Opportunities and Risks for Contractors in a Rebounding Economy


By Kamy Molavi
Despite periodic reports of Europe’s progress in dealing with the Greek sovereign debt debacle, neither Greece nor other (and larger) European economies are out of the woods, and the continent may be on the verge of another recession. And there is alarming, but potentially contradictory, news regarding a slow-down in the Chinese economy and significant increase in oil prices driven largely by the threat of another war in the Middle East. Shockingly, economists cannot agree on the potential impact of all or any one of those looming calamities on the U.S. economy. 

The euphoria may be short-lived, but there are significant indications that the U.S. economy is rebounding and is poised for growth. The stock market is up and unemployment is inching down. What does this mean for the construction industry? According to the Associated Builders and Contractors (“ABC”), non-residential construction spending grew by 4.5% in 2011. That growth was attained despite a 1.8% drop in public non-residential construction spending over the same period.
Last year’s growth in construction spending was not uniform across all sectors or all states and regions. The ABC reports that construction spending in the areas of manufacturing, commercial, power, higher education, public safety, and highway and street construction increased during last year. There is also significant evidence of increased activity in other sectors, such as private multi-family construction. However, religious, lodging, transportation, and conservation and development-related construction shrank last year. The 2009 economic stimulus has run its course. Struggling with budget restrictions, states and local governments have reduced spending, although they have not entirely curtailed construction activity.
Given what seems to be an upswing, contractors are assessing their business strategies and trying to adapt to shifts in opportunities. Some have either resumed the types of work that they did before, or are actively looking for projects in familiar sectors and areas. Other contractors are shifting at least some of their resources and capabilities to unfamiliar project types, geographical areas, or both. These ventures can mean great opportunities or risks, and often both.
If you are a contractor, one of the issues that deserves attention as you emerge from the doldrums is your contract forms. It is time to dust them off and read them carefully, especially if you will perform work in an unfamiliar physical landscape. Remember that the laws affecting construction can vastly differ from one state to another. Some of the differences are well-recognized, such as licensing requirements, lien laws, registration requirements, building codes, tax laws, and labor conditions. Others, such as variations in workers’ compensation and other insurance requirements, and bonding laws are often ignored. As contractors increase activity, many issues deserve fresh consideration, especially if the new activity entails working in unfamiliar jurisdictions. Examples of those issues include the following:

  • Some states refuse to enforce contract clauses, limiting the availability of damages for delay, while others enforce them to some degree or entirely;
  • Some states limit the application of conditional payment clauses in subcontracts, while others enforce them in most circumstances;
  • Some states do not enforce contract clauses that require dispute resolution proceedings to be held in a state other than where the project is located;
  • Some state and municipal owners require certain levels of participation by local businesses, or businesses controlled by certain socio-economic groups;
  • Recent changes in state and local immigration enforcement laws can affect the extent of monitoring required, the liabilities of parties for violations, and the ability of subcontractors to perform. Some owners impose requirements that may be inconsistent with federal and other applicable laws;
  • If you are not familiar with the Davis Bacon Act and will be bound to contracts that are affected by that law, you must become familiar with its procedures and the potential implications of violating them. For example, a general contractor on a project requiring certified payrolls can become liable for the unpaid wages of workers engaged by subcontractors;
  • If you are venturing into federal contracting for the first time, you must educate yourself regarding the vast and potentially unfamiliar collection of regulations that affect your rights and obligations.

This is not an exhaustive list of issues that merit attention. You should research the particular needs of each project. In some instances it may be prudent to consult with your attorney.
For more information, contact Kamy Molavi at [email protected] or 770.818.1416.