Construction and projects in the United States: overview
A Q&A guide to construction and projects law in the United States.
The Q&A gives a high level overview of the main trends and significant deals; the main parties; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.
Overview of the construction and projects sector
2016 has been forecast as another prosperous year for construction in the US. Dodge Data & Analytics Construction Outlook forecasts a 6% growth in construction, with the value of construction starts reaching an estimated US$712 billion. Specific trends in the industry include:
Governmental moves towards privatisation of construction and operational activities, as more states and local governments continue to enact public private partnership (PPP) enabling legislation and become increasingly more comfortable with this form of project delivery to expedite much needed infrastructure projects.
A continued focus on sustainable construction and smart building methods designed to deliver significant energy savings by automatically controlling various systems.
Current major projects include:
Hudson Yards Redevelopment Project, New York City.
The Gateway Project, New York City and New Jersey.
LaGuardia Airport, New York City.
Tappan Zee Bridge, Tarrytown, New York.
Pulaski Skyway P-3 and P-4 project, New Jersey.
Finish Work on East Side Access, New York City.
Bertha Tunnel, Seattle, Washington.
Atlanta Falcons Stadium, Atlanta, Georgia.
Bay Bridge Eastern Span, San Francisco-Oakland, California.
Silver Line, Washington, DC.
Cheniere Energy, Inc, Liquefaction Project, Corpus Christi, Texas.
Freeport LNG Liquefaction Project Train Three, Quintana Island, Texas.
Medical Center Renovation and Expansion Project, Houston, Texas.
Highway 183 South, Austin, Texas.
Toyota's North American Headquarters, Plano, Texas.
UP Health System Replacement Facility for the former Marquette General Hospital, Michigan
Ohio Dept. of Transportation Replacement of Decks of the Twin IR-480 bridges over the Cuyahoga River Valley in Valley View and Independence, Ohio.
Carrollton electric power plant, Eastern Ohio.
California high speed rail.
Second Avenue subway.
WTC transportation hub.
The most common contractual structure in the US involves an arrangement in which the owner contracts directly with an architect or engineer for the design of the project, and with a general contractor for the construction. The general contractor then enters into subcontracts with all of the trade contractors. However, this structure often varies depending on the needs or desires of the owner, the project delivery method (design-bid-build, design and build, and so on) and pertinent laws. For example, sophisticated owners on large private construction projects are increasingly using construction managers on either an:
"At-risk" basis, to hold all the contracts with the trade contractors and to furnish the completed work at a guaranteed maximum price.
"Agency" basis, where the owner contracts with each of the trade contractors separately through the construction manager.
In addition, several states have laws requiring public entities on certain improvement projects to enter into separate contracts with each of the major trade contractors (mechanical, electrical, plumbing, general contracting, and structural steel), as opposed to a single-source contract with a general contractor.
Larger infrastructure projects are often undertaken by joint ventures of major contractors, in order to diversify risk.
Many foreign contractors have entered the US market successfully, employing different models to establish their operations. Two models have worked well for European contractors:
Purchasing a domestic operation and pursuing business through that operation.
Establishing joint ventures with domestic companies.
These models eliminate many potential problems in forming a US operation, particularly if the contractor purchases a domestic company, as it inherits an operation already fully integrated into US practices and its target markets. Foreign companies are increasingly pursuing the acquisition of US construction companies, as the condition of the US economy has created new opportunities. However, Asian contractors have typically established their operations in the US by initially working with Asian businesses and then growing domestically from that base. This model requires a greater investment in developing a unit that can succeed in the US markets than the European models. However, the Asian model has undergone some recent changes as Asia-based companies are now pursuing the purchase of US companies to compete in the US market.
Various mechanisms are available and used to finance construction projects in the US, depending on the whether the project owner is public or private, and whether the public project is a federal project or a state or local project. Private construction projects are typically financed with a combination of equity and debt financing from either institutional or private lenders. Private owners also use mezzanine financing as a means to bridge the gap between debt and equity financing.
The financing of projects in the public sector is more diverse. Depending on the size of the project, public entities generally finance projects through bond issues or by appropriations from the general budget or a dedicated fund, such as the federal Highway Trust Funds, which receives money from federal fuel taxes and excise taxes and is used to fund highway and transportation projects. State and local governmental entities generally rely on bond issues and appropriations for their projects, although increasingly, where legislation has been enacted, they have been turning to public private partnerships (PPPs) as a means to finance major infrastructure projects that otherwise could not be built due to budgetary constraints. PPPs open up an array of additional financing mechanisms to leverage the private entity's access to capital, as well as other federal financing tools, such as private activity bonds (PABs). PABs are debt instruments issued by state or local governments with approval from the federal government in support of privately developed or operated public projects.
The federal government also provides low interest rate financing for large infrastructure projects through the:
Water Infrastructure Finance and Innovation Act (WIFIA), which applies to water and wastewater infrastructure projects.
Transportation Infrastructure Finance and Innovation Act (TIFIA), which applies to highway and other transportation projects.
Another form of low-cost project financing can come from the federal Immigrant Investor Program (EB-5 Program), in which foreign nationals invest either US$500,000 or US$1 million in the US for a job-creating venture (such as a construction project) in exchange for a "green card" individual permanent residence permit.
Security and contractual protections
Bonds are the most predominant form of security in the US construction industry, with completion guarantees from a corporate parent occasionally employed. The most common bonds seen are:
Bid bonds. Most public projects that are awarded by bid require the contractor's bid to be accompanied by a bid bond from a surety (or another form of designated security) in favour of the owner, to offset any damages the owner may incur should the bidder refuse to enter into a contract after having been awarded the contract. Some bid invitations state that the bid bond will be forfeited as liquidated damages if the successful bidder refuses to honour its bid. The penal sum of the bid bond is usually 5% of the total bid price.
Performance bonds. Performance bonds are another instrument typically required by statute on public construction projects, and are also occasionally required by owners on private construction projects. A performance bond is given by the contractor to the owner as security to ensure that the contractor will complete its obligations under its contract with the owner. If the contractor defaults on its obligations and/or breaches the contract and the contract is terminated, the owner's rights (and/or the owner's lender's rights) to look to the surety to complete the balance of the defaulted contractor's work is triggered. The contractor, for its part, has usually entered into various indemnity agreements with the surety, under which it has pledged money or other collateral against which the surety can seek reimbursement if liability on the bond is established. Occasionally, completion guaranties are provided by a corporate parent of the contractor instead of performance bonds.
Payment bonds. Payment bonds are obtained by a contractor to guarantee that, in the event the contractor defaults on the prime contract, the surety will step in to pay subcontractors and suppliers for their work on the project. Payment bonds are typically employed on public projects, since many states and jurisdictions have prohibitions against the filing of mechanic's/construction liens on public property. Occasionally, owners on private construction projects also require contractors to secure these bonds. Because liens are generally available to attach to privately-owned land, these bonds are less common in the private construction world. The laws governing private improvement liens vary from state to state, but most states have requirements relating to:
the time period within which a lien can be recorded against the property for unpaid improvements to the property;
the notice which must be given;
which tier of contractor/subcontractor/sub-subcontractor/material supplier is permitted to file a lien;
which types of construction services qualify for lien protection;
the time period within which the lien claimant can commence a legal action to foreclose on the private property and recover.
Project funders typically require the owner agreement to include:
Default termination provisions that allow an owner to remove a poorly performing contractor from the project, and to complete the work with a replacement contractor.
Warranties that require any deficiencies in the completed work to be corrected.
For certain projects, performance guarantees that require the complete work to meet desired results.
Assignment provisions that permit the funder or owner to assign the contracts as needed.
Draw request reviews, which permit the funder to approve disbursements and confirm that the payments to the contractor do not exceed the value of the work in place.
Standard forms of contracts
Many different forms of contracts are used in the US. The most widely used contracts are those published by the American Institute of Architects (AIA), which has developed contracts not only for architectural services, but also ones commonly used by owners, contractors, and construction managers. Its A201 document, which sets out general conditions for general construction contracts, is the most commonly used document in the industry and is often attached to customised contract forms that are not written by the AIA.
In addition, the ConsensusDOCS construction documents have been developed jointly by 22 owner, contractor, designer, and surety organisations, including the Associated General Contractors of America (AGC). These documents aim to present a more collaborative approach to contractual relationships, and have several specialised contractual addenda to address the needs of projects that use building information modelling or involve "green" building.
Other available industry form contracts that are less widely used include:
Those published by the AGC, which are generally considered to be more favourable to contractors.
Those published by the Engineers Joint Contract Documents Committee (EJCD) (whose members are representatives of several societies representing professional engineering disciplines), which tend to favour the interests of engineers.
In addition, many large owners and developers, governmental entities, and contractors also have their own standard form contracts, which they may impose on contractors and subcontractors with little ability to negotiate the terms.
Regardless of the form of contract used, there is no requirement that the contract be written in English, although that is typically the case. Federal law and most state laws generally provide that parties to a contract are free to agree on the choice of law that governs their contract and the venue for their dispute, as long as the choice of law and venue bear a reasonable relationship to the parties or the dispute. If not, the courts may engage in a conflict of laws analysis to determine the appropriate jurisdiction's law to apply. As to venue, the court can dismiss or transfer the action to a location that is more convenient for the parties and witnesses. However, several states have enacted a special law that prohibits parties to a contract for a construction project performed within the state from agreeing to apply the laws of a different state.
US contractors doing work abroad often use a FIDIC form contract, which is understood by most sophisticated construction parties. Alternatively, in such circumstances, the entity may have a contract drafted and negotiated for that specific purpose.
The risks generally allocated to the contractor are those risks for which it generally has greater control. For risks beyond the contractor's control, the owner may however shift the risk to the contractor, knowing that it will likely paying a higher price as the contractor prices the contingency risk in its contract price.
In commercial practice, and under statute for federal contracts, the project owner typically bears the risk of unforeseen ground conditions. On public contracts, ground conditions qualify as unforeseen if they either:
Differ materially from the subsurface conditions as represented in the parties' agreement.
Differ materially from those ground conditions the contractor could have reasonably anticipated.
Private contracts generally apportion this risk of unforeseen subsurface conditions to the owner, although the provisions are subject to negotiation, and parties often limit this risk, or shift the risk entirely to the contractor. However, owners typically elect to pay for only unexpected conditions if encountered, rather than paying a sizeable contingency which the contractor receives even if no unforeseen conditions are encountered. Parties can negotiate unit prices in advance to establish the cost of any unforeseen conditions or quantities discovered during performance.
Unless there is a contractual risk shift, the contractor typically bears the risk of material price escalation. Some owners may be willing to accept the risk of price escalation for key materials, which may put a contractor's performance at risk if there is a significant escalation. Price escalation clauses are more likely to be encountered in public projects, when some owners have accepted inclusion of material escalation clauses in standard agreements to avoid hardships faced by contractors during steep commodity price escalation, as occurred during the global construction boom of the past decade. Where material price escalation provisions are not accepted by owners, contractors may mitigate the risk by:
Locking in material costs in purchase orders pre-bid.
Including sufficient contingency.
On large scale projects, using hedging instruments to offset material price increases.
Both parties are free in both public and private projects to exclude liability for indirect and consequential loss, and loss of business or profits. The nature of the project typically defines the owner's willingness to accept such provisions. Liability exclusions are typically the subject of negotiation, with the scope of liability often varying with the nature of the project. For example, construction of industrial or energy facilities typically link timely completion or quality of plant performance to potential exposure for indirect losses, including loss of profits. Most courts find the lost business or profits damages to be highly speculative, and require a strong burden of proof on the owner to demonstrate a contractor's responsibility for the loss. For this reason, responsibility for indirect damages is often reduced to defined liquidated damages, so that the parties' expectations and risks are known beforehand.
Many states, but not all, prevent a contractor from excluding liability for its own gross negligence or wilful misconduct, which is viewed in most states as an intentional breach of contract that overrides any exculpatory clauses, including in some states caps on liability. Many states also have statutory regulations that prohibit a contractor from requiring another party to indemnify the contractor for its own negligence.
Caps on liability
On large commercial, industrial, energy, and infrastructure projects, owners and contractors commonly agree to liability caps, often with caps on individual liability items such as delay damages or other negotiated criteria, and frequently with an overall cap on all damages. These caps are often fixed by an agreed dollar cap, reflecting simply a negotiated measure of acceptable risk or a percentage of the overall contract value.
Energy and process plants project typically cap damages on the amount payable for failure to achieve a certain plant output of performance criteria.
Liability for third party claims for property damages, personal injury, or death are typically outside liability caps, and contractors generally manage this risk through appropriate insurance.
The law applicable to construction contracts is very rigid and, unless there is a total impossibility of performance or a specific contractual provision excusing non-performance, a contractor is bound to perform its contract, even if doing so will be more burdensome or less profitable than it had anticipated. If the contract provides a required date of performance, that date generally must be met, irrespective of whether events occur that are beyond the control of a party.
The reason for this inflexibility is that contracting parties are deemed to have assumed the various risks encountered in meeting their contractual promises. If the parties wish to protect themselves against hardships due to circumstances beyond their control that can hinder or delay their performance, they must pre-emptively incorporate specific protective provisions into their contract.
Two common protective provisions are:
Force majeure. A force majeure provision usually identifies the specific delaying events or occurrences beyond a party's control for which it will be entitled to an extension of time to complete its obligations, such as acts of God, fires, floods, acts of the government, and so on.
Termination for convenience. A termination for convenience provision allows a party, at its discretion, to prematurely end the contract. This type of clause may be used by a contractor to avoid having its subcontractors complete their work when the owner has abandoned the project. However, termination for convenience clauses typically require the terminating party to pay the other party for:
work performed up to the date of termination;
costs incurred by the termination (demobilisation costs and subcontractor close-out costs); and
sometimes, lost profits on the uncompleted work.
For the project owner, damages for project delay are typically reduced to a pre-established daily liquidated damages rate. Liquidated damages are typically a substitute for actual damages, but the contractual provisions should be carefully reviewed, as some agreements provide for recovery of actual damages in addition to liquidated damages for delay.
From the contractor's perspective, material delays are typically addressed through a changes clause. In most contracts, owner-caused delays are compensable, while force majeure or other third party delays entitle the contractor to avoid liquidated damages for delay, but do not allow for recovery of monetary damages.
Contracts can also contain a provision allowing for suspension or termination of performance for material delay, whereby the parties agree that after an unreasonable delay, the contractor may suspend performance and recover costs while suspended, or which allow the contractor to terminate its performance altogether. These provisions usually identify the types of costs recoverable by the contractor on suspension or termination.
Variations in the work are addressed through a changes provision, which provides a procedure for notifying the owner of the existence of a variation in the work and substantiating the cost impact arising from the variation. The change provisions typically outline a multi-step process, whereby an opportunity to agree on the modification and its costs is provided. If the parties are unable to agree to the terms of a change order for the variation, a disputes procedure is usually set out, which provides interim procedures to resolve a claim before submission to courts or arbitration.
To avoid disruption to the project, contractors must continue performance if a change is disputed or if the parties are unable to agree to the cost of the change.
Where the owner and contractor foresee that certain variations are probable, such as the amount of excavation required, the parties may agree in advance to the unit quantity cost of any item of work, which allows for a quick resolution of the cost of the variation once the actual quantity of the variation is confirmed.
Other negotiated provisions
The following contractual provisions are subject to considerable negotiation:
Nature and form of security (parent guarantees, bonds, letters of credit).
Scope and limits of insurance coverage.
Standard of care.
Grounds and process for termination in event of default.
Recoverable costs in event of either party's breach.
Project schedule, completion dates, and measurement of delay.
Warranty scope and start of warranty period.
Cost recovery for profit, jobsite overhead, and home office overhead for changes and/or cost plus contract pricing.
Indemnity, limitation of liability and insurance.
Responsibility for delay, and disruption caused by other contractors/third parties.
Responsibility for errors and omissions in the design or work scope description.
Architects, engineers and construction professionals
The selection of construction professionals is typically relationship-based and performed by the owner through direct fee negotiation. With the exception of public owners, who may be required by law to receive competitive proposals, owners do not typically pursue a formal tender process.
The timing of the design professional or construction manager's engagement varies depending on the complexity of the project and the contracting method used. Under a traditional design-bid-build, the designer is engaged from project inception. Construction managers are often retained after the conceptual phase, but before detailed design.
With the growth of design-build, the owner may retain a professional for early design but typically turns over the professional design and construction management to the design-build team. The design-build team is assembled before award of the design-build agreement with the owner, as the qualifications of the design and construction professionals are a very important factor in the owner's selection of the team. The design-build team may be arranged by a joint venture, with both the builder and designer sharing risk and profits, or the professional may be contracted on solely a fee basis. In some cases, the builder may rely exclusively on its own in-house design employees.
The standard of care for design professionals, which is often heavily negotiated, is generally defined at common law as the level of skill and care ordinarily provided by architects practising under the same or similar circumstances. The major form contracts have incorporated this standard of care to reflect this. For example, the American Institute of Architects standard form Owner and Architect Agreement, B101, defines the standard as requiring "the standard of professional skill and care expected of architectural firms practicing in the geographic area in which the Project is located and experienced in the design and construction of projects similar in scope and size to the Project". The parties may negotiate for a higher standard, such as "A-Class" construction for commercial building, but the vagueness of the standard is difficult to enforce unless actual design elements and details are defined in the scope of work.
Other frequently negotiated provisions are:
Scope of basic services and additional services.
Timing of fee payments for deliverable phases of the work.
Liability for proposal assistance services before owner's contract award.
Scope and fees for design interpretation and monitoring during construction.
Design professional agreements are typically subjected to liability caps. The liability caps typically require errors and omissions insurance coverage up to the limits of liability. The levels of insurance and liability caps are heavily negotiated, with designers seeking to limit liability to their contract sum, and owners seeking to align the limits to the potential risk of damages that may arise from malpractice.
Payment for construction work
Methods of payment
Most construction contracts between owners and general contractors, and between general contractors and subcontractors, provide for payment on a monthly basis, while labourers are traditionally paid on a weekly basis. Payments are typically made in accordance with the contractor's certified requisition for work completed during the preceding monthly period, with a withholding of usually between 5% to 10% of the amount payable, which the owner or contractor retains until the final payment requisition as security for the contractor's completion of the contract. On fast turn-around projects, such as tenant fit-outs, which only last a couple of months, it is not uncommon for requisitions and payments to be made on a bi-weekly basis as a means for the contractor to be paid for the first part of the work before the entire project is completed. There is no uniformity or custom for the manner in which payments are made, but it is standard for payments to be made either by cheque or electronic wire transfer.
There are a number of options available to contractors to ensure payment from owners. The simplest means is for the contractor to satisfy itself at the outset that the owner has made adequate financial arrangements to fulfil its contractual obligations. The American Institute of Architects' (AIA's) General Conditions (AIA Document A201-2007) provide that, before the commencement of the work and on the contractor's written request, the owner must furnish reasonable evidence to the contractor that it has made adequate financial arrangements to pay the contractor. Contract documents published by other industry trade groups contain similar provisions. If non-payment constitutes a material breach of the contract, the contractor may be justified in terminating its performance.
The most common legal remedy available to unpaid contractors is the right to file a mechanic's lien, which serves as a lien against the improved property for the amount of the unpaid contract work that was performed. However, the lien laws of each state must be checked and strictly adhered to for a contractor to avail itself of this remedy. The notice and procedural requirements are stringent and there are often penalties for improperly filed liens. If the project was for a public improvement, state and federal laws require the general contractor to post a payment bond, which guarantees payment to unpaid subcontractors and suppliers. In some instances, payment bonds may also be required by statute for private improvements on public property.
In addition, the federal government and numerous states have adopted "prompt pay laws" that require payment within a certain specified time period and provide for penalties such as higher interest rates and attorneys' fees if payment is not made in a timely fashion by an owner. Under these laws, the contractor may also have the right to suspend work in the event payment is not made within the prescribed time. These laws typically provide the contractor with a right to interest on the unpaid monies and may entitle the unpaid contractor to suspend its future performance on the project (without recourse by the owner) until payment is finally made. In the absence of such a statute, the contractor can still attempt to include similar terms in its contract.
On public projects, a common condition for receiving payment from the government is the requirement that the contractor certify on the payment requisition that all subcontractors have been paid in accordance with the prompt pay provisions. A false certification can result in serious claims by the government, including claims of making false statements, false claims, and fraud. The government has been known to make these claims in both civil and criminal contexts, depending on the circumstances.
Subcontractors typically enter into a defined maximum risk contract with general contractors. Typically, these are lump sum agreements. On larger projects, subcontractors may perform on a cost-reimbursable basis with a guarantee maximum price.
Owners face liability to unpaid subcontractors who file mechanic's liens against the owner's real property and improvements (see Question 16). The lien procedure is specific to each state, whose statutes provide a detailed process for securing and enforcing a lien against the owner for unpaid services. Public property is not lienable in the US, but public owners, by law, require contractors to post bonds as a means to secure payment to subcontractors. Private owners may also require general contractors to provide payment bonds, but they often include provisions requiring the general contractor to immediately remove any lien placed by a subcontractor. This is typically done through a lien bond, which substitutes an actual lien with a bond equivalent in value to the amount of the lien or greater.
Licensing requirements vary from state to state and even within a state. Not all states require contractors to have licences. States such as California have statutes requiring virtually all contractors to be licensed, while others, like New York, do not require contractor licensing on a state-wide level, but leave contractor regulation to the municipalities. A growing number of states have also begun requiring entities that provide pure construction management services to be licensed, either by procuring a specific construction management licence issued by the state or by requiring the construction manager to possess a general contractor or mechanical contractor licence, or an architect or engineering licence. Architects and engineers typically require local licences in the states in which they provide professional services. However, as an alternative, the laws in New York and some other states provide that a foreign engineer or architect may be granted a limited permit to perform design services in connection with a specific project. However, where a licence is required, it must be kept current and the contractor must be able to demonstrate that it is properly licensed.
Failure to be licensed is viewed as illegal, and courts typically refuse to enforce such contracts. The laws in many states provide that if a contractor is not licensed (when required), or if the licence has lapsed without renewal, the contractor is not entitled to compensation for the work it performed and may be required to return monies already paid. There have even been reported instances of public entities scrutinising a contractor's licensing history and, if a technical lapse is found, filing a lawsuit to recover any monies already approved and paid. To overcome such inequities, some jurisdictions have established a "substantial compliance" doctrine that allows such a contractor or designer to recover payment for services performed, in certain limited circumstances.
The necessary construction permits are typically granted by the local jurisdiction where the work is performed, typically at the county and city levels. The permitting process varies in each jurisdiction, and is generally more complicated and time consuming in more densely populated locales. Project owners are typically responsible for obtaining the construction permit for the overall work, although the responsibility for processing the permits on behalf of the owner can be shifted to a contractor. Certain activities of a contractor may require separate permits, such as hazardous activities or those which interfere with public use of surrounding areas, such as traffic disruption. The specialty contractor is typically charged with obtaining permits for its specific work activities.
General contractors are required in most jurisdictions to be licensed at the state level to perform construction services. This licence is not project-specific and is obtained by the general contractor. Some but not all states require subcontractors to hold construction licences.
Inspections by public authorities are routine during construction, generally for ensuring compliance with safety requirements and building codes before overall completion. The safety inspection authority is typically separate from the code compliance authority.
Depending on the nature of the structure under construction, several certifications may be required on project completion, including:
Final code compliance (plumbing, gas, electrical).
There are many different insurance products available to contractors and subcontractors in the US construction market. Collectively, these insurances will cover most types of third-party liability exposure for personal injuries, property damage, environmental damage, and in some cases, economic losses. Many forms of insurance also are required by contract or by local laws. The most common insurances procured by contractors and design professionals include:
Employer liability insurance.
Errors and omissions insurance.
Comprehensive general liability insurance.
Pollution liability insurance.
Builders' risk insurance.
Owners' and contractors' protective liability insurance (OCP).
Umbrella or excess liability insurance.
Workers' compensation insurance.
Subcontractor default insurance (SDI).
There is no limit on the quantum of a contractor's liability to a third party, but there may be limits on the amount of coverage that an insurer is willing to provide in respect to a particular risk, so that the contractor is exposed to personal liability for damages sustained by a party in excess of the policy limits. For this reason, depending on the project, some contractors may procure umbrella or excess liability coverage to insure against the risk that the limits of a particular insurance policy are exceeded, but even these excess policies have limits that may conceivably be exceeded on a particular claim. Depending on the specific terms of the policy, insurance coverage may be available to cover delay damages sustained by a third party, but due to coverage exclusions typically found in most liability policies, a contractor is usually unable to insure against delay damages or liquidated damages the contractor sustains due to its own actions or the actions of its subcontractors. The one exception may be in respect of SDI, which is specifically designed to insure the contractor against damages attributable to the default of one of its subcontractors.
Most insurance coverage available to contractors is non-compulsory, with the exception that virtually all states in the US require employers (including contractors) to maintain workers' compensation insurance, as well as comprehensive car liability insurance for car-related bodily injury and property damage. Although minimum limits for these policies differ by state, those limits are always increased by contract to coincide with the risks associated with the project. For both worker's compensation and vehicle insurance, each state's requirement must be carefully evaluated for compliance.
The owner typically requires by contract certain minimum levels of insurance for risks that are common to the construction industry. The following types of insurance are typically maintained by a contractor, regardless of whether they are contractually required by the owner:
Commercial general liability.
Professional liability/ error and omission (for contractors undertaking design responsibilities).
Pollution liability insurance.
Umbrella or excess liability insurance.
Some larger contractors also maintain SDI on a by-project or by-subcontractor basis to insure against the costs and issues associated with a subcontractor's failure to perform. SDI programmes may be proposed by a contractor as an alternative to requiring subcontractors to provide performance and payment bonds from a surety. SDI pays the insured general contractor the costs associated with a subcontractor's default on the declaration of the default, including:
Costs of subcontractor replacement.
Delay damages to the developer.
Other costs beyond those typically paid by a defaulted subcontractor's surety.
While SDI has been in use for several years, there has been very little litigation and, as a result, there is little judicial guidance as to how the SDI contract would be interpreted in the event of a dispute between the contractor and the SDI carrier.
To control the costs of insurance throughout the contractual chain, the various policies are sometimes provided by way of a wrap-up policy, in the form of an owner-controlled insurance programme or a contractor-controlled insurance programme. Under these programmes, either the owner or the general contractor purchases the desired insurance, covering each of the project participants as insureds, so that they do not have to purchase their own insurance.
Lastly, although not technically defined as insurance, governmental entities (state and federal) typically require contractors with which they have contracted for public improvements to maintain payment and performance bonds with a penal sum in the amount of the construction contract.
Generally, contractors are free to determine staffing levels for all components of their projects. However, for public works projects the contracting entity may require contractors to use a certain percentage of "minority" or "disadvantaged business" enterprises to perform the work. Requirements range from best efforts to recruit such enterprises with no specific use requirement, to a specific set-aside requiring use of such enterprises for a fixed percentage of the work. Collective bargaining agreements and trade union work rules may oblige contractors to have crews of a certain size, depending on the nature of the work. For example, a labour agreement with an equipment operating union may require that a mechanic be employed whenever a certain number of machines are operated on a project. On public works projects, applicable prevailing wage laws may incorporate staffing requirements contained in local collective bargaining agreements.
As of 8 September 2009, contractors that are awarded a federal contract or subcontract are required to electronically verify employment authorisation of all employees performing work on the project using the EVerify internet-based system operated by the Department of Homeland Security and the US Citizenship and Immigration Services.
See Question 21.
The only legal obligations towards employees that may remain after the completion of employment are any continuing obligations for work performed during the employment that may exist under:
The federal Davis-Bacon Act (DBA), and corresponding state statutes.
The Employee Retirement Income Security Act of 1974 (ERISA).
The DBA requires payment of locally prevailing wages and fringe benefits to labourers and mechanics employed on most federal government contracts for construction, alteration, or repair (including painting and decorating) of public buildings or public works. Under the DBA, contractors and subcontractors must pay all mechanics and labourers employed directly on the site, not less than once a week, the full amount accrued at the time of payment, and calculated at wage rates not less than those stated in the advertised specifications, regardless of any contractual obligation that may exist. Many states have also enacted their own public works statutes, known as "Little Davis-Bacon Acts", which operate much in the same manner, including their own prevailing wage requirements.
In addition, to the extent that a contractor, or a union used by a contractor, maintains a pension plan on behalf of its employees, ERISA regulates the operation of the plan, and obligates a contractor to fund the plan on behalf of a terminated employee, where the employee's benefits were earned before his termination. When a contractor enters into a collective bargaining agreement with a US labour union that requires the contractor to contribute towards the union's fringe benefits fund, the contractor assumes the risk that, if and when it terminates a relationship with the union, it will be liable for some portion of the unfunded liability of the union fringe benefits fund. The unfunded liability can be significant and is therefore an important issue for all contractors who enter into collective bargaining agreements.
When a contractor decides to cease its operations, there are various laws and other considerations that are implicated in that decision. The primary statute affecting these decisions is the federal Worker Adjustment and Retraining Notification (WARN) Act, which protects workers, their families, and communities by requiring employers with 100 or more employees to provide at least 60 calendar days' advance written notice of a plant closing or a mass lay-off affecting 50 or more employees at a single site of employment. These requirements do not apply when the lay-offs occur due to unforeseeable business circumstances, faltering companies, and natural disasters. Also exempt are workers on a particular building or project, or recurring seasonal work, if the workers understood at the time they were hired that their work was temporary. Advance notice gives workers and their families transition time to adjust to the prospective loss of employment, to seek and obtain other jobs, and, if necessary, to enter skill training or retraining that will allow these workers to compete successfully for employment. In addition to the federal statute, some states have their own versions of the WARN Act, which must be adhered to as well.
Additional considerations affecting a company's decision include whether the company has unionised employees and whether it contributes to a defined-benefit pension plan. In addition, if the employees are unionised, it may have to bargain with the union before closing its operations. If corporate contributions have been made to the union's defined-benefit pension plan (known commonly as fringe benefit funds), liability may be incurred for a portion of the unfunded pension benefits measured at the time when the employer ceases contributing to the plan.
Health and safety
Numerous health and safety laws and regulations exist at the federal, state, and municipal levels. At the federal level, the most prominent law is the Occupational Safety and Health Act (OSHA), under which the Occupational Safety and Health Administration (under the US Department of Labor) has set out regulations governing the safety of construction worksites. Among other things, the Administration also:
Promotes safety training.
Inspects job sites.
Investigates workplace accidents.
Issues monetary sanctions for violations.
Civil and criminal liability can be imposed for an OSHA violation.
For public construction projects with the US government, the Contract Work Hours and Safety Standards Act also provides, with respect to construction contracts in excess of US$100,000, that no contractor or subcontractor can require any labourer or mechanic to work in surroundings or under working conditions that are unsanitary, hazardous, or dangerous to health or safety. Under this Act, federal contracts can be cancelled for violations and the contractor can be charged with any additional costs incurred by the federal agency to complete the contract. For repeat offenders of the Act, a three-year ban on the award of federal contracts can be imposed, not only on the offending contractor/subcontractor, but also on any person with a substantial interest in the contractor/subcontractor entity. There are many state and local level versions of these acts and regulations which should also be consulted.
The US was a party to the Stockholm Declaration of 1972, but the action plan and common principles it provided were never incorporated into US legislation. Instead, the federal Environmental Protection Agency (EPA) was established to safeguard human health and conserve the natural environment. Today, there are extensive state and federal environmental laws affecting construction projects, and the laws most typically encountered are those addressing the traditional environmental media of water, soil and air.
Water is a major permitting concern for construction projects. Potential storm water runoff from the site could adversely affect water quality, and therefore requires a project to meet the requirements of either:
The EPA Construction General Permit.
State-specific general storm water permits.
Site-specific storm water permits.
In addition, if work must be performed in wetlands or US waters, a Clean Water Act (CWA) section 404 permit is typically required. Recent federal court decisions have led to the development of discharge criteria for storm water at construction sites, as well as revisions to federal wetlands rules and guidance. The goal of the CWA is to protect and maintain the nation's waters by prohibiting the discharge of pollutants into those waters.
During a construction project, solid waste generation (hazardous and non-hazardous) is expected and is regulated by the federal Resource Conservation and Recovery Act and by various state statutes, which establish specific requirements for properly handling, storing, transporting, and disposing of such waste.
Air quality related to construction activities is regulated by the federal Clean Air Act and numerous analogous state statutes. These laws are designed to control the generation of particulate and ozone precursor emissions, such as dust, vehicle emissions, burning debris, and release of chlorofluorocarbons or other ozone-depleting substances. Emissions from heavy equipment are now regulated at both state and federal levels, with the recent federal stimulus bill providing funds for retrofitting and updating equipment.
There are also specific regulations applicable to asbestos and lead-based paint abatement in buildings being renovated or demolished.
When engaged in a project for a federal agency, a contractor may also be subject to certain constraints under the National Environmental Policy Act, which requires all federal agencies to prepare environmental impact statements assessing the environmental impact of, and alternatives to, construction and post-construction activities, including, among other things, impacts on:
Endangered species (under the Endangered Species Act).
In addition, the Comprehensive, Environmental Response, Compensation, and Liability Act (CERCLA) may impose liability on developers and contractors in certain circumstances for clean-up of hazardous waste. Destruction and disturbance of freshwater wetlands is a significant concern when improving undeveloped land, as they are protected at the federal level by regulations promulgated under the Clean Water Act and by specific statutes in various states. These statutes and regulations are all applicable to construction activities and provide very detailed and exacting obligations on developers and contractors. Violations of these statutes can result in an array of potential liabilities, including fines ranging from a few hundred dollars to several thousands of dollars for each violation and for each day that the statute is violated, and/or onsite and offsite remediation.
Environmental impact assessments (EIAs)
Projects for governmental entities must comply with federal and state environmental policy acts. The purpose of the National Environmental Policy Act (NEPA) is to ensure that the federal government gives proper consideration to the environment before undertaking any major federal action that significantly affects the environment. Examples of projects where NEPA requirements can be invoked are:
When it is determined that a major federal action significantly affects the environment, the federal agency must prepare an environmental impact statement (EIS), which assesses the environmental impact of, and alternatives to, the federal action. Environmental assessments (EAs) are prepared to provide sufficient evidence and analysis for determining whether to prepare an EIS or to prepare a finding of no significant impact (FONSI). The President's Council on Environmental Quality (CEQ) has set out regulations implementing NEPA, and some individual federal agencies have their own procedures that supplement the CEQ's regulations.
Several states have enacted similar legislation (sometimes called State Environmental Policy Acts or State Environmental Quality Review Acts) that also require reviews of projects with significant environmental impacts. Some states have environmental review legislation similar to NEPA, but others have gone beyond NEPA to adopt legislation that specifies highly-detailed requirements in the environmental review process.
Organisations and governments have developed incentives and laws to motivate contractors and owners to develop sustainable projects. For example, the US Green Building Council developed the Leadership in Energy and Environmental Design (LEED) certification programme that promotes sustainability in design, construction, operations, and maintenance. Additionally, local governments have built on the LEED programme by incorporating concepts of sustainable development into their building codes by, in some cases, adopting energy efficiency and "green" building standards, expediting the installation and permitting of alternative energy systems (such as photovoltaics and small-scale wind turbines). In some cases, local governments require that certain new construction projects obtain a LEED certification standard.
The construction industry in the US has embraced "green" or sustainable building and development. Many states now have regulatory, permitting, and financial incentives that encourage such development. In addition, green initiatives and laws are being developed at the federal level that will affect federal projects, as well as non-federal construction.
Prohibiting corrupt practices
A bribe is generally defined, under state and federal laws, as the giving of money or something of value to a person who can control or influence action favourable to the person making the gift. This would include giving a government contracting officer money to influence the manner in which a contract is awarded. Giving money or something of value to a purchasing agent at a private company to influence the award of a contract is considered a commercial bribe and is also impermissible. Facilitation payments to expedite or secure the performance of routine governmental functions are also deemed to be impermissible bribes if made to government officials in the US. However, these same facilitation payments are legal if made abroad by US companies and their subsidiaries, and constitute an exception to the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA). Even though facilitation payments are technically permissible under the FCPA, this exception is very narrowly construed and such payments are closely scrutinised.
Bribery in the US is a crime punishable by imprisonment, fines, or both. Importantly, it can also result in forfeiture of the benefits of the crime, including the right to payment for services provided under the illegally procured contract. In short, offering a bribe to get work is a serious mistake in the US. The person and the company offering the bribe will suffer criminal prosecution, will likely lose the right to be paid under that contract (even if the work was performed), and may suffer other adverse consequences as a by-product of the illegal activity, such as suspension or debarment from the right to perform work for any government agency. Bribery is taken very seriously in the US and is zealously prosecuted.
Foreign companies working in the US need to learn the distinctions between acceptable practice in other jurisdictions internationally and in the US, given that innocent, allowable gift-giving to a government representative in other parts of the world is looked on harshly in the US and can have serious legal consequences.
Even treating a government employee to a dinner can result in serious disciplinary action against the government official and, at a minimum, the suspicion of illegal bribery by the contractor.
While bribery statutes focus on money or gifts given directly to public officials, the federal government and a growing number of states have begun to enact legislation that addresses attempts to influence public officials through indirect means, by way of political contributions. These statutes are commonly referred to as "pay to play" laws. Pay to play is the practice of making contributions to elected officials in order to garner their favour and to influence their awarding of government contracts. Although particular statutory requirements vary, these laws generally prohibit any company from making campaign contributions to a political official, candidate, or to a political action committee for up to several years before the award of a public contract.
These laws further require contractors bidding on public works to disclose all previous political contributions. If the contractor discloses a political contribution during the proscribed period, the contractor will be disqualified from being awarded the contract. In addition, if the contractor intentionally fails to disclose an offending contribution, the sanctions can be severe, including a monetary penalty up to the value of the contract awarded, and the contractor may be debarred from further contracts with any public entity in the jurisdiction for a period of years. These severe sanctions may be triggered, in at least one state, by offending political contributions amounting to as little as US$300 over the preceding 18 months.
Federal bankruptcy law prohibits (stays) any adverse action against a contractor that legally declares bankruptcy. A court-appointed trustee will then decide whether the company adopts or rejects the bankrupt's contracts.
If a contractor is insolvent, but does not seek bankruptcy protection, there are no extra-contractual legal bars to removing and replacing the contractor.
There is no general statutory PPP or PFI framework applicable to federal procurements. Legislation that enables such partnerships is either project-specific or specific to a federal agency. For example, the Veterans Administration and the Department of Defense regularly enter into PPPs through their enhanced use lease (EUL) procurement procedures. The US Army Corps of Engineers is now authorised to undertake a PPP pilot programme for water and navigation projects.
Although the most significant PPP road projects may be perceived as federal projects (due to designation of the road as an inter-state highway), the reality is that they are state projects administered by the state department of transportation under state statutes. However, there is an important federal component, as these projects often rely on federal funding. There is no common statutory scheme or governmental approach towards PPPs among the 50 states, but the Federal Highway Administration has a model PPP law for private toll roads that allows for both solicited and unsolicited bids from private developers.
PPPs remain a highly political issue. However, as states have a growing need to undertake major infrastructure projects that are frequently estimated to cost in excess of US$1 billion, they are beginning to adopt legislation to permit PPPs on either a state-wide or project-specific basis. At present, there are about 34 states that now have some form of PPP legislation, either for transportation or social infrastructure (such as public buildings), or both. States with a legal framework for PPPs typically exempt them from the traditional procurement rules, which are often too impractical or onerous for PPP proposers and may award a contract based on the best value rather than the lowest bid. Where state agencies consider unsolicited proposals, the PPP laws normally require that final bidding be opened up to other qualified proposers.
There is no general statutory PPP or PFI framework applicable to federal procurements. Legislation that enables such partnerships is either project-specific or specific to a federal agency. See Question 29.
The benefits of PPP procurement include:
Access to private capital and private sector innovation.
As opposed to typical procurement methods, in which public entities arrange for project financing, hire the designer, manage the construction bidding phase, and oversee the project's construction, PPPs only require the owner to select a qualified team that can ensure the development, construction, maintenance, and operation of the project over its entire lifecycle. In addition, depending on each state's legislative framework, many PPP infrastructure projects are taking off through both solicited and unsolicited proposals.
Once a government body identifies a project that has the potential to be delivered under the PPP model, they can prepare it for procurement. Typically, agencies develop the conceptual structure of an agreement before procurement, which involves scoping and preliminary engineering work. The ideal structure of an agreement depends on the project characteristics, including government goals and capabilities as well as the incentives and capabilities of potential private partners.
Federal, state, and local governments use their own form agreements. This means that PPP participants will often come across an entirely new PPP agreement for each PPP project in which they are involved.
After working with their technical, financial, and legal advisers, government owners of PPP projects often release for comment to the industry a request for information to provide a fair and competitive method. After taking into account these suggestions, a multi-phase procurement process takes place, which usually includes:
Issuing a request for qualifications.
Selecting qualified bidders.
Issuing a request for proposal.
Selecting or short-listing proposals.
Selecting a preferred proponent.
Negotiating final concessions or a comprehensive development.
As described by the Federal Department of Transportation, bid selection can be based on different criteria, such as the:
Dollar value of the offer.
Lowest subsidy or availability payment required.
Lowest proposed length of the concession term.
Lowest net present value of gross revenues required.
The selection of the preferred partner can be based on the bid price in conjunction with qualitative factors.
Another procurement method a government entity may choose to use is a preliminary development agreement (PDA), in which a competitively-selected bidder takes the initial risk of developing a project, and, in exchange, receives the first right-of-refusal on a negotiated basis once the project is deemed feasible. Project teams, both solicited and unsolicited, propose a true partnership with the owner by determining, on an open-book basis, the cost and technical features of project delivery for a certain government asset.
This arrangement is beneficial during the early stages of a PPP project when the scope and costs have not been completely defined. Private bidders often propose an array of innovative development plans, and the owner, while retaining termination rights, selects the most feasible plan. The private entity is then reimbursed for its bid and preparation costs.
Formal dispute resolution methods
Arbitration is a frequently employed means for resolving construction disputes, but it is not necessarily preferred over in-court litigation. The preference for one process over the other will depend on the facts and circumstances of the dispute.
One advantage of arbitration is the ability to select one or more arbitrators who are experienced in construction or construction law to decide the merits of the dispute. In traditional litigation the judge cannot be chosen and it is rare to get a judge (not to mention a juror) with construction experience, without which a decision would be based solely on a battle of the experts. Although arbitration is thought to be cheaper and faster, this largely depends on the complexity of the dispute. For example, arbitrators are paid by the hour or day. Judges and juries are free. Both forums permit differing levels of pre-hearing or pre-trial discovery procedures. In addition, it may be difficult to schedule arbitration hearing dates, since the competing schedules of the parties, their attorneys, and perhaps three arbitrators must be accommodated, whereas the court simply dictates the trial dates.
One significant advantage of litigation over arbitration is that the parties have the right to appeal unfavourable rulings. Conversely, an arbitrator's decision is virtually unchallengeable, except for demonstrable fraud, partiality, mathematical mistakes, or if the award exceeds the arbitrator's authority. In addition, an arbitrator's award must be converted to a judgment by a court of competent jurisdiction before it can be legally enforced. However, contractors generally favour arbitration because of its finality and because of their ability to plead their case to someone who understands construction, while many lawyers prefer litigation, as they perceive that there is greater control, more structure, and because it may be more familiar.
With very few exceptions, in most states there are no special courts or public tribunals dedicated exclusively to the resolution of construction disputes. However, the federal government and various states have tribunals dedicated to resolving disputes against public entities, and given the volume of construction-related disputes in the public sector, these tribunals have developed a particular specialisation in such claims.
Under the Federal Claims Act, a contractor can challenge a contracting officer's final decision in the US Court of Federal Claims (USCFC) or before a board of contract appeals (BCA). The USCFC is the single and central court in which contract claims brought against the federal government are heard. A BCA is a quasi-court within the federal agency that hears disputes resulting from the issuance of a contracting officer's final decision. At present, there are only three BCAs:
The Civilian Board of Contract Appeals (CBCA).
The Armed Services Board of Contract Appeals (ASBCA).
The Postal Service Board of Contract Appeals (PSBCA).
The CBCA hears challenges brought against all the civilian government agencies.
Some states also have special courts that hear claims brought against that state. For example, the New York Court of Claims is the only court that hears contractual and other claims brought against the State of New York. In addition, some state and municipal governments have established specialised boards to hear disputes, similar to the BCAs at the federal level. For example, in New York, some state agencies (such as the Metropolitan Transportation Authority) have established boards to hear disputes, as have some city agencies (such as the New York City Department of Environmental Protection). Accordingly, knowing whether or not there are any specialised courts or other tribunals to resolve construction disputes at the state and municipal level requires inquiry in the particular jurisdiction.
Courts and arbitration organisations
The International Chamber of Commerce (ICC) is probably the best known of the international tribunals for construction contract disputes and has been considered by many to be the most favoured provider. However, the International Centre for Dispute Resolution (ICDR), which is part of the American Arbitration Association (AAA), has gained recognition and acceptance as a reliable entity for arbitration among international parties, if for no other reason than it is less expensive than ICC arbitration. If the project is performed in the US, the foreign contractor should anticipate that American contractors will insist on arbitration before the AAA under its Construction Industry Arbitration Rules and often will seek to have the law of a particular state apply to the dispute. This is particularly so if the contract form is derived from one of the familiar standard forms that are generally well understood by American contractors and designed to reflect American legal principles.
FIDIC (International Federation of Consulting Engineers) contract forms are widely used abroad but are rarely used in domestic projects. In addition, the American contractor often specifies that the venue for any arbitration be in the US to minimise the cost of the arbitration, since most or all of the necessary witnesses would be located in the US and the project site would be more readily accessible for a site inspection if necessary.
Construction industry arbitration has long been regarded as a very successful and commonly used dispute resolution procedure, where the parties have the ability to select specialised arbitrators who are trained, experienced, and knowledgeable in the field of construction and/or construction law. For quite some time, standard industry contracts (American Institute of Architects, Associated General Contractors of America and so on) permit the election of binding arbitration of all disputes under the auspices and rules of the American Arbitration Association.
The use of dispute review boards (DRBs) is increasing in the US, and major, high-profile projects, have used DRBs. Typically, DRBs are used on major infrastructure projects, rather than building projects. There is no particular reason for this distinction other than the manner in which the use of DRBs has developed.
DRBs have succeeded in avoiding substantial postcompletion litigation on complex projects. DRBs are often referred to as "realtime" dispute avoidance or resolution. Hearings are typically conducted on the project shortly after the dispute arises and while the construction is ongoing. Relationships are preserved and construction delays are kept to a minimum. In North America, 58% of projects had no disputes requiring hearings before the DRB, and 98.7% of projects were completed without resorting to traditional dispute resolution methods, such as arbitration or litigation.
The US has bilateral income tax treaties with about 56 countries. Generally, these treaties do not prevent an individual or company residing in a treaty jurisdiction from being subject to US federal income tax on services performed in the US. The same holds true for a US company performing services in a treaty country.
However, a contractor from a treaty jurisdiction may be exempt from federal taxes on its business profits if it does not have a permanent establishment (PE) in the US. Typically, any kind of office or workshop will constitute a PE. If the contractor has no office or fixed place of business, and its only contact with the US is a construction site of limited duration, treaty protection may be available. Many treaties provide that a building site or construction or installation project will not constitute a PE if it lasts for less than the period of time prescribed in the treaty.
If treaty protection is available, a foreign taxpayer is required to file a US tax return to claim the exemption. Significant penalties can be imposed for failure to file a treaty-based return in a timely manner. However, while an exemption may be available from federal income taxes, state and local taxing jurisdictions in the US are not bound by tax treaties and therefore may still impose a tax on the contractor.
The siting of a project will often affect its tax liability as localities frequently identify areas (zones) where taxes are lowered to encourage development. Special one-time tax abeyance is sometimes successfully negotiated between a business and local or state government to facilitate locating to that jurisdiction.
Particular tax credits are offered to spur certain kinds of development. For example, the federal government offers transferable tax credits in return for the construction of low income housing and many local governments provide tax incentives for cleaning up and building on brownfield sites.
Other requirements for international contractors
Although not intended to disadvantage foreign contractors, various local laws effectively give local contractors an advantage in public contracting. Regardless of nationality, construction companies awarded federal contracts must comply with the Buy American Act, which requires that materials incorporated into the project be made in the US or in a trade agreement-compliant country. Otherwise, 6% of the cost of the foreign materials is added to the bidder's price proposal. The American Recovery and Reinvestment Act of 2009 (ARRA) imposes even more restrictive "Buy American" requirements under ARRA-funded contracts. More than half of the individual states in the US, as well as many local governments, have similar "buy local" requirements. Therefore, while foreign and domestic contractors are treated alike, foreign contractors may be disadvantaged by lack of access to domestic material suppliers and competitive pricing in the local market.
The US government also has a goal of awarding 23% of its procurement budget to small businesses. Additional goals of 3% to 5% are set for preferential classes, such as small disadvantaged businesses, service disabled veteran-owned small businesses, and so on. Foreign contractors are explicitly excluded from these set-aside programmes, since eligibility requires the company to be organised for profit, with a place of business in the US, and to operate primarily within the US, or to make a significant contribution to the US economy through payment of taxes or use of American products, materials, or labour.
As a consequence of the large number of contractor and designer acquisitions by large domestic and foreign companies, there have been a significant number of situations where companies have been disqualified from competing for a publicly funded project because of the role that a parent or sister company had in the project, which was perceived to create a possible advantage to the competing contractor. With the increasing frequency of contractors and designers serving at times as project managers, and contractors serving as construction managers or general contractors, depending on the opportunity, the possibility of this organisational conflict is substantial.
The US is probably one of the most welcoming jurisdictions for foreign investment or active participation in the construction industry. Although there are few obstacles to doing business in the US, it is not a single jurisdiction unlike most other countries. Serving as a contractor in the US requires knowledge of a spectrum of local issues in the particular states in which the contractor intends to operate, ranging from basic legal principles, to cultural and business practices. This is often the reason why some contractors in the US operate within certain geographical regions and not others. Within large states the range of cultural issues can be quite varied, even while the law is uniform.
The cultural and business practices aspect of doing business in the US is critically important. From labour relations to subcontractor relations, to work practices and acceptance of "out-of-towners" (not less foreign companies), these issues will determine the potential profitability of a newcomer more than any other. The ability of the foreign contractor to adapt to the way business is conducted and individuals behave in the US is critical to success.
For example, the representatives of foreign companies assigned to work in the US may not understand or appreciate US laws relating to conduct in the workplace (such as sexual harassment and age discrimination), which may result in claims, litigation, and other serious legal issues. That is why entrance into the market through purchasing an existing and successful US contractor, or joint-venturing with one, is often the wisest path for a foreign company.
Reform and trends
There are no important reform proposals for the construction industry in 2016. However, US presidential politics have put immigration and labour reform to the forefront of the political discussion, although it is unclear whether these discussions will result in any significant policy changes regarding labour availability in the construction industry.
Current trends include:
Skilled labour shortages.
Building information modelling (BIM) maturing and becoming commonplace.
Green building maturing and becoming incorporated into all elements of design and construction.
Residential and commercial focus on livable, walkable, mixed-use communities.
*with thanks to Frank R Rapoport and David Scriven-Young.
Main construction organisations
Associated General Contractors (AGC)
Main activities. This is the largest and oldest national construction trade association in the US.
Associated Builders and Contractors (ABC)
Main activities. ABC is a national trade association of contractors.
American Institute of Architects (AIA)
Main activities. This is a professional organisation of architects in the US that offers education, government advocacy, community redevelopment and public outreach to support the architecture profession and improve its public image.
Design Build Institute of America (DBIA)
Main activities. An association of leaders in the design and construction industry using design-build and integrated project delivery methods to achieve high performance projects.
American Society of Civil Engineers (ASCE)
Main activities. ASCE promotes the interests of civil engineers in public policy and education with specific emphasis on professional engineer licensing and promoting public investment in infrastructure.
Construction Specification Institute (CSI)
Main activities. CSI creates formatting and content standards for construction documentation. Its members are drawn from the full spectrum of design professionals, material suppliers, general contractors and specialty contractors.
Construction Management Association of America (CMAA)
Main activities. Promotes the profession of construction management and the use of qualified construction managers on capital projects and programmes.
Description. The US government's website providing access to federal statutory text.
US Code of Federal Regulations
Description. Contains the regulations enacted by federal agencies to implement the laws of the US.
Mark R Berry, Partner
Peckar & Abramson, PC
Professional qualifications. Admitted to practice in State of Virginia; State of Maryland; District of Columbia; US District Courts for the Eastern District of Virginia; US District Courts for the District of Columbia; US District Courts for Maryland; US Courts of Appeals for the Fourth Circuit
Areas of practice. Construction law; government contracts; public private partnerships.
- Upgrade and expansion of multiple power production facilities in Maryland and Virginia.
- Construction of water and wastewater infrastructure throughout the US.
- Negotiation of EPC agreements for green energy cogeneration facility in Texas.
- Renovation and Construction of hospital facilities in Colorado, Michigan and Maryland.
- Construction of semiconductor production facilities in Colorado and Virginia.
- Demolition of Base Command, Joint Base Andrews.
- Rehabilitation of the Aswan High Dam in Egypt.
- Major bridge, tunnel and roadway construction projects throughout the Northeast and Mid-Atlantic, US.
- Deep foundation steel mill in Indiana.
- Airport terminal upgrade and expansion project at Ronald Reagan National Airport in Washington, DC.
- Engineering, procurement and construction of a chemical processing plant in Malaysia.
Professional associations/memberships. American Road and Transportation Builders Association; American Bar Association (Forum on the Construction Industry); Construction Management Association of America (Legal Committee); Virginia State Bar (Construction and Public Contract Law Section); Washington Building Congress; Associated General Contractors of America.
- Virginia Construction Law, Thomson West, 2008-2016 (co-author).
- Virginia: Source Book on Construction Contracting by State and Local Government (co-author).
- Public Construction Law Source Book, CCH, Inc. (co-author).
- Construction Management: Law and Practice, Wiley Law Publications, 1995 (co-author).