Construction Law Blog
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More Washington Infrastructure Projects On The Horizon - Yakima River Basin Integrated Water Resource Management Plan
Governor Jay Inslee recently spoke in Ellensburg, Washington and emphasized the need for more infrastructure projects in the state of Washington.[i] Speaking to a largely Eastern Washington agricultural audience, the Governor emphasized that the State's roads "need work," and if they do not get it soon, farmers trying to move their crops to market will definitely notice. "I am here to report to you we are in deep, deep trouble," Inslee said in his keynote address to the Annual Economic Outlook Conference at Central Washington University.[ii] Inslee, citing the collapse of the I-5 bridge in Skagit County several months ago, along with cuts to bus service across the state, indicated that more drivers are now on the road. He stressed the need for a bipartisan transportation funding package for maintenance.
Contractors who complete federal public projects are given Past Performance Evaluations ("PPE") by the public entity, as outlined by Federal Acquisition Regulation ("FAR") 42.15. Currently, after a PPE is sent to the contractor, the contractor has 30 days to comment on the evaluation before it is published in the Past Performance Information Retrieval System ("PPIRS"). Once the PPE is published in the PPIRS it becomes available for all other agencies to view. A new rule has been proposed (78 FAR 48123) that would require the evaluations to be included in the PPIRS database not later than 14 days after the delivery of the information to the contractor. This means the contractor would be limited to 14 days to respond to an evaluation before it is published for all agencies to obtain access, regardless of whether or not the contractor has been able to actually respond to or rebut a particular criticism.
The General Contractor/Construction Manager ("GCCM") method, sometimes referred to as Construction Manager/General Contractor ("CMGC"), is an alternative approach to the customary prime contractor procurement process. In the traditional approach, owners aim to have a complete project design finished when general contractors begin bidding. Under the GCCM approach, however, owners hire a contractor during the early design stages. This contractor takes on the role of construction manager during design development, project planning, and budget creation. When the project is almost ready to begin construction, the owner and contractor negotiate a "guaranteed maximum price" for construction services, and the construction manager becomes the general contractor. Unlike the competitive bidding procedure used in traditional contracting, owners using the GCCM method often make their selection on the basis of qualifications, such as experience or personnel, rather than price.
New National Defense Authorization Act of 2013 Removes Contract Thresholds for Women-Owned Small Businesses (WOSB).
In addition to telecommuting, which appears to be a good thing, the technology revolution has some downsides. For example, the distraction involved with texting while driving. We can now conduct business from almost anywhere, but there are certain times and locations where checking voice mail or email may present a danger to others. Thus, the government regulates certain behavior. According to recent statistics, texting while driving is a major cause of accidents, and has been made illegal in many states, including Washington. Not to be left behind, through the Federal Acquisition Regulations (FARs), the federal government has joined in prohibiting texting and driving on federal projects.[i]
In accordance with FAR Subpart 23.11, federal government contractors must adopt and enforce a policy which bans employees from texting whenever an employee is: (1) driving a vehicle owned by the company; (2) driving a vehicle owned by the government; or (3) driving a privately owned vehicle when performing any work on behalf of the government. This requirement, FAR Subpart 23.11, is incorporated into every government contract through FAR 52.223-18. Specifically, if the value of the subcontract exceeds the "micro-purchase threshold" (presently $3,000), general contractors are required to incorporate ("flow down") this anti-texting provision to all of their subcontractors.
Further, federal contractors, to meet the requirements of FAR 52.223-18, must "conduct initiatives to educate their employees about the danger of texting while driving; these initiatives should be commensurate of the size of the business." Large government contractors will be expected to engage in some type of training in addition to having a written policy and employee handout which covers this topic. This anti-texting message can be incorporated into the orientation session for all new employees and updated when conducting periodic ethics training (also required by the government) (see previous Ahlers & Cressman PLLC blog Government Ethics).
[i] Thank you to the “Federal Contracting Blog” (March 25, 2013) for bringing this issue to our attention.
This is the first in a multi-post analysis regarding tax saving opportunities available in Washington to "Speculative Builders." Prior to the economic downturn, the Seattle office of a large accounting firm promoted tax saving opportunities on Washington projects though formation of joint ventures structured to appear as a "Speculative Builder," a single entity with both the developer and construction contractor as members. The objective was to avoid B&O Tax and Washington State Sales Tax on the portion of the construction "self-performed" by the Speculative Builder entity. Under this program, a project specific entity was created with the developer entity holding a significant percentage interest and the construction contractor holding a small membership percentage in the entity. This became the "Speculative Builder" entity.
Not surprisingly, the Department of Revenue ("DOR") took the position that the Speculative Builder tax exemption was being abused, and as would be expected when tax revenue declined due to the economic downturn, challenged many of these structures. This has resulted in tightened requirements that must be met in order to qualify as a Speculative Builder.
This post explains what a Speculative Builder is, while subsequent articles will address steps the Washington legislature has taken to narrow the availability of speculative builder tax treatment and our analysis of the structure and terms that will be required in order to pass DOR scrutiny.
What is a Speculative Builder?
WAC 458-20-170 provides an exemption for Washington State Sales Tax and B&O Tax on a Speculative Builder's self-performed work, profit and overhead. Key provisions of the code definition of a Speculative Builder follow:
(2) Speculative builders.
(a) As used herein the term "speculative builder" means one who constructs buildings for sale or rental upon real estate owned by him.
* * *
(e) Speculative builders must pay sales tax upon all materials purchased by them and on all charges made by their subcontractors.
* * *
(f) Persons, including corporations, partnerships, sole proprietorships, and joint ventures, among others, who perform construction upon land owned by their corporate officers, shareholders, partners, owners, co-ventures, etc., are constructing upon land owned by others and are taxable as sellers under this rule, not as "speculative builders."
A person who constructs buildings for sale or rental on real estate owed by that person is a Speculative Builder. WAC 458-20-170(2)(a). Speculative Builders are the consumers of the materials and construction services they purchase. WAC 458-20-170(2)(c). While a Speculative Builder must pay sales tax on all materials purchased and all charges by subcontractors, it does not have to pay sales or use tax on its own labor and overhead. The following diagrams illustrate this:
Traditional Owner-Contractor Transaction:
Owner Pays Retail Sales Tax on
Full Contract Value
General Contractor Pays B&O Tax on
Full Contract Value
Subcontractors and Suppliers
Speculative Builder Transaction:
[No sales or use tax on its own labor or overhead]
Subcontractors and Suppliers
[Sales tax is paid on all charges by Subcontractors and Suppliers]
If a Speculative Builder self-performs significant aspects of a project - concrete and steel for example - the tax savings on this self-performed scope can be significant and give a competitive advantage. The key is that the contractor is part of the owner entity, not a construction contractor to the owner entity.
The next article on this topic will explore RCW 82.32.655, enacted by the legislature effective May 1, 2010, known as the "tax avoidance" statute, which has significantly narrowed the ownership structure that DOR will deem to qualify as a Speculative Builder.
For Washington construction projects, two different statutes interact to determine whether a lawsuit is timely. RCW 4.16.310 states that any cause of action that has not accrued within 6 years of substantial completion of the project is barred. Based on relatively recent decisions of the Washington Supreme Court, accrual for purposes of RCW 4.16.310 has come to be contemporaneous with the claimant's becoming aware that there is a problem with the work. This statute is known as the statute of repose. Then, once the cause of action has accrued, RCW 4.16.040 gives the claimant another 6 years to bring suit. This is called the statute of limitations. Taken together, for a problem a claimant discovers almost 6 years after substantial completion, a contractor is exposed to suit for a total of 12 years after substantial completion of the project.
In order to avoid this extended liability, contractors routinely insert a provision into their contracts stating that any cause of action relating to the work shall be deemed to have accrued upon substantial completion, thus doing away with the 6-year discovery period allowed by the statute of repose, and starting the clock on the 6 year statute of limitations. The result is to reduce their exposure to a total of 6 years from the time they finish their work.
That is a good strategy for private projects, and it is one that the joint venture that built Safeco Field employed when it believed it was contracting with a non-state entity. Unfortunately for the joint venture, three years ago, in a dispute over allegedly defective primer on structural steel used in the construction of that project, to the surprise of most observers, the court held that Safeco Field was a project "for the benefit of the state" under RCW 4.16.160, so that the 6-year statute of limitations for actions based on written contracts for non-state projects did not apply.
The joint venture went back to court and argued that even if the statute of limitations did not apply, because the Mariners did not discover the problem with the primer for more than 6 years after the stadium was substantially complete, the statute of repose barred the claim. Late last month, the court disagreed, and held that the contractual provision stating that causes of action accrued upon substantial completion was enforceable, such that the statute of repose was satisfied.[i]
The result is that the contractor's attempt to contractually reduce its exposure from 12 years to 6 years ended up exposing it to claims relating to the project indefinitely.
The lesson is that it may be a good idea to make the accrual-upon-substantial completion language conditional on a finding that a project is not "for the benefit of the state" under RCW 4.16.160, and to include a provision that states that if it is found to be such a project, the statute of repose will apply as provided by RCW 4.16.310. That seems to be the only way to guarantee a time limit on claims against a contractor on a project that a court may characterize in a surprising way after the fact.
[i] Washington State Major League Baseball Stadium Public Facilities District v. Huber, Hunt & Nichols-Kiewit Construction Company, 2013 WL 363453, __ P.3d __ (2013).
Oregon Contractor Whose License Was Suspended During Performance Is Precluded From Bringing An Action For Compensation For Performance Of The Work
In a recent Oregon case,[i] a builder contracted to construct a residence for $286,271. The builder, however, had its contractor's license suspended by the Oregon Construction Contractor's Board (CCB) during performance of the contract because the builder's liability insurance lapsed. Fourteen-days later CCB reinstated the builder's license when it obtained replacement liability insurance, and, for six more months, the builder continued to construct the residence.
Ultimately, after construction was complete, the builder claimed that the homeowners had not paid for the construction services and filed a lawsuit for breach of contract, quantum meruit, and account stated. The homeowners responded by filing a counterclaim against the builder for breach of contract, negligence, indemnity, and unlawful trade practices, asserting as an affirmative defense that under Oregon Revised Statute ORS 701.131(1)(b), the builder was barred from commencing an action against them because it had failed to maintain its contractor's license continuously throughout performance of the contract. ORS 701.131 provides in relevant part:
(1) … a contractor may not . . . commence an arbitration or a court action for compensation for the performance of any work or for the breach of any contract for work that is subject to this chapter unless contractor had a valid license issued by the board [CCB] . . .
* * *
b. Continuously while performing the work for which compensation is sought.
The homeowners moved for partial summary judgment against the builder on grounds that ORS 701.131(1)(b) barred the builder's lawsuit. The builder opposed the motion contending that the homeowners were developers so, therefore, they fell within an exception of ORS 701.131(2)(c), which does not protect residential developers who seek to escape payment simply because the contractor's license lapsed.
The trial court granted the homeowners' motion for partial summary judgment and dismissed the builder's claims against the homeowners, finding they were not residential developers. On appeal, the appellate court reviewed the history and purpose of the developer exception (ORS 701.131(2)(c)). The court in reviewing the legislative history, determined that the exception was inserted into the statute to benefit consumers (not contractors). By lifting the bar to allow unlicensed contractors to bring third-party claims against others whose action had caused or contributed to construction defects, the provision was intended to allow contractors to recover funds from other responsible parties, and to thereby better ensure that affected consumers were made whole. The court concluded that the exception (ORS 701.131(2)(c)) applied only to construction defect proceedings - not actions for compensation like the builder's action. Accordingly, the court found that the trial court properly dismissed the builder's claims.
Comment: Washington's registration statute RCW 18.27.080 is more contractor friendly than Oregon's. Washington only requires that the contractor be duly registered at the time of contracting for the performance of the work. As long as the contractor is properly licensed and bonded (registered) at the time of entering into the contract, even if the contractor's license lapses during performance, the contractor may pursue an action to recover unpaid amounts. This case is an example of how different states treat the licensing issue. In Oregon, the failure of the contractor to maintain its contractor's license continuously throughout performance resulted in a forfeiture of its claim against the homeowner, irrespective of the merits of the amount due and owing to the builder.
[i] Pincetich v. Nolan, 252 Or.App. 42, 285 P.3d 759 (2012).
Readers of our Blog will find of interest three construction related bills that had their first public hearings last week. A link to each bill is provided below.
The first two bills were heard in the House Labor and Workforce Development Committee, the third bill was heard in the Senate Committee on Law and Justice:
1. HB1025-Extending the Application of Prevailing Wage Requirements. http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/House%20Bills/1025.pdf.
HB1025 would extend the application for prevailing wage requirements by extending the definition of “public work” to include all publicly subsidized work, construction, alterations, repairs or improvements other than ordinary maintenance if subsidized by the public. The bill provides that:
(5) "Public work" has the same meaning as in RCW 39.04.010, except for purposes of this chapter, "public work" also includes all publicly subsidized work, construction, alterations, repairs, or improvements other than ordinary maintenance. Work is subsidized by the public if:
(a) One or more parties to the contract received or will receive a qualifying tax preference;
(b) One or more parties to the contract received or will receive a loan from the state or any county, municipality, or political subdivision;
(c) The work occurs on land that a party to the contract leases from the state or any county, municipality, or political subdivision; or
(d) The work occurs on land that a party to the contract purchased from the state or any county, municipality, or political subdivision for less than fair market value as determined by the state, county, municipality, or political subdivision at the time of the sale.
This broad definition of what constitutes “public work” would result in a significant expansion of prevailing wage requirements in our state to projects in which a public entity is not even a party to the contract. This would result in significant cost escalation on the projects captured by this expanded definition. I expect substantial opposition to this bill.
2. HB1026-Requiring Use of Resident Workers on Public Works. http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/House%20Bills/1026.pdf.
HB1026 would require specifications for every public works contract to contain a provision requiring that at least 75% of the labor hours be performed by Washington residents. The language of this bill states that residents of states bordering Washington may be considered Washington residents if the border state does not restrict the right of a Washington resident to be employed on public works project in that state. The full text of this bill can be found in the link above.
3. SB5031-Damages to Real Property Resulting from Construction, Alteration, or Repair on Adjacent Property. http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/Senate%20Bills/5031.pdf.
SB5031 would overrule the Washington Supreme Court decision in Vern J. Oja & Assoc. v. Washington Park Towers, Inc., 89 Wn.2d 72, 569 P.2d 1141 (1977), which held that claims for damages to real property resulting from construction activities on adjacent property do not accrue until the construction project is complete. In its place, a two year limitations period would be established so that a lawsuit for damage to real property resulting from construction on adjacent property must be commenced within two (2) years after the damaged property owner first discovered or reasonably should have discovered the damage.
Our understanding is that the proponent of this bill is Sound Transit, which is seeking to limit exposure for damage its projects cause to adjacent property to this two (2) year limitation period from the date the damage is discovered or should have been discovered.
We will supplement this post to advise how these bills progress through committee.
The Washington Supreme Court in Department of Transportation v. James River Insurance Company, on January 17, 2013, held that RCW 48.18.200(1)(b) barred arbitration of an insurance coverage dispute.
James River issued two insurance policies to the Contractor on a WSDOT highway project. These policies provided coverage for certain liability relating to the Contractor's work on the project for WSDOT. The Contractor requested that James River add WSDOT as an insured under the policies, which was done.
A traffic accident occurred at or near Contractor's highway project. The representatives of those persons killed or injured in the accident filed suit in King County Superior Court against WSDOT. The plaintiffs later amended their Complaint to include the Contractor as a defendant. WSDOT sent a letter to Contractor tendering its request for a defense in response to the suit under the insurance policies. Contractor forwarded the tender to James River. James River accepted WSDOT's tender under a reservation of all rights under the policies. James River also informed WSDOT that the policies contained a mandatory arbitration provision, and demanded arbitration of the parties' coverage dispute.
James River attempted to initiate arbitration pursuant to the arbitration provision. WSDOT objected and filed a declaratory judgment action against James River, seeking a declaration that the arbitration provision was void.
The matter came on before the trial court on Cross-Motions for Summary Judgment, and the Court entered an Order granting WSDOT's Motion that the arbitration provision was barred by RCW 48.18.200, and that the statute was not preempted by the Federal Arbitration Act based on the McCarran-Ferguson Act, a Federal law.
On direct review to the Supreme Court, the Court unanimously affirmed the trial court.
RCW 48.18.200(1)(b) provides:
(1) No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state shall contain any condition, stipulation, or agreement…
* * *
(b) depriving the courts of this state of the jurisdiction of action against the insurer…
The Court found that the meaning of this statute was properly determined from looking at the entire phrase: "jurisdiction of action against the insurer." The court found that this phrase demonstrates the legislature's intent to protect the right of policyholders to bring an original "action against the insurer" in the courts of this state.
The Supreme Court went on and found that the McCarran-Ferguson Act shields RCW 48.18.200(1)(b) from Federal preemption by the Federal Arbitration Act. The McCarran-Ferguson Act provides in pertinent part:
No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance… unless such Act specifically relates to the business of insurance: Provided, That, [the federal anti-trust statutes] shall be applicable to the business of insurance to the extent that such business is not regulated by State law.