Midwest Construction Law Blog

Are Commercial Buildings and Public Buildings a Lead-Paint Hazard? Contractors Could be Impacted by Renovation Regulations Contemplated by EPA

Lamer, Chad — Wed, 15 May 2013 21:48:24 GMT

If you manage or perform renovations, repairs, or painting activities on the exterior or interior of public building or commercial buildings, you should be aware that EPA is currently evaluating whether and how to regulate such activities in public buildings or commercial buildings constructed before 1978 that pose lead-based paint hazards. On Monday, May 13, 2013, EPA issued a notice in the Federal Register that it is seeking public comment on this topic until July 12, 2013, and will host a public meeting at EPA’s headquarters on June 26, 2013.

In April 2008, the EPA issued final regulations covering child-occupied target housing, which includes residential structures and most pre-1978 housing, as well as a subset of public and commercial buildings where young children spend a significant amount of time (known as the Lead Renovation, Repair, and Painting (RRP) Rule). The RRP Rule requires, among other things, that contractors and subcontractors be properly trained and certified and use safe work practices to minimize lead dust. The EPA has begun aggressively enforcing the RRP Rule. On May 2, 2013, EPA announced 17 enforcement actions for violations of the RRP Rule in Missouri, Nebraska, Michigan, Indiana, Florida, Tennessee, Maryland, Pennsylvania, New Jersey, New York and New Hampshire. EPA initiated a similar sweeping enforcement action in November 2012 against 16 companies in a number of states including Kansas and Illinois.

When EPA finalized the residential and housing RRP Rule, several environmental and children’s advocacy groups, filed suit against EPA seeking to expand the regulatory reach to repairs and renovations at commercial and public buildings (other than child-occupied facilities), to the extent such renovations create lead-based paint hazards.

On December 31, 2012, EPA announced its intention to hold a public meeting and to seek comment and data pertaining to the renovation, repair, and painting activities on public and commercial buildings. Today’s May 13 federal register notice, reopens the comment period until July 12, 2013. EPA has specifically requested information on:

• The manufacture, sale, and uses of lead-based paint after 1978;
• The used of lead-based paint on public and commercial buildings;
• The frequency and extent of renovations of public and commercial buildings;
• Work practices used to renovate public and commercial buildings; and
• Dust generation and transportation from exterior and interior renovations of public and commercial buildings.

According to EPA’s May 13, 2013, federal register notice, the agency has also prepared a discussion guide that includes a description of the information received during the previous comment period in the rulemaking docket.

Spencer Fane Britt and Browne, LLP, routinely works with construction contractors and related businesses in rulemaking and associated regulatory developments. Construction businesses, contractors, demolition companies, and related entities that seek additional information on EPA’s proposed action may contact any member of Spencer Fane’s Environmental Practice Group or Construction Law Group.

Why Construction Professionals Must Understand the Intricacies of Surety Bonds

Lamer, Chad — Fri, 03 May 2013 21:40:20 GMT

Today's guest post is courtesy of Sara Eisenberg, Director of Educational Outreach at SuretyBonds.com.

Although many professionals might not understand what surety bonds are and how they function, they usually know they must purchase this unique type of insurance to work within their chosen industry. For construction professionals, however, the bonding process is more complicated than it is for brewery owners, auto dealers and mortgage brokers. Why? Because cities and states have their own unique bond requirements. Furthermore, there are two categories of surety bonds that construction professionals usually need before work can begin on a project. Differentiating between these bond types — contractor license bonds and contract bonds — can be difficult for even the most seasoned contractor or construction project owner.

To understand the difference between contractor license bonds and contract bonds, one must first understand what a surety bond is and how it functions. A surety bond is a legally and financially binding contract that brings together three parties: a principal, an obligee and a surety.

The principal is the professional who purchases the bond and, by doing so, pledges to adhere to laws that regulate the local construction industry
The obligee is the government agency or other developer that requires the principal to purchase the bond. In most cases, the bond protects the obligee in the event of a principal's inability to fulfill expectations.
The surety is the underwriter that produces the bond and, therefore, backs up the principal's pledge. If the principal breaches the contract, the obligee can make a claim on the bond to recover losses. The surety will then require the principal to reimburse it for any claims paid out.

Contractor license bonds — known more simply as "contractor bonds" — are required by a city or state government agency to guarantee that the local industry's licensing laws are followed. In most cases, these bonds are fairly affordable and easy to qualify for, especially when working with a reputable surety producer that can issue license and permit bonds quickly.

Contract bonds — also called "construction bonds" — aren't as cut-and-dry as contractor bonds. For starters, there are several bond types that fall into the contract bond category. The most common types are bid bonds, performance bonds and payment bonds. Other types of contract bonds include supply bonds, maintenance bonds, site improvement bonds and subdivision bonds. The type of bond a construction professional needs depends on the project owner/developer's unique requirements and the project at hand. If the contracted party fails to fulfill the contract's terms, the project owner/developer can file a claim on the bond to recover financial losses.

One of the most common misconceptions about construction bonds is that they're just as easy to obtain as contractor license bonds. Unfortunately, this isn't the case, primarily because there's a large amount of contractual risk associated with construction bonds. Typically, a contractor's bond eligibility will depend on several of the following factors:

the type of construction project at hand;
the contractor's bid amount for the project;
the bond amount required by the project developer/owner;
whether the construction company has been in business for at least one year;
the contractor's revenue over the past calendar year;
whether the contractor has been bonded before; and
the contractor's personal credit score

A variety of insurance companies underwrite construction bonds, and each has a different set of approval requirements. For example, most require applicants to have a credit score of at least 680 to qualify for relatively small bonds. Some companies require contractors to provide financial documents prepared by a licensed CPA while others refuse to bond contractors working on residential projects. Because so many stipulations factor into a surety's decision to issue a contract bond, the bonding process often proves to be more challenging than contractors anticipate. Unfortunately for some contractors, getting approved for a contract bond could be impossible.

As a professional contractor, it's important to understand the bond that's required of you — whether by your city and/or state or the project owner/developer — before you submit a bid. By purchasing a surety bond, you pledge that you're a skilled, reputable and credible construction professional who will complete your job according to contract (a.k.a. on time and on budget). By fulfilling your contract, your reputation will become more established and your eligibility to be bonded in the future will increase.

Sara Aisenberg is the director of educational outreach at SuretyBonds.com. Through her writing, Sara strives to educate professionals of all types about the importance of understanding what surety bonds are and how they work. Because bonds pertaining to the construction industry tend to be more confusing than those for other industries, Sara makes it a point to maintain a strong working knowledge of contractor and construction rules and regulations. Keep up with Sara on Google+.

Public-Private Partnership Helps the City of Riverside, Missouri land $45 Million Automotive Plant

Lamer, Chad — Fri, 26 Apr 2013 21:45:00 GMT

The key to any good public-private partnership (P3) is having the vision and commitment to succeed. For all those interested in growing a community through economic development, what occurred in Riverside, Missouri, this morning is a great example of the public and private sector working together to accomplish more than they could individually.

For those who have not yet read The Wall Street Journal, Missouri Governor Jay Nixon announced that auto parts supplier Yangfeng USA Automotive (YF) will construct a manufacturing facility in the City of Riverside, Missouri. YF plans to invest $45 million in the plant, which will produce and supply interior components to General Motors plants in both Kansas and Missouri.

The plant will be YF's third-largest facility in the United States and will create 263 new jobs in Missouri.

The YF announcement is an example of using a P3 and public incentives to capture a return on investment for the entire community. There were numerous places YF could have located, but it ultimately chose the City of Riverside based in large part on the work accomplished in the public-private partnership between NorthPoint Development and the City of Riverside.

The Banning of Prevailing Wage in Kansas

Lamer, Chad — Fri, 19 Apr 2013 15:29:03 GMT

On Tuesday, the State of Kansas put the final nail in the coffin for prevailing wage requirements on public projects. Kansas has not had a state-wide prevailing wage requirement for public projects since 1987, but individual localities could require prevailing wage if they thought it was good public policy. That all changed this week with the passage of House Bill 2029, which bans a political subdivision from requiring the payment of prevailing wage on public projects.

How will this influence the political subdivisions in Kansas? Currently, only Wyandotte County has a prevailing wage requirement, so the law will probably not affect the majority of the state. I guess the real question is whether or not union shops will be able to compete for public projects in Wyandotte County after the passage of the bill.

The ban on prevailing wage will take effect on July 1, 2013, when Governor Sam Brownback signs it into law.

Thoughts From the American Planning Association's National Conference in Chicago

Lamer, Chad — Tue, 16 Apr 2013 18:58:38 GMT

I'm currently wrapping up a great weekend at the American Planning Association’s (APA) National Planning Conference in Chicago, Illinois. For the MCL Blog readers unfamiliar with this event, the APA hosts an annual development conference for planning professionals and representatives from communities all over the United States. The five-day conference offers seminars on a broad range of topics, from common planning problems like the use of economic development incentives, to some unique regional issues, such as whether roosters and goats should be allowed under a city's urban agriculture ordinance. (Think Portland!)

I always leave this conference inspired by the professionals’ ideas and passion for community improvement, and this year my takeaway is that all projects should involve planning decisions at the local level. This is true even if the project is an approved use and the owner is just pulling a building permit. Most of the projects I work on usually involve more than just pulling a building permit (or I wouldn't be involved) but to be fair, my point is that many people are involved with shaping our built environment. Many of the people participating in local planning decisions are regular citizens volunteering their time to develop a vision of how they want their community developed.

As both a planning commissioner and representative of owners, developers, and contractors, I believe it is of utmost importance that those involved in a project contact the neighborhood group where the project is located. This simple step will likely expedite the approval process and promote fairness for all parties involved. Too often, I have seen owners appear before governing bodies only to have their projects delayed or denied because the neighborhood group voices concerns that could have been addressed prior to the hearing.

Simple steps like attending a neighborhood meeting can go a long way when it comes to facilitating community buy-in for projects, and taking this action may ultimately help an owner achieve project approval.

Commercial Tenant Fails to Pay Contractor for Tenant Improvements: Now What?

Lamer, Chad — Mon, 08 Apr 2013 19:25:29 GMT

I am frequently asked this question by both contractors and commercial property owners. Generally, owners of commercial property (at least in Missouri and Kansas) will not be liable for contracts entered into by their tenants unless the tenant is acting as an agent of the owner, or the lease requires the tenant to make certain improvements that enhance the value of the property.

For instance, it is not uncommon for the tenant to be responsible for HVAC repair and/or replacement. Should the tenant fail to pay the contractor for either the equipment or the labor, then theoretically the contractor could place a mechanic’s lien on the real property, the improvements installed, and the tenant’s leasehold interest.

When a tenant contracts for new improvements or erections without acting as an agent of the owner, the contractors who perform the work will acquire a lien only to the tenant’s leasehold interest and the improvements furnished or placed on the real property, not to the real property itself. In addition, the provision or repair of a tenant's personal property subjects said property to a mechanic's lien. The contractor must still comply with the requirements of RSMo. §§ 429.005 to 429.360 in order to assert a mechanic’s lien against the interests of the tenant.

From the contractor’s perspective, it may be impossible to know during the applicable lien time if the tenant is being directed by the owner to install the improvements. All most contractors know is that they performed work on the property and that payment is due. Given this common set of facts, a contractor should include the underlying real property and the tenant’s leasehold interest in the contractor’s mechanic’s lien claim. If it is later determined that the tenant was not acting as an agent of the owner, then the contractor can remove the real property from its petition to enforce the mechanic’s lien.

Owners trying to protect themselves from mechanic’s liens caused by their tenants may want to consider requiring tenants to post a payment bond or a letter of credit before allowing the tenant to begin any improvements on the property. Most commercial leases contain a provision requiring the tenant to immediately remove any mechanic’s liens asserted on the property; however, this provision may have little value if the tenant is strapped for cash. Given this reality, a letter of credit or a payment bond may be the owner’s best protection from mechanic’s liens caused by its tenant.

Acquiring Real Estate Before the Construction Project: Should Buyers Order a Phase I Inspection?

Lamer, Chad — Mon, 18 Mar 2013 20:52:54 GMT

One of the key issues a buyer should consider before purchasing property is whether or not to order a Phase I Environmental Site Assessment. The purpose of the Phase I is to evaluate a property’s environmental conditions and assess the likelihood of any contamination being present onsite. From a buyer’s perspective, the Phase I is used to identify possible contamination on the property and to provide some protection from liability should environmental hazards later be discovered.

This protection from liability is generally achieved if the buyer has met the requirements of the “all appropriate inquires” rule. The EPA issued final standards and practices for conducting all appropriate inquiries in 2006. Those requirements are applicable to any party who may potentially claim protection from the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) as an innocent landowner, a bona fide prospective purchaser, or as a contiguous property owner.

A liable party is not necessarily the entity that created the environmental hazard!

As a buyer, obtaining exemption from environmental liability is important because under CERCLA, the EPA can require liable parties to clean up the property or charge those costs to the liable party. A liable party under CERCLA may include:

(1) the current owner and operator of a contaminated property; (2) any owner or operator at the time of disposal of any hazardous substances; (3) any person who arranged for the disposal or treatment of hazardous substances, or arranged for the transportation of hazardous substances for disposal or treatment; or (4) any person who accepts hazardous substances for transport to the property and selects the disposal site.

Given these facts, it is likely in the best interest of a potential buyer to conduct a Phase I investigation prior to purchasing real property. This is particularly true in urban areas where the history of uses conducted on the property or the uses conducted on adjacent properties are unknown.

What is all the buzz about Kansas Senate Bill No. 54?

Lamer, Chad — Mon, 11 Mar 2013 20:57:54 GMT

It’s that time of year again: the legislature is back in session, and a host of bills are moving through the Kansas House and Senate. Recently, I received a legislative update from the Kansas Society of Professional Engineers concerning Senate Bill No. 54. The bill itself seems relatively straightforward, standardizing language and clarifying technical changes to the definitions of architecture, engineering, geology, landscape architecture, and surveying. There are other proposed changes within the bill, but nothing that seems terribly problematic from the perspective of the design industry.

Given the content of the bill, I was surprised to learn there are two proposed amendments currently being discussed in the capital. If approved, these amendments could have enormous implications on the health and safety of the public. One of the proposed amendments would provide an exemption for religious facilities related to design. In essence, a non-licensed architect or engineer could design a religious facility under the proposed amendment without having to be licensed by the State of Kansas.

The second proposed amendment being discussed would to allow a person to build any structure (residential or commercial) on their own property (including building open to the public), if they agreed to accept liability for any injuries that occurred on the property. While I have not seen written drafts of these proposed amendments, they are being openly discussed and could be introduced as early as this week.

I will continue to monitor this bill and others that are important to the construction industry as we work through the legislative session.

What about you? Do you think Senate Bill No. 54 will be amended to allow the design of religious facilities by non-licensed individuals?

Preventing Construction Job Completion Issues During Inclement Weather

Lamer, Chad — Tue, 26 Feb 2013 17:42:42 GMT

The recent snow storms in the Midwest and the possibility of ongoing weather interruptions this week have many business owners facing issues such as lost productivity and client service interruption. Most business owners should be wondering: “Is there anything I do to prevent lost productivity and potential job completion problems?” Here at MidwestConstructionLaw.com, we’ve come up with a few tips for providing outstanding service to construction projects/ clients during inclement weather.

Contracts. Review open contracts to determine if extensions of time to complete the project are available. You may also want to see if your contracts have liquidated damages or delay timelines that can be passed on to your company. If so, you may want to immediately challenge by resort to force majeure provisions in your contracts.

Jobsite Issues. Determine if there have been damages to any jobsite. This includes corrupted material, collapsed roof/ structure, lack of access to a jobsite, or delay caused by trades that might be compensable under existing policies of insurance. You should also ascertain whether there could be on-going complications in accessing the jobsite. In that case, notice needs to be given to the owners.

Communication. Consider issuing information to employees (via email or telephone) about expectations for the job and determining whether you will be short staffed

Current/Future Project Bids. Assess whether the storm has caused you to rethink upcoming projects bids, and whether the same should be taken on at this point. Revisit whether the owner or contractor will have the resources, staff and time to re-mobilize to the job during inclement weather.

Try to mandate whether additional precautions should be taken with the colder than expected winter conditions. Be safe out there!

KU Basketball Season is in Full Swing. So Why am I Thinking About the 49er’s New LEED Certified Stadium?

Lamer, Chad — Fri, 22 Feb 2013 17:18:42 GMT

This is the best time of the year for sports. March Madness is approaching and my Kansas Jayhawks are preparing for another run at the Big 12 Championship. Opening Day for the Kansas City Royals is a few months away and they are going to break 500 this year.* The Kansas City Chiefs have the number one pick in the NFL draft and are sure to take the next Tom Brady.

Given all these great sports diversions, why am I thinking about San Francisco’s new stadium? In short, because it sounds like a great place to watch a football game, but also because it will be one of the first NFL stadiums to achieve LEED Certification.

Now to be fair, the new stadium is not the first LEED certified stadium in the NFL. That honor belongs to the Chicago Bears. In 2011, the Chicago Bears’ Soldier Field was awarded LEED–EB Certification by the U.S. Green Building Council (USGBC). Soldier Field is the first existing NFL stadium to receive LEED certification but the 49ers' new stadium will be the first LEED Certified stadium for “New Construction.”

A brief look at the 49ers website shows a live view of a stadium well under construction.

The stadium will have solar panels, green roof technology, access to nearby public transit, and several features necessary for it to achieve LEED certification. The stadium’s solar array will have a total peak capacity of about 400kW and is projected to provide enough power over the course of a year to offset the power consumed at the stadium during the 49ers home games. As a result, the stadium will be the first professional sports venue in California to achieve net zero energy performance.

For me, the LEED certification and the sustainability features of the stadium are just a bonus for fans that are becoming used to seeing a winning product on the field. Maybe the reason I am thinking about San Francisco’s new stadium is because I want my teams to embrace a culture of leading others with both stadium innovation and winning product on the field.

*Midwest Construction Law Blog readers are advised that my predictions are for entertainment purposes only and that they would be better off throwing their money into a flaming barbecue grill than betting on any of my so called “predictions”

What was the Most Important Kansas Construction Case in 2012? (Hint: Can you say “Economic Loss Doctrine?”)

Lamer, Chad — Tue, 12 Feb 2013 20:50:59 GMT

It is not often that the Kansas Supreme Court reverses Kansas judicial precedent and offers new avenues for plaintiffs to pursue claims. In David v. Hett, the Court did exactly that by expanding the ability of home owners to pursue tort claims instead of relying on breach of contract claims. What does this mean for contractors? In short, it means a residential home owner can now make claims against a contractor for breach of contract and/or negligence.

An explanation of the “economic loss doctrine” is important in understanding the significance of this decision. The economic loss doctrine is generally described as "a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses." Courts will apply it to bar plaintiffs from asserting tort claims (negligence, fraud, etc.) in cases where the terms of the contract adequately address the parties’ risks. Courts have reasoned that when sophisticated parties enter into contracts, then in such instances tort exposure should be limited to hold the parties to the terms of their agreement.

In this case, Scott and Sherry David acted as general contractors for a home they were building in Tampa, Kansas. In doing so they contracted with Hett Construction to provide the excavation, basement, and concrete work. Hett completed the work in 1998 and in 2003 the Davids noticed unusual settling in the garage and basement. The Davids subsequently sued Hett for breach of contract, negligence, fraud, fraudulent concealment, and violation of the Kansas Consumer Protection Act. The lawsuit sought actual damages to bring the house into compliance with the original plans and specifications.

Unfortunately for the Davids, they failed to properly respond to a motion for summary judgment and the District Court was forced to deny many of their claims. To compound this injury, the District Court also held that the economic loss doctrine prevented the Davids from bringing tort claims (fraud, negligence) under circumstances governed by contract. The Davids, faced with no alternative, appealed and the Court of Appeals affirmed the District Court's decision citing Prendiville v. Contemporary Homes, Inc., 32 Kan. App. 2d 435, 83 P.3d 1257, rev. denied 278 Kan. 847 (2004). The Davids then appealed to the Supreme Court of Kansas.

The Supreme Court of Kansas ruled that the economic loss doctrine should not bar claims by homeowners seeking to recover economic damages resulting from negligently performed residential construction services and overruled the holding Prendiville.

What does this mean for contractors and subcontractors performing work on residential construction? Well to be sure it means that homeowners now have more claims to assert in lawsuits against contractors. It also means such claims could be asserted long after contractual warranty provisions expire.

Zombie E-mails and the Death of Your Construction Case

Lamer, Chad — Wed, 30 Jan 2013 23:21:46 GMT

E-mails never die. They lurk in the hidden recesses of not only your computer, but also the computer of everyone that received your message. They must be disclosed in a lawsuit, and if you are up against a reasonably competent attorney—trust me, they will be discovered. That joke you sent to a colleague about jobsite conditions? Well, it just bought you three hours in a deposition explaining what your “joke” really meant. You don’t know it yet, but there are e-mails stored on your computer that can be taken completely out of context in litigation. Frightened? You should be.

Zombie e-mails are out to destroy your business.

There are four rules to consider when developing an e-mail policy for your company:

Rule #1: What did we do before we had e-mail?

We used to make telephone calls when we had issues with our business. If it was really important, we would schedule a meeting to discuss it in person. E-mail is great for handling day-to-day activities, but when sensitive issues arise, my suggestion is to use the telephone or schedule a meeting. This ensures that a message is not misconstrued, and will be time well spent if you are ever faced with litigation.

Rule #2: Beware of ‘Reply All’

There is an interesting story about an advertising executive who hit “reply all” and sent an e-mail to his entire firm. His message was intended for one person, but instead went to the firm’s entire distribution list, bad-mouthing most of its recipients. Did he get fired? Shockingly…no. Instead, he repackaged his mistake into a popular Super Bowl commercial. But don’t get too excited: this probably won't happen to you. Always consider the content of the message and the recipients before you hit send.

Rule # 3: Cocktail Rule

Happy Hour is a great way to maintain relationships with your colleagues and clients. But what tastes good at 5:00 p.m. won’t read so well in an e-mail you want to send at Midnight. That lawyer spelled your entity’s name wrong on that Certificate of Service? Well yeah, that’s a big deal. You’re angry and sending him a hostile e-mail after that last beer? Hold that thought. Nothing good comes out of messages sent by anyone in an upset or angry state of mind, and any such messages will be read by opposing counsel or presented as evidence to a jury. Sleep on it and call the respective party the next day to discuss issues or mistakes that require a more in-depth explanation.

Rule #4: Local Paper Rule

“Extra! Extra! Read all about it!” As a society we rely on the media for business news, but it’s a different story when you pick up the Sunday paper and discover your lawsuit is front page news. Anything you communicate in writing to your employees faces the risk of release to an outside source that could use that information to potentially harm your business’ image. The solution? Don’t put anything in an e-mail that you wouldn’t want outsourced to local journalists.

Implementing these rules within your company could go a long way in protecting your business from Zombie e-mails and other threats to your bottom line.

Road Construction Contractor to Pay $735,000 Fine for Stormwater Discharges

Lamer, Chad — Tue, 22 Jan 2013 15:43:57 GMT

On January 3, 2013, a general contractor for the Oregon Department of Transportation, Granite Construction Co., settled allegations of Clean Water Act stormwater permit discharge violations for $735,000. The settlement is currently subject to a 30-day comment period as reflected in the January 18, 2013, federal register notice.

EPA Region 9 and the U.S. Department of Justice allege that the California-based contractor discharged large quantities of sediment-laden construction stormwater runoff into navigable waters and tributaries of the Yaquina River. According to the Complaint, the discharges resulted from slope failures and rainfall events on unstablized slopes, as well as the company’s clearing, grading, and excavation activities. The discharges occurred during construction of the U.S. Highway 20 expansion project in Lincoln County, Oregon.

The Clean Water Act prohibits the discharge of pollutants from a point source into waters of the United States, unless in compliance with a permit issued under the Act. The discharge prohibition includes stormwater discharges associated with construction activities involving clearing, grading, and excavation resulting in the disturbance of at least five acres of total land area. 40 CFR 122.26(b)(14)(x).

In addition to the civil penalty, the company is required to assign a special stormwater pollution control manager to all of its Oregon construction sites and ensure stormwater control training for all of its Oregon-based supervisors.

EPA’s and DOJ’s latest action on stormwater reflects the growing emphasis and focus on stormwater discharges by regulatory agencies. Two stormwater cases were argued before the U.S. Supreme Court in December 2012, and a federal court in Virginia recently held that the EPA cannot regulate stormwater flow as a “surrogate” to control sediment runoff.

For persons interested in learning more, Spencer Fane’s Environmental Practice Group (with presenters from the firm’s Denver, Kansas City, and St. Louis offices) will host a complimentary 60-minute webinar on February 12, 2013, entitled “Navigating Uncertain Waters: Regulatory Developments in Clean Water Act Enforcement, Stormwater Permitting & Fracking.”

CLICK HERE TO REGISTER FOR THE COMPLIMENTARY WEBINAR

How to Extend Lien Rights Under Kansas Law (Free Forms Available for Kansas Filings)

Lamer, Chad — Thu, 17 Jan 2013 17:30:00 GMT

I often receive calls from my construction clients asking "How long do I have to file a mechanic’s lien in Kansas?" The simple answer for commercial projects is that General Contractors have four months and Subcontractors and Suppliers have three months from the last date of performing labor or supplying materials. Given a 30 day billing cycle, this three month time frame puts many subcontractors and suppliers in jeopardy of losing their lien rights before knowing whether they will receive payment.

The solution to this dilemma is to file a Notice of Extension of Lien. In Kansas, a General Contractor, Subcontractor, or Supplier can extend the deadline for filing its mechanic’s lien by filing a Notice of Extension of Lien. This is a fairly simple document and can be filed rather easily. Fortunately, the Kansas Judicial Counsel has provided a free form for Contractors which you can access by clicking this link (Notice of Extension of Lien for Contractors) and another free form for Subcontractors and Suppliers which you can access by clicking here (Notice of Extension of Lien for Subcontractors/Suppliers). Once completed, you will need to file the Notice of Extension with the Clerk of the District Court in the county where the project is located.

The key thing to remember is that you still must file the mechanic’s lien within the five month window or you will lose your mechanic’s lien rights. The Notice of Extension gives you a little more breathing room to work out payment issues before putting together a complicated mechanic’s lien. In a future post I will discuss the essential elements of a mechanic’s lien statement in Kansas.

EPA Issues Fine to Nebraska Contractor: Are you Notifying Homeowners of Lead Risks in Remodel Projects?

Lamer, Chad — Mon, 14 Jan 2013 21:03:03 GMT

Last week, Albracht Perma-Siding and Window Co., of Omaha, Nebraska, agreed to pay a $6,188 civil penalty to the United States to settle allegations that it failed to notify an Omaha couple about lead-based paint risks before the company or its subcontractors performed renovation work in their pre-1978 home. The company also failed to keep records of lead safe practices for work it performed at 10 pre-1978 homes in Lincoln, Bellevue, and Omaha, Nebraska.

Albracht and/or its subcontractors were legally required to provide owners and occupants of the properties with an EPA-approved lead hazard information pamphlet before starting renovations at the properties. They were also required to maintain records of required lead safe work practices performed at the properties. According to the consent decree entered into with the EPA, neither of these requirements was satisfied by Albract or its subcontractors.

Provision of the lead hazard information pamphlet to property owners and occupants is one requirement of the Residential Lead-Based Paint Hazard Reduction Act, which Congress passed in 1992 as an amendment of the federal Toxic Substances Control Act (TSCA). There are other requirements under the Act but apparently this was the violation the EPA was most concerned about in issuing the fine.

The question for contractors and subcontractors working in pre-1978 homes is: Are you keeping accurate records of your lead safety practices and meeting these requirements?

Pros and Cons of Using Industry Professionals as Arbitrators Instead of Attorneys

Lamer, Chad — Wed, 09 Jan 2013 17:19:19 GMT

I recently arbitrated two construction cases using two very different arbitrators. In one case, the parties agreed to use an industry professional as the arbitrator and in the other case we used an attorney as the arbitrator. By way of background, both of cases involved a manufacturer of construction materials. The cases focused on construction methods, and legal theories were not driving portions of either case. In the case that used an industry professional as arbitrator, the parties both hired experts and in the other case the parties relied on testimony from the owner, contractors, and manufacturer representatives.

After arbitrating both cases, my position is that using an industry professional or a construction law attorney as an arbitrator is a choice that should be driven by the facts of the case. Before deciding on an arbitrator, you should ask yourself if the case hinges on legal theories or on methods of construction.

In cases driven heavily by legal theories (i.e. breach of contract, equitable estoppel, quantum meruit, negligence, or some other type of tort), I would recommend that the parties use a construction law attorney as the arbitrator. It may be difficult to bring an industry professional up to speed on the intricacies of the legal theories involved in such cases. A construction law attorney will have some familiarity of the standard practices within the industry and will know the law within the given jurisdiction. One thing to consider in these types of cases is that the time spent educating a non-lawyer arbitrator on legal points may outweigh the benefit of having someone that understands the mechanics of the construction project.

In cases that mostly concern the mechanics of the construction project (i.e. whether or not someone deviated from the plans and specs), I would recommend using an industry professional as the arbitrator. From my experience, you spend far less time educating the industry professional about the mechanics of the construction project than you will an attorney. This is true even with a knowledgeable construction law attorney acting as the arbitrator. In addition, the industry professional will have a far better understanding of the opinions offered by any experts testifying during the arbitration.

Now, what about cases that involve complex construction issues and legal theories? In those situations, I recommend using a three-party panel consisting of two industry professionals and an experienced construction law attorney. There is more expense in using such a panel, but ultimately the parties will find they have the right combination of industry expertise and legal knowledge to arrive at a fair and reasonable decision.

Colorado Court of Appeals Finds Doctrine of Equitable Estoppel May Apply to Ambiguous Construction Contracts

Lamer, Chad — Mon, 07 Jan 2013 22:35:57 GMT

As a matter of first impression, the Colorado Court of Appeals in Extreme Construction Company v. RCG Glenwood, LLC has found that the Doctrine of Equitable Estoppel may be applied to an ambiguous construction contract. Some of you may be asking "what is the Doctrine of Equitable Estoppel and why should my company care about it?" In plain English, Equitable Estoppel is basically about what is fair. It means that if you have taken certain actions and those actions are relied upon by another party to their detriment, then you cannot deny that you intended the consequences of your actions. Here is an example:

A Contractor hires an electrical Subcontractor. The contract between the Contractor and Subcontractor contains a “pay-if-paid” provision under which the Contractor does not have to pay the Subcontractor if the Contractor is not paid by the Owner. During the project the Owner begins to have difficulties paying the Contractor. The Contractor tells the Subcontractor to continue working and it will make sure the Subcontractor is paid. The Owner ultimately files for bankruptcy and the Contractor cannot pay the Subcontractor for its work. In such an instance, the Doctrine of Equitable Estoppel may prevent the Contractor from using the “pay-if-paid” clause as a defense to payment of Subcontractor.

In the Extreme Construction case, Extreme was a subcontractor to RCG on a remodel project. During the course of the construction, RCG bounced checks to Extreme and Extreme contacted Spradlin, the owner of the project. After receiving assurances from Spradlin, Extreme continued working on the project. RCG again bounced checks to Extreme and Extreme threatened to file a lien on the property. In response, Spradlin sent a letter stating it would execute a promissory note and personal guaranty if Extreme would not file the lien. Extreme never filed its lien, Spradlin never executed the note, and RCG never paid Extreme. All the necessary elements for litigation were present and so Extreme filed a lawsuit to recover its fees.

At the trial court level, Spradlin and RCG argued that the Extreme overbilled on its contract. The key issue was whether Extreme’s rate for superintendence and labor was supported by the contract. The trial court ruled that the contract was ambiguous and that the evidence supported RCG’s position on the labor rates. Extreme appealed the decision and argued that RCG was “equitably estopped” from deny the amounts owed to Extreme because RCG had paid invoices that included the disputed labor rates.

The Court Appeals agreed with Extreme and found that RCG could not deny the labor rates when it had previously paid, without dispute, and even discussed the invoices with Extreme. All the time never disputing the labor rates. In such instances, the Court stated that “it is unreasonable for a contracting party who knows of, but secretly disagrees with, the other side’s contract interpretation to delay challenging that interpretation until the other side has completed its performance.”

Lessons Learned

One take away from this case is that a party should not remain silent if it disagrees with an interpretation of a contract. Try to resolve those disagreements as soon as possible and do not wait until the other party has completely performed before raising those issues. Another take away is to make sure you are not inducing a party to perform by making assurances that are beyond your control. Given the promises of Spradlin in this case concerning Extreme not filing a mechanic’s lien, the Court could very easily have found that Spradlin promised to pay Extreme. In short, the Doctrine of Equitable Estoppel may be applied to your actions and you should be aware that promises made on the jobsite may have far reaching consequences should litigation occur.

Selling real estate during the middle of a construction project? Three points on closing the deal

Lamer, Chad — Thu, 27 Dec 2012 21:23:51 GMT

There are times when an owner may want to sell their real property during a construction project. As an owner, what are the key issues you should consider? As the general contractor, what is likely to be requested by the owner and by the buyer’s lender? This blog post addresses some of the larger issues that will need to be resolved in the transaction and should provide a general roadmap of how to structure the process.

Point One: Should you sell during the construction project or delay the closing until completion?

The answer to this question will be driven by the size of the project, the willingness of the buyer to take over a construction project, the willingness of buyer’s lender to finance the purchase, and of course the contractor’s willingness to consent to an assignment of the construction contract. The easiest answer is to delay the closing until the construction is complete; however, the easiest answer may not meet the needs of all the parties. There are times when an owner wants to sell and a buyer wants to buy. In those cases, the goal is to get to “yes” without imposing unnecessary risk on any of the parties.

Point Two: Consent by General Contractor to an Assignment of the Construction Contract.

The general contractor will want to know the financial strength of the potential new owner before it consents to an assignment of the construction contract. If the new owner is a relatively known commodity within the community, then this may be a fairly easy task. As a general contractor, there are a variety of methods to determine the financial strength of the potential new owner. These methods are similar to determining the financial strength of a prospective new client or the hiring of a subcontractor. Typically a general contractor may request financial statements, run a D&B report on the buyer, review court records, or just do a Google search on the new buyer before agreeing to any consent.

Point Three: How to handle lien rights of the General Contractor, Subcontractors and Suppliers.

One issue that is sure to arise is what to do about the lien rights of the general contractor, subcontractors, and suppliers on the project. In many states, lien rights arise when work first begins on the project and relate back over time to such date. This is often called the “First Spade Rule.” Lenders and title companies want to know whether or not they will be protected from liens that arise after the acquisition of the property. While it may be impossible to provide full protection to the new owner from lien rights for work that occurred prior to the closing date, there is a method to provide some level of comfort that everyone has been paid through the closing date.

The first thing is to coordinate with the contractor, subcontractors, and suppliers to make certain they can stop work on the job a few days prior to the closing date. An owner should request a payment application from the general contractor that covers all work and material provided through the closing. The owner should also request lien waivers from the general contractor, subcontractors, and suppliers for all amounts paid and work performed through the closing date. These partial lien waivers will be delivered to the buyer and title company prior to closing. Care should be taken to instruct material suppliers not to deliver any materials when the contractors have stopped work on the jobsite. Delivering materials during such a time could establish lien rights not covered by the latest payment application.

Other potential issues include how to deal with change orders arising after the closing date and who is responsible for paying for such change orders. Should an escrow account be set aside to deal with potential nonpayment of subcontractors and suppliers by the general contractor for work conducted prior to the closing date? What about builders risk insurance for the new owner? Will all product warranties transfer to the new owner?

Take Away Points

These are just a few issues that should be considered when selling real estate during the middle of a construction project. With these points in mind, there is a way to structure the transaction so as to minimize the risk to all parties and close the deal.

Kansas City, Missouri Approves $100 Million Infrastructure Project

Lamer, Chad — Tue, 18 Dec 2012 15:30:56 GMT

Voters in a Kansas City, Missouri special district recently approved funding for a $100 million streetcar system in the downtown area. The two-mile streetcar system will run from the River Market to Union Station. Supporters such as Mayor Sly James hope this investment will generate further development along the streetcar corridor and ultimately result in new streetcar lines throughout the metro area.

This type of development and the planning theories behind it are known as Transit-Oriented Development ("TOD"). There are numerous case studies demonstrating what can occur in communities that adopt TOD strategies which are typically aimed at encouraging economic growth and improving the walkability of the community. When successful, these TODs have seen increases in overall density, increased property values, and an increased use of public transit.

For readers of the Midwest Construction Law blog, Kansas City's first TOD represents $100 million in new construction spending that will begin in 2013. The multiplier effect of this type of construction spending in the community and the additional development that is anticipated to occur along the streetcar line presents a great oppportunity for Kansas City construction companies. Hopefully many of our local contractors will bid and be awarded contracts on this TOD project.

Missouri Revises its Model Environmental Covenant for Activity and Use Limitations on Contaminated Sites

Lamer, Chad — Fri, 14 Dec 2012 22:49:23 GMT

This guest entry about Missouri's Environmental Covenant Act comes from Andrew Brought of Spencer Fane's Environmental Law Practice Group. Given the issues property owners face with land use and site activities, the use of an environmental covenant can give said owners a significant advantage when used effectively.

Businesses that own contaminated property in Missouri, such as brownfield sites and former industrial locations, can avail themselves of Missouri’s Environmental Covenant Act (MoECA), RSMo Section 260.1000 et seq., 10 CSR 25-18.010(18), to expedite cleanup and, if site conditions allow, beneficial reuse of those properties. In particular, property owners can record an environmental covenant on their property that restricts certain land uses and site activities to minimize exposure to impacted soils and groundwater.

When coupled with a risk-based cleanup approach, an environmental covenant can present significant advantages to a property owner. Most notably, a company can clean up a site based on human health and environmental risks associated with appropriately tailored uses of the property, such as cleaning up an industrial property to satisfy industrial standards as opposed to residential standards.

The most common types of activity and use limitations found in environmental covenants include:
• residential use restrictions;
• prohibitions on drilling of groundwater wells and the use of groundwater for domestic purposes; and
• limitations on disturbance of surface and subsurface soils.

Environmental covenants like other property interests are recorded in a property’s chain of title to provide notice to prospective buyers of the specific activity and use limitations imposed by the restrictions.

Missouri, along with more than 20 other states, has adopted a version of the Uniform Environmental Covenants Act. The Missouri Department of Natural Resources (MDNR) has a “model” environmental covenant used by the agency in situations where MDNR is the sole overseeing Department and a second model covenant in which both EPA and MDNR are the overseeing agencies.

The provisions in the new model Environmental Covenant differ only somewhat from the provisions in the prior model Environmental Covenant, but the new model serves as a reminder that Missouri has a robust risk-based cleanup program when it is neither pragmatic nor cost-effective to clean up sites to residential levels. The use of Missouri's risk-based program should be carefully evaluated considering site-specific circumstances.

Missouri Court of Appeals affirms judgment holding knowing misstatements; invalidates mechanic’s lien

Lamer, Chad — Mon, 10 Dec 2012 22:03:10 GMT

A recent decision from the Missouri Court of Appeals Western District examined a couple interesting items in the world of Missouri mechanic’s liens. Of interest to Midwest Construction Law Blog readers are two items: (1) what does a contractor need to prove in a breach of contract claim; and (2) how can a misstatement in a mechanic’s lien invalidate the entire lien? In R.K. Matthew Investment, Inc. v. Beulhah Mae Housing, LLC, the Court of Appeals offered us some guidance on these two important topics.

What does a Contractor need to prove in a breach of contract claim?

If you want to recover any money on a breach of contract claim, you will need to prove: (1) there was a contract; (2) there were rights and obligations under the contract; (3) a breach occurred; and (4) that there were damages from such breach. Now this is straightforward stuff on any breach of contract claim.

What makes the R.K. Matthew Investment, Inc. case interesting is the Court stated that in construction contract cases, party alleging a breach much prove that payment was not made for work performed in a good and workmanlike manner. This means you will need to put on evidence that you were not paid for your work but also that your work was completed in a “workmanlike” manner. In plain English, the work needed to be done right!

In R.K. Matthew Investment, Inc., the evidence showed that much of the work failed inspections and needed to be redone. In addition, some of the work was not completed and yet was included in the mechanic’s lien. Given these facts, the Court found that R.K. Matthew Investments had not met its burden of proof and was denied its claim for breach of contract.

What not to include in your mechanic’s lien statement:

Missouri requires that every mechanic’s lien contain a “just and true” account of what the contractor, subcontractor, or supplier is claiming in its lien. The requirements of a “just and true” account are more stringent for subcontractors and suppliers than for general contractors in that a general contractor can just state the amount due in a single lump sum, whereas the subcontractor or supplier must provide an itemization of labor and materials provided.

What a contractor, subcontractor or supplier cannot include are charges for items which have already been paid or charges for work that was never performed. These types of charges demonstrate an “intentional and knowing misstatement” in a mechanic’s lien and will likely invalidate the lien on the basis of the lien not containing a “just and true account.”

Key things to remember about you mechanic’s lien:

This case teaches us a couple things. First off, you should make sure you introduce evidence at trial that you were not paid for your work and that the work was completed in a “workmanlike” manner. The evidence could consist of your own testimony, photographs of the jobsite, or even reports from the building inspector. The second teaching point is to make sure that your lien statement does not contain egregious errors such as charges for things you have already been paid for or charges for items you did not complete. These types of items could prove fatal to your mechanic’s lien.

Demolition crew accidentally destroys 18th century French Chateau. Do you think there is any insurance coverage?

Lamer, Chad — Fri, 07 Dec 2012 22:07:12 GMT

I have been thinking about dedicating a portion of Midwest Construction Law Blog to the Construction Hall of Shame. Look for this in the future but I think we may have its first entry with this story out of France. Apparently, a Russian business man hired a Polish demolition crew to demolish a small building located next to the 18th French chateau. He returned to find a pile of rubble where the Chateau used to stand and officials from the town of Yvrac, a town northeast of Bordeaux, France in an uproar.

The Mayor of the Yvrac has called for an investigation and everyone seems to be in disbelief that a “mistake” of this magnitude could occur. The question for us in the construction industry is whether or not something of this nature could occur on our jobsite. We always try to anticipate the risks involved with project and insure around those risks to the extent that such coverage makes economic sense. However, there are just some risks which are impossible to foresee. This may be one of those cases.

Fitting Bonds Into Your Risk Allocation Strategy for Construction Projects

Lamer, Chad — Tue, 04 Dec 2012 14:58:12 GMT

On any construction project, bonds should be considered as part of the owner's or general contractor's strategy for risk management or risk allocation. Bonds are separate from the types of insurance generally found on the construction projects (builder's risk insurance, commercial general liability, workers' compensation/employer's liability, and umbrella coverage), but nonetheless they can be equally as important to the success or failure of any project.

There are a wide variety of bonds available for construction projects. Whether or not a particular bond is applicable for the construction project is often driven by either statutory requirements in the case of public construction projects, or the owner's requirements in the case of private construction projects. Below is a brief description of the types of bonds available in the marketplace and generally found on a construction project.

On some projects, a bid bond may be requested by either the owner or the general contractor. The entity requesting the bid bond is referred to as the "obligee" and the bid bond runs to the obligee's favor. The purpose of the bid bond is to ensure that the general contractor or the subcontractor will honor its bid and perform the work contemplated in the construction contract once the contract is awarded. Should the contractor or the subcontractor refuse to honor its bid, then the obligee can make a claim against the surety for the sum of the bond or difference between the contractor/subcontractor's bid and the next highest bid on the project (whichever is less).

Payment bonds are meant to ensure that subcontractors and suppliers are paid on the construction project. The general contractor or a subcontractor may be required to post a payment bond on the project. In general, most public construction contracts require payment bonds. Many private construction project owners will require payment bonds to help ensure that payments are being made to subcontractors and suppliers.

Performance bonds are meant to ensure that the contractor or subcontractors complete the project in accordance with the plans and specifications outlined in the contract documents. If the contractor fails to complete the project in such a manner, then the "obligee" (often the owner) can make a claim against the surety, up to the amount of the bond, to complete the project. These too are often required in public construction projects.

Construction contracts generally always have some type of warranty provisions. The length of the warranty provisions can vary by contract but there are bonds available to protect owners from a contractor's failure to honor its warranties. These bonds are called maintenance bonds. A maintenance bond offers the same level of protection (depending on the amount of the bond) that the contractor will honor its warranties and ensure that the project is functioning as intended.

Another bond typically found in a construction project is a retention bond. The purpose of a retention bond is to allow for the removal of retainage requirements in the construction contract or the release of retainage on the construction project to contractors and/or subcontractors in return for the retention bond. Should the contractor or subcontractor fail to complete the project in accordance with the contractor, or fail to pay its suppliers, then the obligee can make a claim against the retention bond.

These are a few of the commonly found bonds on a construction project. Whether these types of bonds are appropriate for your project is driven in part by cost, risk tolerance, and whether the project is public or private. A take away from this article is that bonds should not be considered a stand alone product and must be incorporated into every owner and contractor's strategy for risk management. In upcoming posts, we will explore how and when to make a bond claim, which can be just as important as purchasing bond coverage in the first place.

Five Simple Tips to Avoid Litigation on Construction Projects

Lamer, Chad — Fri, 30 Nov 2012 23:01:57 GMT

1. Written and Signed Contracts. Sounds impossible. Contractors would never begin working on a job without first getting a written contract. Nor would they take the time to negotiate a contract and then not return signed originals to each other. These sorts of things happen. Particularly when there has been a long history of work between the parties and there is some sort of urgency to begin the project. My suggestion is not to rely on proposals or handshakes but instead take the steps necessary to formalize the agreement. This simple action helps protect all parties from the good intentions of starting as quickly as possible.

2. Lien Waivers. At the beginning of the job, it should be made clear that all payments to any contractors or suppliers will require lien waivers. This of course should be standard language in your contract but sometimes a party will issue payment without a lien waiver or they will not require a lien waiver from a contractor’s supplier. What this does is create unnecessary risk to the owner and can be avoided by following the policies and procedures outlined in your construction contract.

3. Change Orders. All change orders should be in writing. In the age of modern technology, there is no reason that a change order cannot be approved immediately by an email or a text message. I understand this does not always occur in the field but it is not that difficult to send the person requesting the change an email or text. Six months after a project has been completed memories may fade. An email or text message can help document that the change was requested and approved.

4. Job Logs. I am firm believer that daily job logs are some of the best evidence of what occurred on the construction site. These can be as simple as the handwritten notes of the foreman during the job. I would request documentation of the number of workers on site, the weather conditions, type of work being performed that day, and any unusual circumstances that were encountered. Again, the goal of keeping these logs is so that should a dispute arise you can refer to these logs and hopefully avoid litigation by demonstrating what occurred during the construction.

5. Photographs. Photographs fall into the realm of documentation (similar to job logs). They should show, “What, when, and where.” Unfortunately, I have seen photographs that were not dated or the date was wrong on the picture. These do little good in proving your case if you cannot testify when the photograph was taken. My suggestion is to make sure that any photographs taken include the correct date and time. You may also want to include a note in your daily job logs of who was on site taking photographs.

These are just a few simple tips designed to help avoid litigation. The goal here is to have enough evidence that you can convince the other side it is not worth going to battle.

Pavement without Permit=Payment: Asphalt Company Pays $36K to Settle Violation of Clean Air Act

Lamer, Chad — Tue, 27 Nov 2012 22:21:15 GMT

An Idaho paving and asphalt company agreed to pay $36,360 to settle a complaint by the U.S. Environmental Protection Agency. The EPA alleged the company violated the Clean Air Act during pavement operations on the Nez Perce Reservation in Idaho. The company, Valley Paving & Asphalt, operated asphalt mixing equipment on the Reservation where it allegedly released air pollutants without an authorized Clean Air Act permit.

According to the settlement agreement, while paving roads on the Nez Perce Reservation, the company operated an asphalt mixing machine without a required permit. In addition, the company also failed to submit its annual registration report to the EPA, which is required under Federal Air Rules for Reservations. As a result, fines were issued to the company.

Kim Ogle of the EPA’s Seattle office commented on the case, stating:

“The law requires companies that produce air pollution to get the proper permits before they start work. Permits are fundamental to protecting people and the air they breathe, and companies need to play by the rules.”

This case clearly demonstrates the need to understand the rules before beginning operations on your construction project. My suggestion is to become familiar with the local, state, and federal regulations that impact your business, or hire someone to help you. Either option could prove to be time or money well spent.

So What's the Deal With Lost Profits and Overhead?

Lamer, Chad — Wed, 21 Nov 2012 16:51:47 GMT

Many of the construction disputes I am involved with involve a claim for lost profits and overhead. The typical situation is where one party (often the owner) alleges a breach and then terminates either the general contractor or the subcontractor. The terminated party then makes a claim for lost profits and overhead. The two questions usually asked by contractors and subcontractors in these situations are: (1) “Am I entitled to lost profit and overhead damages” and (2) “How are they calculated?”

The answer to the first question is that it depends on the contract language. Many construction contracts specifically exclude language about lost profit and overhead damages. In those situations, the contractor or subcontractor will be prohibited from making a claim for its lost profit and overhead. By contrast, AIA form contracts contain language that is similar to the following:

The Owner may, at any time, terminate the Contract for the Owner’s convenience and without cause. The Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.

With these contracts and any contracts that contain similar language, the contractor or subcontractor will be entitled to make a claim for its profit and overhead. If the contract is completely silent on lost profits and overhead, a claim can still be made by the contractor or subcontractor.

Turning to our second question: how does the contractor calculate its lost profits and overhead? Recently, the Missouri Court of Appeals (Southern District) in Williams Construction, Inc. v. Wehr Construction, L.L.C. provided us with guidance on how to calculate lost profits and overhead damages.

In Williams Construction, the trial court awarded Williams Construction $30,000 in lost profits and $5,000 in overhead damages based on Wehr Construction terminating the contract for convenience. Wehr Construction appealed and the Missouri Court of Appeals reduced the award to $15,028. The reason for the reduction was due to how the overhead damages were calculated.

The Williams court stated that, “[I]n proving an award of lost profit damages, ‘a party must produce evidence that provides an adequate basis for estimating the lost profits with reasonable certainty.’” Under Missouri law, a business owner can testify about its lost profits on a project and the trier of fact can rely on this testimony in reaching its judgment. A business owner’s testimony is also acceptable evidence to prove overhead damages.

The issue in Williams was that the business owner included labor costs that would have been necessary to generate the “profit” as an “overhead” expense and, in essence, double-dipping on the amount of damages. The Williams court stated that, “A party cannot recover both its lost profits and the overhead expenses that are tied to the production of that profit.”

The take away from Williams for contractors and subcontractors involved in a dispute about lost profits and overhead damages, is to be sure to separate the overhead costs that are necessary to produce the lost profit claimed (i.e. labor costs). It should also be remembered that the business owner can testify about overhead costs which potentially will save expert witness fees in presenting the case. Finally, contractors and subcontractors should review their contracts to make certain there is not an exclusion of lost profit and overhead damages.