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Most contractors with experience on federal construction projects are familiar with the federal False Claim Act (“FCA”) which provides for civil and administrative penalties for anyone who knowingly submits or causes the submission of a false or fraudulent claim to the United States. The civil penalties range from $5,500 to $11,000 for each false claim submitted to the federal government, plus three times the amount of damages sustained by the government. The administrative remedies include suspension or debarment from work on future federal projects.

The FCA has evolved since it was introduced in 1863 to reflect a growing concern about fraud against the federal government. It was amended in 1986 to encourage private citizens known as whistleblowers to bring lawsuits against alleged violators of the FCA on behalf of the United States. In addition to providing financial incentives to whistleblowers, the FCA protects these individuals from retaliation if they bring a lawsuit against their employer. Recoveries under these lawsuits have dramatically increased over the years from less than $400,000 in 1986 to approximately $3,000,000,000 in 2010. The trend is a result of increased education to potential whistleblowers and the expanding scope of the FCA provided by the courts and statutory amendments.

Many states, including Montana, Nevada and California, have false claim statutes that address claims made to state governments based on the FCA model. Contractors should determine whether these statutes exist and what potential liabilities they provide when performing state and local government work in other states.

Although Idaho has not enacted a state false claims statute, a recent revision to the FCA has expanded its applicability to contractors performing state and local government work in Idaho. The number of contractors performing government work in Idaho has also increased due to the economic downtown over the last several years. Many contractors who previously bid primarily private construction projects are now bidding government projects. Contractors must be more mindful than ever of FCA and its reach.

The FCA was significantly expanded in 2009 to cover all projects funded at least in part by federal funds. A large number of state and local projects in Idaho are at least partially funded by federal money. These projects now fall within the scope of the FCA even without federal agency involvement.

Another expansion of the FCA impacts subcontractors and suppliers. Federal courts were historically divided on whether subcontractors, sub-tier contractors, and sub-tier suppliers were subject to FCA liability. In a 2008 decision, the Supreme Court found that the FCA applied to a subcontractor who makes a false statement to the prime contractor intending that it be passed through to the federal government. The Court rejected the notion that the FCA extended liability to any entity receiving federal funds directly or indirectly. In response to the decision, the 2009 revision expands the scope of the FCA to cover subcontractors and suppliers at all tiers.

FCA liability can arise in a number of situations at every stage of the project. Although each phase of a project presents different potential false claims, several bases for FCA liability are worth noting.

False statements in bids or negotiations often result in FCA liability. These statements can include everything from knowingly identifying an unavailable employee as the project manager or superintendant to identifying a sham disadvantaged business enterprise subcontractor for the project.

Certifications of payment and compliance with laws and regulations are also common bases for liability. Contractors must be vigilant to ensure that subcontractors comply with environmental regulations, the Davis-Bacon Act, and Buy America Act. Certification can also lead to FCA liability when a prime contractor withholds funds from a subcontractor or supplier due to an alleged breach of contract. A contractor should notify the government agency in writing anytime it requests payment that it does not intend to pass through to the party performing the work or supplying the material or equipment. Similarly, a prime contractor should never hold retention from a subcontractor when it has received full payment from the government.

Probably the most recognized act giving rise to FCA liability is false or inflated pricing which typically arises during the change order process. Contractors should avoid using the word “cost” when submitting pricing to perform extra work on government projects. If the contract requires that change order requests are based on cost estimates, contractors should carefully analyze all costs to ensure accuracy and retain supporting documentation. If a cost- based change order results in overpayment by the government, a contractor’s failure to refund the overpayment may result in FCA liability.

Given the expansion of the FCA, the steep liability for violations, and a substantially more aggressive attitude by the federal government toward enforcement, contractors that perform government work at any level should establish an internal education and compliance system to reduce potential liability under the FCA.

(Published in the Idaho Business Review, April 2011)

An award for consequential damages against a contractor can turn a profitable project into a potential for bankruptcy. Consider this example: In 1983 a contractor was hired as construction manager on a project to renovate an Atlantic City casino. The contract stated that the contractor would coordinate with the owner and architect, supervise the trade contractors, and set a guaranteed maximum price for the project in exchange for a fee and expenses.

Although a great deal of the project was completed on time, construction of the façade designed to attract customers passing by the casino was late. The owner terminated the contract because of the delay on the façade, and the contractor brought an action for wrongful termination and the balance of the fee. In turn, the casino sought damages for lost profits and was awarded $14,500,000 in arbitration which was later upheld by the New Jersey Supreme Court. This scenario demonstrates the impact of a consequential damage award and illustrates the importance of contractually managing these risks.

In 1997 the American Institute of Architects (AIA) revised its form contract language pertaining to consequential damages in its general conditions (AIA A201). The A201 general conditions adopted a mutual waiver of consequential damages in reaction to the decision referenced above. The pertinent section reads as follows:

“The Contractor and Owner waive all claims against each other for all consequential damages arising out of or relating to this Contract. This mutual waiver includes:
Damages incurred by the Owner for:
  • Rental expenses;
  • For losses of use, income, profit, financing, business and reputation; and
  • For loss of management or employee productivity or of the services of such persons; and
Damages incurred by the Contractor for
  • Principal office expenses including the compensation of personnel stationed there;
  • For losses of financing, business and reputation; and
  • For loss of profit except anticipated profit arising directly from the Work.”

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination. Nothing contained in this shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.

On its face, this language seems to favor contractors because the largest consequential damage claims (like the one referenced above) are those recoverable by owners. Lost profits may be recoverable by contractors but typically those losses are not comparatively as large. Although it seems to favor contractors, the A201-1997 mutual waiver of consequential damages language may not eliminate owners’ options for recovering consequential damages for construction delays.

Owners may attempt to recover lost profits, loss of use or other consequential damages as liquidated damages even if the parties agree to the mutual waiver of consequential damages. The A201-1997 document uses the term “liquidated direct damages” in an attempt to remove “consequential” damages from an award for liquidated damages. The definition of “liquidated direct damages” is not included in the document and has not been addressed by the courts.

In Idaho, two requirements must be met for recovery of liquidated damages: (1) an accurate determination of the actual damages that might be incurred upon breach must be difficult or impossible to determine; and (2) the amount of the liquidated damages must bear a reasonable relationship to the actual damages anticipated to be incurred. This seems to contradict the idea of “liquidated direct damages” because eliminating consequential damages leaves only recovery for damages which should not be difficult or impossible to determine at the time the contract is entered into. However, Idaho courts have held that the fact that there is an accepted means of calculating damages does not necessarily mean that the amount of the damage will be easily determined.

Liquidated damages, although likely inclusive of consequential damages, are somewhat beneficial to contractors in that they define a limitation of risk resulting from construction delays. Contractors should discuss what types of costs a liquidated damages provision is intended to cover when negotiating contract terms with an owner and try to limit the recovery amount to direct damages.

Additionally, contractors should consider including a liquidated damage provision which applies in the case of owner-caused delays and disruptions. This way contractors may recover for those overhead, bonding capacity and onsite costs which continue to be incurred as a project is delayed. While the drastic results of an award of consequential damages have been addressed by A2011997, neither party is entirely without crafting a liquidated damage provision which attempts to address delay damages.

Contractors should consider having their legal consultant periodically review their contracts to manage their risk exposure in the contract’s liquidated damage provisions and in language pertaining to consequential damages.

(Published in the Idaho Business Review, January 2007)

With few exceptions, the Idaho Contractor Registration Act (“Act”) requires registration of anyone who engages in construction work or holds themselves out as capable of performing construction work for others. Contractors in Idaho are well aware that failure to comply with the Act has serious consequences.

The Act contains several non-criminal penalties for failure to register. Idaho Code § 54-5208 provides, in pertinent part, that “[a] contractor who is not registered as set forth in this chapter, unless otherwise exempt, shall be denied and shall be deemed to have conclusively waived any right to place a lien upon real property. . .” Additionally, under Idaho Code § 54-5217(2), a contractor, unless otherwise exempt, cannot file a lawsuit to collect “for the performance of any act or contract for which registration is required by this chapter without alleging and proving that he was a duly registered contractor. . . at all times during the performance of such act or contract.”

Although the Act has been effective since January 2006, Idaho appellate courts have only recently interpreted these provisions. A recent Idaho Supreme Court opinion, Parkwest Homes LLC v. Barnson, clarifies the Act’s penalty provisions as they relate to a contractor’s right to a mechanic’s lien.

In Barnson, the contactor, ParkWest, negotiated and executed a contract to construct a home before it registered under the Act but did not commence construction work until it was properly registered. ParkWest sought full compensation for its work by recording a claim of lien against the property and filing a lawsuit to foreclose its lien. A dispute arose regarding the validity of ParkWest’s lien. The owner argued that the lien was void because ParkWest was not registered under the Act when it entered the contract.

The Idaho Supreme Court did not find such a harsh reading of the Act persuasive. It held that the Act only denies the right to lien “for work or labor done or materials furnished in the construction during the period that the contractor is not registered.” The Court found that “to hold otherwise would mean that a contractor who violated the Act would be forever barred from obtaining a mechanic’s lien.” The Barnson decision shows that the Idaho Supreme Court will liberally construe the Act to allow recovery for the contractor. It is clear, however, that a contractor is only entitled to lien for work performed while duly registered under the Act. This raises several issues with Idaho’s lien statutes.

Idaho’s courts are currently full of priority disputes between mechanic’s lien claimants and beneficiaries under deeds of trust. The priority date for a deed of trust is the date that it was properly recorded. As contractors are well aware, the priority date for a mechanic’s lien is the date of commencement of the work.

Under the Barnson decision, the priority date for a mechanic’s lien is probably when a contractor begins work on a project as a duly registered contractor under the Act. Thus, a contractor who begins construction on a project before it registers under the Act risks losing its lien priority. Moreover, a contractor who fails to timely renew its registration may lose its lien priority on any work performed after the period in which it was unregistered. Given the deflated property values in this economic downturn, a loss in lien priority often results in no recovery for the contractor.

Another important consideration is that a mechanic’s lien is invalid unless recorded within 90 days after last performing work. The 90 day period typically starts to run when the project is substantially complete. Under Barnson, however, the 90 days will likely run from the last day the contractor performed work as a duly registered contractor under the Act. Thus, a contractor may lose its lien rights if it begins a project as a registered contractor under the Act but fails to renew its registration more than 90 days prior to recording a claim of lien.

In Barnson, the Idaho Supreme Court liberally construed the Act’s penalty provisions in favor of compensating contractors for work performed while registered. As this recovery is based only upon the contractor’s lien rights, it is imperative that contractors timely register under the Act and continuously maintain their registration status to take full advantage of Idaho’s lien laws.

(Published by the Idaho Business Review, July 2010)

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