Katrina - Issues For Contractors

Thomas Kelleher, Jr. & Phillip E. Beck
July 7, 2008 — 1,032 views  

The physical and economic devastation as well as the human misery and loss of life caused by Hurricanes Katrina and Rita are difficult to comprehend, notwithstanding the first-hand video reports by the various television networks. Even as other events come to dominate the evening news reports, the immense reconstruction effort will continue for months, if not years to come. Both the hurricanes and the resulting massive reconstruction effort raise issues and questions for construction contractors throughout the country. This article attempts to identify some of these issues which warrant thoughtful consideration by everyone.

1. State of the Nation’s Infrastructure.

While it is widely known that the devastating floods resulted, in large part, from levee failures in New Orleans, does the American public recognize that infrastructure problems or inadequacies are not restricted to one area and could lead to more catastrophes in the future? In general, our nation’s infrastructure requires a very substantial capital investment. The construction industry would be an immediate beneficiary of any such investment; however, the entire country would benefit in the long term. Members of the construction industry (contractors, designers, etc.) need to join together to educate the public and its elected officials on the critical need for this investment, and then work together to assure that the monies are committed in sufficient amounts and with sufficient promptness and are prudently spent. This is a national, state, and local problem that requires immediate and thoughtful attention. It is a top priority.

2. Economic Effects on Industry.

The rebuilding of the devastated areas will create significant opportunities for qualified contractors. There will be a direct economic effect in the Gulf Coast area. Other effects will be nationwide. Key materials will be in short supply due to a combination of especially heavy demands for materials in the Gulf Coast area, and supply chain disruption due to the damage caused by the two hurricanes. In addition, if materials are available, prices will continue to escalate due to the increased demand and higher energy prices. Labor shortages and wage escalation in key trades are also very likely. Given that, contractors should consider the following:

a. Firm Quotations. If a quotation from a prospective supplier is firm, does your company have a binding purchase order or material contract with that supplier and will the supplier be able to honor it? This applies to contractors throughout the country.

b. Availability of Labor and Materials. Review your contract to determine if it addresses the availability of time extensions due to labor or material shortages and Acts of God. If there is a provision for time extensions, is that time compensable or only excusable? Are the parties’ expectations on the availability of materials or labor and their effect on the cost and the schedule clearly articulated in the contract?

c. Payment for Materials. Does your contract with the owner or upper tier contractor contemplate payment for stored materials, either off-site or on-site? If not, explore obtaining a modification to achieve that result so that you can procure and obtain payment for necessary materials before being caught in a supply crisis. Again, this is an issue of general concern regardless of your location.

d. Material Risks. If there is a provision for payment of stored materials, consider the effect of early delivery on applicable warranties. Establish a procedure to inspect those materials for damage and compliance with the specifications upon delivery. Obtain insurance to cover replacement cost if the materials are stolen, lost, or damaged while in storage.

e. Cost Escalation. Consider whether or not your contracts or purchase orders - whether with owners, other contractors, or vendors - address the risk of any material or labor cost escalation. Who bears that risk? If there is a provision addressing contract price adjustments for material or labor cost escalation, is there a clearly defined cost baseline?

3. Environmental Risks and Liabilities.

If the press reports are accurate, it is possible that some of the debris to be removed from the areas affected by Katrina may have been exposed to pollutants or hazardous materials. Contractors need to carefully review and address their potential exposure for liability to the public or workers for future claims based upon alleged exposures to such materials. Legislation has been introduced in Congress to address and limit such potential liabilities. While the enactment of such legislation would be clearly beneficial, its passage is not certain.

Contractors need to carefully review their contracts to determine: (1) what risks are being borne by them; (2) what is the scope of any contractual indemnifications; and (3) what insurance coverage has been obtained? The fact that the actual debris removal and cleanup has been subcontracted may not be sufficient to insulate a contractor from clean-up related claims and liabilities.

Mold must be recognized as a major potential, if not actual, challenge and risk. If a contractor is engaged to perform remedial work on a building that was exposed to flood waters, the possibility of mold related claims must be considered. The scope of the contractor’s remedial efforts must be clearly defined. Broad form indemnification provisions must be carefully reviewed. Quality control procedures need to be clearly specified and followed. Similarly, preliminary and final inspections and acceptance of the work must be completely documented. Again, the fact that a general contractor subcontracted this work to a specialty subcontractor is no guaranty that the risk has been shifted and effectively addressed.

While there may be a natural desire to expeditiously complete remedial work, at the least possible cost, the long-term risks and claims exposure from hazardous materials and mold cannot be ignored. While it may not be possible to prevent someone from asserting a claim in the future, it is possible to have available the necessary documentation to effectively respond to such a claim, if presented. That documentation depends upon careful analysis of contractually assigned risks and responsibilities, clear and complete scopes of work and specifications, and documented compliance with performance requirements.

4. Status of Projects in Progress.

On-going projects can be affected by the direct damage and disruption caused by the hurricanes, as well as the continuing economic effects. Contractors should consider their entitlement to time extensions for excusable delays due to weather, non-availability of labor and materials, Acts of God, etc. If time extensions are justified, document and request them in accordance with the contract’s requirements. If justified time extensions are denied, this action may constitute a constructive acceleration of the work.

In conclusion, Hurricanes Katrina and Rita left an unprecedented wake of destruction in their path. As with prior natural disasters, the construction industry will face the challenges of repairing that damage. For its own protection, however, industry members must do so in a pro-active manner, which recognizes and accounts for the numerous risks posed by these events and the subsequent rebuilding efforts.

Thomas Kelleher, Jr. & Phillip E. Beck

Smith, Currie, & Hancock LLP