Bart Reed – Daily Journal of Commerce

Construction labor shortages: a primer for owners and contractors | Opinion

Bart Reed — Wed, 18 Jun 2025 17:09:34 +0000

Bart Reed

In the post-COVID world of construction, industry analysts and participants have focused considerable attention on material price escalation concerns and impacts caused by raw material shortages, supply chain issues, and disruptions in the market (including volatility resulting from tariffs). But labor shortages also continue to grip the industry and warrant heightened attention from project owners and contractors alike, particularly given the threats posed to schedules and budgets on megaprojects. Such shortages jeopardize the orderly flow and efficient prosecution of work, not to mention the paramount need for timely completion and utilization of the project.

Labor shortages pose potentially significant impacts to large infrastructure projects and megaprojects, particularly those in the energy and technology sectors (like large-scale nuclear and renewable energy projects and data center developments where a premium is placed on scalability, on-time delivery, and budget spend). The dearth of labor has been attributed to an aging workforce and a general declining interest in construction, which is viewed by many as physically demanding, low-paying, and offering fewer career advancement opportunities than, say, working for the developer or end-user after completion of the project.

Large projects require a massive, dedicated stream of skilled workers, which places a strain on local labor markets, thus increasing competition between industries and between markets. Sectors like technology, energy, and manufacturing actively recruit skilled labor by offering higher compensation and improved benefit packages to workers. Limited availability of skilled workers, such as those with electrical and mechanical systems experience, expertise, and credentials, cause contractors to delay projects, pay higher wages, and potentially compromise the quality of the work, leading to increased costs, schedule delays, and the risk of claims. Adding to these possible impacts are increased safety risks and a higher likelihood of project site safety concerns and accidents, which also lead to delays, increased costs, and claims.

To address the labor shortages in their respective industry sub-sectors, general contractors and large trade subcontractors are implementing strategies to attract new workers by offering higher pay, more benefits, and better opportunities for advancement such as training, certification, and apprenticeship programs. Utilizing off-site construction methods, such as promoting efficiencies in the delivery of prefabricated, standardized project-specific equipment (“modularization”), can offset the strain caused by labor shortages. Leveraging technology – automation, robotics, construction management software, and Building Information Modeling (BIM) – can produce additional options to minimize labor requirements, reduce rework, and improve productivity.

To mitigate and manage the risks associated with project labor shortages, owners and contractors will (or should) consider risk-shifting language in their construction contracts. Contractors will seek to allocate labor shortage risk to owners by employing a number of possible contract provisions, some more creative than others, that owners would be wise to recognize in advance of contract negotiations. For example, contractors could argue that labor shortages could fall under the contract’s force majeure provision, which generally excuses a party from fulfilling its obligations because of unforeseen, uncontrollable events beyond the contractor’s control. These sorts of events, typified by natural disasters or acts of war, can make it impossible or impractical for the contractor to perform its contractual duties. But from the owner’s perspective, natural disasters (earthquakes, floods, other natural catastrophes) and human-caused events (war, terrorism, government actions, pandemics, labor strikes) may only contribute to labor shortages. Project-specific requirements for labor across various disciplines of the work should be reasonably anticipated and estimated in preparing the contractor’s bid for the work. After all, the contractor should be in the best position to understand – and seek bids from – the trade subcontractor markets.

Contractors may also argue that unexpected labor shortages in the market (e.g., caused by unknown projects in the region competing for the same labor resources) that increase costs could constitute a basis to pull monies from the project contingency fund (if one exists), perhaps specifying that labor shortages and labor cost increases are within the scope of the contingency clause, designating a specific amount within the project budget to cover unexpected increases like labor shortages and wage increases, and outlining the approval process for and clearly defining how the contingency funds will be accessed and approved. Or, alternatively, contractors could seek to characterize any increased costs due to labor shortages as a “cost of the work” reimbursable under a guaranteed maximum price (GMP) cost model.

A more overt contractor risk allocation could involve an express labor cost escalation clause, like the price escalation clauses that are increasingly being negotiated for larger projects. Such a clause may specify events that trigger the clause (labor shortages or wage increases beyond a defined threshold), outline how cost adjustments will be calculated (using published indices or cost-based adjustments with detailed backup), include a cap on the total amount of the price increase the owner will absorb, and possibly contemplate a de-escalation component that benefits the owner (if labor costs decrease beyond the defined threshold).

Of course, the project owner will desire its own risk mitigation measures in consideration of labor shortages, to ensure minimal disruption to the prosecution of the work and optimal chances of success to achieve project completion without unnecessary delay or cost impact. Collateral security in the form of performance bonds could be considered, but in the event of default termination of the original contractor based on its failure to perform, the surety’s designated completion contractor could face the same labor shortages, causing further delays and disputes.

An owner could include in its bid documents and agreement with the contractor an express acknowledgment and representation by the contractor that it has become familiar with the labor market conditions and utilized this information in preparing its bid (including both schedule and budget). A “labor market conditions acknowledgment” in the contract could also include language that the contractor considered local and regional conditions, the availability of workers in union shops nationally, and competing projects in assessing the required labor needs to ensure project completion without delay and budget impacts.

Labor shortages may be overshadowed by material shortage issues now, but they, too, can disrupt and derail a project. By carefully drafting and negotiating construction contracts, owners and contractors can effectively mitigate the risks associated with labor shortages and protect their financial interests.��Parties should consult with legal counsel to ensure that mitigation and risk allocation clauses are properly drafted and tailored to their specific project needs.

Bart Reed is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7568 or��bart.reed@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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New law requires timely payment of undisputed change order claims | Opinion

Bart Reed — Thu, 18 Jul 2024 18:19:44 +0000

Bart Reed

RCW 39.04.360, effective June 6, 2024, sets forth protections and assurances of payment for contractors, subcontractors, and suppliers that perform undisputed changed or additional work on both public and private construction projects in Washington and imposes payment obligations on public and private owners to the extent the changed or additional work furnished to the project is satisfactorily completed.

Specifically, subsection 1 of the statute requires a public or private owner on a construction project (except private residential projects of 12 or fewer units) to issue a change order for the “full dollar amount of the work not in dispute” no later than 30 days after satisfactory completion of the additional or changed work. Within 10 days of receipt of the change order from the owner, the contractor must in turn issue a change order to any subcontractor “impacted by” the change. If the owner or contractor fails to issue the change order in a timely manner, then the statute imposes interest (1 percent per month) on the dollar amount of the additional or changed work (i.e., work beyond the defined contractual scope) until the change order is issued.

Subsection 2 of the new law provides similar payment protections to subcontractors and suppliers. Here, the contractor must request a change order from the owner no later than 30 days after satisfactory completion of any additional or changed work authorized by the owner. A lower-tier subcontractor must request a change order from the upper-tier contractor “30 days after the completion of the additional work and a request from the lower-tier subcontractor,” but note that the language here does not seem to qualify completion of the subcontractor’s additional or changed work on satisfactory performance or even contemplate that the changed or additional work must be authorized by the contractor, and the language regarding the timeliness of the submission is confusing at best. Indeed, the second sentence of RCW 39.04.360(2) is unclear and inconsistent with the first sentence of the subsection, but the intent is probably to require the lower-tier subcontractor to request a change order within 30 days after satisfactory completion of changed or additional work that is authorized by the contractor.

This subsection next provides that the contractor is not liable for interest on any delayed issuance of change orders downstream to subcontractors if the contractor timely requested a change order for the work from the owner within 30 days of satisfactory completion of the work not in dispute.

And the last sentence appears to limit the rights of a contractor, subcontractor, or supplier to pursue claims of nonpayment against only those with whom those parties have a direct contractual relationship and not against third parties. For example, this probably means that a lower-tier subcontractor cannot invoke rights under this statute and pursue a claim, including interest, against the general contractor with whom it is not in direct contractual privity.

Subsection 3 of the statute provides rights for an “aggrieved party” to pursue an action for “appropriate relief, including interest and reasonable attorneys’ fees and costs.” This provision entitles contractors and suppliers to interest, fees, and costs in the event they prevail in an action based on the statute. However, based on the broad interpretation of “aggrieved party,” it would also appear that owners or anyone against whom an aggrieved contractor or supplier has filed its action could pursue relief for fees and costs under the statute. This portion of the statute aligns with the trend to support an award of interest, fees, and costs under Washington’s prompt payment statutes applicable to public works projects (including RCW 39.04.250(3)) and the recent retainage statute, RCW 60.30.010, applicable to both public and private construction projects.

Given the recent enactment and the (unartful) wording of this new change order statute – which has not yet been subject to judicial scrutiny or interpretation – public and private owners and contractors alike should understand the risks related to the submission, evaluation, processing, and payment of change order requests. Owners must remain wary and exert care in the assessment and processing of change order requests, while contractors must remain cautious regarding the submission of change order requests from subcontractors and suppliers and also ensure that the work subject to change order requests is in fact additional or changed work, is satisfactorily completed, and was authorized by the owner, and that the contractor has not waived the right to request a change order.

Claims will undoubtedly arise in the interpretation of the statute and its interplay with the factually sensitive issues surrounding whether the additional or changed work performed by the contractor (or within its scope) is “undisputed,” and the statute lacks any definition for “undisputed claims” or “work not in dispute.” And the risks associated with these determinations in submitting and assessing the propriety of change order requests are illuminated, if not amplified, when viewed through the lens of statutory entitlement to interest, fees, and costs in favor of the “aggrieved” prevailing party.

Bart Reed is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7568 or��bart.reed@stoel.com.

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New Washington law applies limitations to retainage on private construction projects | Opinion

Bart Reed — Fri, 18 Aug 2023 12:30:15 +0000

Bart Reed

Emily Vo

On May 9, Washington Gov. Jay Inslee signed into law Senate Bill (SB) 5528, which limits the percentage of retainage withheld from contractors on private construction projects in Washington.

During a construction project, the withholding of retainage is a common practice and a frequently negotiated business term of a construction contract. This generally accepted custom in the industry is primarily regarded as security for an owner or contractor to ensure prompt and faithful performance by downstream contractors. The concept of retainage is an important tool to mitigate the risk of default by a contractor or its subcontractor, since monies withheld by an owner or contractor can be used to correct or complete defective or deficient work on a project.

Before the bill, Washington retainage statutes only applied to public works projects. See RCW 60.28.011. However, as of July 23, 2023, a similar statute will now apply to private construction projects in Washington. Since the retainage statute has recently taken effect, it is crucial for owners and general contractors to understand their obligations under the law and the potential impact these changes have on their construction contracts executed on or after July 23.

The new retainage statute, which will be codified as a new chapter in Title 60 RCW, largely mimics the retainage limits that exist in the public works context. SB 5528 sets forth two sections. The first of which limits retainage on private construction projects to no more than 5 percent of the contract price of the work completed and imposes interest, at the rate of 1 percent per month, if payment is not made after notification is received that the work (for which payment is requested) is complete. The second section of the approved law creates an opportunity for contractors or subcontractors to tender to the upstream owner or contractor a retainage bond in lieu of retainage.

The new statute focuses on private construction projects and does not apply to public improvement projects or single-family residential construction of fewer than 12 units.

Retainage Limited to 5 Percent

SB 5528 limits the amount of retainage that can be withheld by an owner, contractor, or subcontractor on private construction projects. The retainage amount that can be withheld is capped at “5 percent of the contract price of the work completed.”

Interest Imposed on Amounts Owed for Completed Work��

Another significant addition by SB 5528 relates to the owner’s or contractor’s obligations to pay after receiving notification from downstream parties of completed work and interest imposed for failure to pay for the completed work.

The statute imposes an interest rate of 1 percent per month on final payments due a contractor or subcontractor. The interest commences 30 days after the contractor or subcontractor has completed and the owner has accepted the work.

The statute also outlines a procedure regarding a contractor’s or subcontractor’s notification of its final completed work and the commencement of interest on unpaid final contract amounts. After completion of all the contracted work, the contractor or subcontractor must notify the party for whom the construction work is performed under the contract. The exact form of this notification is not specified in the statute. Within 15 days of receiving the notice of completion, the party for whom the work is performed must (1) accept the work or (2) notify the contractor or subcontractor of what portion of the work remains incomplete under the contract.

It is noteworthy that SB 5528 reflects that the contractor may notify the owner of completion of a subcontractor’s work, and the statute seems to require the same notification process: 30-day notice from the contractor, 15-day notice from the owner, and, in the event the owner does not respond, interest (at the rate 12 percent per annum) commences 30 days after the end of that 15-day period (whether or not the owner accepts the work or fails to provide notice) in the event of nonpayment. This new law appears to place an obligation on the owner to determine whether a subcontractor’s work is complete, to mitigate the risk of accruing interest on unpaid amounts.��An owner can manage this risk by independently verifying the completion of the subcontractor’s work (an onerous task since the owner does not have direct contractual relations with or oversight over the subcontractors) or by relying on a certified statement of the general contractor that the work is complete and reserve rights to pursue the general contractor (e.g., via indemnity) if that statement proves false.

If the owner or contractor does not accept the work or notify the contractor or subcontractor of the incomplete work within 15 days after receiving the notice, interest at the rate of 1 percent per month on the final payment due to the contractor or subcontractor commences 30 days after the end of the 15-day period. The interest runs until final payment is tendered to the contractor or subcontractor.

A contractor’s obligation to pay interest to a subcontractor does not begin until that contractor receives payment of the subcontractor’s retainage, provided that the contractor submitted the subcontractor’s retainage request to the owner or upper-tier contractor within 30 days of the contractor’s receipt of the subcontractor’s retainage request. This language of the statute seems to address the risk of imposing interest on the contractor based on delayed payment from the owner (or an upper-tier contractor).

Bonds in Lieu of Retainage

��The second section of SB 5528 introduces a mechanism for contractors or subcontractors to get paid their retainage prior to full completion on a project and allows for contractors or subcontractors to post a retainage bond as a means to obviate the withholding of retainage and receive their earned contract billings as the work is performed and accepted on the project.

Under the new law, in lieu of retainage, a contractor or subcontractor may tender a retainage bond, which the owner or contractor “must accept,” not to exceed 5 percent of the amount earned by the contractor or subcontractor.

When an owner accepts a bond in lieu of retained funds from a contractor, the statute mandates the contractor to accept like bonds from any subcontractor or supplier from which the contractor has retained funds. The contractor must release funds retained from the subcontractor or supplier within 30 days of accepting the bond from the subcontractor or supplier.

Additional requirements include that a contractor or subcontractor must provide a good and sufficient bond from an authorized surety company, conditioned on the contractor or subcontractor: (1) faithfully performing the provisions of the contract; (2) paying all laborers, mechanics, subcontractors, and material suppliers, and all persons who supply such contractor or subcontractor, or other subcontractors, with provisions and supplies for the carrying on of such work; and (3) paying the taxes, increases, and penalties incurred on the project.

The contractor or owner may require that the authorized surety have a minimum A.M. Best financial strength rating so long as that minimum rating does not exceed A-. The contractor may withhold the subcontractor’s portion of the bond premium, provided the contractor tenders a retainage bond to obtain a release of the subcontractor’s retainage.

SB 5528’s Effect on Current and Future Private Construction Contracts

Construction industry stakeholders will be curious to learn whether or to what extent the enactment of this new legislation will apply to and affect their contracts executed before July 23. Although the statute is phrased in terms of future actions (withholding), it raises questions about the enforceability of contracts made in the past and therefore raises questions about whether the statute should be given retroactive effect. See, e.g., Gillis v. King County, 42 Wn.2d 373, 255 P.2d 546 (1953) (analyzing amendment to street vacation statute); In re F.D. Processing, Inc., 119 Wn.2d 452, 832 P.2d 1303 (1992) (analyzing amendment to agricultural lien statute); Cameron v. Atlantic Richfield Company, 8 Wn.App.2d 795, 442 P.3d 31 (2019) (analyzing amendment to construction statute of repose).

A statute is presumed to have prospective effect only unless the legislature indicates otherwise, or unless the statute is deemed “curative” or “remedial.” See, e.g., Densley v. Dep’t of Ret. Sys., 162 Wn.2d 210, 223, 173 P.3d 885 (2007). Neither SB 5528 itself nor its legislative history indicates the legislature’s intention to have the statute apply retroactively. SB 5528 is not curative or remedial in the relevant sense.

Even if a statute is intended to be retroactive, it may not be applied to interfere with vested rights, which include contractual rights (see, e.g., Gillis, 42 Wn.2d at 376), nor may it “impair the obligation of a contract,” Scott Paper Co. v. City of Anacortes, 90 Wn.2d 19, 35, 578 P.2d 1292 (1978).

Based on these legal principles, it seems reasonable to conclude that SB 5528 does not have retroactive effect and that contracts existing on its effective date (July 23) calling for retainage greater than 5 percent are not affected. Contracts made on or after July 23 should be subject to the 5 percent retainage provision. If an owner has an ongoing relationship with a contractor, questions may arise whether a new contract is formed or an existing contract amended. The answers to these questions may determine how the new statute will apply.

Conclusion

The enactment of SB 5528 represents a significant change to how owners and contractors can withhold retainage on private projects in Washington. To comply with the new law, owners and contractors alike should carefully prepare their contracts to ensure precision in defining completion of the work and consider strategies for implementing security, via limited retainage rights or bonds in lieu of retainage, to manage and mitigate the risk related to delayed or incomplete work.

Bart Reed is a partner and member of the Construction and Design Group in the Seattle office of Stoel Rives LLP and may be reached at (206) 386-7568 or bart.reed@stoel.com. Emily Vo was a 2023 summer associate at Stoel Rives LLP and is a student at the University of Washington School of Law.

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OP-ED: Considerations for contesting a frivolous lien in Washington

Bart Reed — Thu, 18 Aug 2022 11:05:31 +0000

Bart Reed

Lien claims can pose serious challenges – and immense frustration – for any owner or developer of a private construction project, particularly for those wishing to refinance or sell the property. An owner with a finance transaction or conveyance on the horizon should consider options to have any lien claim filed against the property discharged and released as soon as practicable – and, hopefully, without incurring tremendous cost or delaying the transaction.

Following is an exploration of the scenario where an owner cannot look to its prime contractor to ensure the prompt release of a subcontractor’s or supplier’s lien claim (through application of indemnity or a lien release bond). Perhaps the contractor has absconded, leaving unpaid subcontractors or suppliers – and thus lien claims – in the wake. And suppose under this scenario there are serious defects with one or more of the lien claims now encumbering the property. Beyond procuring a lien release bond (which are accompanied by unwanted costs), what other legal options should the owner consider in this predicament?

In Washington, like other states, an owner can challenge the validity of a lien claim (but not the underlying debt) by invoking rights under the frivolous lien claim statute found at RCW 60.04.081. This is a summary process, truncated and expedient, for an owner – or any other party contesting lien priority or with competing interests – to challenge a lien that is “frivolous and made without legitimate cause, or clearly excessive.” This procedure may be invoked at any time after a lien claim has been recorded, even before a foreclosure action has commenced.

Under Washington’s frivolous lien challenge statute, the challenger bears the initial and high burden of showing why the lien is frivolous, and that the lien was improperly filed “beyond legitimate dispute.” See Gray v. Bourgette Construction, LLC (2011). Once the challenger satisfies this initial showing, the burden then shifts to the lien claimant to show that the lien was not frivolous. Then, if this level of proof is satisfied from the trial court’s perspective, the burden shifts back to the challenger to prove the lien was frivolous. An important caveat to consider in this summary process is whether the lien dispute presents debatable issues of law or fact. If so, then the lien is likely not to be found frivolous or without reasonable cause. Again, see Gray.

The level of proof required to prove a lien claim is frivolous “beyond legitimate dispute” was illustrated in the case of Intermountain Electric, Inc. v. G-A-T Bros. Construction, Inc. (2003). The lien claimant admitted its lien was filed 94 days after its last active work on the site (Washington law requires liens be filed within 90 days of last furnishing lienable work to improve the property), but argued that: 1, the law should be changed in cases where the owner promised that work would resume, and 2, leaving its trailer on the site counted as “furnishing equipment” (i.e., a lienable improvement) under RCW 60.04.091. The trial court rejected these arguments and ruled that the lien was frivolous. The Court of Appeals agreed the lien was “invalid on its face” but reversed the trial court’s ruling, holding that “not every invalid lien is frivolous.” See Intermountain Electric. The appellate court reasoned that the lien claimant made a good faith argument to change existing law. So, not only may debatable legal issues pose hurdles to a frivolous lien claim challenge, but debatable factual issues also present risk to a lien challenger. See S.D. Deacon Corp. v. Gaston Bros. Excavating, Inc. (2009) regarding whether parties’ contract was integrated was debatable, preventing relief under the frivolous lien statute.

A challenger may also seek to prove not simply that the lien is frivolous, but also that it is excessive in amount. This, too, carries with it a heavy burden, for the challenger must show by clear evidence, without legitimate dispute about material facts, that the amount stated was claimed with an intent to defraud or in bad faith.�� See Pacific Industries, Inc. v. Singh (2003).

After a hearing on the disputed lien claim, the trial court issues an order discharging and releasing the lien (if frivolous) or reducing the lien (if excessive) or denying the requested relief. The frivolous lien statute mandates, rather than permits, the trial court to award reasonable fees and costs to the prevailing party (i.e., the loser pays). Based on the heavy burden required to show the lien is frivolous or excessive, in conjunction with the risk of paying the prevailing party’s fees and costs, a lien challenger must exercise this statutory remedy with caution.

With the threat of an economic recession looming, contractors and suppliers alike will probably look to safeguard lien rights and mitigate the risk of nonpayment more vigilantly by protecting and, if necessary, enforcing their respective lien rights. This, as we have seen from previous economic downturns, may give rise to an increase in lien claims. An owner or developer would be wise to consider measures to reduce the chance that liens arise in the first instance (e.g., contract provisions and lien waivers). And if liens are filed against the property without legitimate basis or in bad faith, there is a truncated legal procedure that may afford an aggrieved owner relief.

Bart Reed is a Stoel Rives partner and a member of its construction and design practice group in the firm’s Seattle office. Contact him at 206-386-7568 or bart.reed@stoel.com.

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OP-ED: Ways owners can protect themselves from lien claims in Washington

Bart Reed — Thu, 15 Oct 2020 19:44:26 +0000

Bart Reed

The COVID-19 pandemic has caused, and continues to cause, major impacts to many sectors of the economy, including the construction industry. Projects under way before the pandemic triggered pauses may have been slow to resume or abandoned altogether because of funding issues. A consequence of this unforeseen impact is that contractors, subcontractors and suppliers feel immense pressure and anxiety to protect and preserve their rights to payment for work performed.

The construction lien, as a security interest against the improved property, is one tool that contractors and suppliers routinely employ to ensure payment. But since lien claims encumber title and can tie up construction financing or property transactions, during the project – though preferably before – owners and developers should implement strategies to mitigate the risk of lien claims. Fortunately, many options are available to help owners and developers deal with such risk, which may be heightened during these unsettled times.

In Washington, owners can first look to the state’s lien statute for guidance. The pre-claim notice required (in some cases) by RCW 60.04.031 contains “important information” for owners of property being improved. The statutory notice form references two commonly used methods to avoid liens: joint checks and lien releases. However, these suggestions may not be helpful in all cases. Even a project of modest size may have a dozen subcontractors and suppliers, and it is not practical to issue checks to 12 parties at once. Moreover, doing so will not protect the property from a lien by the prime contractor. Lien releases can provide useful information, but a reasonable form of release will allow subcontractors and suppliers to reserve pending claims that may later turn into liens.

For a broader array of lien risk mitigation strategies, the following may prove useful to owners:

The owner’s contracts with its contractor(s) and designer(s) can include a release of lien rights (in consideration of payment, but probably not in advance of the work).
The owner can obtain the consent of appropriate contractors and designers to subordinate their lien rights to the interest of the owner’s lender.
The owner’s contracts with its contractor(s) and designer(s) can minimize the likelihood of claims for additional compensation by clearly stating the scope of work and establishing strict deadlines for notice and submission of claims.
The owner can minimize the risk of multiple liens by requiring the prime contractor and lead designer to respond to liens from their subcontractors, suppliers and sub-consultants. Here is sample language that can be used in prime construction contracts:

Upon learning that any lien has been recorded against the Project improvements or property by any person performing a portion of the Contract Work, Contractor shall, at its own expense and within __ calendar days, remove that lien from the Project by settling the claim underlying the lien, recording a lien release bond, providing other security to the lien claimant, or otherwise. If Contractor fails to act as provided in the previous sentence, Owner may record a bond and recover the cost of the bond from Contractor or deduct that cost from amounts otherwise coming due to Contractor.

If concerned about liens arising from work ordered by a person holding a leasehold interest in the property, the owner should ensure the lease clearly defines the extent to which the lessee is required to perform improvements.
The owner can require the prime contractor and lead designer to submit, with their periodic invoices, conditional or unconditional lien releases for at least their major subcontractors, suppliers and sub-consultants, or to give notice if any of them have asserted claims for additional compensation.
The owner can provide (or direct the prime contractor to provide) a bond or other security for payment of the contractor(s) or designer(s) and obtain agreements expressly accepting the alternative security in place of lien rights. This can be done at the outset of a project or after lien claims have been recorded.
If a lien claim is recorded by a subcontractor or supplier not in privity with the owner, the owner may under RCW 60.04.151 withhold amounts from the prime contractor sufficient to protect against the lien claim.
If a lien claim is recorded by a subcontractor or supplier not in privity with the owner, the owner can use joint checks made out to the prime contractor and the lien claimant.
Track recorded lien claims and determine whether there are grounds to challenge them as frivolous or clearly excessive in amount. If the lien claimant records an “unjust, excessive or premature notice” of lien under the stop notice provisions, the owner may recover damages and attorneys’ fees.

The above strategies underscore the importance of advance planning to ensure the proper allocation of risks in a contract before the work commences. A comprehensive risk management plan developed early in the process, with proper terms reflected in the parties’ contract, will go a long way to ease concerns if or when problems arise later on the project.

Bart Reed is a partner and construction and design group member of Stoel Rives LLP. Contact him at 206-386-7568 or bart.reed@stoel.com.

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OP-ED: That contract might not be ironclad: a primer on waiver by conduct

Bart Reed — Thu, 17 Oct 2019 22:31:39 +0000

Bart Reed

Presumably before the commencement of work on a construction project the parties will expend significant resources drafting and negotiating their contract documents. After spending so much energy and effort to reach final terms and conditions, the parties expect certain results from their contracts regarding how risks and responsibilities are allocated and what outcomes to anticipate in the event of claims and disputes. Although the actual contract terms usually carry great weight in any contract dispute, the parties’ actions and course of dealing during construction could carry even greater significance than the contract terms.

Consider the plight of the unwitting owner on a construction job that has become riddled with numerous change order claims for additional compensation or contract time. In this example, assume the prime contract contains language favorable to the owner that: 1, requires written change orders executed by the owner before the commencement of the changed or additional work, and 2, waives claims for additional compensation or time arising from the work based on the contractor’s noncompliance with the procedure. Also assume the owner orally approved the contractor’s changed or additional work on the project during or even after prosecution of the work on repeated occasions. Relying on the owner’s pattern of behavior, the general contractor continued to submit claims for additional costs and time after completion of the work. The owner often paid the contractor for such work as part of the monthly progress payments. But when the change order claims grew too large (toward the end of the project), disputes ensued.

When confronted with disputed change order claims, where the owner seriously questions the propriety of the change order claim or the amount requested by the contractor for performing the disputed work, the owner naturally retreats to the express language of the governing contract documents to provide protection against claims that deviate from the parties’ contractually agreed process or procedure. After all, it is the all-encompassing contract – a heavily negotiated and carefully drafted document – that should control in these situations, even if the parties may have established a course of dealing as to how change order claims are processed, right? Not necessarily. In this instance, the owner would be unwise to rely exclusively on the contract terms without acknowledging the significance of the parties’ (or namely, the owner’s) behavior relative to contract administration and change order claims.

The foregoing hypothetical situation underscores the importance of vigilant and unwavering adherence to the contract terms and adopting behaviors during construction that remain consistent with, and do not materially deviate from, the contract processes or procedures.�� Appellate cases from various jurisdictions recognize and uphold the concept of “waiver by conduct.”

Courts have even held that a party’s conduct can serve as a waiver of contract provisions even if the governing contract contains a “non-waiver clause.” These clauses provide, for example, that no action or failure to act by the parties shall constitute a waiver of a right or duty afforded them under the contract, except as may be specifically agreed upon in writing.

But even these provisions, offering seemingly greater protection against waiver by conduct, may be unavailing in the context of an established course of dealing between the parties.

While waiver by conduct usually “requires unequivocal acts of conduct evidencing an intent to waive” express contract provisions, courts may scrutinize the parties’ conduct and construe a pattern of behavior as determinative when assessing how to enforce contract terms. Therefore, when assessing the viability of disputed contract claims and defenses, the parties’ conduct and course of dealing should be carefully considered. And the contract terms, while critically important, should be regularly reviewed and consistently followed at all times during the construction contract.

Bart Reed is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7568 or bart.reed@stoel.com.

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OP-ED: Advance contractual lien releases in Washington

Bart Reed — Thu, 18 Jan 2018 23:24:31 +0000

Bart Reed

As the construction boom continues in Washington (especially in Seattle), owners and developers are looking for ways to mitigate risk on projects. Risk mitigation is often accomplished through negotiated terms and conditions of the parties’ contractual agreements. One such tool that should be considered and implemented concerns lien releases.

Lien release forms vary in their terms and effect. Some are little more than receipts for money paid; others release all lien rights and underlying claims for payment with respect to any work done during stated time periods. See A.A.R. Testing Lab. Inc. v. New Hope Baptist Church (2002). (Lien waivers given with progress payments released lien rights with respect to work through stated dates).

Thus, it appears that lien rights may be freely released even before a lien claim is recorded. But can lien rights be waived or released prospectively, before work begins that creates the lien rights? Technically, the answer is no: a substantive statutory right cannot be waived before that right exists; accordingly, such waivers are void. See Bowman v. Webster (1954) (“The right, advantage or benefit must exist at the time of the alleged waiver.”). Because lien rights are substantive statutory rights, they cannot be waived (unilaterally, without consideration) before they have arisen.

So, can lien rights be released (for consideration) before the work begins? Suppose a construction contract contains the following provision: “contractor agrees not to assert any rights against the project property under Chapter 60.04 RCW.” Would such a provision be enforced in Washington? The lien statute does not directly resolve this question, nor does any published Washington case. The following considerations are relevant, but provide conflicting authorities for and against prospective lien releases:

The lien statute provides that acts of coercion or attempted coercion, including threats to withhold future contracts made to discourage a person from submitting a pre-claim notice or from recording a claim of lien, are unfair and deceptive acts (RCW 60.04.035). A violation of this statute could result in the imposition of severe penalties, including treble damages and attorneys’ fees, under Washington’s Consumer Protection Act, Chapter 19.86 RCW. This statute, however, does not clearly apply to prospective lien releases, but even if it does, it seems to say that only “coerced” lien releases are ineffective. Whether a negotiated contractual term for consideration that prospectively forecloses the right to a lien claim constitutes “coercion” is debatable.
The lien statute expresses a strong policy of protecting potential lien claimants (particularly those with limited bargaining power, like material suppliers, lower-tier subcontractors or laborers) at a very early stage, even before they file a pre-claim notice (RCW 60.04.021). This public policy argument in favor of lien rights may call into question the enforceability of such advance releases, particularly those that may impact lower-tier subcontractors or suppliers through contractual “flow-down” clauses.
The common law rule is that prospective lien releases are enforceable. At least one older federal court case in Washington seems to have assumed that prospective lien waivers could be utilized. See Haskell v. McClintic-Marshall Co. (1923) (although in that case, the court held that the lien releases were induced by fraud, but raised no objection as to such waivers generally).
A subordination agreement, where the parties agree to subordinate lien rights to (usually) a mortgage interest, is enforceable, even if made before the lien rights have arisen. If this very important lien right (priority) can be released before it arises, it would seem reasonable that other lien rights can also be released.
Most states have restricted the enforceability of prospective lien releases by statute. Since Washington is not one of those states with anti-advance lien waiver or release legislation, an argument could be advanced that restrictions to prospective lien releases should be made clear through legislation on the subject.

Although some of the above considerations suggest that a prospective lien release might be enforced in Washington, the proof would have to be clear and any element of coercion would raise a risk of liability under RCW 60.04.035. Given the lack of clear authority, however, the effectiveness of a prospective release is not assured. The safest course might be to pattern a proposed lien release on forms that have proved effective in disclaiming implied warranties. See Mattingly v. Palmer Ridge Homes LLC (2010) (disclaimer of implied warranties is effective if conspicuous and bargained for).

As the enforceability of prospective lien releases remains a debatable issue under Washington law, perhaps the safest course for owners and developers entails the execution of conditional and unconditional lien release agreements at each progress payment and in exchange for final payment. Until legislation is promulgated to address the validity of such releases, contracting parties risk running afoul of the underlying protective policy of the lien statutes and potential liability under Washington’s Consumer Protection Act for coercion in contracting.

Bart Reed is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7568 or bart.reed@stoel.com.

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OP-ED: Integrated project delivery: important caveats to consider

Bart Reed — Fri, 20 Jan 2017 17:56:35 +0000

Bart Reed

Integrated project delivery (IPD) has been lauded by many construction industry professionals as the next great innovative contracting delivery method that will reduce the risk of claims, delays and project cost overruns through “gain sharing” and “pain sharing” collaboration. However, IPD may not be the panacea that will – or should – replace other forms of collaborative agreements or more conventional forms of contract delivery.

Owners, contractors and design professionals should seriously consider the legal implications of blurring traditional project roles and responsibilities, especially in the context of new technology (like Building Information Modeling). Without an appreciation of the risks involved in IPD, project participants may suffer unintended consequences, and current insurance offerings may not be adequate to cover the risks.

These are some potentially significant legal issues to consider before taking the leap into the IPD realm:

Erosion of the Spearin doctrine

The Spearin doctrine originates from a U.S. Supreme Court case that held that a contractor will not be liable to an owner for loss or damage that results solely from defects in the plan, design or specifications provided to the contractor. See United States v. Spearin (1918). The owner instead can pursue legal action against the project architect or engineer of record for design defects. This principle is less applicable with design-build contracting where a single-entity design-build contractor is responsible for providing the design services. Unlike conventional design-bid-build or even design-build, IPD potentially conflates construction means and methods and design obligations, particularly when the owner, contractor and design professional all participate in the design through BIM or other collaborative processes.

Third-party design liability

IPD contracts also present risks associated with third-party liability for defects and deficiencies in project design. Suppose a structure designed and built under an IPD contract collapses and causes personal injury or property damage. With varying levels of contribution, cooperation, participation and involvement from each of the IPD team members, the blurred lines of responsibility mean both the designer and contractor (and possibly the owner) may share liability. There may also be gaps or deficiencies in insurance coverage, which place the project team members at direct risk of covering these losses. This issue also implicates the contractual indemnification clauses and any limitation of liability provisions, which – if not carefully crafted to appropriately allocate the risk between the parties – could contribute to unintended liability exposure.

Economic loss doctrine/independent duty doctrine implications

In most states, the economic loss doctrine (ELD) is a valid defense that generally precludes recovery of purely economic damages against a contractor or designer to the extent that the damages or other legal remedies are addressed in the contract. This has the effect of limiting or barring negligence causes of action between parties that do not share a direct contractual relationship. Courts generally adhere to this doctrine unless there is a breach of a legal duty owed independently of the contract. This exception to the ELD has been adopted as the independent duty doctrine (IDD) in Washington, where the courts have recognized independent duties arising beyond the contract when personal injury or property damage is sustained by third parties. This doctrine is nebulous at best under the current state of the law, and it remains to be seen if Washington’s appellate courts will retreat to the ELD or continue to relax the limitations of recovery that the ELD imposes. Designers may have challenges applying the ELD or IDD as a defense, because appellate courts (at least in Washington) now recognize liability arising independently from the contract’s stated scope of work. Contractors also share increased exposure from third-party claims arising from an IPD project. With the blurred line between design and construction in an IPD setting, contractors (or owners) may now find themselves in a position of increased exposure to negligence-based claims because they may have participated in the design and assumed a professional standard of care.

Elevated or altered standard of care

Third-party negligence actions arising from personal injury or property damage will invariably raise the question of whether the design professional adhered to the applicable standard of care. The professional standard of care generally provides that an architect or engineer performing professional services has a duty to exercise care and skill to the same degree as that used in like cases by reputable members of the profession practicing under similar circumstances. With the emergence of IPD and BIM, this standard of care may be altered to the extent that it presumes collaboration by multiple parties. So, the issue may become whether the standard of care is diluted by shared participation/collaboration from disparate interests within the IPD team. Or, will the standard of care be elevated across all IPD team members insofar as BIM and “clash detection” provide a more robust modeling resource from which: 1, the design can be formulated and 2, the project can be constructed on time, within budget and without defects?

While IPD is garnering accolades for benefits realized through a new collaborative team approach to construction, this relatively new and untested model poses some unique legal challenges and may amplify risks. Accordingly, great care should be exercised in drafting any IPD agreement so that risks are properly identified and allocated among the project team members.

Bart Reed is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7568 or bart.reed@stoel.com.

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OP-ED: Key aspects of joint check agreements

Bart Reed — Fri, 15 Jan 2016 15:48:35 +0000

Bart Reed

In the construction industry, owners and prime contractors can use joint checks to protect themselves from lien foreclosures by lower-tier subcontractors and material suppliers that upper-tier contractors and subcontractors have failed to pay. Aside from other contractual measures that can be implemented before and even during construction (such as lien and claim waivers and releases, payment withholding rights, contingent payment clauses and lien claim indemnity provisions), this device helps to mitigate against an owner or prime contractor being required to pay twice for the same work or materials.

A joint check arrangement usually involves an agreement between the owner or prime contractor and downstream subcontractors and suppliers or simply the issuance of a joint check made payable to joint payees and endorsed to one of the joint payees. By entering into such an agreement or issuing a joint check, an owner or prime contractor gains peace of mind that lower-tier subcontractors or suppliers are in fact paid and potential lien claims are avoided. Material suppliers, meanwhile, are assured that additional payment security is in place from an upper-tier entity with which it has no privity of contract.

A payor issuing the joint check or one of the co-payees in a joint check transaction should carefully consider many important issues. For instance, many states (including Washington and Oregon) to varying degrees have adopted what is called the “joint check rule.” This rule provides that, when downstream parties (such as a subcontractor) are joint payees, and no agreement exists with the owner or prime contractor as to allocation of the proceeds, the supplier by endorsing the check will be deemed to have received the money owed to it from the subcontractor. The presumption of payment upon endorsement of the joint check can have serious consequences for an unwary lower-tier subcontractor or supplier, particularly to the extent that it may have received only partial payment of the amounts owed. Additionally, this presumption may give rise to a release of claims against the prime contractor’s registration or payment bond sureties (but not rights between co-payees and their sureties) and even a waiver of mechanic’s or materialmen’s lien rights. However, the joint check rule usually does not apply in public construction settings.

Ultimately, the issue of whether a joint check constitutes payment of the amount owed by the contractor or subcontractor to lower-tier subcontractors or suppliers is a question of fact based on the intention of the parties. To mitigate the risks arising from a factual dispute concerning what the parties intended, prime contractors or owners might want to incorporate joint check agreements into their contracts and subcontracts. Such agreements, whether incorporated into a prime contract or via collateral agreements, should clearly spell out the parties’ rights relative to the issuance, endorsement and effect of joint check payments.

Although each construction project – and the relationship of the project participants – is different, consider the following when using joint checks and joint check agreements:

• Ensure that the prime contract or the subcontract clearly provides that the owner or prime contractor may (but is not required to) use joint checks for payment to downstream parties. By attaching a copy of a form joint check agreement to the prime (or any sub) contract or by incorporating express language in the contract that affords the owner or prime contractor the right (but not the duty) to issue joint checks to lower-tier subcontractors and suppliers, the owner or prime contractor can avoid the risk of potentially breaching the contract by the unilateral issuance of joint checks.

• Establish that the joint check arrangement between the parties and any payment issued to a lower-tier subcontractor or supplier is merely an accommodation of payment and does not create any contractual relationship between the owner or the prime contractor and lower-tier persons or entities not having a direct contractual relationship with the payor. A series of payments made to downstream entities may create a presumption that a contractual relationship exists between the parties and consequently give rise to independent liability on the part of the payor.

• Although any payment made (progress or final) should require completed and signed waiver and release of claim documents, make sure in the joint check agreement or clause that endorsement of the check constitutes an express release of bond and lien rights and waiver of any claims arising from the work or materials furnished by the payee.

• Limit the joint check agreement as payment for work or materials furnished only after the date of the agreement and only for items actually incorporated into the project.

• Confirm that the immediate downstream party (prime contractor or subcontractor) agrees to endorse the joint check and the co-payee subcontractor or supplier agrees to pay the immediate upstream party any excess over the joint check amount.

• Identify who bears the risk of one co-payee cashing the joint check and failing to disburse the proceeds to the other co-payee.

• Consider a limitation of liability provision consistent with the amount of the joint check payment(s) or in some aggregate amount.

• Reflect an acknowledgement that the joint check proceeds are the property of the co-payee recipient and not of the other co-payee (like the prime contractor) in an effort to mitigate against the risk of such funds being associated with the co-payee’s bankruptcy estate, should the payee contractor or subcontractor file for bankruptcy.

• If a joint check arrangement is not part of a more robust contractual agreement, ensure that the parties also consider a choice-of-law provision, a venue selection clause for the resolution of any disputes, an entire-agreement or merger clause to mitigate the risk arising from any contemporaneous or prior oral agreements or representations, an anti-waiver provision, and a clause binding the terms of the agreement to the parties’ respective successors and assigns.

Joint check agreements and the actions taken under (or in the absence of) them can give rise to unintended consequences and liability. Prior to drafting or entering into any joint check agreement, consult an experienced construction lawyer able to identify the associated risks and benefits.

Bart Reed is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7568 or bart.reed@stoel.com.

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OP-ED: Contract conflict bears a cautionary tale

Bart Reed — Thu, 18 Jun 2015 23:10:42 +0000

Bart Reed

In the haste to negotiate and execute contracts, and commence design and construction of real estate improvement projects, parties may lose sight of important lien priority issues. A notable Washington appellate case illustrates the risk lurking in the shadows.

In Scott’s Excavating Vancouver LLC v. Winlock Properties LLC (2013), the Washington Court of Appeals examined a lien priority issue in the context of multiple amendments to a design professional’s contract for services and found that: 1, the contract and all subsequent amendments should be treated as one contract, and 2, the lien claim prevailed over the lender’s deed of trust under the “relation back” statute of Washington’s lien law. Most, if not all, of the hardship that befell the lender could have been avoided if it had secured a lien subordination agreement.

In the Scott’s Excavating Vancouver case, a designer furnished engineering and surveying services for development of a housing and commercial project to be completed in several phases. After services were rendered under an original design services agreement and multiple amendments thereto, the developer stopped paying, the designer ceased further work and the project faltered.

The designer then filed a lien and later commenced foreclosure proceedings. Soon thereafter, and as a result of the developer’s default of its loan obligations, the lender foreclosed on its deed of trust. At issue at the trial court stage was whether the designer’s lien claim had priority over the lender’s recorded deed of trust, which predated the recorded lien claim but arose after commencement of the design work.

Critical to the trial court’s and appellate court’s rulings was whether the contract and its multiple amendments, based on the scope of various services and when they were performed, were to be considered one contract or several independent contracts. If the agreements were one contract for the purposes of the lien law statutes, then the designer would have lien priority over the deed of trust and be entitled to foreclose against the lender’s deed of trust.

The trial court and appellate court both held that substantial evidence demonstrated that the parties intended a single enforceable contract. The lender knew that the designer started work before it granted the loan secured by the deed of trust. The designer knew that the developer faced financial difficulties, and, accordingly, the parties formed a contract that limited the consequences if either party failed to comply with the contract. Additionally, the original contract envisioned multiple phases, with details covered by subsequent contract amendments relating back to the original contract.

In reaching its holding, the Washington Court of Appeals relied on the well-settled principle that “mechanics’ liens are a statutory exception to the general rule of first in time, first in right priority between creditors,” citing the “relation-back” statute, RCW 60.04.061, which provides that claims of lien established under RCW 60.04 “shall be prior to any lien, mortgage, deed of trust, or other encumbrance which attached to the land after or was unrecorded at the time of commencement of labor or professional services . . . by the lien claimant.” Thus, noted the court, “such liens create an ‘off-the-record’ interest that may be senior to interests actually recorded before the lien’s recording but after commencement of work on the project.”

So, what is the takeaway from the Scott’s Excavating Vancouver decision? Those furnishing lienable work to improve property, including design services, should take care during contract drafting to ensure that lien rights are protected throughout all phases of the project, with any subsequent contract amendments expressly defined to relate back to the original agreement and with an understanding and appreciation of the consequences of signing lien subordination agreements.

Although it appears from the Scott’s Excavating Vancouver decision, as well as from earlier Washington appellate decisions (see Zervas Grp. Architects, P.S. v. Bay View Tower LLC [2011]), that inquiry notice is sufficient to trigger the professional’s lien priority, a design professional should consider complying with the provisions of RCW 60.04.031(5) allowing the recordation of notice of professional services that are not visible from an inspection of the property. The issue turns on whether and to what extent the mortgagee or subsequent purchaser knows of the professional services being performed on the property prior to the recording of the deed of trust.

Conversely, owners and lenders should consider the benefits of lien subordination agreements to ensure that project financing is adequately secured by the property and not jeopardized by early lien claim attachment from design professionals whose work may not be readily visible from an inspection of the site.

For more information on construction liens, download a free copy of “The Construction Lien in Washington: A Legal Analysis for the Construction Industry,” by Bart Reed and Karl Oles of Stoel Rives LLP. The treatise, recently updated for 2015, is available at www.stoel.com/construction_lien_law.

Bart Reed is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7568 or bart.reed@stoel.com.

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