Understanding Unabsorbed Home Office Overhead

It is readily apparent that – if a project is delayed – the contractor is losing money.  The increased direct costs associated with the labor and equipment on site are obvious. The more complex question arises when considering the effect a delayed project has on a contractor’s recovery of its home office overhead, where “home office overhead” is defined as the cost of the contractor’s main office including, but not limited to, rent, utilities, executive and management salaries, staff, office equipment, office supplies, taxes, insurance, etc.  Everyone intuitively understands that a delayed project increases such costs in the same manner that that delays increase the project’s direct costs but increases in home office overhead cannot be directly correlated to any one project because a contractor typically has several projects with overlapping schedules underway at any given time.  Over the years, courts have attempted to determine the damages necessary “to compensate a contractor for its indirect costs that cannot be allocated to a particular contract for the period during which the government has made contractual performance impossible.”  Charles G. Williams Constr., Inc. v. White, 326 F.3d 1376, 1380-1381 (Fed. Cir. 2003).  “As a result, there are at least nine formulas that have been used,

A Contractor That Acts as His Own Expert Witness May Inadvertently Waive Attorney Client Privilege

The general rule is that a party does not have to disclose communications with its attorney seeking legal advice.  A recent Superior Court decision, Noble v. the City of Norwalk, 2012 Conn. Super. LEXIS 2017, however, has found an exception to the attorney client privilege that contractors need to be aware about.

During a trial, witnesses are not allowed to give their opinion unless they are qualified as an “expert.”  Under the legal definition, an “expert” is anyone that has knowledge through education, training or experience that would be helpful to the jury given the subject matter of the lawsuit.  Based upon the foregoing definition, almost anyone can qualify as an expert if the right case came along.  For example, my 13-year-old daughter has been taking ballet lessons since she was 3.  If ballet ever became relevant to a key issue in a lawsuit, my daughter would qualify as an expert on that subject.

In construction litigation, there are always questions that are not clearly fact or opinion.  For example, the amount of time that the forms have to remain in place after a concrete pour is a subject upon which there is disagreement and often depends upon the structure that was poured and the conditions under which the concrete was placed. 

The Contract and Not Common Sense Determines the Proper Parties to an Arbitration

Many construction contracts require the parties to resolve their disputes through alternate dispute resolution procedures such as mediation and arbitration.  Arbitration is intended to be a cost effective alternative to litigation.  The issue of whether arbitration works as well as intended will be the subject of a future post on this Blog but the topic of discussion here is the question of determining the proper parties to any given arbitration.  The answer is counterintuitive.

When it comes to arbitration, there are several well settled rules.  For example, courts favor arbitration, arbitration is a creature of contract, and no party will be forced to arbitrate when it has not agreed to do so.  In light of the foregoing, you might believe that a party, who is named in a demand for arbitration, files an answer to the demand, and participates in the arbitration hearing, has agreed to arbitrate and should be held liable for any arbitrator’s award that enters against it.  If you did believe that, however, you’d be wrong.

In CDIFUND, LLC v. Lenkowski, disputes arising out of home construction contracts were arbitrated.  CDIFUND, LLC v. Lenkowski, 2011 Conn. Super.

The Standard Procedure for Obtaining Lien Waivers May Be Ineffective

A recent Superior Court decision should cause general contractors and owners to reevaluate their procedures for obtaining lien waivers.  Typically, signed lien waivers are submitted after the work is performed but before payment is received.  On a basic level, the procedure makes sense because the owner does not want to issue payment to its general contractor unless it is sure that it’s protected from potential mechanic’s liens.  While the general contractor and its subcontractors may argue that they should not have to provide lien waivers until they receive payment, they are generally protected if the owner does not actually issue the payment described in the lien waiver because standard lien waiver language makes it clear that the waiver is not effective unless the payment described therein is actually received.

In Milone & MacBroom, Inc. v. Winchester Estates, 2011 Conn. Super. LEXIS 2688, the Superior Court considered whether a lien waiver is valid when:

1. The lien waiver is issued after the work is performed:
2. The lien waiver is executed before payment is received; and
3. The payment described in the lien waiver is received three weeks after the lien waiver was signed.

Court Rules That the Government Contractor Defense is Not Applicable to Road Reconstruction Projects

As articulated by the United States Supreme Court, the government contractor defense provides that “[l]iability for design defects in military equipment cannot be imposed, pursuant to state law, when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.”  Boyle v. United Techs. Corp., 487 U.S. 500, 512 (U.S. 1988).  The Connecticut Supreme Court recognized the government contractor defense in Miller v. United Technologies Corp., 233 Conn. 732 (Conn. 1995).  Nonetheless, a Connecticut Superior Court has just refused to apply the government contractor defense to a claim arising out of a road reconstruction project.

In Fox v. Town of Stratford, 2012 Conn. Super. LEXIS 1443 (Conn. Super. Ct. June 1, 2012), the plaintiff alleged that his property was damaged by flooding caused by a road reconstruction project.  The contractor asserted that, under the authority of Miller and Boyle, it cannot be held liable for plaintiff’s alleged damages because it strictly complied with the government’s plans and specifications. 

Act Promoting Fairness In Private Construction Contracts? Hardly.

A new law has recently gone into effect in Massachusetts that drastically changes the relationships between private owners, contractors and subcontractors; and some people are going to suffer severe financial hardship as a result. For some inexplicable reason, the Commonwealth of Massachusetts has decided to interfere in what has been traditionally been the private right to contract. The new law has three main points; each more insidious than the next.

First, “pay when paid” and/or “pay if paid” provisions commonly found in subcontracts are now prohibited by statute in the Commonwealth of Massachusetts. Many general contractors simply are unable to pay their subcontractors until they receive payment from the owner. Thus, they write their subcontracts to make the subcontractor’s payment due a reasonable time after the contractor receives payment from the owner. Now, “every contract for construction shall provide reasonable time periods within which” an application for payment shall be submitted, approved and paid. Contract provisions that first require that the contractor to receive payment from the owner are void except in cases where the subcontractor has performed defective work or is insolvent.

Second, general contractors must abide by the time requirements for the review and approval of pay applications or suffer an extremely harsh result.