Letter from the Editor

by James J. Sienicki

Spring is always associated with new beginnings. Likewise, we are always looking for fresh new tips that offer insights on building better business practices. What better time to consider that than during the spring? Our spring 2013 issue of Under Construction provides four informative articles that offer insights into recent events that have sprouted in the industry.

• In our first article, Jason Ebe and I co-authored Tips for Presenting, Analyzing and Resolving Delay and Impact Claims. This article provides tips to contractors and subcontractors, as well as to owners and their consultants. The article addresses how to review the prime contract and subcontract, and how to properly plan and execute performance in order to prepare, analyze, defend, present and resolve claims for construction delays and impacts arising out of construction projects.
• In The Ever-Shrinking Federal Budget: Preparing for Contract Cut-Backs, attorney Brett Johnson writes about the new “sequestration” order and provides timely advice for contractors and subcontractors on what to do if they receive a “stop work” order or termination for convenience notice from a governmental agency or prime contractor. This article further addresses other options that a government contractor may want to consider in these unsettled times.
• In the third article, Colorado Court of Appeals Rules that Contractors May Be Liable for Dangerous Site Conditions Before and After Work is Complete, attorney Scott Sandberg cites a recent Colorado Court of Appeals case that held that contractors on Colorado projects may have an ongoing duty to maintain construction site conditions even after the project is completed and accepted by the government owner.
• The fourth article addresses expert testimony. In construction, architecture and engineering cases, testimony by experts is often the crucial factor in success or failure. In her article, California Supreme Court Case Sets New Standards for Expert Testimony, attorney M.C. Sungaila shares the details of a recent California Supreme Court case that provided long-awaited guidance in this area. The decision requires trial courts to determine whether the matters relied on by the expert provide a reasonable basis for the opinion and then to conduct an inquiry to determine whether the information cited by the expert adequately supports the conclusion that the expert’s theory is valid. Now, everyone should know the standard for California cases.

 Finally, we hope your year is off to a good start and will only get better!

Jim Sienicki

Tips for Presenting, Analyzing and Resolving Delay and Impact Claims

by Jason Ebe and James J. Sienicki

Contractor and subcontractor claims seeking relief—time and often money—for impacts due to delay, acceleration, disruption and loss of productivity and/or efficiency are common, as are disputes arising from such claims that must be resolved through negotiation or mediation, or awarded by courts, arbitrators, hearing officers, dispute review boards and/or similar tribunals. In some cases, the owner, and its representative or design professional providing construction administration services, may dispute or reject the contractor’s or subcontractor’s claim based on a lack of prior and proper planning and execution or the terms and conditions of the contract or subcontract. This article provides tips to contractors and subcontractors, as well as to owners and their consultants, on how to review the contract and subcontract, how to properly plan and execute performance, and how to present, analyze and resolve claims due to delays and impacts.

Know the Prime Contract and Subcontract
Before executing a contract or subcontract, each party should become familiar with the provisions applicable to the schedule, the contractor’s ability to manage and modify its and the subcontractor’s work plan, schedule and sequence, and the ability for the contractor and subcontractor to seek relief from changes to and impacts upon the contractor’s and/or subcontractor’s work plan and schedule. A contract or subcontract that has an enforceable no “damages-for-delay” clause may prevent the contractor or subcontractor from obtaining any money as a result of delays. The terms and conditions in the prime contract regarding, without limitation, what delays are excusable, what the contractor must prove to be entitled to an excusable delay, what Time Impact Analysis (TIA) must be provided to the owner, and what time extension and/or damages the contractor may be entitled to arising out of the delay, are critical in evaluating what the contractor may or may not be entitled to or whether or not the owner is instead entitled to liquidated damages for loss of use and/or actual damages as a result of the delay. Likewise, the terms and conditions in the contract and subcontract are critical to the success or failure of claims by a subcontractor.

Estimate and Document the Work Plan Accordingly
Every contractor and subcontractor should, upon estimating and bidding a project, prepare a written plan for the performance of the work, including, where appropriate, a work plan showing the scheduling, sequence and durations of various items of work, as well as resource loading in a baseline schedule upon which the contractor’s contract amount was based. Similarly, the owner and its consultant should obtain, analyze and, if appropriate, comment upon the contractor’s work plan and schedule. Some contractors and many subcontractors fail to prepare this initial and critical foundation to a successful delay or impact claim. If the contractor or subcontractor cannot demonstrate what it originally planned for the performance of the work, that its original plan was logical and reasonable, and that its contract price was based upon this schedule, the owner and its consultant (and the courts or arbitrators) may give little credence to the contractor or subcontractor’s later complaints that its original plan was impacted.

           
Follow the Contract and Work Plan
Once the contract and subcontract language has been agreed to and the initial work plan has been developed, it is incumbent on the contractor and subcontractor to follow both the contract (and subcontract) and the work plan. The contractor and subcontractor should prepare and submit daily reports as to labor and other resource utilization and note any project conditions that have delayed or impacted the subcontractor’s performance. The owner and its consultant should do the same or, alternatively, periodically review and comment upon the daily reports submitted by the contractor to attempt to maintain an objective record of the progress of the project. The contractor and subcontractor should provide prompt written notice to the owner and contractor, as applicable, of any impacts in accordance with the time periods set forth in the contract and subcontract. The contractor and subcontractor should then follow up in a timely manner (and in the manner required by the contract and/or subcontract, as applicable) to present a quantification of time and/or money sought as relief. Any deviations from the work plan should be noted and explained in contemporaneous project records, which are usually the most persuasive evidence. The contractor should provide accurate monthly updates showing the as-built status of the schedule, without manipulating the schedule by unreasonably changing durations, logic ties, lags, leads or activities. The contractor must follow the steps set forth in the contract if claiming excusable delay and/or time and/or costs as a result of such delay. Actual costs directly attributable to the impact should be separately tracked throughout the project and presented. The contractor and subcontractor will generally have the burden of proving that the impact/delay was caused by the owner (or that the owner is otherwise responsible, for example, by design deficiencies for which the owner is responsible), that the impact/delay caused the contractor and/or subcontractor to be delayed or impacted for a certain period, and that the impact/delay caused the contractor and/or subcontractor to be damaged so many dollars (additional general conditions, additional labor costs and similar costs).

Document Agreements (or Not)
When changes occur, they must be documented. If the owner and contractor, or the contractor and subcontractor, agree on the scope, time and/or cost impacts of a change, those should be documented in a change order. In the absence of such agreement, the contractor or subcontractor should request that the owner or contractor, as applicable, issue a construction change directive or similar written order to the subcontractor documenting the instruction regarding the change. If the owner or contractor orders work orally and fails or refuses to document the instruction, it is incumbent on the contractor or subcontractor to submit prompt written notification to the owner or contractor of the direction/change to preserve the contractor or subcontractor’s later claim. Likewise, the owner should police these notices and clarify the notice if necessary.

Just as important as providing notice and substantiation of a claim is the impact of waivers or releases. Change orders, payment applications and related lien waivers and releases often contain broad boilerplate language that may waive or release any and all claims up through the date of the change or payment, whether or not previously presented. Some states provide legislative protections to contractors and subcontractors as to the effectiveness of such waivers, but many do not. A contractor or subcontractor should not sign a change order, payment application or lien waiver or release containing language that waives or releases claims if it is not the contractor or subcontractor’s intent to grant such a waiver or release, as most tribunals will later find in favor of the owner and deny relief on that basis. The owner and its consultant should similarly review the change order, payment application and lien waiver language to confirm that the change, time and/or payment agreed is consistent with the intent of the parties’ agreement and that further claim rights are not being reserved unless the parties so intend. Taking these steps can help prevent surprises and expensive litigation down the road.

Consult Attorneys and Experts Early
Consultation with knowledgeable legal counsel and claims consultants early in the process can help all parties maximize the likelihood of the successful pursuit or defense of claims. The attorney should hire the expert first as a consultant to preserve the work product privilege. Both the attorney and the consultant can provide a critical analysis of the contract and subcontract, the original work plan, the impacts, the costs incurred, and the likely factual and legal defenses. This can help the contractor and subcontractor develop a persuasive claim, and similarly help the owner and its consultant develop a persuasive defense, that may then lead to an early negotiated or mediated resolution in lieu of the more expensive, time consuming, and relationship-damaging lawsuit or arbitration that may result after the parties have become too entrenched in their positions over time. Whether in negotiation or before a tribunal, simply demanding the highest number calculable usually does not maximize recovery. Moreover, obvious gaps in proof will undermine the credibility of the contractor or subcontractor. Similarly, wide variations in the claim computation, as it is presented over time, tend to create doubt in negotiations and dispute forums as to the legitimacy of the claim. The earlier the parties obtain knowledgeable legal and expert consultation, even if behind the scenes, the greater the likelihood a path to successful recovery can be identified and followed.

By following these tips, contractors, subcontractors and owners can likely better position themselves to seek, defend and, more importantly, resolve, more quickly and amicably, claims for delays and impacts.

The Ever-Shrinking Federal Budget:  Preparing for Contract Cut-Backs

by Brett W. Johnson

On March 1, 2013, President Obama signed the order directing “sequestration” to go into effect. As has been repeated constantly leading up to sequestration, $85 billion will now be cut from the federal government’s budget through October 1, 2013, when the fiscal year ends. Then, a new “sequestration” will take effect. Unless the federal government takes action to direct specific cuts to various programs, such sequestration will continue to occur until $1.2 trillion is eliminated from the federal budget over the next 10 years. This sequestration-phased scenario is separate from the possible federal government “shutdown” that is scheduled for March 27, 2013, if further funding is not approved. Based on these uncertainties, many companies will choose different options to ensure survival.

Companies may choose to stop bidding on government contracts or may attempt to plan for the gradual elimination (or termination) of existing government contracts. As previously referenced in Under Construction, the government contractor that is prepared for the possible “stop work” order will be well-positioned to negotiate an orderly exit from government contracting. As many governmental agencies (at all levels) have not fully explained to its prime contractors the consequences of the existing sequester and the future budget cuts, prime contractors need to have candid conversations with government contracting officers about existing contracts and future solicitations. Subcontractors need to have the same candid conversations with the prime contractors about the same issues. This is especially the case with solicitations. If a proposed solicitation (or project) will be terminated, the offerors should not be wasting resources in preparing proposals or considering protests. Unless there are frank conversations among all parties, the ability to manage the budget cuts may be hindered and/or difficult.

If a government contract is terminated, a company should properly respond and ensure that it is complying with the various contractual terms and government regulations in winding down the contract. These terms and regulations, especially regarding the accounting requirements, are onerous. Moreover, companies should ensure that they are maximizing any equitable adjustments or other compensation through properly filed claims, while being considerate of not violating the False Claims Act (FCA). As companies are likely going to terminate employees, “whistle-blowers” who want to take advantage of the FCA may become the norm. Companies should take any “threat” of a possible FCA violation seriously and initiate an internal investigation. If appropriate and even if the claim does not have merit, the company may want to consider a possible voluntary self-disclosure to the government before a whistle-blower has an opportunity to report to ensure mitigation of any risk.

Companies may take the opportunity surrounding the uncertainty to acquire competitors or lower-tiered subcontractors. Many large government prime contractors have significant cash reserves as a result of the uncertainties from the Great Recession and the existing economic outlook. However, due to the significant number of government regulations related to government contracting, due diligence on any acquisition or merger should be intense. Both sides of any deal, regardless of how friendly the transaction is, should fully understand the due diligence requirements and ensure that the pricing of any deal is correct and that the necessary representations and certifications are made.

Companies may also look to new non-governmental commercial markets or foreign governments to maintain their commercial standing and competitive advantage. However, many foreign governments' contracting regulations are just as, or even more, onerous than the United States' procurement laws. For example, many foreign governments require that the United States company “offset” any sale to the foreign government by making significant purchases in the foreign country’s domestic market. These offsets sometimes lead to a confusing matrix of deals between multiple companies to ensure compliance.

In addition to complying with the foreign governments' contract regulations, the United States' government contractor must still abide by the United States’ laws including, at times, confusing international trade laws, such as the Foreign Corrupt Practices Act, the Export Administration Regulations and the International Traffic in Arms Regulations, to name a few. This is currently a significant area of enforcement by United States governmental agencies. Companies should ensure that its policies and procedures, international agreements and training are compliant to meet these requirements.

Regardless of what options are chosen by each company, these are uncertain times for government contractors. Many companies are relatively new to government contracting because they took advantage of the Recovery Act to weather the Great Recession and may not have truly appreciated the abundance of contractual terms and regulations that must be complied with when a contract is terminated for convenience. Companies should consider seeking knowledgeable legal and professional assistance to assist in navigating the unknown budgetary cut waters.

Colorado Court of Appeals Rules that Contractors May Be Liable for Dangerous Site Conditions Before and After Work is Complete

by Scott C. Sandberg

In Collard v. Vista Paving Corp., the Colorado Court of Appeals adopted the “foreseeability rule” under which a contractor may have a duty of care for dangerous site conditions even after the contractor’s work was completed and accepted by the owner and the contractor had left the site.  

In Collard, Vista was hired by the city of Grand Junction to construct road medians for a sidewalk improvement project. Vista completed its work and the city’s inspector authorized Vista to leave the site and take its traffic control devices. At the time, the yellow dividing line in the center of Wellington Avenue continued straight into the medians, so the city’s project inspector notified the city traffic control division that the road needed to be re-striped. That did not happen and a motorist crashed into the median.

The motorist suffered injuries and sued both the city and Vista. The claims against the city were dismissed under Colorado’s Governmental Immunity Act. A common law negligence claim against Vista was dismissed under the completed and accepted rule—i.e., the trial court found that Vista owed no duty of care for the road’s safety after the work was completed and the city accepted the work. The motorist appealed.

On appeal, the Court of Appeals reversed the trial court and adopted—for the first time—the foreseeability rule. The Court of Appeals concluded that “because Vista’s road construction work created a dangerous condition,” Vista had a duty “for a reasonable period of time, either to eliminate the condition or to warn foreseeable users … of the road hazards that foreseeably could result in injuries, even if its work had been completed and accepted by the City.” The court did not define what qualifies as a “reasonable period of time” but did state that the duty would not be extended if the contractor “had a reasonable good-faith belief that another authorized party … would promptly take the necessary measures to eliminate” any dangerous condition.

In light of the Collard decision, contractors cannot simply rely on an owner’s acceptance of completed work. Rather, to avoid liability, contractors should ensure that the owner will promptly eliminate any dangerous site conditions arising from the work and should document the contractor’s understanding that the owner will do so.

California Supreme Court Case Sets New Standards for Expert Testimony

by M.C. Sungaila

It is common for experts to testify in civil cases in California. In construction and engineering cases, in particular, testimony by experts is often the critical factor in success or failure. Despite the importance of expert testimony, the California Supreme Court has remained silent about the proper standards for admitting it. Until now.

In Sargon Enterprises, Inc. v. University of Southern California, the Court considered whether the trial court erred by excluding expert testimony to substantiate the lost profit damages allegedly stemming from The University of Southern California's (USC) refusal to clinically test a new implant designed by the plaintiff dental implant company; but for USC’s breach, the implant company claimed the company would have become a worldwide leader in the implant industry and made millions of dollars in profit each year. The Supreme Court affirmed the expert’s exclusion, concluding that “trial courts have a substantial ‘gatekeeping’ responsibility,” including the duty “to exclude speculative expert testimony.”

The Supreme Court explained that

under Evidence Code section 801, subdivision (b), and 802, the trial court acts as a gatekeeper to exclude expert testimony that is (1) based on matter of a type on which an expert may not reasonably rely, (2) based on reasons unsupported by the material on which the expert relies, or (3) speculative.

The court further observed that other provisions of law, including case law, “may also provide reasons for excluding expert testimony.” Citing to the U.S. Supreme Court’s decision in Daubert v. Merrill Dow Pharmaceuticals, the Court warned, however, that the focus of the trial court’s analysis must be on the principles and methodology espoused by the expert, and not on choosing between two competing expert opinions.

The Supreme Court emphasized that the trial court’s preliminary determination whether “the expert opinion is founded on sound logic is not a decision on its persuasiveness.” Instead, under Evidence Code section 801, “the court must simply determine whether the matter relied on can provide a reasonable basis for the opinion or whether that opinion is based on a leap of logic or conjecture” and then “conduct[] a ‘circumscribed inquiry’ to ‘determine whether, as a matter of logic, the studies and other information cited by experts adequately support the conclusion that the expert’s general theory or technique is valid.’” Applying this standard to the lost profits expert testimony in the case before it, the Court noted that the expert based his lost profit estimates not on any market share the plaintiff company had, in fact, ever achieved, but rather on a hypothetical increased share of the market that would have been achieved because of the “innovative” implant that never made it to market. “An accountant might be able to determine with reasonable precision what Sargon’s profits would have been if it achieved a market share comparable to one of the Big Six [implant companies]. The problem here, however, is that the expert’s testimony provided no logical basis to infer that Sargon would have achieved that market share.” As the Court noted:

World history is replete with fascinating ‘what ifs.’ What if Alexander the Great had been killed early in his career at the Battle of the Granicus River, as he nearly was? … Many serious, and not-so-serious, historians have enjoyed speculating about these what ifs. But few, if any, claim they are considering what would have happened rather than what might have happened.

In adopting this standard, the Court approved the reasoning in Lockheed Litigation Cases, in which the Second District Court of Appeal affirmed summary judgment for the defendants in a wrongful death action brought on behalf of former workers at Lockheed’s aerospace plant in Burbank. The Lockheed plaintiffs claimed that chemical manufacturers and suppliers failed to adequately warn of hazards associated with products they allegedly supplied to Lockheed and that purportedly harmed the workers. The trial court excluded the testimony of the plaintiffs’ sole causation expert, Dr. Daniel Teitelbaum, based on the lack of a reliable foundation for his testimony, and then granted summary judgment for the defendants.

Teitelbaum had relied exclusively on a single survey of epidemiology studies to support his opinion that the defendants’ chemicals—the cleaning solvents used in manufacturing aircraft—increased the risk of contracting the types of cancer the plaintiffs claimed to have. But the survey established only that painters exposed to a complex mixture of thousands of chemicals, containing only three of the defendants’ five chemicals, showed an increased risk of cancer.

The plaintiffs argued that the court had no authority to examine these deficiencies because Evidence Code section 801 allows a trial court to examine only whether the type of study on which an expert relies is generally the type on which experts tend to rely—for example, epidemiology studies—without examining the relevance of the study’s content to the particular opinion being offered. In affirming the trial court’s exclusion of this testimony, the Court of Appeal made clear that Evidence Code §801 requires a link between the matter the expert relies on and the opinion being offered. Accord, Jennings v. Palomar Pomerado Health Sys., Inc. (“The plaintiff must offer an expert opinion that contains a reasoned explanation illuminating why the facts have convinced the expert, and therefore should convince the jury, that it is more probable than not the negligent act was a cause-in-fact of the plaintiff’s injury”); Bushling v. Fremont Medical Center (An “expert opinion may not be based on assumptions of fact that are without evidentiary support or based on factors that are speculative or conjectural, for then the opinion has no evidentiary value and does not assist the trier of fact.”).

California lawyers have long awaited the Court’s adoption of a uniform expert testimony admissibility standard. The Court had the opportunity to adopt a gatekeeping expert testimony standard in 2005, when it granted review in a subsequent expert testimony appeal in the Lockheed Litigation Cases coordinated litigation. The Court dismissed review of that case after it was fully briefed, however, because a majority of the members of the Court, at the time, owned stock in the defendant companies.

In light of the Supreme Court’s Sargon decision, Evidence Code Section 402 hearings and challenges to the admission of expert testimony should be carefully considered and brought in every case where an expert’s opinion appears speculative or ill supported. California trial courts now have a clear mandate to examine the basis for and to exclude expert testimony that provides no assistance to the jury.

Ms. Sungaila, an appellate partner at Snell & Wilmer, has briefed and argued many expert testimony cases, including the Lockheed Litigation Cases. This article, in slightly different form, was originally published in the Washington Legal Foundation’s The Legal Pulse blog.

Government Contracting Seminar

Please join Snell & Wilmer for a timely discussion concerning the current environment surrounding government contract opportunities in light of significant sequestration budget cuts. Snell & Wilmer partners will discuss ways to position prime contracts and subcontractors in winning government contract awards in a highly competitive marketplace, performing government contracts to ensure compliance with government regulations and contractual terms, and pro-actively addressing possible contract terminations related to budget cuts to ensure maximization of the expected financial return. The discussion will include important information on bid protests, claims against the government, debarment proceedings and risk management related to government contracts.

Date:  
Thursday, April 25, 2013

Location:
Snell & Wilmer L.L.P.
Tabor Center
1200 17th Street, Suite 1900
Denver, CO 80202

Time: 
8:00 a.m. - 8:30 a.m. - Registration
8:30 a.m. - 10:00 a.m. - Program/Q&A     

RSVP:
RSVP by April 19th to rsvp@swlaw.com or by calling
1.855.SWEvent (1.855.793.8368)