The News Story
The Times-Tribune reports that a Lackawanna County insurance agent recently pleaded guilty to fraud for accepting premiums for payment bonds from contractors but never actually procuring those payment bonds from a surety. This resulted in situations where public works projects were performed without any payment bond providing security for the subcontractors. Pennsylvania’s Public Works Contractors’ Bond Law of 1967 (i.e. the “Little Miller Act”) requires payment bonds for public projects but imposes no penalty on the public project owner for failing to ensure the requisite bonds are posted. Thus, Pennsylvania public project owners have no incentive to check to make sure its primes post the required bonds and things like the fraud described in the letter can easily go undetected.
The Practical Lesson for Subcontractors
Accordingly, this story is a good reminder to subcontractors in Pennsylvania about the need to obtain a copy of the payment bond for a public project at the time of subcontract formation rather than waiting until when a dispute arises. Such action will help protect against the type of fraud described in the Times-Tribune report by revealing the lack of payment bond before the subcontractor finds itself in a compromised position.
In an unreported decision handed down this summer, the United States District Court for the Eastern District of Pennsylvania in Elliott-Lewis Corp. v. Skanska USA Bldg., Inc., 2015 WL 4545362 (E.D. Pa. July 28, 2015), declined to extend the Bilt–Rite exception to Pennsylvania’s economic loss doctrine – which established that architects and design professionals can be liable in tort to contractors for purely economic harm resulting from the inclusion of erroneous information in design documents – to a contractor that supplied information to design professionals during remedial construction.
The Franklin Institute (“Franklin”) contracted with Saylor Gregg Architects (“Saylor Gregg”) to design significant renovations to the Franklin Institute in Philadelphia. Saylor Gregg entered into an agreement with Urban Engineers (“Urban”) and Marvin Waxman Consulting Engineers, Inc. (“Marvin Waxman”) to provide engineering services for the project. Franklin contracted separately with Skanska USA Building, Inc. (“Skanska”) to construct the project.
Skanska subcontracted with Elliott-Lewis Corporation (“ELCo”) to install the project’s HVAC piping and controls. Skanska and ELCo had discretion to choose the exact make and model of the HVAC system’s cooling tower so long as Marvin Waxman’s design specifications were met, and ultimately elected to use a four-cell cooling tower which required different piping and controls than the two-cell tower specified in the original plans.
The HVAC system was not completed in accordance with project deadlines and the cooling tower overflowed when the system was first tested, damaging the building itself. In troubleshooting the issues with the HVAC system, Marvin Waxman utilized information provided by the supplier of the HVAC’s pump system, Patterson Pump Company (“Patterson”), and Patterson’s representative, Clapp Associations, Inc. (“Clapp”). After several weeks of unsuccessful repair efforts, Patterson eventually admitted that there were problems “intrinsic to the pumps supplied.”
Despite performing extra work on the HVAC system and providing Franklin with a temporary cooling system, ELCo was never paid for this extra work by Skanska. ELCo sued Skanska for breach of contract and Skanska filed a third-party complaint against Saylor Gregg, Urban, and Marvin Waxman (the “Design Defendants”), claiming that ELCo’s extra work was necessitated by errors in the design drawings and specifications. The Design Defendants filed a fourth-party complaint against Patterson and Clapp, alleging that they reasonably relied on inaccurate information regarding the HVAC system supplied by Patterson and Clapp when drafting the design documents.
Patterson and Clapp claimed that the Design Defendants’ suit was barred by Pennsylvania’s economic loss doctrine, which prohibits a plaintiff from recovering in tort if the loss suffered is purely economic and not accompanied by an injury to either person or property. However, the Design Defendants argued that their claims were valid under the Bilt–Rite exception to the economic loss doctrine, which permits recovery in tort for purely economic injuries when information is negligently supplied by one in the business of supplying information (such as an architect or design professional) and where it is foreseeable that the information will be used and relied upon by third parties. See Bilt–Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa.2005).
Here, the Eastern District declined to extend this exception to Patterson and Clapp because they are not in the business of supplying information. Specifically, Patterson manufactured a product and Clapp facilitated the sale of that product. The court noted that the “sale of a product is fundamentally different than the sale of information, even if the seller provides information about the product to consummate the sale,” and that a “manufacturer and a manufacturer’s representative are very different from the accountants, lawyers, and architects noted in Bilt–Rite.” The court further reasoned that, if the Bilt–Rite exception were to apply to Patterson and Clapp in this situation, then many typical commercial transactions would be subject to this standard and the economic loss doctrine would be rendered meaningless. Because the sale and purchase of a product often involves at least some conveyance of information by the seller, the court determined that broadening Bilt–Rite to include such run-of-the-mill transactions was inappropriate and dismissed the Design Defendants’ claims against Patterson and Clapp.
While the Bilt–Rite exception remains narrowly-tailored, the court also noted that the Design Defendants failed to demonstrate that they reasonably relied on any representations made by Patterson and Clapp when drafting the design documents. Therefore, contractors should therefore be wary of making representations to design professionals on which the design professionals will rely when drafting design documents.
On April 5, 2016 Babst Calland Attorneys Robert Palumbi and Marc Felezzola attended a Prompt Pay Task Force Coalition meeting in Harrisburg organized by the American Subcontractors Association’s Central Pennsylvania Chapter to discuss House Bill 726 of 2015 (“HB 726”). The meeting attendees discussed the proposed legislation, its practical impact on Pennsylvania’s construction industry.
In addition to discussing the as-drafted legislation, meeting participants worked together to prepare proposed changes to the language of HB 726 aimed at clarifying the existing language and placing a cap on the percentage of retention that can be withheld in private construction.
HB 726 is currently before the House Commerce Committee. We anticipate that the Committee will vote upon the Prompt Pay Coalition’s recommended changes to HB 726 at its regularly scheduled meeting in May.
Babst Calland will continue to track HB 726 and provide updates on this blog.
Representative Dan Truitt, a Republican serving part of Chester County, Pennsylvania, recently proposed as House Bill 430 legislation that seeks to amend the Pennsylvania’s Mechanics’ Lien Law of 1963 (i.e. the current and applicable mechanics’ lien law, hereinafter referred to as the “Lien Law”) to add “architect, engineer, or other licensed design professional” to the definitions of “contractor” and “subcontractor” that have mechanics’ lien rights.
Under the Lien Law, a mechanics’ lien may only be maintained for payment of debts due by the owner to a “contractor” or by a “contractor” to any of his “subcontractors”. 49 P.S. § 1301. As of the date of this blog post, the definitions section of the Lien Law defines “contractor” to include “an architect or engineer who, by contract with the owner, express or implied, in addition to the preparation of drawings, specifications and contract documents also superintends or supervises any such erection, construction, alteration or repair.” 49 P.S. § 1201. The definitions section also states that the term “subcontractor” does not include “an architect or engineer who contracts with a contractor or subcontractor….” Id.
Thus, under the current law, architects only have mechanics’ lien rights if they supervise or “superintend” onsite work for the construction project. By amending the definitions of “contractor” and “subcontractor” to expressly include architects, engineers and other design professionals, House Bill 430 stands to remove the requirement that design professionals must perform onsite work to have mechanics’ lien rights, thereby significantly expanding what were previously very limited mechanics’ lien rights for design professionals.
House Bill 430 is currently before the House’s Labor and Industry committee. Babst Calland will continue to monitor the Bill’s status and will post updates on this blog when applicable, so check back often.
In exclusive April 14, 2015, article, the Pittsburgh Business Times reported that Skanska, a Swedish construction company that ranks as the world’s seventh largest, is opening a new office in Pittsburgh. The construction giant will occupy approximately 8,000 square feet of commercial space at 11 Stanwix Street in Downtown Pittsburgh. It remains to be seen what types of projects the company will pursue.
In construction industry news, the Pittsburgh Business Times is also reporting that O’Hara Township based Massaro Corp. is opening an office for its construction management business in Bellefonte, Centre County, Pennsylvania. The office will be located near the Centre County Courthouse and is intended to allow the company to serve its customer base in central Pennsylvania.
According to a report in the Pittsburgh Business Times, Robert Bruno, a labor and employment relations professor at the University of Illinois at Urbana-Champaign, has determined that the shale fields in Western Pennsylvania, Eastern Ohio and Northern West Virginia are a strong job growth engine that have provided work for between 36,320 and 45,400 construction jobs between 2008 and 2014. The Pittsburgh Business Times quotes Mr. Bruno’s study, saying “An examination of national and relevant state employment data for the construction industry indicates that but for natural gas projects, the [Western Pennsylvania, Eastern Ohio and Northern West Virginia] region would have experienced substantially higher incidences of construction industry job displacement.”
The full Pittsburgh Business Times article about Professor Bruno’s study is available here.
Recent economic data suggests that construction starts are down significantly over the first half of the 2014 calendar year. According to the Tall Timer Group, as reported by the Pittsburgh Business Times, housing starts are down 37.3% and non-residential construction is down 29.4% during the first half of 2014. Much more information about the sluggish construction numbers for the beginning of this year may be found by following this link to a blog post about the subject found on Building Pittsburgh, a blog operated and maintained by the Tall Timber Group’s president, Jeff Burd.
The Pittsburgh Business Times, citing an analysis of Labor Department Data performed by the Associated General Contractors of America, recently reported that over the past twelve months, the Commonwealth of Pennsylvania has experienced the fourth highest amount of construction job gains. According to the Pittsburgh Business Times, over the past year, Pennsylvania has experienced a 4.3% increase in construction jobs. This increase translates to the addition of approximately 9,800 construction jobs within the Commonwealth.
Although 39 of the 50 states experienced construction job gains, the Labor Department data suggests that the construction industry is far from fully recovering from the recent economic downturn. In fact, according to the Pittsburgh Business Times article, only North Dakota is now adding construction jobs at a rate above prior peaks in job growth percentages. The full Pittsburgh Business Times article is available here.
According to the most recent government data as reported by the Associated General Contractors of America (the “AGC”), construction employers added 15,000 workers to payrolls in February despite harsh winter weather throughout much of the nation. Those additions have pushed the construction industry employment to the highest level since 2009. The largest area of growth remains residential construction; however, over 50,600 non-residential jobs have been added over the last twelve months.
The AGC also reports that the unemployment rate for workers actively looking for jobs and last employed in construction declined from 15.7% in February of 2013 to just 12.8% last month. This unemployment rate is the lowest since 2008 and represents a significant decrease from February of 2010, when it reached 27.1%.
The AGC’s most recent construction industry employment report provides another indication that the construction industry continues to recover from the economic downturn. The AGC’s full report is available here.
A report analyzing data from the Department of Labor posted on the Associated General Contractors of America’s website indicates that while construction employment for the Commonwealth of Pennsylvania fell by 3% in 2013, construction employment for the Pittsburgh region increased by a slight margin of 0.4%.
According to the figures in the report, which is available here, statewide construction employment in Pennsylvania dropped from 225,000 jobs in December 2012 to 217,800 in December 2013. However, despite this overall loss of 7,200 jobs in the Pennsylvania construction industry during the 2013 calendar year, the data shows that the Pittsburgh region actually added 200 construction jobs, increasing its overall number of jobs 52,900 to 53,100 over that same time period.
Perhaps even more encouraging than the data about the Pittsburgh region, is the data from the neighboring Steubenville-Weirton, Ohio-WV region which topped the list in terms of percentage of growth, posting a growth of 31%. However, because Steubenville is a relatively small market, its 31% growth represents an addition of only 500 construction related jobs – a number equal to the total jobs added by Pittsburgh’s neighboring market to the north in Erie.
Overall, the jobs data remains promising, with construction employment growing in 192 metro areas, remaining static in another 63, and declining in 84. The Associated General Contractors of America’s chief economist, Ken Simonson, attributed much of the growth to the increased demand for apartment and single family housing, noting that private residential construction spending increased by 18% in 2013, while public sector spending decreased by 1% over the same time period. Mr. Simonson remained even more optimistic about the future, stating that an unusually cold or snowy December in many regions may have artificially held employment data down, and with the weather and economy both likely to improve soon, even more areas should post employment gains in the coming months. The Associated General Contractors of America’s press release, including quotes from Mr. Simonson, is available here.
Babst Calland will continue to monitor the construction industry economic reports, so please check back often for updates.
Once again, Shell and Horsehead have extended their land option agreement for Horsehead’s zinc smelter in Beaver County, the site for Shell’s potential cracker. This is the parties’ third extension. Read more on this topic at Babst Calland’s Shale Energy Law Blog.
Recent economic data suggests that the construction industry is continuing to pull itself out of the recent economic downturn. For example, the Associated General Contractors of America (the “AGC”), citing a data released by the Census Bureau, is reporting that construction spending increased by 5.9% between November 2012 and November 2013 despite negative growth in public sector construction. The AGC is also reporting that construction employment increased in 211 out of 339 metro areas between November 2012 and November 2013 and that the largest percentage gain occurred in the Steubenville, OH/Weirton, WV area (posting a 29%, or 500 job increase).
This data suggests that the construction industry continues to rebound and paints a positive picture for private sector construction as we start 2014.
Shell, which has indicated that it will decide next year whether to build a cracker in Beaver County, continues to negotiate land deals with businesses and residents in areas surrounding Horsehead’s zinc smelting plant in Monaca Borough, the site for the potential cracker. Read more from the Pittsburgh Post Gazette.
The construction industry is likely to see an increase in the number of compressed natural gas stations to be built. Babst Calland’s Shale Energy Law Blog has more on the potential trend here.
According to a press release issued by Associated General Contractors of America, an analysis of the most recent government data indicates that employment in the construction industry rose by 20,000 jobs in September, and the industry’s unemployment rate dipped to 8.5%, a new six-year low. In fact, the 8.5% unemployment rate marks a considerable improvement from the 11.9% unemployment rate for the industry just twelve months prior. Additionally, construction spending increased for the fifth consecutive month in August.
Although all of this data paints a very positive picture of the construction industry overall, public construction remains a sector in decline. The Associated General Contractors of America warned the data it analyzed predates the federal government shutdown, which may result in weaker industry spending numbers and hiring gains next month, and certainly will produce lower public construction figures. Additionally, the pre-shutdown numbers still indicate that while overall construction spending increased, public spending remains down nearly 2% from the previous year.
The full press release from the Associated General Contractors of America is available here.