Construction Law Blog

We posted Part I (General Contractor’s Mistakes) of this blog post on February 10, 2012 and Part II (Subcontractor’s Mistakes) of this blog post on February 14, 2012.

State and federal public works contracts employ different rules when deciding whether a mistaken bid can be corrected.  On discovering a mistake in a contractor's bid after bid opening, the contractor may seek to attempt to convince a public works owner to reform its bid price.  On State public works projects, the bidder would have virtually no chance of success.  However, pre-award and even post-award correction of mistaken bids is allowed under certain circumstances in federal contracts.

 1.            State Contracts.

In J.J. Welcome & Sons[i] and in Red-Samm Mining Co v. Port of Seattle,[ii] the Washington courts held that an upward correction of a contractor’s bid price after bids have been opened, is not available due to the State competitive bidding laws which only allow a public works owner to accept the bid as submitted.  A post-bid-opening reformation of a bid would defeat the purpose of the competitive bidding system, which is to ensure that the public works projects will be awarded to the lowest, responsive and responsible bidder.[iii]  Even where the bidder is without fault or negligence in creating the situation that results in the mistaken bid, reformation is not allowed.[iv]  In J.J. Welcome, Western Union made a typographical error in J.J. Welcome's bid which resulted in J.J. Welcome's bid being $10,000 lower than the bid which J.J. Welcome intended to submit.  The only recourse available to J.J. Welcome for the mistaken bid was withdrawal of its bid[v] or to perform the work for the mistaken price.  Washington courts have held that as a matter of ensuring the integrity of the competitive bidding process, a post-bid-opening attempt to increase a bid price will not be allowed.

2.                 Federal Contracts.

In federal contracts, a bidder who promptly and before the award alleges a mistake and thereafter presents clear and convincing evidence of the bidder’s mistake and how it occurred, as well as the intended price (a price must have been intended) may have its bid corrected to reflect the bidder’s intention.[vi]  The Federal Acquisition Regulations ("FAR") addresses how awarding agencies are to deal with mistakes made by prospective contractors in a sealed bidding process.  The FAR addresses the general objective of the government in dealing with mistakes made by bidders, requiring an examination by the Contracting Officer of all bids for obvious mistakes, and notice to the bidder of such discovery. 

Only the bidder may allege error in its bid. Sometimes another bidder will allege an error in the low bid to have it rejected.  Generally, the government will not consider such a protest. 

There are some important limitations with respect to the type of mistake that is correctible.  To be considered for correction, the bid must be responsive as submitted.  Corrections are generally not permitted for mistakes of judgment.  To obtain a correction, it is not enough to show that some cost factor was omitted from the bid computation.  The bidder must be able to show that the omission of an intended amount, although not necessarily to the last dollar. 

• Correction does not displace the low bidder.

If the bid is low as submitted and would remain low even with the claimed correction, there is no practical limit on the type of evidence that may be submitted in support of a request for correction.  The most common types of evidence are bid worksheets, supplier quotes, published price lists and sworn statements.  The intended bid should be established with as much precision as circumstances will allow, but there is no requirement that the exact price intended be established.  If a bid is both low as submitted and with the claimed correction, and the government denies the correction attempt, the bidder may accept the award at the lower price with the understanding that it will not bar the bidder's right to later apply for relief.  Acceptance of the award reserving the right to relief is the most sensible approach since refusal to perform may subject a low bidder to a possible termination for default action if it is ultimately determined that the low bidder was not entitled to the correction. 

• Displacement of the low bid.

Where the bid correction sought would result in displacing the otherwise low and acceptable bid, a stricter rule of evidence is followed.  Correction in these cases is permitted only where the existence of the mistake and the bid actually intended are ascertainable by clear and convincing evidence.[vii] 

• Post-award correction.

Post-award correction is judged by an entirely difference standard.  Where an error is first alleged after award, the contractor can obtain correction or rescission in such cases only by establishing that the Contracting Officer was on (1) actual notice; or (2) constructive notice of a mistake at the time of the award.  [viii]

[i]               6 Wn.App 985, 497 P.2d 953 (1972).

[ii]               8 Wn. App. 610, 508 P.2d 175 (1973).

[iii]              J.J. Welcome & Sons at 990.

[iv]              Id. 

[v]               Id. at 989.

[vi]              See FAR 14.407

[vii]             FAR 14.406-3(a). 

[viii]         Wender Presses, Inc. v. United States, 343 F.2d 961 (Ct. Cls 1965).

There continues to be a split between Washington courts and federal courts as to whether Union Benefit Trusts are entitled to claim against a general contractor's payment bond and retainage on a Washington public works project or entitled to file a mechanics' lien on a private project. Union Benefit Trusts provide benefits to union workers. If the Union Benefit Trusts do not receive payment for the benefits of workers on a particular project, the Union Benefit Trusts seek to recover the contribution from nonpaying contractors and subcontractors, including claiming against the general contractor's payment bond or retention on a public project or filing a lien on a private project. The Washington Supreme Court in Brotherhood of Electrical Workers, Local Union No. 46 v. Trigg Electric Construction Co., 142 Wn.2d 431, 13 P.3d 622 (2000), however, held that the Employee Retirement Income Security Act ("ERISA") (federal law) preempted state lien (RCW 60.04) and bond statutes (RCW 39.08), thus, precluding the Union Benefit Trusts from bringing claims against a general contractor's payment bond and retention. The decision was decided narrowly, only 5 to 4, and the Washington Supreme Court has not revisited the issue since it issued this opinion in 2000.

Federal courts, on the other hand, have allowed Union Benefit Trusts to bring such claims against a general contractor's payment bond and retention on a Washington public works project. In Ironworkers District Council of the Pacific Northwest v. Jordan Sollit Corp., 2002 WL 31545972 (W.D. Wash.), the Washington federal district court held that the Union Benefit Trust's bond claim was not pre-empted by ERISA under Federal law, and denied the defendants'motion to dismiss the bond claim, despite the Washington's Supreme Courts' decision in Trigg Electric. The federal district court only had jurisdiction over the state bond claim because of diversity jurisdiction (the plaintiff and defendant resided in different states and the amount in controversy exceeded $75,000). Generally, in a diversity jurisdiction case, the federal court will apply state law yet, the court in Jordan Sollit applied federal law because it stated that the issue was federal preemption, not a state bond claim issue. Similarly, in Cement Masons & Plasterers Health & Welfare Trust v. GBC Northwest LLC, 2007 WL 1306545 (W.D. Wash.), the district court entered an order establishing its jurisdiction over a state lien foreclosure action brought by a Union Benefit Trust.  The court held that there was supplemental jurisdiction over such a claim in the ERISA action, because the claim arose "under the exact same set of facts surrounding the employer's failure to make required payments to the Union's Trust actionable under ERISA."

In sum, if the Union Trusts Benefit forecloses its bond or lien action in state court, the action should get dismissed under the Washington Supreme Court's decision in Trigg Electric. But if the Union Trusts Benefit forecloses its claim in federal court under diversity jurisdiction, the federal court will likely not dismiss the action and the Union Benefit Trust can proceed under both ERISA and the state bond or lien statutes. The lesson for general contractors is to monitor their subcontractors, to ensure they are making their required payments to the subcontractor employees' Union Benefit Trusts, to avoid potential liability to the Union Benefit Trusts in either state or federal court.

As discussed in the last blog, there are four requirements that a contractor must demonstrate before obtaining relief from an erroneous bid. They are as follows:

1. The mistaken party must be reasonably prompt in giving notice of its error;
2. The party receiving the bid must not have changed its status so significantly that relief or forfeiture will work a hardship on it;
3. The bidder acted in good faith; and
4. The bidder acted without gross negligence.[i]

Subcontractors must be able to show the same four elements before obtaining relief from a bid mistake.

Subcontractors unilateral mistake defenses are generally unsuccessful because general contractors have reasonably relied on the subcontractor's bid and have substantially changed their position in reliance on that bid. Under these circumstances, Washington courts generally deny subcontractors relief from unilateral bid mistakes.[ii] Where a subcontractor makes a mistake in its bid, and even where the subcontractor provides prompt notice to the general contractor, the general contractor's bid price is "locked in" and the general contractor has "changed its status so significantly that relief or forfeiture will work a hardship on it." The general contractor will be able to show that it cannot merely increase its price to account for the subcontractor’s error. Thus, a relief from mistake is more difficult.

To escape liability for a mistake in bid, a subcontractor may be able to show one of the following:

1.      The general contractor had reason to know of the unilateral mistake:

Where the general contractor knows, or should have known, of the mistake, the subcontractor will be provided relief from a unilateral mistake of fact.[iii] "The offeree [general contractor] who has reason to know of a unilateral mistake will not be permitted to 'snap up' such an offer in profit thereby."[iv] A low bid, however, without further evidence of a mistake, is not sufficient to constitute constructive knowledge of an error justifying rescission. The cases are all over the board as to what disparity in between the low and the next low bid provide the general contractor notice that the subcontractor has made a mistake. The court in Drennan v. Star Paving[v] found that an accepting party would have no reason to know of a mistake based on a bid disparity, since the high and low bids on paving contracts usually varied as much as sixty percent.

In another case, Heifetz Metal Crafts, Inc. v. Peter Kiewit Sons' Co.,[vi] a low bidder's offer to do subcontracting work for $99,500 was $52,000 less than the next lowest bid (52% lower). The court denied Heifetz's (subcontractor) request for rescission, and granted Kiewit's (general contractor) counterclaim for $50,000. Even though Heifetz's bid was 52% less than estimates submitted by its closest competitor, the court determined, since Kiewit had no familiarity with estimating the particular type of work, it was not unreasonable for Kiewit to assume that such bids would be relied upon, particularly after verification from Heifetz's president. Despite the disparity, Heifetz was held to its bid. In other cases involving bid mistakes from other jurisdictions, disparity between the low and next low bids of 20-50% have been found not to be so obviously erroneous as to preclude enforcement of bids. However the general contractor's reliance on a subcontractor's bid was deemed unreasonable where the bid was 300% lower than the next bid.[vii]

 2.     Failure to reach a “meeting of the minds"

One Washington case suggests that a possible defense for a subcontractor in a bid mistake situation is that the parties never reached a "meeting of the minds" on the essential elements of the contract. In Lakeside Pump v. Austin Constr. Co., 89 Wn.2d 839, 845-46, 576 P.2d 392 (1978) a pump supplier was granted relief from a mistake in an oral telephone bid where the court found that the parties had not agreed on the scope of the work.

3.       Effect of Bid Shopping on Subcontractor Mistakes

One of the elements that a general contractor must demonstrate in holding a subcontractor accountable when the subcontractor makes a mistake in its bid is that the general contractor relied on the subcontractor's bid estimate in the general contractor's bid proposal to the owner.

In an unreported Puget Sound area case, a subcontractor made a mistake in its bid and sought relief from the general contractor. The general contractor insisted that the subcontractor perform the mistake notwithstanding. The subcontractor refused. The general contractor engaged another subcontractor to perform the work and the general contractor filed a lawsuit. During the discovery process, the subcontractor learned that the general contractor, after bids were opened, instead of immediately awarding the contract to the mistaken subcontractor bidder, "shopped&" the subcontract market. The general contractor solicited other subcontractor prices in an effort to obtain an even lower price than the mistaken subcontractor's bid proposal.  The subcontractor's lawyers were able to convince the trial judge that the general contractor, who had shopped the subcontract market after bids were open, did not "rely" on the subcontractor's price. The judge ruled that the mistaken subcontractor was relieved from its erroneous bid.

Generally, subcontractors' unilateral mistake defenses are unsuccessful. However, there are ways that a subcontractor can escape liability for a mistake in its bid. In the next blog we will explore the difference in relief from mistake in state public works contracting versus federal public works

[i] See Puget Sound Painters v. State, 45 Wn.2d 819, 822-823, 278 P.2d 302 (1954)

[ii] Ferrer v. Taft Structurals, 21 Wn. App 832, 587 P.2d 177 (1978).

[iii] Snap-On Tools Corp. v. Roberts, 35 Wn. App 32, 33, 665 P.2d 417 (1983).

[iv] Clover Park Sch. Dist. #400 v. Consol. Dairy Products Co., 15 Wn.App 429, 434-35, 550 P.2d 47, rev. denied, 87 Wn.2d 1010 (1976)

[v] Drennan v. Star Paving, 51 Cal.2d 409, 333 P.2d 757 (1958).

[vi] Heifetz Metal Crafts, Inc. v. Peter Kiewit Sons’ Co., 264 F.2d 435, 437-38 (8th Cir. 1959).

[vii] Tolboe Constr. v. Staker Paving & Constr. Co., 682 P.2d 843, 847 (Utah 1984).

This three-part blog is provided to give our readers an overview of how courts deal with contractor bid errors.  In this blog we will discuss general contractor bid errors, in the next post we will explore subcontractor bid errors and in the third post we will discuss the different way state and federal public owners handle general contractor bid errors. In federal contracting, a bid error can be reformed as long as the low bidder is not displaced by the reformation.

Generally, the courts recognize that bidding is a hectic task and that in the final minutes of rushing to prepare a bid, a contractor may make an error in its bid:

"Contractors do not work under ideal conditions in the rush to meet the deadline for submitting bids and equity recognizes that honest, sincere men, even in the exercise of ordinary care, under such pressure can make mistakes of such fundamental character that the enforcement of the apparent resulting agreement would be unconscionable. In such a situation if the parties may still be placed in status quo, equitable relief will be granted." Kenneth E. Curran, Inc. v. State.

For a general contractor to get relief from a mistake, the mistake must be one of fact, not judgment. Peter Kiewit Sons Co. v. Dept. of Transp. Mistake of fact results from such things as faulty addition, misplaced decimals, typographical errors, transposition of numbers and multiplication errors.  The Washington Court of Appeals, however, allowed a bidder to escape an erroneous bid where the error involved an interpretation of the specifications - presumably an error in judgment. The Town of LaConner v. American Constr. Co.

The Puget Sound Painters case established the elements that a general contractor must establish to escape liability on a public works bid. In Puget Sound Painters, the general contractor submitted the low bid to re-paint the main towers at the Tacoma Narrows Bridge for the State of Washington Department of Transportation (WSDOT). The bid was accompanied by a bid bond. The contractor discovered a significant disparity between its bid and the next low bid and promptly advised WSDOT that a mistake had been made.  The subcontractor (whose price had been incorporated into the general bid) had multiplied measurements by two rather than four in computing the surface area of the four legs of each tower.  WSDOT refused to release the contractor from its bid bond and the contractor sued to prevent forfeiture of its bond. The requirements for obtaining relief from an erroneous bid were established as follows:

1. The mistaken party must be reasonably prompt in giving notice of its error;
2. The party receiving the bid must not have changed its status so significantly that relief or forfeiture will work a hardship on it;
3. The bidder acted in good faith; and
4. The bidder acted without gross negligence. See Puget Sound Painters at 822-23. 

Notice of the mistake was provided to WSDOT the day before the State of Washington formally acted to award the contract to the contractor.  The court held that the basic purpose of the bid bond was to afford protection against a change of status involving substantial damage, loss or detriment by a party soliciting bids.  Since WSDOT was able to award the contract to the second bidder, and the mistake was not knowingly or willful, but instead one of gross neglect or negligence, the court held that WSDOT did not suffer a substantial detriment and therefore the bid bond could not be forfeited.

Courts are reluctant to simply allow a contractor out of a bad bid and require that the contractor satisfy the good faith element of the four-part test. This was emphasized in the case of Clover Park School District #400 where the courts stated in dictum: 

"At this point we wish to parenthetically state our view that sound public policy requires us to closely scrutinize a bidder's contention that it intended to rescind its bid on a contract with an agency of the government. It should be difficult for bidders to claim an error in computation as a basis for escaping from a bid noticeably lower than the competition's. This is the "bad faith element" of the test quoted above." Id.(Emphasis added).

Where the mistake involves both questions of fact and judgment, contractors can be successful in obtaining relief for bid errors.  In Peter Kiewit Sons Co. v. Dept. of Transp., the court stated the law of unilateral mistake as follows: 

"The courts have come to recognize that numerous mistakes, besides simple mathematical errors, can result in the contractor submitting a bid which does not embody his intent and thereby prevent a true meeting of the minds. Many mistakes involve mixed errors of fact and judgment and drawing too fine a line between the two can produce harsh and unnecessary results. The modern trend is to accord equitable relief to mistakes which render the bid incompatible with the true intent of the bidder and which can be clearly and convincingly demonstrated by objected proof."

Under this more liberal standard, there are certain types of mistakes, such as underestimating the cost of labor and materials, which are purely judgmental and never entitle a bidder to equitable relief.  Mistakes of this type are inherent business risks assumed by contractors in all bidding situations. The proof as to whether a mistake of this type has occurred is so completely within the control and power of the contractor that the public body is helpless to refute it. Id. at 430-431. Thus, in general, if the prime contractor is able to demonstrate by clear and convincing evidence that it made either a clerical error (mathematical error, typographical error, transposition of numbers, etc.) the general contractor will be accorded equitable relief (be allowed out of its contract) provided that the other elements of the test are met and most importantly that the public works owner can award the contract to the next lowest bidder. If the mistake is one of mixed judgment and an error of fact, again, the modern trend as set forth above is to excuse the contractor from its bid and relieve it from forfeiture of its bid bond provided the elements of the test are met and the contractor can demonstrate its error clearly and convincingly. Only pure errors of judgment which are inherent business risks do not permit the contractor to withdraw its bid. 

Practical Advice:  Bidders seeking relief from a mistake of fact in their bids (clerical errors or mixed questions of fact and judgment) must immediately place the owner on notice of the mistake (prompt notice is essential to avoid the prejudice argument) and, secondly, be prepared to demonstrate the error by use of bid estimate sheets and work papers by "clear and convincing evidence."

The following blog will address subcontractor bid errors.

During the housing boom from 2004 to 2009, approximately 309 million square feet of Chinese drywall was imported into the United States. Since then, over 600 lawsuits have been filed alleging that the imported drywall contains sulfur compounds which when exposed to heat and moisture, release sulfurous acids causing a noxious smell and the corrosion of metals. Most significantly, the corrosion has been noted on copper components, such as wiring, refrigerator coils, and the coils of air-handling units. The lawsuits also alleged a variety of health issues, which were linked to the tainted Chinese drywall, however, according to a CDC report, no link between Chinese drywall and health issues was determined (see A&C blog dated February 24, 2011). Although, the majority of litigation is in the Southeast United States, reports indicate that Chinese drywall may have been used in construction across the United States (see A&C blog dated January 11, 2010).

On January 10, 2012, a federal judge approved a settlement pursuant to which a Chinese drywall manufacturer (Knauf Plasterboard Tianjin Co.) will pay hundreds of millions of dollars to resolve court claims by thousands of Gulf coast property owners who allege that the product wrecked their homes. The Chinese drywall manufacturer has agreed to create an "uncapped" fund to pay for repairing roughly 4,500 homes in Florida, Louisiana, Mississippi, and Alabama. The settlement agreement also creates a separate "capped" fund of $30 million to pay for other types of losses including health issues. A fairness hearing is scheduled on the settlement in June 2012.

Reference: The New York Times.

A subcontractor default on a construction project is one of the greatest risks faced by the general contractor in constructing a project. Generally, contractors protect themselves from that risk by purchasing bonds, and now, also subcontractor default insurance.  An example best contrasts the differences between bonding and insurance.

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 60.04.021 provides that "any person furnishing labor, professional services, materials, or equipment for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials or equipment furnished at the instance of the owner, or the agent or construction agent of the owner."

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.

Dear WBE, MBE, and DBE Contractors,

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).

The National Football League is preparing for the Super Bowl XLVI and here is an interesting story that ties "football drafting" and "legal drafting" together. We all remember that Jacksonville passed on Tim Tebow the Denver quarterback (a conservative shoe-in for Obama this fall if he were running). The Jacksonville Jaguars passed on Tebow in the draft, and now they are under new ownership.

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.