorsement applies only to ongoing operations performed by the Named Insured on or after” the endorsement’s effective date.

Fall Meeting - D1 Lunch Program - Innovative Approaches to ADR

As the projects grow more complex, the stakes for project participants similarly grow complex. To solve the problems that inevitably arise, project participants have crafted various methods of resolving disputes in an effort to “right size” dispute resolution.

Loring A. Cook III of Murtha Cullina, J. Thomas Nocar of Porter Wright Morris & Arthur, and Ronald L. Williams of Fox Rothschild, with co-sponsorship by the ABA Construction Litigation Committee, offered some insight into several of these innovative approaches including med-arb, arb-med and hot-tubbing experts at the Division 1 lunch program during the ABA Forum on Construction Law's Fall Meeting in Boston, MA.  The panel then turned the conversation over to the attendees and invited their thoughts on several topics such as: how to best prepare your client's expert for hot-tubbing and when and why your clients should mediate.

We ran out of time to weigh in on "how do you prepare differently when your client's case will be heard by a non-lawyer arbitrator or mediator?"  Feel free to offer your comments below!