1. Contrast Between Bonding and Default Insurance.

Assume on a high end condominium project the drywall contractor uses non-compliant drywall screws to fasten the GWB to the studs. This error is not discovered by the general contractor until the project is virtually complete.

When confronted with the oversight, the subcontractor refuses to redo the faulty work and walks off the job.  Now, the general contractor is on the hook, not only for replacing all the wall coverings, granite, tile, paint and other finishes, but also for the indirect costs associated with the overall project delay.

If the general contractor had bonded the subcontractor, the loss is capped at the penal sum of the bond (the bond amount limits the recovery), and generally no liquidated damages associated with project delay will be reimbursed by the bond. Generally, the project will be delayed further while disputes between the general contractor and the bonding company are being settled. If on the other hand, the general contractor had purchased subcontractor default insurance, the insurance companies are generally able to promptly mitigate the damages, complete the project quickly, without the limitation of a penal sum, and with coverage for indirect damages (liquidated damages).

2. Default Insurance.

There are three commercial products on the market for subcontractor default insurance, Zurich's "Subguard®," XL Insurance's "ConstructAssure®," and a product from Construction Risk Underwriters (CRU). Subcontractor default insurance, an alternative to surety bonds, protects the general contractor from losses arising from defaults by unbonded subcontractors. The general contractor enrolls all prequalified subcontractors for a specific project or policy term and is indemnified (held harmless) by the insurance company for any direct or indirect costs incurred if one of those subcontractors defaults on performance.

Subcontractor default insurance operates under a high deductible, high co-pay model offered at a significant discount to bonds. It protects the general contractor against losses well above the penal sum of the bond and also rewards those general contractors with the best risk management procedures.

The premium for subcontractor default insurance includes an option to collect the potential deductible and co-pay responsibilities in a loss fund. If the general contractor does not incur any losses, and therefore does not withdraw against the loss fund, that money is profit to the general contractor. Under a bond, the premium money is paid to the bonding company never to be seen again, even if the general contractor manages the job and subcontractors perfectly. Thus, subcontractor default insurance provides a significant financial incentive that compensates general contractors for the risk management work they are already doing day in and day out.

Reference: The Grayling Report, Vol. 2, Issue 1 (January 2012).

RCW 60.04.011 defines "contract price" as "the amount agreed upon by the contracting parties, or, if no amount is agreed upon, then the customary and reasonable charge therefore." As every contractor knows, the contract price will always include a markup for overhead and profit, which is intended to cover (among other things) the cost of the contractor's management and administrative personnel stationed at its home office. Most of the time, when a contractor files a lien at or near the completion of a project, it will include the amount of its unpaid overhead and profit as part of the "contract price" for which it is seeking security, and its doing so is almost never questioned by the owner or other lien claimants on the property.

Unfortunately, when owners pull the plug on projects early in the process, they tend to try to avoid responsibility for the costs the contractor has already incurred planning the project, and perhaps performing constructability reviews and value engineering at its home office, by arguing that such costs do not fall into the categories of "labor" or "professional services".

The contractor's first response to such arguments should be to dismiss them as missing the point. The contractor should take the position that it is entitled to the "contract price" for whatever work it has performed in furtherance of the owner's project, including that portion of the "contract price" that is overhead and profit, which is intended to cover its costs for work performed at its home office, regardless of how that work is categorized. This approach is supported by several Washington cases that ask whether the services were independent of the contract for work at the site or part of "the contractor's entire labor and materials contract." Pacific Industries, Inc. v. Singh, 120 Wn.App. 1, 9 (2003).

If the contractor is forced to categorize its off-site costs, it should avoid calling them "labor" because the statute explicitly defines labor as "exertion of the powers of body or mind performed at the site...", which seems to exclude any efforts undertaken elsewhere. This was one of the holdings in Pacific Industries, Inc. v. Singh, in which a developer sought to enforce a lien for negotiating the purchase of the subject property and negotiating contracts with various contractors on behalf of the owner, based on his assertion that such services were "labor" under the lien statute. The court rejected that claim because (among other reasons) the claimant did not perform those services at the site.

Instead, the contractor should call work performed at its home office "professional services", because both the statute and the case law have arguably left room for recovery based on that categorization. The statute defines "professional services" as "surveying, establishing or marking the boundaries of, preparing maps, plans, or specifications for, or inspection, testing, or otherwise performing any other architectural or engineering services for the improvement of the real property."  In the recent case of Blue Diamond Group, Inc. v. KB Seattle 1, Inc., 163 Wn.App. 449 (2011), Division 1 of the Court of Appeals held that construction management services performed pursuant to a contract limited to such services were neither "labor" (because not performed at the site) nor "professional services" because the term "construction management" did not appear in the definition set forth above. In a slightly earlier 2011 case, however, Colorado Structures, Inc. v. Blue Mountain Plaza, 159 Wn.App. 654, 246 P.3d 835 (2010), Division 3 of the Court of Appeals assumed that investigational drilling performed by a contractor fell within the definition of "professional services", but found that a lien claim based on that activity failed for other reasons.

It seems, then, that a non-engineer or architect can claim for professional services, provided that they relate to "preparing maps, plans, or specifications for, or inspection, [or] testing" relating to the eventual improvement. Work performed at a contractor's home office often includes preparing detailed work and safety plans, and inspecting the plans and specs prepared by others to test their constructability, and providing suggested changes to those plans and specs in order to increase efficiency or save money.  It does not seem much of a stretch to argue that such work is lienable as "professional services" under the statute.

In summary, a contractor who is terminated early in a project should seek the costs it has incurred at its home office in connection with the project as part of the overhead and profit included in the "contract price" for which it is entitled to lien under Washington law. Failing in that, it should call that work "professional services" performed in connection with preparing plans and specifications for the work, or inspecting plans already prepared and testing the constructability of those plans.

Approximately every three years, the Office of Minority and Women's Business Enterprises ("OMWBE") reevaluates your certification and issues a letter hopefully congratulating you on your renewed certification. While this OMWBE letter generally means you can continue going about your business as usual, it is important to review the wording carefully, especially the portion that lists the NAICS codes OMWBE has assigned to your firm.

The North American Industry Classification System ("NAICS") is the standard used by both Federal and State agencies to classify businesses activities. A list of the NAICS codes can be found here. At the time of application for WBE, MBE, or DBE certification, the applicant firm is asked to identify its primary business and professional activities and the associated NAICS codesThe OMWBE grants certification only for the specific NAICS Codes which the firm has listed and that OMWBE has verified the firm is capable of performing. A certified firm can only perform and receive credit for work associated with the specific NAICS codes it is assigned.

Thus, it is crucial to check that your firm is assigned the correct NAICS codes because, in determining whether your firm is small enough to remain in the WBE, MBE, or DBE program, OWMBE applies the current Small Business Administration ("SBA") size standards related to those NAICS codes (expressed in either millions of dollars or employees). For example, the current SBA size standard for most building specialty trade contractors is $14 million while the size standard for building general contractors and heavy and civil engineering general and special trade contractors is $22.41 million (although the chart shows $33.5 million, this number is modified by the federal regulations for USDOT/WSDOT projects). Thus, if you are a building specialty contractor and the average of your last three years of revenue exceeds $14 million, you will be graduated (decertified) from the program. The current SBA size standards can be found here.

In the three-year certification letter, OMWBE usually states language similar to the following paragraph:

"The state program requires the firm to notify OMWBE in writing of any changes in its ownership, control, size or activities, and provide supporting documentation describing the change(s).  This information must be submitted within thirty (30) days of the change(s)."

(emphasis added). Although a firm may have been performing work in an area with a higher size limit for years, OMWBE may rely on these letters and a firm's failure to modify its assigned NAICS code to challenge a firm's appeal of its graduation from the program. Therefore, if you fail to notify OMWBE in writing of changes that need to be made within 30 days of the certification letter, you may waive your right to add or change NAICS codes down the line.

Recommendation: To avoid possibly waiving your right to change or add NAICS code classifications, be sure to review your current NAICS Code classifications and make sure you have been assigned all of the appropriate NAICS code classifications. These will be listed in OMWBE's certified directory. For DBE code classifications, click here. For MBE/WBE code classifications, click here.

If the appropriate codes are not listed, contact OMWBE to request the appropriate NAICS codes. You will likely need to provide additional support to establish that your firm performs this work (e.g., past or current contracts, evidence of activity specific equipment, etc.). In addition, it is also wise to see where your firm stands with regard to the SBA size limitation so you can track and anticipate a potential graduation from the program. To do so, compare the SBA limit with the average of your last three years of revenue.

Ahlers & Cressman PLLC's lawyers have been assisting numerous general contractors, and small women and minority owned firms with their DBE questions over the last twenty-five years. Should you have any issues correcting your assigned NAICS codes or have any other questions, please contact Lindsay Taft ( or 206-529-3017).

It seems that the Jaguars' lawyer also has a problem. The Jaguars new owner reportedly removed the team's general counsel (lawyer) for something that looks like an unforgivable error for a lawyer to make ESPN reports that Paul Vance, the team's senior vice president of football operations and general counsel, was dismissed on January 8, 2012 because the Jaguars may owe 7 assistant coaches an extra year of salaries due to an error made in the coaches' contracts. Seven assistant coaches, if they are paid for another year, could cost the team $3.5 to $ 4 million.

The seven assistants had signed extensions in 2010 and the club believed it was for two years that would expire at the end of the 2011 season. The applicable clause in dispute, however states that the contract "shall terminate on the later of January 31, 2012 or the day after the Jaguars' last football game of the 2012 season and playoffs..."

The assistant coaches want to be compensated. The team indicated that the contract provision "should have read the 2011 NFL season." Terming it an error, Vance contended that there was no intent to establish a contract for the 2012 season.

Shad Khan, an Illinois millionaire, bought the Jaguars for $660 million and assumed the team's $110 million debt. The $4 million coaches' salary probably will not affect Mr. Khan's bottom line. Thus, it is also entirely possible that Paul Vance was fired for his performance as the VP of football operations instead of his omission in the coaches' contract drafting. Either way, whether drafting contracts or quarterbacks (Tim Tebow), the Jacksonville organization needs some help.

In Townsend v. Quadrant Corp., several Quadrant homeowners and their children filed suit against the developer alleging "outrage, fraud, unfair business practices, misrepresentation and breach of warranty." The homeowners alleged that Quadrant knowingly engaged in shoddy workmanship resulting in construction defects that caused personal injuries relating to "mold, pests and poisonous gasses." Quadrant filed a motion to transfer the claims to arbitration relying upon the arbitration clause in the PSA.

In an effort to avoid having their claims heard by an arbitrator, the homeowners claimed that the PSA was procured by "high pressure sales tactics" and should not be enforced as an unconscionable contract of adhesion. The dispute over enforcement of the arbitration clause was ultimately appealed to the Washington Supreme Court.

In a ruling which favored Quadrant, the high court held that the issue of whether the overall PSA was procured by fraud was for the arbitrator to decide, not the courts. The court reasoned that because the homeowners had not claimed that the arbitration provision itself had been procured by fraud, the arbitrator and not the court had jurisdiction to decide that issue.

The court also held in a controversial decision (which was criticized by four justices in a dissenting opinion) that the children's claims against Quadrant were also subject to arbitration even though the children had not signed the PSA. The court's curious reasoning was that the children's claims effectively sought the benefits of the PSA such that it was reasonable to hold them to the "burden" of the arbitration provision as well.

The Townsend decision is a significant victory for Quadrant and for all businesses seeking to enforce arbitration provisions contained in contracts with the general public.

This is the second part of a two part post concerning the Eichleay formula. Contractors, when confronted with delays, disruptions, and/or suspension of contract performance have for many years looked to the Eichleay formula, which is the best known and most widely used method of computing unabsorbed overhead. Although the Washington case of Golf Landscaping v. Century Co.[i] has yet to be overruled, there have been significant developments in federal case precedent which raise questions as to the future applicability of the Eichleay formula as a method of computing unabsorbed overhead in construction claims.

1. P.J. Dick, Inc. v. Principi [ii]

P.J. Dick requires the Contractor to prove three things in order to demonstrate that it is "on stand-by" as a result of a government-caused delay: (1) the delay as "of indefinite duration;" (2) during the delay, the Contractor was required to be ready to resume work "at full speed as well as immediately;" and (3) "much, if not all, of the work" was suspended. 324 F.3d 1364 (Fed. Cir. 2003).

(a) The Basic Rule

To recover Eichleay damages, the Contractor must prove: (1) there was a government-caused delay to contract performance; (2) the original time for performance of the contract was thereby extended; and (3) Contractor was required to remain on standby during the delay. If the Contractor proves these three elements, the Contractor established a prima facie case of entitlement, and the burden of proof shifts to the government to show that it was not impractical for the Contractor to take on replacement work and thereby mitigate its damages. [iii] If the government meets its burden of proof, the Contractor then bears the burden of persuasion that it was impractical for it to obtain sufficient replacement work. This third element, the "standby" requirement, has led to rampant confusion and puzzlement as to how to prove Eichleay recovery.

(b) The Standby Requirement

If the contracting officer issues a written order that suspends all work on the contract for an uncertain duration and requires the Contractor to remain ready to resume work immediately or on short notice, the Contractor need not offer further proof of standby. [iv]

In cases where the contracting officer does not issue such a written order (which is most of the time), the Contractor must then prove standby by indirect evidence. The Contractor must show the following three elements of the standby rule when no such order is issued:

1. The Contractor must show that the government-caused delay was not only substantial but was of an indefinite duration (for example, where the government suspends all work on the contract but tells the Contractor work will begin again at a date certain, the Contractor cannot be on standby).
2. The Contractor must show that during the delay, it was required to be ready to resume work on the contract at full speed as well as immediately.
3. The Contractor must show effective suspension of much if not all of the work on the contract.

P.J. Dick seems to make it clear that there is little chance for a Contractor to recover unabsorbed overhead under this standby rule.  The elements of the rule are simply too severe. It is unlikely that a contracting officer will issue a written suspension order containing a requirement that the Contractor be ready to immediately resume full-scale work with no re-mobilization. Without such an order, the standby test is almost impossible to satisfy.

Many commentators have criticized the Eichleay formula as a means of computing damages for an absorbed overhead. It seems the Court's standby rule has buried Eichleay. Now, instead of relying on the Eichleay formula to prove unabsorbed overhead, recovery may still be had by conventional accounting analysis.

2. Redland Co. - Eichleay's Death Knell?

A recent decision, Redland Co. v. U.S., 97 Fed. Cl. 736 (2011), 53 GC p. 190, illustrates the difficulty of meeting the standby requirement.

Shortly after the Air Force awarded Redland a construction contract, it issued a suspension of work order on the same day as it issued the notice to proceed. When the suspension was lifted four years later, the contractor completed the work and claimed unabsorbed overhead for that period of time. The court ruled that the contractor was not entitled to unabsorbed overhead because it had not started performance at the time the suspension order was issued, citing Nicon, Inc. v. US., 331 F.3d 878 (Fed. Cir. 2003). However, it went on to analyze whether the contractor had met the P.J. Dick "on standby" requirements. The Court found that the delay was of indefinite duration and that it affected all of the work. However, it found no evidence of an order to be ready to resume work immediately.

The Contractor urged that, although the suspension order was silent as to any requirement that it be prepared to resume work immediately, that silence should be interpreted as imposing such a requirement. The court concluded that under the P.J. Dick formulation, the order to resume work immediately could only be found in the suspension order if there was express language to that effect.

Finding no such language, the court analyzed whether there was indirect evidence that the contractor had been ready to resume work immediately. It found no such evidence, stating:

[B]eing "ready to resume work at full speed as well as immediately" is a strict requirement, one that is separate from the requirement that the delay or suspension be of uncertain duration. [P.J. Dick, 324 F.3d at 1371] For instance, if a contractor is given a reasonable amount of time to gather together its equipment and personnel after a suspension is lifted, the contractor is not on standby. Id. Nor is a contractor on standby if the government requires "immediate resumption of the work, but only with a reduced work force [that allows] the contractor to gradually increase its work force." Id. Rather, in order to be on standby, "the contractor must be required to keep at least some of its workers and necessary equipment at the site, even if idle, ready to resume work on the contract (i.e., doing nothing or working on something elsewhere that allows them to get back to the contract site on short notice)." Id.

Plaintiff does not even allege that it had workers or equipment present at the work site during the period of suspension. Rather, plaintiff merely asserts that "[t]he record evidence demonstrates that Redland was a local contractor that could keep equipment and forces close-by, and did in fact re-commence on short notice." Id. Nevertheless, the evidence does not support plaintiff's assertion.

Although plaintiff was a local contractor, there is no evidence that it had equipment or personnel at any location either waiting idly for work to begin at [the site] or doing work that could be immediately stopped. When asked to detail what resources plaintiff had available during the period of suspension, plaintiffs vice president could not identify any specific resources, but merely offered that plaintiff would have used either in-house equipment or rental equipment. Thus, rather than keeping resources idle and ready to commence work at [the site] immediately, plaintiff evidently relied, at least in part, on its ability to rent equipment in order to begin work when the suspension was lifted. These are signs of a fully employed construction company that would increase its resources to perform additional work, not one that was waiting on standby with its existing resources constantly at the ready.

This analysis shows how difficult it is to meet the "ready to resume work immediately" requirement.

3. Ralph C. Nash's Comment:[v]

The Redland decision is a clear illustration of the impact of the P.J. Dick formulation. A Contracting Officer can place a contractor on standby by inserting the magic language in a suspension order but there is little reason to believe that this will occur very often. Rather, P.J. Dick teaches COs how to avoid paying unabsorbed home office expenses. This is fine for large contractors that probably never suffered any such damages in the first place. But, as noted in Nash & Cibinic's Report,[vi] it is very unfair to small contractors that have suffered real damage if they have no more bonding capacity. We suspect Redland was not seriously injured because the facts seem to indicate that it continued to do business during the four-year delay. But a small company in that situation probably would have been destroyed. In short, the P.J. Dick formulation is not only totally disconnected from reality but it is also grossly unfair to small contractors[vii].

[i] 39 Wn. App. 895, 696 P.2d 590 (1984).

[ii] 324 F.3d 1364 (Fed. Cir. 2003).

[iii] See Marine Inc. v. U.S., 187 F.3d 1370, 1376 (Fed. Cir. 1999).

[iv] See Interstate Gen. Gov't Contractors, Inc. v. West, 12 F.3d 1053, 1055 (Fed. Cir. 1993).

[v] R. Nash is a well respected author of numerous authoritative reference books on the subject of federal procurement.

[vi] 17 N&CR p. 33

[vii] 25 No. 10 N&CR p. 51.

Controversies relating to delays, disruptions, and suspensions of contract performance involve two major elements: entitlement and quantum.  To recover increased costs beyond what was contemplated, the Contractor must establish (1) that the delays were indeed attributable to the Owner (entitlement), and (2) the amount of additional costs caused by the delays (quantum).

Additional costs arising from delays frequently include direct material, direct labor, other direct costs, and, one of the most complex items, overhead.  When a project is delayed, the amount of the Contractor's overhead is allocated disproportionately to the delayed project.

1. Golf Landscaping

Undoubtedly, the best known and most widely used method of computing unabsorbed overhead is the Eichleay formula, as set forth in Eichleay Corp.,[i] a 1960 Board of Contract Appeals decision.

In Golf Landscaping v. Century Co.,[ii] the Washington Court of Appeals held that overhead expenses may be a legitimate component of delay damages and allowed the subcontractor recovery under the Eichleay formula.[iii]

Despite many commentators hailing the Golf decision as Washington's stamp of approval of the Eichleay formula, there are a number of significant inquiries which must be made before the Eichleay formula can be utilized for computating unabsorbed overhead. Specifically, the Golf case involved a subcontractor's claim for unabsorbed overhead, which by definition is based on the alleged continuation of fixed expenses through the delay period.

In a claim for unabsorbed overhead, the relevant inquiry is whether the delay prevented the Contractor from obtaining contracts during the delay period, which would have "absorbed" the ongoing home office overhead expense.

The Contractor in Golf, which opposed the Eichleay claim, never questioned if Golf's overhead expenses were unabsorbed by other contracts. The Contractor in Golf instead attacked the subcontractor's accuracy in computing the amount of damages. Unless the Contractor could show that the delay prevented it from obtaining contracts during the overhead period, the Eichleay formula could not be used as a method of calculating unabsorbed overhead.

For example, in an unpublished opinion, Strand Hunt Const., Inc. v. Lake Washington School Dist., 134 Wn. App. 1053 (2006), the Court denied Eichleay damages, holding that such damages were inappropriate "as long as the contractor is able to continue performing the contract, although not in the same way or as efficiently or effectively as it had anticipated it could do so." The Court reasoned that, as long as performance was not halted entirely, the Contractor could still allocate a portion of its overhead costs to that contract. The Court further went on to quote approvingly of federal cases which described the Eichleay formula as "an extraordinary remedy." The Eichleay formula is a federal concept, thus the Washington court will look to federal law when questions concerning the application of the Eichleay formula arise.

2. Federal Precedent

Many questions concerning the Eichleay formula have not been answered in Washington case precedent, thus, federal case law provides guidance for applying the Eichleay formula when dealing with an unabsorbed overhead claim.

(a) Wickham Contracting Co. v. Denis J. Fisher [iv]

In Wickham Contracting, the Contractor argued that, since approximately 80% of its home office activity was devoted to the delayed project, the Eichleay calculation was unfair. The Eichleay formula resulted in only 34% of the Contractor's overhead expense being allocated to the delayed project. The Contractor insisted that the Eichleay formula should be used only when overhead costs cannot be otherwise accurately determined. The Court disagreed and unequivocally stated that the Eichleay formula is "the only proper method" for calculating unabsorbed overhead when a Contractor otherwise satisfies the Eichleay requirements. These requirements are (1)a government-caused suspension of or delay in contract performance, (2)a sufficient degree of uncertainty regarding the period of delay, coupled with a requirement by the government to remain ready to resume performance on short notice (the "standby test"), and (3)the unavailability of additional work during the period of delay or suspension that would have supported the overhead otherwise allocable to the delay contract. Thus, if a Contractor is able to show that any period of government-caused suspension or delay was sufficiently uncertain in duration, that the Contractor was required to resume performance immediately upon its completion, and that the Contractor did not take on new work to "fill the gap" caused by the suspension or delay, it would satisfy the Eichleay requirements as framed in the Wickham decision.

Second, the Wickham opinion focuses on the concept of "unabsorbed" home office overhead as opposed to "extended" home office overhead, the latter of which has been the term most often used in construction contract cases. This difference in terminology is more than semantics. Some commentators have argued that it is inappropriate to use the term "unabsorbed" overhead in the construction context because of the ability of a construction contractor - unlike a manufacturing contractor - to obtain new work without the restriction of a limited plant capacity.

(b) Mech-Con Corp. v. West [v]

The Federal Circuit in Mech-Con reaffirmed the three elements necessary to establish Eichleay, but shifted the burden of the third element to the government.  Thus, if the Contractor establishes a prima facie case for Eichleay relief by proving a government-caused delay and "standby," at that point the government can rebut the prima facie case by showing that the Contractor was able to take on additional work during the delay period.

Despite the shift in the burden of proof, the burden remains on the Contractor to prove all elements, including that it was unable to obtain other work. In Satellite Elec. Co. v. Dalton,[vi] the Federal Circuit ruled that the government failed to rebut the Contractor's prima facie case by showing that it began bidding on other projects at the end of the delay period, but succeeded in rebutting the prima facie case where the Contractor aggressively bid on other projects throughout the delay period. The Satellite case can be read to hold that if a Contractor bids on, receives, and/or is capable of obtaining additional work during the delay period, it is not entitled to use the Eichleay formula.

In our next post, we will discuss the P.J. Dick, Inc. case and its impact on the Eichleay formula, as well as recent developments which question the use of the Eichleay formula in future cases.

[i] ASBCA No. 5183, 60-2 BCA § 2,688 (1960); 61-1 BCA § 2,894 (1960).

[ii] 39 Wn. App. 895, 696 P.2d 590 (1984).

[iii] Computation of Unabsorbed Overhead / Eichleay Formula

Definition of Unabsorbed Overhead:

Delayed Contract Billings    x   Total Home Office Overhead   =   Allocable Home Office Overhead
Contractor's Total Billings

           Allocable Home Office Overhead                             =            Daily Overhead Rate
Days Required to Perform the Delayed Contract                            for the Delayed Contract

        Daily Overhead Rate x Number of Days of Delay = Overhead Damages

[iv] No. 93-1146 (Fed. Cir., January 6, 1994).

[v] 61 F.3d 883 (Fed. Cir. 1995).

[vi] 105 F.3d 1418 (Fed. Cir. 1997).

References: The Wall Street Journal and Bloomberg

The NLRB filed a complaint against Boeing in April 2011, seeking to force Boeing to move the 787 Dreamliner passenger plane production from a non-union plant in South Carolina to the union assembly line in Washington State. The NLRB contended that Boeing had retaliated against its workers for exercising their federally protected right to strike because Boeing management had announced that it was moving the plant to South Carolina to "punish" the Boeing workers for having power the strike in the future (Lafe Soloman General Counsel for NLRB April 22, 2011, see our blog article dated May 5, 2011).

Republican lawmakers and presidential candidates announced that the lawsuit was a prime example of regulatory overreaching by the Obama Administration, and argued that the federal officials should not be telling companies where they can or cannot build factories. Congress held hearings and demanded thousands of pages of documents. Boeing invested over a billion dollars in the South Carolina plant before the lawsuit was filed. On Wednesday, December 7, the International Association of Machinists approved a new contract with Boeing in which Boeing agreed to build its 737 Max Jet in the state of Washington with union labor. Within a few days, the NLRB dropped its lawsuit against Boeing.

The question now becomes whether the NLRB’s motivation to bring the lawsuit in the first place was simply born out of some political loyalty to side with the union over management in the collective bargaining situation? Boeing was very clear that the new contract to build the 737 Max Jet in Washington was not tied directly to a settlement of the NLRB complaint, and that it had always intended to build the 737 Max Jet in Renton because of the workforce and that the experience gained from manufacturing the present 737 offers certain efficiencies. It is nevertheless difficult to resist the conclusion that Boeing felt obliged to make the agreement to save its more than one billion dollar investment in South Carolina where it is presently building the 787s. As for the NLRB, its decision to drop the case as quickly as it did after the machinists made their deal exposes how politically motivated the Boeing suit may have been. The NLRB is supposed to be an even-handed and fair-minded referee in labor disputes, making sure that neither side breaks the federal law. In this instance, the NLRB seems to have come down squarely on the side of the union and against the employer's move to assemble the 787 in a right to work state. The message appears to be that if an employer seeks to move its plant and operations to escape onerous collective bargaining agreements, that its investment will be at risk.

Although maintaining manufacturing in the state of Washington is vitally important to this state's economy, this case raises questions as to the NLRB's independence, and raises concerns that companies may be motivated to send even more jobs overseas where there is no NLRB to be concerned about.

References: New York Times and The Wall Street Journal.