MAKE PRUDENT DECISIONS REGARDING YOUR HURRICANE IRMA PROPERTY DAMAGE CLAIMS

Posted on September 11, 2017September 11, 2017 by Edward Garber

Hurricane Irma barreled down on us with all of her forceful winds and torrential rains. She was scary and relentless. There was mass evacuation. Commercial flights were booked. Trains were booked. There was gridlock with the concern as to whether gas would even be available. There were many people that did not evacuate, uncertain as to the eventual path Irma would take. Originally projecting an easterly course, people on the east coast evacuated to the west coast, central Florida or out-of-state. She then shifted to a westerly course forcing people on the west coast to evacuate to the east coast, central Florida, or out-of-state. It was chaos stemming from the total unpredictability of Mother Nature. It was chaos stemming from the dreadful images of Hurricane Harvey. Mother Nature and all of her uncertainty is undoubtedly frightening, as proven by her devastation throughout the amazing state of Florida.

We are fortunate. We made it through her wrath. We have our life and our health. This is the most important. I repeat — the most important. Sure, there may be property damage at our house or in our community, but it could always be worse. I repeat again — it could always be worse. Assets are replaceable. Life and health is not replaceable.

When it comes to property damage, perspective is important. Do not forget perspective. Please do not engage in an emotional knee jerk reaction and hire the first person that comes your way to assist with the damage and fallout of Irma. Disaster unfortunately causes others and the unqualified to prey on vulnerabilities. Take a deep breath and do not neglect to digest your damage and do your due diligence on your course of action and hiring someone you will trust and know will assist in your needs. Here are some tips I encourage:

1) Survey the damage. After you have initially digested and assessed the damage, do another walk-through of your property and survey and notate the damage you are observing. Either get a pen and pad and write down your assessment or use your phone, ipad, or laptop to memorialize your observations.

2) Persuasively photograph the damage. Sure, everyone tells you to do this. But, I am telling you to look at the photos you take to ensure you are capturing the damage to the best of your ability. This means to focus on the elevation of your photo and the proximity of your camera or phone (in the case of a camera phone) to the damage or item you are capturing. The reason for this is to persuasively capture the damage – take photos from various elevations, angles, and distances to capture the water damage and hurricane-caused damage. Correlate the photo with your written survey. If you use a camera that is not a camera phone, date stamp the photograph.

3) Persuasively video the damage. Similar to above, if you have a systemic leak, do not just photograph that leak. Take a video of it that captures the water intrusion and movement of the leak. Correlate your video with your written survey. You can also take a video of the damage and narrate that damage as you are observing it.

4) Obtain a copy, if you can, of your property insurance policy or your declaration page so that you can submit a claim ASAP. If you have a property insurance policy, have this handy. Insurance is complex and it is always advisable that you work with a professional when submitting a claim under your policy for hurricane-related damage. You will want to submit an insurance claim soon to report the damage caused by Irma. Your property insurer is anticipating claims caused by Irma.

5) Hire a trustworthy and qualified professional. There will be a lot of lawyers and/or public adjusters soliciting your business. Lots of them. They will be offering to help. Some will have good intentions. Others will not. They will want you to pay them a contingency percentage of anything you receive from your property insurer (oftentimes, a minimum of 20% or more based on the issue). You want someone QUALIFIED and you can TRUST – that you know will not take advantage of the situation and will keep you informed and give you the best advice so that you can make the most informed decisions. This is very important and based on the severity of the damage you may want to explore different options to compensate a professional.

6) If you hire a contractor, make sure they are licensed. If you hire a contractor to implement immediate repairs and remediate water intrusion, make sure they are licensed and read what you sign. A reason to engage a professional is to ensure you are properly notifying your property insurer and you are not being taken advantage of by hiring a qualified professional. Also, make sure you save all contracts, invoices, and payments you make to preserve a basis for reimbursement from your property insurer.

7) Do not unilaterally discard any damaged contents or otherwise. Do not start throwing things away or discarding damage before you engage in items 1 – 5 above. A reason you want to hire a professional is so that you do not prejudice your rights by discarding potential evidence before notifying your insurer.

The key is not to act haphazardly based on your emotional reaction to the damage. I know it is emotional. I get it. But, because it is emotional, you want to make sure that you are implementing prudent decisions moving forward to maximize your property insurance. You want to make sure you are implementing a path that benefits YOU!

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

NEED CONTINUING EDUCATION CREDIT IN FLORIDA? CONSIDER THESE COURSES

Posted on May 14, 2017May 14, 2017 by Edward Garber

Are you a contractor and need continuing education credit? I recently got three one-house courses approved by Florida’s Construction Industry Licensing Board. These one-hour courses are designed for live breakfast-and-learn or lunch-and-learn sessions. They are designed for practical application on key issues facing all in construction. The courses are as follows:

1) Delay! The Project is Late – What do You do and how do You Allocate the Delay?;

2) Contract Risk Considerations; and

3) Effective Project Documentation & Management.

Please reach out to me if you are interested in learning more about these live presentations including whether you think your employees can benefit from a breakfast-and-learn or lunch-and-learn.

CONSULT WITH COUNSEL WHEN PREPARING CONSTRUCTION LIENS

Posted on April 8, 2017April 8, 2017 by Edward Garber

All too often entities prepare their own construction liens. Sure, it is an effective way to save a few bucks. No doubt about it. But, by doing so, you are (i) not relying on advice of counsel that is important when it comes to lien preparation and (ii) not relying on strategy that goes along with the preparation of a lien. When you are liening, the reason you are doing so is because you have not been paid. You therefore want to collateralize your nonpayment against the real property—the leverage of a construction lien. This is a very beneficial statutory tool if implemented correctly, so it only makes sense to do it “strategically” right.

A construction lien is a statutory form. So, how hard can it be? Filling out the “form” is not hard, however, there is legal significance to the information and amounts included in a lien. For instance:

There is significance to the amount you are liening. Are you liening for disputed change order work? Are you liening for amounts unrelated to base contract work?
There is significance to the final furnishing date. Are you liening within 90 days of performing base contract work unrelated to punchlist or warranty work?
There is significance to date the Notice to Owner was served (if you are not in privity with the owner). Was the Notice to Owner served within 45 days of initial furnishing?
There is significance to the legal description identified in the lien. Are you liening the right property based on the type of project you are working on?
There can even be significance to the initial furnishing date. Assuming you are the general contractor, what was your initial furnishing date in comparison with when the Notice of Commencement was recorded? If you are not a general contractor, when was the initial furnishing date in comparison with when you served the Notice to Owner?

And, there is legal significance to extraneous issues unrelated to the information in the lien. For instance:

There is legal significance to when the lien is served on the owner and others identified in the Notice of Commencement. Did you look at the Notice of Commencement to ensure the lien is served on those identified therein? Did you serve your lien within 15 days of recording?
There is legal significance to the timing of the recordation of the lien. Is the Notice of Commencement still in effect at the time the lien is recorded? Has there been an amended Notice of Commencement?

All of these are important considerations when dealing with a construction lien. There is value, however, consulting with counsel relating to all of the pertinent facts that surround the lien and having counsel prepare the lien for you. There is authority that consulting with and providing counsel all pertinent facts and relying on counsel in the preparation of the lien can serve as a lienor’s evidence of good faith to otherwise refute an owner’s fraudulent lien defense/claim. See Iberiabank v. Coconut 41, LLC, 984 F.Supp.2d 1283, 1302 (M.D.Fla. 2013).

Further, there is strategy that goes along with preparing a lien. Sometimes, there is value, in the case of a contractor in privity with the owner, with a lienor serving a Final Contractor’s Payment Affidavit along with the construction lien. Also, sometimes there is value serving a Request for a Sworn Statement of Account along with a lien.

Too many times, all of the issues and strategy that goes hand-in-hand with the preparation of a lien is lost when a lienor prepares its own lien. This is why there is value consulting with counsel in the preparation of construction liens.

NEW EBOOK: INNOVATIVE ATTORNEY’S FEE ARRANGEMENTS

Posted on March 29, 2017March 29, 2017 by Edward Garber

The traditional attorney’s fee model for business disputes including construction disputes is hourly billing. There is certainly nothing wrong with this model. But…it is NOT the only model and there are other models that can actually be perceived as value-added to your business. There is nothing wrong with innovation and creativity. This new ebook discusses Innovative Attorney’s Fee Arrangements. It can be obtained from Amazon, iTunes, or Nook.

WHICH CONSTRUCTION CONTRACT SHOULD I USE?

Posted on October 18, 2016October 18, 2016 by Edward Garber

In the previous article I posted a chart that includes a side-by-side comparison of common risk allocation and risk assumption provisions in industry form construction contracts (the general conditions between the owner and contractor in the AIA, EJCDC, and ConsensusDocs industry form contracts). This chart was used to illustrate various contractual provisions in industry form contracts in a presentation I recently did on construction contracts. The point of the presentation was to summarize many of the common risk allocation and risk assumption provisions in construction contracts that need to be considered when selecting and finalizing an industry form construction contract. A portion of that presentation is below.

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2016/10/Advanced-Construction-Contracts.pptx”]

IMPACT OF LIS PENDENS ON UNRECORDED INTERESTS / LIENS

Posted on August 27, 2016November 8, 2024 by Edward Garber

In a previous article, I discussed the importance of recording a lis pendens in a construction lien foreclosure action.

There is another noteworthy point relating to the impact of lis pendens that can provide quite a bit of consternation.

Florida Statute 48.23(1)(d) provides:

Except for the interest of persons in possession or easements of use, the recording of such notice of lis pendens, provided that during the pendency of the proceeding it has not expired pursuant to subsection (2) or been withdrawn or discharged, constitutes a bar to the enforcement against the property described in the notice of all interests and liens, including, but not limited to, federal tax liens and levies, unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens. If the notice of lis pendens expires or is withdrawn or discharged, the expiration, withdrawal, or discharge of the notice does not affect the validity of any unrecorded interest or lien.

The language in this statute requires persons with unrecorded interests / liens to intervene in a lawsuit subject to a lis pendens within 30 days or else they are barred from proceeding against the property (unless the property subject to the lis pendens is not foreclosed on or the lis pendens is discharged). This is a harsh outcome because such a person’s (unrecorded) interest may not accrue until it is already too late—beyond the 30 days of the recording of the lis pendens.

The best way to explain the potentially harsh application of this statute is to examine its application in a few cases.

In Adhin v. First Horizon Home Loans, 44 So.3d 1245 (Fla. 5^th DCA 2010), a lender recorded mortgages associated with a construction loan. The borrower entered into an agreement to sell parcels and any homes currently built on the parcels. The parcels were sold, however, the closing agent failed to record the deeds and mortgages associated with the closing, and failed to secure any release from the construction lender as to the parcels that had been sold. Subsequently, the construction lender foreclosed on its mortgage which included a foreclosure that applied to the parcels that had been sold. A lis pendens had been recorded. Approximately two months after the lis pendens was recorded, the purchasers of the parcels recorded their deeds and corresponding mortgages and moved to intervene in the construction lender’s foreclosure lawsuit. The construction lender opposed the motion to intervene arguing that the purchasers of the parcels failed to timely intervene pursuant to s. 48.23(1)(d) since the lender’s foreclosure action impacted their rights to the parcels they purchased. The appellate court agreed with the lender finding that the language operates as a nonclaim statute that bars enforcement against the property by a holder of an unrecorded interest (such as the purchasers of the parcels in this case) after the prescribed statutory period (30 days), provided the litigation proceeds to a final judgment and judicial sale of the foreclosed property. This meant the purchasers of the parcels could not intervene and their rights as it related to their parcels were entirely dependent on whether the construction lender’s foreclosure action proceeded to a final foreclosure judgment and judicial sale of the property (inclusive of their property). Ouch!!!

In Jallali v. Knightsbridge Village Homeowners Ass’n, Inc., 2016 WL 3548843 (Fla. 4^th DCA 2016), a homeowner’s lender filed a mortgage foreclosure action and recorded a lis pendens. While the mortgage foreclosure action was pending, the homeowner’s association recorded a lien for unpaid assessments and moved to foreclose its assessment lien. The issue was whether the lender’s notice of lis pendens barred the homeowner’s association’s subsequent foreclosure action based on its lien for unpaid assessments. The appellate court held it did not because the lien was based on a recorded Declaration of Covenants that was recorded prior to the filing of the lis pendens—thus, s. 48.23(1)(d) did not apply because the Declaration was an interest recoded prior to the lis pendens.

In Ober v. Town of Lauderdale-by-the-Sea, 2016 WL 4468134 (Fla. 4^th DCA 2016), a lender filed a foreclosure action and recorded a lis pendens. The lender obtained a final judgment in foreclosure. Subsequent to the final judgment in foreclosure, but before any foreclosure sale, the Town of Lauderdale-by-the-Sea recorded liens against the property for code violations that occurred post-final judgment. The property was sold at a foreclosure sale and the new owner filed suit to quiet title and remove the Town’s liens. The appellate court held that s. 48.23(1)(d) does not operate to bar liens that accrue and are recorded AFTER the final judgment. Hence, recording a lis pendens does not operate to bar liens that occur (accrue) and are recorded post-final judgment but before a foreclosure sale.

When it comes to construction projects, sometimes there are multiple construction lien foreclosure actions relating to the same property. All of these foreclosure actions are routinely accompanied by a lis pendens. Some of these actions could arguably be barred under s. 48.23 since they may be based on liens recorded outside of the 30-day window of the first lis pendens that was recorded. So, if the initial foreclosure action results in a judicial sale of the property, the subsequently recorded liens on the property whose holder’s failed to timely intervene may be out of luck – they would not be able to foreclose on the same property that was already sold at a judicial sale. On the other hand, under Jallali, liens relate to a notice of commencement, and similar to a Declaration of Covenants (or Condominium), could be considered a recorded interest. The notice of commencement would be recorded prior to any construction lien, meaning that any construction lien is not based on an unrecorded interest at the time a lis pendens is recorded. If this is true, than s. 48.23(1)(d) arguably would not apply to bar any liens that accrue and/or are recorded after 30 days from the initial lis pendens. To preserve this argument, it is important that liens are recorded within the effective period of a notice of commencement so that the liens can relate back to the date the notice of commencement is recorded.

MILLER ACT CLAIM FOR UNSIGNED CHANGE ORDERS

Posted on June 25, 2016November 8, 2024 by Edward Garber

Contracts and subcontracts often contain language that requires change orders to be in writing and that no change order work shall be performed unless agreed to in advance in a signed change order. Oftentimes change order work is performed but the parties have not complied with the strict requirements of the contract by having this work signed off by the parties in a change order prior to the commencement of the work. Well, can such requirements be waived? If so, can such change orders form the basis of a Miller Act claim? The answer is generally yes provided the party arguing waiver can support the waiver with evidence (that the other party voluntarily relinquished the requirements through its course of conduct / actions).

This is exemplified in U.S. f/u/b/o Agate Steel, Inc. v. Jaynes Corp., Case No. 2:13-CV001907-APG-NJK (D. Nev. June 17, 2016), where a sub-subcontractor asserted a Miller Act payment bond claim for non-payment largely dealing with change order work that was never signed by the subcontractor that hired it. The subcontract stated:

No change orders or contract additions will be made unless agreed to in writing….If additional work is performed and not covered in this contract [sub-subcontractor] proceeds at [its] own risk and expense. No alterations, additions, or small changes can be made in the work or method of the performance, without the written change order signed by [subcontractor] and [sub-subcontractor].

Jaynes, supra.

The sub-subcontractor submitted change order requests and time and material summaries to the subcontractor that hired it. However, the subcontractor never signed the change orders or time and material summaries. The sub-subcontractor acknowledged that most of the requests for change order work was prompted by verbal authorizations, including written authorizations. Shortly thereafter, the subcontractor disputed the change order requests and claimed that the sub-subcontractor performed work without signed change orders. The prime contractor and its Miller Act payment bond surety disputed the sub-subcontractor’s payment bond claim contending the sub-subcontractor never complied with its subcontract by not obtaining prior written approval in a change order before performing the change order work.

Here, the trial court held that the subcontractor waived the subcontract’s requirement that change orders be in writing signed by both parties thereby allowing the sub-subcontractor to recover against the Miller Act payment bond:

Here, Agate [sub-subcontractor] has presented evidence that American Steel [subcontractor] waived the requirement that change orders be approved in a writing signed by both American Steel and Agate. Agate presented change orders and T&M summaries for payment. In his June 18 email, American Steel’s president, Williamson, approved a revised contract amount of $126,907.00. He also directed Agate to proceed with work as soon as possible and asked how soon Agate could return to the work site. Agate subsequently performed more work on the project based on the approval of the change orders. No issue of fact remains that the parties therefore waived the requirement that the change orders be in a writing signed by both parties.

Ideally this issue would never arise because the parties would comply with the strict requirements of the contract and change orders would never be performed without there being a signed change order. But we all know that this does not always happen leading to disputes relating to change orders after the work is already performed. While such strict language is certainly beneficial, it is not absolute and the party performing the change order work can navigate around the strict requirements by presenting evidence establishing this requirement was waived. Such evidence can be in the form of written authorizations to perform the work, the manner in which other change orders were handled, testimony from fact witnesses regarding oral authorizations, meeting minutes discussing the change, and other evidence that shows the party looking to enforce the requirements waived them through their course of conduct and actions.

A DAVIS BACON SNACK – PREVAILING MINIMUM WAGE RATES ON CONSTRUCTION PROJECTS

Posted on March 23, 2015November 8, 2024 by Edward Garber

Contractors working on federal projects should be familiar with the Davis Bacon Act (40 USC s. 3142 and formerly cited as 40 U.S.C. 276a). This Act requires contractors to pay, at a minimum, prevailing wage rates including fringe benefits for labor as determined by the Secretary of Labor. The wage rate for select workers is oftentimes an exhibit to the contract. To confirm parties are complying with the Act and paying prevailing wage rates including fringe benefits, parties are responsible for submitting certified payroll certifying the rates they are paying labor. For more information on the Davis Bacon Act and submitting certified payroll, please click here and here.

Violations of the Davis Bacon Act are bad! Violations can include contract termination, fines in the form of liquidated damages, debarment from federal projects for a period of time, claims by improperly paid laborers, potential violations of the False Claims Act, and potential criminal prosecution.

Many local jurisdictions also have their form of prevailing wage rates that they require for the labor working on their projects.

By way of example, Miami-Dade County has what it refers to as “Responsible Wages and Benefits” embodied in Section 2-11.16 of its Code. You will see minimum wage rates for labor (e.g., glazers, carpenters, drywall finishers, electrical workers, plumbers, roofers, etc.). Any failure to pay these minimum rates can result in fines/ penalties and the County withholding payment to cover the required payment and penalties/ fines.

In Broward County, Section 26-5 of the County’s Code contains “Rate of Wages, fringe benefits on county construction contracts.” It requires minimum wages pursuant to the wages promulgated by the United States Department of Labor in the Federal Register.

If you are working on a federal or state or local government public construction project, make sure you know what the minimum prevailing wage rates are for labor. Not only will this help you in accurately projecting the costs of the work, but will help to avoid harsh consequences if that labor is not paid the minimum wage rates or, worse, there is a false certification of wage rates.

SERVING REQUESTS FOR SWORN STATEMENTS OF ACCOUNT UNDER FLORIDA’S LIEN LAW

Posted on August 14, 2014November 8, 2024 by Edward Garber

Florida Statute s. 713.16 provides a useful vehicle under Florida’s Lien Law for parties on private projects to serve a Request for a Sworn Statement of Account on another party to potentially deprive: (a) a lienor (contractor, subcontractor, supplier, design professional) of lien / bond rights or (b) an owner of the right to recover attorney’s fees in an action to enforce a lien. An unsuspecting party that receives a Request for a Sworn Statement of Account could find itself in an undesirable position by failing to respond within 30 days after the Request.

A. An Owner Serving a Request for Sworn Statement of Account

Section 713.16(2) authorizes an owner to serve a Request for Sworn Statement of Account:

“The owner may serve in writing a demand of any lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement by the lienor. Any such demand to a lienor must be served on the lienor at the address and to the attention of any person who is designated to receive the demand in the notice to owner served by such lienor and must include a description of the property and the names of the owner, the contractor, and the lienor’s customer, as set forth in the lienor’s notice to owner….The failure or refusal to furnish the statement under oath within 30 days after the demand, or the furnishing of a false or fraudulent statement, deprives the person so failing or refusing to furnish such statement of his or her lien….The failure to furnish a response to a demand for statement of account does not affect the validity of any claim of lien being enforced through a foreclosure case filed before the date the demand for statement is received by the lienor.”

This is a useful tool for an owner that wants to obtain accounting information of a lienor that served it with a notice to owner or recorded a lien on the owner’s property. The statutory form for this Request is set forth below. If the lienor neglects to respond within 30 days after the Request, the owner has the argument that the lienor lost its lien rights by failing to respond. The Request needs to be served via certified mail, return receipt requested, or by a common carrier delivery service such as FedEx where the receipt of the Request is tracked.

REQUEST FOR SWORN STATEMENT OF ACCOUNT

WARNING: YOUR FAILURE TO FURNISH THE REQUESTED STATEMENT, SIGNED UNDER OATH, WITHIN 30 DAYS OR THE FURNISHING OF A FALSE STATEMENT WILL RESULT IN THE LOSS OF YOUR LIEN.

To: (Lienor’s name and address)

The undersigned hereby demands a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement for the improvement of real property identified as (property description) .

(name of contractor)

(name of the lienor’s customer, as set forth in the lienor’s Notice to Owner, if such notice has been served)

(signature and address of owner)

(date of request for sworn statement of account)

B. A Contractor Furnishing a Payment Bond Serving a Request for Sworn Statement of Account

Section 713.16(4) authorizes a contractor that furnished a payment bond on a private project to serve a Request for Sworn Statement of Account on a lienor (sub-subcontractor or supplier that served a notice to owner / notice to contractor):

“When a contractor has furnished a payment bond pursuant to s. 713.23, he or she may, when an owner makes any payment to the contractor or directly to a lienor, serve a written demand on any other lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement by the lienor.”

Florida Statute s. 255.05(8) (governing Florida public projects) similarly authorizes a contractor that furnished a payment bond on a Florida public project to serve a Request for Sworn Statement of Account on a claimant not in privity of contract with the contractor when the contractor receives payment from the public body.

The requirements for a contractor serving the Request are ultimately the same as the owner, except the contractor can only serve the Request when it furnishes a payment bond (since the owner’s property is exempt from liens) and the owner makes a payment to the contractor or a lienor (bond claimant). The failure to respond within 30 days after the Request should deprive the bond claimant of its rights under the payment bond.

C. A Lienor that Recorded a Lien Serving a Request for Sworn Statement of Account

Section 713.16(5) authorizes a lienor that recorded a lien to serve a Request for Sworn Statement of Account on the owner:

“Any lienor who is perfecting a claim of lien may serve with the claim of lien or thereafter a written demand on the owner for a written statement under oath showing:

1. The amount of the direct contract under which the lien was recorded;

2. The dates and amounts paid or to be paid by or on behalf of the owner for all improvements described in the direct contract;

3. The reasonable estimated costs of completing the direct contract under which the lien was claimed pursuant to the scope of the direct contract; and

4. If known, the actual cost of completion.”

The form of this request is different than the request served by the owner and needs to include the below warning on the top along with a request for the 4 categories (referenced above) taken from the statute. An owner that does not provide the statement within 30 days after the Request is not deemed the prevailing party for purposes of attorney’s fees.

WARNING: YOUR FAILURE TO FURNISH THE REQUESTED STATEMENT WITHIN 30 DAYS OR THE FURNISHING OF A FALSE STATEMENT WILL RESULT IN THE LOSS OF YOUR RIGHT TO RECOVER ATTORNEY FEES IN ANY ACTION TO ENFORCE THE CLAIM OF LIEN OF THE PERSON REQUESTING THIS STATEMENT.

Serving a Request for Sworn Statement of Account is a useful vehicle in an impending construction dispute. As shown above, this vehicle can be served by an owner, a contractor, or a lienor depending on the circumstances. Do NOT neglect the utility of serving a Request; and, do NOT ignore a Request if in receipt of one!

HOME OFFICE OVERHEAD (EICHLEAY) AND GOVERNMENT-CAUSED STANDBY

Posted on August 3, 2014November 8, 2024 by Edward Garber

JMR Construction Corp. v. United States, 2014 WL 3418445 (Fed.Cl. 2014) is a good federal government contracting case discussing a prime contractor’s challenging burden to support unabsorbed home office overhead damages caused by a government-caused delay. The United States Court of Federal Claims described unabsorbed home office overhead damages and the required elements (under the Eichleay methodology) for a prime contractor to prove these damages:

The term “home office overhead” refers to the general administration costs of running a business, such as accounting and payroll services, general insurance, salaries of upper-level management, heat, electricity, taxes, and depreciation. These are indirect costs, expended for the benefit of the whole business, [and thus] by their nature cannot be attributed or charged to any particular contract.

***

Contractors typically recoup these indirect costs by allocating them to individual contracts in proportion to those contracts’ direct costs. But, in the event of a government-caused delay or suspension of work, the stream of direct costs against which to assess a percentage [of home office overhead] is decreased. The resulting shortfall is termed unabsorbed home office overhead.

***

The Circuit has held that the so-called Eichleay formula is the sole method through which contractors are able to recover unabsorbed home office overhead. The Eichleay formula requires that contractors satisfy several strict prerequisites. First, the contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay. Second, the contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the un-extended performance period’s close. Third, the contractor must establish that it was required to remain on standby for the duration of the delay. [Standby does not require the prime contractor to prove that it was completely idle but that its work was significantly slowed such that it was performing minor tasks.]

***

In order to establish standby, contractors must demonstrate three things. First, the contractor must show that the government caused delay was not only substantial but was of an indefinite duration. Second, the contractor must demonstrate that, during the delay, it was required to return to work at full speed and immediately [once the suspension period is over. If the prime contractor is given a reasonable period of time to remobilize after the suspension is lifted, it will not be able to satisfy this requirement]. Third, the contractor must show a suspension of most if not all of the contract work. If the contracting officer has issued a written stop work order proving these elements the contractor can utilize that order to provide direct evidence of standby. Otherwise, these elements can be proven through indirect evidence.

***

If the contractor can make a prima facie showing of the standby elements, the burden of production shifts to the government to show either that it was not impractical for the contractor to obtain replacement work during the delay, or that the contractor’s inability to obtain or perform replacement work was caused by a factor other than the government’s delay.

JMR Construction, supra, at *5-7 (internal quotations and citations omitted); see also P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed.Cir. 2003) (finding that contractor could not support claim for unabsorbed home office overhead as it could not support it was on standby).

The Federal Circuit Court of Appeals summarized these requirements by the following questions:

In short, a court evaluating a contractor’s claim for Eichleay damages should ask the following questions: (1) was there a government-caused delay that was not concurrent with another delay caused by some other source; (2) did the contractor demonstrate that it incurred additional overhead…; (3) did the government CO [contracting officer] issue a suspension or other order expressly putting the contractor on standby; (4) if not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of which it was required to be able to return to work on the contract at full speed and immediately; (5) can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages; and (6) if the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.

P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1373 (Fed.Cir. 2003).

In JMR Construction, the prime contractor was hired to build an aircraft maintenance facility. The prime contractor sued the government pursuant to the Contract Disputes Act for government-caused delays. The period of delay the prime contractor was seeking to recover damages for was January 16, 2009 (day after the government occupied the facility) through September 4, 2009 (completion).

The government took occupancy of the facility on January 15, 2009. The prime contractor continued to perform work after this date, although its workforce slowed down. On February 3, 2009, the prime contractor demobilized its jobsite trailer and was finishing the balance of its work including the manufacturing and installation of a permanent power converter and the installation of ceiling lights in one of the rooms. Temporary stopgap measures had been implemented to address these electrical issues that likely allowed the government to utilize the facility.

The government moved for summary judgment as to the prime contractor’s entitlement to unabsorbed home office overhead damages. The Court broke the prime contractor’s unabsorbed home office overhead claim into two discrete periods: (1) January 16, 2009 (day after the government took occupancy) to February 3, 2009 (when the contractor demobilized jobsite trailer) and (2) February 4, 2009 to September 4, 2009 (period when the permanent power and room lighting were being installed). Because the contracting officer never issued a standby notice, the prime contractor had the burden to prove by indirect evidence the factors (referenced above) supporting its entitlement to unabsorbed home office overhead.

First Period: 1/16/09-2/3/09

The Court did not grant summary judgment during this period because there was a disputed issue of fact as to materiality of the work the prime contractor was performing during this time period. The prime contractor contended the work it was performing was minor whereas the government contended the work was material. If the work is deemed material (or more than just minor tasks) the prime contractor’s unabsorbed home office overhead claim will fail since it was never on standby or suspended. If it was minor, the prime contractor would still need to prove the elements of standby. Although the Court declined to grant summary judgment based on this disputed factual issue, it seems from the Court’s ruling during the second time period (below) that the prime contractor will have difficulty proving the elements of standby.

Second Period: 2/4/09-9/4/09

The Court granted summary judgment on the prime contractor’s claim for unabsorbed home office overhead during this period because the prime contractor could NOT prove the elements of standby. In particular, the prime contractor could not prove it was required to resume work at full speed and immediately once the “suspension period” was over. The prime contractor did not appear to maintain any personnel or equipment on site during this period that eliminated any argument that it was required to return to work with any degree of urgency once the suspension was lifted. The prime contractor also utilized a subcontractor to perform the incomplete electrical work, and the use of subcontractors can limit a prime contractor’s ability to prove standby since it was only monitoring the work and not actually required to return to work at all. And last, temporary stopgap measures were implemented relating to the lighting that negated the time sensitivity of the remaining work meaning there was no urgency for the contractor to resume work immediately.

Finally, even assuming the prime contractor could support its entitlement to unabsorbed home office overhead, the Court did not go into any discussion regarding the Eichleay formula–the specific formula utilized to determine the allocable unabsorbed home office overhead associated with a government-caused delay. The objective of the Eichleay formula is to obtain a daily rate for the home office overhead allocated to the specific contract and multiply the daily rate by the number of delay days to determine the contractor’s unabsorbed home office overhead caused by the government’s delay.