Tenant improvement work is a common source of construction liens. When liens arise out of tenant improvement work, the question is always: Does the lien attach to the owner/landlord’s ownership interest in the property, or does the lien attach solely to the tenant’s leasehold estate?

If the owner/landlord contracts for the tenant improvement work itself, the answer to this question is simple – the lien attaches to the owner/landlord’s ownership interest. As the Oregon statutes state, “Any person performing labor upon, transporting or furnishing any material to be used in, or renting equipment used in the construction of any improvement shall have a lien upon the improvement for the labor, transportation or material furnished or equipment rented at the instance of the owner of the improvement or the construction agent of the owner” (ORS 87.010(1)). The Washington statutes agree that “any person furnishing labor … for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner” (RCW 60.04.021).

However, what about the more common scenario when the tenant hires the contractor to perform the tenant improvement work as required by the lease and subject to a tenant improvement allowance in the lease?

In Oregon, the answer is again simple: any lien for tenant improvement work attaches to the owner/landlord’s ownership interest unless the landlord did not know of the work or posts a “notice of non-responsibility.” Regarding the “notice of non-responsibility,” Oregon statutes state that the owner/landlord is responsible “unless the owner shall, within three days after the owner obtains knowledge of the construction, give notice that the owner will not be responsible for the same by posting a notice in writing to that effect in some conspicuous place upon the land or the improvement situated thereon” (ORS 87.030(1)).

While the owner/landlord could argue it did not have actual or imputed “knowledge” of the construction work, that will nearly always be a fact-sensitive, and expensive, question. Moreover, when a lease has a tenant improvement requirement and allowance (which most commercial leases have) an owner/landlord will be hard-pressed to prove it did not have actual or imputed “knowledge” of the tenant improvement work.

The better course is to post notice of non-responsibility. There is no required form, but the following suffices to satisfy the Oregon statutes:

Notice of non-responsibility

Pursuant to ORS 87.030, [name and address of landowner], the owner(s) of the [description of property] (the “Property”) hereby gives notice that any improvement constructed upon, or labor, services, or materials supplied to the Property on behalf of or by order of [name of tenant], or any other person or entity other than [name of landlord] has not been and is not being constructed at the instance or request of [name of landowner]. [Name of landowner] is not and will not be responsible for any labor, material, services, or equipment provided or to be provided in connection with any construction on the Property.

[Name of landowner]

The notice should be posted on the door to the premises being improved. The owner/landlord should take a photograph of the posted notice, establishing the date it was posted. All too often owner/landlords fail to post this notice, leaving themselves exposed to a contractor’s lien for tenant improvement work. While the owner can seek indemnity from the tenant, the better course is to post the notice and remove itself from the payment dispute.

By contrast, Washington owner/landlords do not have statutory means to protect themselves from liens arising out of tenant improvement work. Instead, in Washington, the test is whether the tenant may or is obligated to perform the tenant improvement work. The reason is that if the tenant makes the improvements because it is required to do so under the lease, it makes the improvements not only for the tenant’s benefit but also for the landlord’s benefit, thereby making the tenant the landlord’s construction agent for the purposes of the lien.

Thus, in Washington, whether a lien attaches to the owner/landlord’s ownership interest or just the tenant’s leasehold estate depends on the obligations under the lease. A lease requiring a tenant to improve the premises, providing an allowance to do so, will likely mean that the contractor’s lien attaches to the owner/landlord’s ownership interest. Leases that allow, but do not require, tenant improvements may limit the contractor’s lien to just the tenant’s leasehold estate.

The takeaway

In Oregon, owner/landlords can protect themselves from liens arising out of tenant improvement work by posting a notice of non-responsibility. By contrast, in Washington, owner/landlords concerned about liens arising out of tenant improvement work should consider a lease term that allows (but does not require) the tenant to improve the premises. This may avoid the tenant becoming the landlord’s agent for the tenant improvement work. In addition, since Washington owner/landlords do not have the ability to post a notice of non-responsibility, they may consider requiring the tenant to bond the tenant improvement work.

Oregon contractors performing tenant improvement work should keep an eye out for any notice of non-responsibility as it limits the contractor’s lien security to the tenant’s leasehold estate only. If the Oregon contractor’s lien is limited to the tenant’s leasehold estate, the contractor should review its contract with the tenant, which typically has a right to ask for verification of the tenant’s financial resources to pay for the improvements before starting the project or if the owner posts a notice of non-responsibility during the project.

Washington contractors performing tenant improvements should review the tenant’s lease, or at least the tenant improvement provisions in the lease, before commencing the work to determine if its lien would be limited to the tenant’s leasehold estate. If so, the contractor should ask for verification of the tenant’s financial resources to pay for the improvements before starting the project.

Jacob Zahniser is a Miller Nash partner who focuses on construction law and commercial landlord/tenant disputes. He represents contractors, subcontractors, material suppliers, owners, and design professionals. Contact him at 503-205-2352 or jacob.zahniser@millernash.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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The ongoing COVID-19 outbreak represents an unprecedented challenge to the construction industry – not just the immediate impact of labor shortages and adaptation to social-distancing guidelines, but also the long-term impact on productivity and supply-chain disruption.

As project managers address the immediate and ever-evolving day-to-day impact, they should not forget to prepare for the long-term impact. Now is the appropriate time for all parties involved in the construction industry to reassess their risks of supply-chain disruptions, labor shortages and governmental restrictions on their projects now under construction or on tap to begin soon. By taking the following steps, businesses may be able to soften the coming blow.

Review contracts

Downstream, upstream and financing agreements may contain provisions addressing the risk of this unprecedented challenge. While legal doctrines fill in the gaps, express contract provisions control.

One important contract provision that must be considered is the force majeure clause. This clause excuses contract nonperformance caused by unforeseen events beyond either party’s control that make performance impracticable or frustrate the purpose of the performance. When reviewing a force majeure clause, pay particular attention to the following:

• Does it list events constituting force majeure to the exclusion of other events, or is there a catchall provision?
• What are the notice or documentation requirements to trigger force majeure rights?
• What are the limits of a force majeure claim? Are you limited to just an extension of time, or can you also recover cost impacts?

Another equally relevant provision is the contractor’s right to terminate if work is stopped for an extended time, typically 30 consecutive days, because of an act of government. Upon proper notice, the contractor can terminate the contract and recover payment for work performed, as well as reasonable overhead and profit on work not executed, and costs incurred by reason of the termination.

Other potentially relevant provisions include “changed conditions” and “suspension of work.” This is certainly not an exhaustive list of potentially relevant contract terms. Every contract is different. Thus, the first step is ascertaining the relevant contract provisions to determine what protections are available under the contract in response to the COVID-19 outbreak.

Monitor outbreak areas

We know the local situation – but the construction industry relies on a national supply chain, if not a global one. Key trades and material suppliers are facing similar supply-chain disruptions, labor impacts or governmental actions (such as quarantines or travel restrictions) that affect projects. Understanding the virus’s impact on suppliers assists in developing a claim.

Review insurance policies

Insurance for large projects is highly customized and could include coverage for “soft costs,” including “time element” or delay. Coverage, however, is typically triggered by physical damage to the project itself. Nevertheless, “soft costs” coverage may be written in such a manner that it could be triggered by a “civil authority” directive to shut down the project untethered to specific physical damage. Moreover, for projects in the pipeline, talk with an insurance professional about available insurance products for future projects. Review the insurance portfolio to determine whether there is coverage that can mitigate the impact of a construction delay or COVID-19-related shutdown of a project.

Keep detailed records

Accurate contemporaneous documentation is critical for multiple reasons. First, the contract likely requires documentation and notice contemporaneous with the event giving rise to the claim. Second, contemporaneous documents have much more credibility with a fact finder than after-the-fact re-creations based on memory and assumptions. Third, contemporaneous documentation shows the cause-and-effect relationship between the event and the delay.

360-degree project review

Reevaluate the construction budget and construction schedule in light of the virus’s impact on workforce availability, material cost, and supply-chain impacts. To do this, open a dialogue with the project team, the owner, the design professionals, the lenders, the general contractor, the subcontractors, and the key material suppliers regarding the impact of this virus on the budget and schedule and the team’s efforts to mitigate the impact on the project. Verify in writing the team’s ability to perform and pass the verification, or lack thereof, upstream. No one will be alone or unaffected by the virus. A proactive dialogue up front may go a long way toward avoiding expensive disputes down the road.

Finally, owners, designers, lenders and contractors alike should bring in experienced counsel to assist them through this unprecedented event. Experienced counsel can assist in reviewing the insurance portfolio, developing contemporaneous records, and guiding resolution before the litigation battle lines are drawn. And when parties disagree, experienced counsel can make sure that rights are preserved while the project continues to completion.

Jacob Zahniser, a Miller Nash Graham & Dunn partner, focuses on construction and real estate litigation, as well as insurance coverage disputes arising from construction defects. He represents clients including contractors, suppliers, and insurance policyholders and assignees to commercial property owners, landlords and homeowners associations. Contact him at 503-205-2352 or jacob.zahniser@millernash.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not 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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Productivity is critical for a construction project to be profitable. Changes to scope, site conditions and the manner in which the work must be performed all impact productivity in real time and reduce profits. Compensation for lost productivity depends on proper documentation.

During the bidding phase, the means and methods to be used to build the project, including resource scheduling and sequencing, are determined. Based on the means, methods, resources and sequencing, the contractor will estimate the duration of each activity. This is used to establish not only the schedule but also the baseline upon which productivity is anticipated. Unless the contractor can defensibly state its expected productivity on any given task, it cannot later prove forces beyond its control pushed it off the mark.

Once the anticipated productivity rate is established, and construction is under way, countless circumstances can derail the efficient execution of the work. Weather events, changes in crew size, poorly trained or supervised workers, shortages of workers, erratic workflow, work in reduced spaces, trade stacking, unavailability of materials, design modifications, access restrictions and excessive change orders are just some of the countless ways productivity can be impacted. The result often is additional time, and therefore additional labor hours, to accomplish the work; unit costs increase and profitability decreases. Some of these circumstances are internal and contractor-driven, and some of them are external and owner-driven.

If a contractor suffers a loss in productivity caused by a circumstance beyond its control, the first step is to document from day one the cause and effect relationship. Accurate documentation is critical for multiple reasons. First, the contract likely requires documentation and notice contemporaneous with the event giving rise to the claim. Contract compliance is critical to securing the lost productivity claim.

Second, contemporaneous documents have much more credibility with a fact finder than after-the-fact recreations. They will feel more authentic and accurate to any decision maker.

Third, contemporaneous documents show the cause and effect relationship between the event and the claimed delay. For example, a properly documented inclement weather event demonstrates the time lost due to the event. However, it is rare on a complex construction project for there to be only one cause of delay. Rather, there is often a combination of events occurring over a period of time giving rise to numerous overlapping delays. Proper documentation allows the parties to unravel the potential Gordian knot of overlapping delays, with each delay’s respective cause and effect. With proper documentation, one can isolate the “impacted” productivity to measure the delay by comparing it to the productivity of the un-impacted portions of the work of a similar nature as well as the anticipated productivity rate established during the estimating phase. This is especially important when seeking both compensable and uncompensable time.

Finally, owners and contractors alike should bring in experienced counsel from the first inkling of a potential delay claim. Experienced counsel can make sure events are captured accurately and contemporaneously. Experienced counsel can assist in guiding the parties to resolution, where possible, before the litigation battle lines are drawn. Even if the parties disagree, experienced counsel can make sure the owner’s and contractor’s rights are preserved while the project continues to completion.

Disruption undermines profits. Owner-caused disruptions are compensable when properly documented. Proper documentation starts from the beginning of the project, during the estimating phase, and continues through the end. Proving the delay claim depends on accurate contemporaneous documents. In short, you have a delay claim and can prove it.

Jacob Zahniser is a shareholder in Jordan Ramis PC’s Dirt Law practice group. He focuses on construction and real estate litigation. Contact him at 503-598-7070 or jacob.zahniser@jordanramis.com. This article is intended to provide information concerning general legal principles and not legal advice regarding specific situations.

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Pre-suit mediation as a condition precedent to litigation or arbitration is increasingly common. For example, AIA Document A201-2007 requires pre-suit mediation of “any claims, disputes or other matters in controversy arising out of or related to the contract” as “a condition precedent to binding dispute resolution.”

Requiring pre-suit mediation makes good business sense: having a chance to resolve a dispute early is certainly preferable to incurring avoidable litigation fees and costs. Plus, successful mediation is faster, cheaper and more private than litigation or arbitration. But what happens if one party ignores the pre-suit mediation requirement and files a complaint in state or federal court for a claim subject to a pre-suit mediation requirement? Unfortunately, under Oregon law there is no clear answer, and sister jurisdictions offer competing guidance.

First, any pre-suit mediation provision should expressly state that it is a condition precedent to litigation or arbitration (whichever is the selected forum) and should be as specific as possible about the required process. Since mediation is a voluntary process, courts are reluctant to enforce a voluntary event where the provision is unclear.

Next, if pre-suit mediation is part of an arbitration provision, enforcing pre-suit mediation is straightforward. In federal court, the defendant can either move to compel mediation and then arbitration or stay the litigation pending mediation and arbitration. Similarly, in state court, the defendant can move to stay the litigation in lieu of mediation and then arbitration. These are relatively straightforward motions that are granted frequently provided the subject matter of the dispute is within the scope of the arbitration provision.

However, if the pre-suit mediation requirement is not part of an arbitration provision, judicial decisions vary. A number of courts have found that when parties to a lawsuit have elected not to be subject to a court’s jurisdiction until some condition precedent, such as mediation, is satisfied, the appropriate remedy is to dismiss the action. Arguably, dismissing a lawsuit in lieu of non-binding pre-suit mediation that may or may not be successful may ultimately prove inefficient and futile. Nevertheless, if the contract requires pre-suit mediation, these courts hold the parties to their clear intent to complete mediation prior to litigation, and agree the parties are not subject to a court’s jurisdiction until the condition precedent to litigation is satisfied.

Some courts, however, take a different approach and stay the matter pending mediation, not dismiss it altogether. These courts reject the notion that failure to comply with a pre-suit mediation requirement negates the court’s power to hear the case altogether. Rather, these courts rule that their power to hear a dispute is not conditioned on pre-suit mediation, which was merely a contractual condition that may be waived or invoked, but the court always retains the power to otherwise hear and adjudicate the claim. These courts are more receptive to staying the claim to allow the parties to mediate. While this approach may be more efficient, it tends to reward a party for failing to follow its contractual obligations.

Finally, invoke the pre-suit mediation as soon as possible. Bring the issue to the court’s attention at the earliest possible point. Failure to do so could result in the court agreeing with the analysis that mediation was a condition precedent to litigation, but also find the party seeking to enforce the condition waived it by delay.

Pre-suit mediation before the cost and time is spent on litigation makes good business sense. A clear and unambiguous provision is critical to making pre-suit mediation enforceable if a dispute arises. How an Oregon court will rule when faced with a motion to dismiss for failing to comply with a condition precedent to litigation is unknown. If a company is faced with a lawsuit where the other party refuses to mediate as required by the contract, officials should consult with an experienced trial attorney to discuss options.

Jacob Zahniser is a shareholder in Jordan Ramis PC’s Dirt Law practice group. He focuses on construction and real estate litigation. Contact him at 503-598-7070 or jacob.zahniser@jordanramis.com.

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In sales, “Always Be Closing” (ABC) is a phrase used to describe a salesperson constantly looking to complete the sale. These ABCs also apply to construction projects; success starts at the beginning with a thorough understanding of the contract deliverables and continues throughout with active contract administration. The successful project is always closing.

A full review and understanding of the contract documents and its deliverables from the beginning of the project is the most effective tool a contractor can utilize in the close-out process. Skipping this prevents the contractor from understanding the full scope of its close-out responsibilities, leading to disputes later on.

For example, at the point of substantial completion, a contractor could assume its primary obligations under the contract are complete when, in reality, it still has to perform certain tasks. Some owners consider the project finished at substantial completion, while other owners do not consider the project complete until every piece of work is finished, no matter how trivial. Consequently, the contract must clearly define when the project is substantially complete, how the project is deemed substantially complete, and what obligations are turned over upon achievement of substantial completion.

Related to completion of the work is final payment. Ambiguities in when final payment is due will cause disputes. Contractors should try to eliminate conditions to final payment that are outside their control. For example, final payment is typically conditioned on the close-out of all permits, but what happens if the owner hires a separate specialty contractor who pulled a separate permit? Does the owner’s separate specialty contractor’s open permit delay the general contractor’s final payment? Hopefully not, but what does the contract say?

Change orders, disputed or otherwise, must also be understood as part of the close-out process. Typically, contractors must notify the owner within a certain period of time of any changes that impact price. Some owners, however, want to reconcile change orders at the end of the project, no matter what the contract says. Regardless, it will always be incumbent on the contractor to follow the change order process in accordance with the contract or fully document the fact that the owner is waiving the change order process in favor of an end-of-project reconciliation. Without understanding the change order process from the beginning and how it affects the close-out of the project, the contractor could be caught flat-footed and underpaid.

Perhaps the most crucial document in the close-out process is the punch list – the owner-created list that identifies deficiencies to be addressed before the project is deemed final. The contractor should try to have the contract allow for only one punch list to be provided within a certain period of time after substantial completion. Otherwise, the project may spiral into a never-ending punch process, evaporating profits by delaying close-out.

A successful close-out starts at the beginning, with a thorough understanding of the contract’s close-out requirement, and continues during the project through active contract administration. Contractors that follow the ABCs during their projects will avoid disputes when it comes time to close them.

Jacob Zahniser is a shareholder in Jordan Ramis PC’s Dirt Law practice group. He focuses on construction and real estate litigation. Contact him at 503-598-7070 or jacob.zahniser@jordanramis.com.

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The duty to defend and the duty to indemnify are separate duties, with the duty to defend being broader and, given the cost of litigation, many times more valuable than the duty to indemnify. But on what is the duty based: the factual allegations in the complaint, or legal theories of recovery such as negligence? Can other evidence or facts not in the complaint be considered? What if the complaint includes other allegations obviously not covered by the policy?

On Dec. 8, 2016, in West Hills Development Co. v. Chartis Claims Inc., the Oregon Supreme Court affirmed Oregon’s broad duty to defend, holding that “regardless of ambiguity or lack of clarity (in the complaint), the duty to defend is triggered if the complaint’s allegations, reasonably interpreted, could result in the insured being held liable for damages covered by the policy.” In reaching its holding, the court reaffirmed the so-called “four-corners” rule, wherein the duty to defend is determined by reference to two, and only two, documents: the complaint and the insurance policy.

Typical policy language

A typical insurance policy states that the insurer “will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.” Under this typical language, the duty to defend turns on the allegations against the insured made in the “suit.” West Hills tested the contours of this policy language in the context of a construction defect claim where a homeowners association sued a general contractor for, among other things, the alleged negligence of its subcontractors, without actually naming the subcontractors specifically.

What triggers a duty to defend?

Under Oregon law, as reaffirmed in West Hills, the factual allegations in the complaint, and not the legal theories for recovery, trigger the duty to defend. In the case, West Hills Development Co. served as general contractor for a townhome development in Sherwood. Its subcontractor, L&T Enterprises Inc., installed the porch columns. As typical in construction contracts, West Hills required L&T to procure insurance naming West Hills as an additional insured under the policy. L&T obtained a policy that covered West Hills only for potential liabilities arising out of L&T’s “ongoing operations,” and not “completed operations.”

After construction was complete, the homeowners association sued West Hills, alleging that the townhomes suffered from serious defects resulting in water intrusion damage. The association claimed that West Hills had negligently failed to oversee the work of its subcontractors, although L&T was not explicitly named in the complaint. West Hills tendered the claim to L&T’s insurer, as a named additional insured under the policy. The insurer refused to defend West Hills on two grounds: 1, the association alleged negligent conduct by only West Hills itself, and 2, the association’s alleged damages arose from “completed operations” rather than “ongoing operations” of L&T.

The Oregon Supreme Court disagreed with both arguments. As to the insurer’s first argument, the court observed that the association’s complaint could reasonably be read as seeking damages from West Hills on account of its subcontractor’s allegedly defective work. As to the insurer’s second argument, the court observed that the complaint alleged damages occurred by the time the owners bought their townhomes. As such, according to the court, it was possible the damages occurred during L&T’s “ongoing operations.”

In other words, the court broadly interpreted the allegations and found the potential that damages occurred earlier, and thus it did not foreclose the possibility that damage occurred during L&T’s ongoing operations. Based on this analysis, as long as a complaint does not expressly state facts that explicitly rule out coverage, the insurer has a duty to defend.

In sum, using the four-corners approach, the court held that the insurer had a duty to defend West Hills; the allegations in the association’s complaint, reasonably interpreted, could result in West Hills being held liable for damages covered by the policy.

Aftermath

Although in and of itself the West Hills decision does not blaze new ground, moving forward, it does raise some salient points. First, a general contractor should review its subcontractor’s policies to make sure it is getting the additionally insured coverage bargained for under its subcontracts. Assuming the general contractor desired more than “ongoing operations” coverage under the additional insured endorsement, much of the legal dispute could have been avoided had the general contractor reviewed L&T’s additional insured endorsement and confirmed the desired coverage was obtained. Second, ambiguous pleadings may turn “ongoing operations” coverage into “completed operations” coverage. Depending on how broad or ambiguous a plaintiff makes its allegations, an insurer’s denials based on “ongoing operations” may no longer be valid under Oregon law.

Jacob Zahniser is an attorney in Jordan Ramis PC’s Dirt Law practice group. He focuses on construction and real estate litigation. Contact him at 503-598-7070 or jacob.zahniser@jordanramis.com.

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Prevailing wage laws require construction workers employed by private contractors or subcontractors on public projects be paid wages and benefits at least equal to the “prevailing” wage for similar work in the locality in which the project is located. Prevailing wage laws exist at the federal, state and local levels.

The federal prevailing wage law, the Davis-Bacon Act, requires private contractors and subcontractors to pay workers the prevailing wage/benefit package on all construction contracts exceeding $2,000 for construction, alteration or repair of federal public buildings or public works. Oregon’s equivalent, its “Little Davis-Bacon Act,” requires private contractors and subcontractors to pay workers the prevailing wage/benefit package on “public works” projects with a contract price greater than $50,000.

A contractor or subcontractor found to have violated prevailing wage laws can face contract termination, debarment from future projects, and the withholding of contract payments to satisfy any unpaid wage, in addition to fines, penalties, liquidated damages and an award of attorneys’ fees. Therefore, it is important for contractors and subcontractors to keep themselves up to date on all recent changes to the federal, state and local prevailing wage rates.

Prevailing wage jobs

The first step to maintaining compliance with prevailing wage laws is to determine whether and which prevailing wage laws apply. Which prevailing wage law applies is based on the source of the project’s funding: federal, state or local. Contractors should be aware, however, that a construction project may have various funding sources. For example, under federal regulations, the Davis-Bacon Act applies when work is performed using funds in excess of $2,000, regardless of whether a federal agency is the owner of the project. In other words, if there is federal money providing even part of the funding on a project, it may be subject to the Davis-Bacon Act and require payment of prevailing wages and fringe benefits. In cases of multiple funding sources, the contractor or subcontractor should comply with the prevailing wage laws resulting in the highest wage/benefit package.

Establishing proper rates

The next step to maintaining compliance with prevailing wage laws is to properly calculate the wage/benefit package. The prevailing wage rate is made up of two components: 1, an hourly base rate, and 2, an hourly fringe benefit rate. A contractor or subcontractor can pay the prevailing wage in a number of different ways. First, the contractor or subcontractor may pay the total prevailing wage rate, including the fringe benefit amount, as cash wages. Alternatively, the contractor or subcontractor may credit toward the hourly fringe benefit rate the cost the contractor or subcontractor incurred for paying a “bona fide” fringe benefit (e.g., health/life/disability insurance, vacation, holiday pay, etc.). Last, the contractor or subcontractor may use a combination of cash wages and “bona fide” fringe benefits to meet the required prevailing wage.

The fringe benefit portion of the prevailing wage rate is complicated and often misapplied by contractors. For example, Executive Order 13706, signed on Sept. 7, 2015, requires federal contractors to provide paid sick leave, which may not be credited against the fringe benefit rate under the Davis-Bacon Act for any paid sick leave actually provided. In other words, paid sick leave would traditionally be considered a “bona fide” fringe benefit but for Executive Order 13706. Whether Executive Order 13706 will remain in effect when the new administration takes office in 2017 is unknown. Further, certain benefits are not considered “bona fide” (e.g., use of a company truck, tools, travel expenses, and cellular phone), so these benefits may not be used to calculate the prevailing wage rate.

Since construction projects can span months or even years, it is important to note that the prevailing wage rates in place at the time the bid is solicited by the agency controls. The prevailing wage rates at the time of bid solicitation will control throughout the entire life of the project, even if the project spans years and the prevailing wage rates have been adjusted, up or down.

Correct labor classification

The prevailing wage rate that applies to a particular worker depends on the labor classification of the work being performed by that worker. Since labor classification is based on the actual work being performed, it is very common for a single worker to be classified in different ways in a single workday if the worker performs different types of work throughout the same day. Unfortunately, not all work performed on a given project falls neatly into the pre-established classifications. One option to stay compliant is to classify the worker at the higher pay rate. This, however, may not be economically feasible. Another option is to identify the tasks that do not fit neatly into any classification at the beginning of the project and agree in advance on the appropriate classification for that specific task. Correlating the specific tasks performed by the worker to the applicable prevailing wage will greatly assist contractors and subcontractors in staying compliant with prevailing wage laws.

Proper bookkeeping

The prevailing wage laws require contractors and subcontractors to maintain certain records. For example, the Davis-Bacon Act requires contractors and subcontractors to maintain records that include: 1, name, address, and social security number of each employee; 2, each employee’s labor classification(s); 3, hourly rates of pay (including rates of contributions or costs anticipated for fringe benefits); 4, daily and weekly numbers of hours worked; 5, deductions made; and 6, actual wages paid. Contractors and subcontractors must maintain these records through the course of the project and for a period of three years afterward. In addition, contractors and subcontractors must submit certified payroll records. Failure to maintain proper books and records exposes the contractor or subcontractor to penalties and fines and even withholding of contract payment when the inevitable audit rolls around at the end of the project.

When it comes to prevailing wage compliance, the old adage is true: an ounce of prevention is worth a pound of cure. When facing a prevailing wage issue, a contractor or subcontractor should immediately seek out experienced counsel for guidance through compliance pitfalls.

Jacob Zahniser is an attorney in Jordan Ramis PC’s Dirt Law practice group. He focuses on construction and real estate litigation. Contact him at 503-598-7070 or jacob.zahniser@jordanramis.com.

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Design-build is a project delivery system in which one entity – the design-build team – works under a single contract to provide design and construction services for the owner. The design-build system is an alternative to the traditional design-bid-build process wherein design and construction services are divided between the designer and the contractor, each with separate contracts and separate scopes of work.

Studies show that the design-build delivery system is quicker and more cost-efficient than the traditional design-bid-build system. Consequently, it is not surprising that design-build projects are increasing in popularity. In fact, a recent study showed that 71 percent of construction dollars spent in Oregon are on design-build projects. Builders who have not already worked on a design-build project probably will very soon.

Whether a firm is a design-build veteran, or using it for the first time, here are four tips for a successful design-build project:

1. Have a well-defined scope of work for each team member

The hallmark of the design-build system is timely, cost-effective construction. By eliminating hierarchical layers of management, a project moves rapidly and decisions are made quickly, and schedule is maintained. Moreover, when the group that designs the project also builds the project, there tends to be much more attention given to pricing and scheduling in the design phase. However, a successful design-build project starts with a well-defined scope of work and a clear understanding of mutual expectations. Like any project, if a design-build one lacks a clear and complete scope up front, it is unlikely the final product will meet project and financial goals.

As with all teams, there should be one project leader as the single point of contact for the owner.  The project leader is generally the entity financially capable of contracting and guaranteeing the completion of the work and ultimately responsible for achieving the owner’s goals. Consistency and project leadership from start to finish add an inherent efficiency; the chance for things to fall through the cracks is greatly diminished.

2. Have a defined criteria for measuring success

All too often projects start without any measurable criteria for success or with the wrong set of success criteria. Every person, from the owner to the tradespeople working day to day, must have the same idea of what success means; otherwise the project will not be completed efficiently.  Success may be measured in terms of schedule, budget, quality, maintainability, or a combination of all these and other factors. Unless each team member is aware of the success criteria, the team as a whole will be unable to anticipate problems, work through challenges and seek team solutions necessary for a successful design-build project.

3. Have a knowledgeable owner who can make quick, sound decisions

Next, a knowledgeable owner is a key factor of successful design-build processes. Since the design-build project moves swiftly, the owner’s representative must be capable of making decisions promptly. Without a decisive, responsive and knowledgeable owner, the design-build process will falter and stall, diminishing the time benefits of the design-build process and sapping the profitability from the project. Ultimately, an inexperienced or unknowledgeable owner will lead to paralysis of design/review/design, which must move forward at a predetermined pace.

4. Have experienced downstream contractors committed to achieving the goals set by the owner

Finally, experienced downstream team members are a must. To be successful, design-build projects cannot afford the tunnel vision seen in the traditional design-bid-build method. Rather, the owner, design-builder and subcontractors must all think of themselves as a team working to achieve the common goal of delivering the project on time and on budget. The only success is mutual success. When challenges are encountered on a project (and there are always challenges), pointing fingers is not an option, and everyone must be willing to compromise and find solutions. Design-build team members should be not only experienced in their respective fields, but also capable and willing to think outside the box to come up with win-win solutions to deliver a successful project. Compromise and cooperation across the board are essential.

The use of the design-build delivery system continues to gain in popularity, with the West Coast and Oregon in particular leading the charge. Applying these four tips will help ensure design-build project success. However, even the best of the best can encounter problems; a good team can make problems easier to resolve.

Jacob Zahniser is an attorney at Jordan Ramis PC. He focuses on construction and real estate litigation, as well as insurance coverage disputes arising from construction defects. Contact him at 503-598-5546 or jacob.zahniser@jordanramis.com.

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A restrictive endorsement controls the use of a financial instrument – typically a check. The most recognized form of restrictive endorsement is “For Deposit Only,” which limits the ability to cash a check over the counter or endorse the check to a third party.

Restrictive endorsements, however, can also be used to resolve disputes. For example, an owner in a dispute with a contractor may issue to the contractor a check on which the owner writes “payment in full” or similar words. If the contractor deposits that check, does that resolve the dispute? The answer depends on what law governs and how the contractor accepts the payment.

In Oregon, depositing a check endorsed as “payment in full” generally does not discharge a disputed debt. Oregon law restricts an owner’s (or any other debtor’s) attempts to unilaterally settle a disputed claim simply by sending a check with language on it stating the contractor’s (or any other creditor’s) deposit of the check constitutes a settlement of the dispute (ORS 73.0311). Thus, in Oregon an owner may not successfully discharge a debt for a reduced sum through a restrictive endorsement on the face of the check or accompanying letter.

In Washington, by contrast, depositing a “payment in full” check usually does satisfy a disputed debt. Washington law allows an owner to unilaterally settle a disputed claim simply by sending a check with this type of language on it (RCW 62A.3-311). Thus, in Washington an owner may successfully discharge a debt for a reduced sum through a restrictive endorsement on the face of the check or accompanying letter.

Of course there are exceptions to each state’s general rule. In Oregon, if the contractor accepts the check in writing, then a “payment in full” check will discharge the disputed debt. If the contractor is an organization, the written acceptance must come from an officer or employee with authority to settle the claim.

In Washington, if the contractor notifies the owner that payment must be sent to a specific person or place, then the owner must send the “payment in full” check to that person or place; otherwise the debt is not discharged. Also, the debt is not discharged if the contractor, within 90 days of depositing the “payment in full” check, returns the payment to the owner.

Applying Oregon’s or Washington’s law becomes even more complex when an Oregon contractor is performing work on a Washington project or vice versa. Oregon law provides that only the law of Oregon applies to Oregon projects, but Washington has no such limitation.

Obviously, the safest course of action for either a contractor or an owner is to seek experienced legal counsel when sending or accepting a “payment in full” check. Owners should not assume that worries are gone because they stamped a few words on a check. And contractors don’t want to be wrangled into an unfortunate situation because they were eager to get that money in the bank.

Jacob Zahniser is an attorney in Jordan Ramis PC’s Dirt Law practice group. He focuses on construction and real estate litigation, as well as insurance coverage disputes arising from construction defects. Contact him at 503-598-5546 or jacob.zahniser@jordanramis.com.

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Every construction project starts with the contract: It is the cornerstone of the project and is for all purposes the rulebook. A good contract defines the scope of the work, sets the budget, dictates the schedule, and governs the parties’ obligations when something unexpected happens – and it always does.

Whether you are an owner, general contractor or subcontractor, the contract will determine the success or failure of a project. Because the contract is the foundation for a successful project, a current and complete contract review, before the agreements are signed, is critical.

Contract review is an important management tool that ensures your contracts reflect your understanding and agreement of the parties’ intent and expectations. However, expectations, laws and contract interpretation are always evolving, causing what was once a “great contract” to become obsolete. Regular contract review can highlight ambiguities or outdated provisions and should identify areas for possible improvement.

In addition, some contract terms have hidden pitfalls that can adversely shift risk among the parties, potentially limiting the financial benefits of a project. In short, a contract with unclear or biased provisions can be devastating in the event of a dispute or payment delay. The following common provisions should be reviewed carefully.

Claims and change orders

One of the most important and most litigated contract provisions deals with claims and change orders. Contracts typically require a contractor to submit a change order or make a claim within a certain number of days after the occurrence of the event, giving rise to the change order or claim. Identifying changes early is critical to protecting the ability to be compensated for added costs. First notice requirements almost always have short time limits and late notice can eliminate the right to compensation.

In addition, prompt action means that events are fresh in everyone’s minds, and gives other parties the opportunity to mitigate the financial and schedule impacts, avoiding end-of-job surprises and lawsuits. Perhaps the most important failure is to follow the claim procedure that may result in the waiver of the claim. Everyone should have working knowledge of the contract’s claim and change order provisions.

Supporting documentation

After safety, identification of the type and content of the documents that must be submitted to receive timely and complete payment or to support a claim or change order is the most important activity on a construction project. Good documentation protects the financial health of the contractors, and without it bad things happen.

Typical documents include: 1, executed payment applications; 2, payroll or progress; 3, payment requests; 4, documents substantiating the payment request; 5, lien waivers; and 6, documentation showing evidence that the submitting contractor has made, or intends to make, payments to its subcontractors or material suppliers.

With regard to application for final payment, typical documents accompanying final payment application include: 1, as-built drawings; 2, operations and maintenance manuals; 3, manufacturer and other warranty documentation; 4, evidence of necessary start-up testing; and 5, final lien waivers. It is important for all contractors to know and understand the contractually required documents and include all of them in payment applications or claims to ensure timely payment.

Certification requirements

More sophisticated projects, and all government projects, require a contractor to certify certain items with each payment application. These certifications can include certified payroll, as well as ongoing representations about the basis for payment.

In some contracts, satisfactory proof of the proper use of prior payments is required before the current request is processed. The consequences of missing or incorrect certifications can be a loss of a deal or payment or more serious fines. In extreme cases contracts can be barred for future government work.

Reimbursable expenses

Cost plus time and materials contracts generally detail allowable or reimbursable cost items. However, the contract may also exclude costs from reimbursement or disallow any markups on certain items.

In these types of agreements record keeping is critical, because owners and upstream contractors have the right to audit the downstream contractors’ records to verify expenses. If the downstream contractor overcharged, it will be liable for reimbursing the overcharge with interest. Contracting parties may avoid common disputes that arise over these types of “overhead” costs by agreeing in advance how they will be paid or using a lump sum contract.

Indemnification and insurance

The indemnity and insurance provisions of a construction contract are tremendously important but often receive little to no attention during contract negotiation and drafting. These provisions place the financial responsibility for inherent risks on the downstream contractors. These provisions are viewed as boilerplate in the beginning of the project, but when a claim arises they are hotly contested and can have disastrous ramifications if not properly drafted or followed.

Every contractor should have the indemnity and insurance clauses reviewed annually. These seemingly innocuous contract provisions can shift liability among the parties, and the law is constantly changing.

The contract impacts the bottom line

Understanding your contract’s requirements for payment and claim procedures minimizes the risk of surprises and mistakes that can delay payment or inadvertently waiver the claim. Understanding your contract’s indemnification and insurance requirements is equally important to avoid serious financial consequences like buying more liability than the contract is worth.

Nobody likes paying a lawyer, but it is always a best practice to have your contracts reviewed by a qualified attorney familiar with the construction industry. By taking care of the contract, you are taking care of business and protecting the bottom line.

Jacob Zahniser is an attorney in Jordan Ramis PC’s Dirt Lawâ practice group. His practice focuses on construction and real estate litigation, as well as insurance coverage disputes arising from construction defects. Contact him at 503-598-5546 or jacob.zahniser@jordanramis.com.

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