The waiting game: Toughing it out in the construction industry

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Lawyers who practice construction law have been watching and waiting.

Waiting for the B2B bustle to give way to the B2G hustle.

After the business-to-business buzz of the past two years subsided, businesses – and the lawyers who serve them – have been looking for the government to take up some of the slack.

Businesses left standing are looking to do business with Uncle Sam. Not only as a source of credit, but as a paying customer.

“It’s my sense that contractors in Virginia, whether large or small, are gearing up to make some opportunities, because such a large-scale cash infusion has been publicized,” said McLean lawyer Sean M. Howley. Howley is a member of the board of governors of the Virginia State Bar Construction Law & Public Contracts Section.

But unless a contractor is ready to work on roads, the flow of funds through the federal pipeline may be just a pipe dream.
A survey of monies available as listed in the commonwealth’s Web site tracking funds under the American Recovery & Reinvestment Act of 2009, www.stimulus.virginia.gov, does not show strong investment in “bricks and mortar,” whether for commercial or residential development.

ARRA funding falls into three categories: tax and finance actions, which cover matters such as reduced payroll taxes; increased funding to existing federal programs, such as Medicaid; and competitive programs, which is where people get to come in and ask for money.

Not surprisingly, requests already have come in from Virginians for more money than is available. A June 2009 update on the Web site shows that more than 9,000 projects have been submitted seeking funds totaling nearly $466 billion. Requests run the gamut, from individuals seeking tax relief or business start-up funds, to funds for social service programs and large-scale municipal recreational projects.

The Recovery Act includes $811 million for transportation. Of the $694.5 million authorized for highway funding, $118 million will be for projects selected by the state’s three urban metropolitan planning organizations in Washington, Richmond and Hampton Roads, according to the governor’s office.

The remaining highway infrastructure investment funding is to be used for federally qualifying surface transportation projects selected by the Commonwealth Transportation Board. The CTB began letting contracts at its May meeting and reports of funded projects are hitting the papers.

The state Web site also indicates there may be some money for renovation and repair of schools, as well as $191 million in 2009 for Qualified School Construction Bonds.

“The stimulus money hasn’t quite hit the streets yet,” said Northern Virginia lawyer James Fullerton, who has a construction law practice.

“Once the money hits the streets and the projects start, then questions will arise,” Fullerton said. For instance, what state or federal procurement regs will apply, and will contractors be facing heightened scrutiny in light of the federal legislation’s call for “transparency and accountability.”

The ARRA has a stated goal of pumping out the money quickly, which means not explicitly making Federal Acquisition Regulations (FARs) applicable across the board, according to industry reports. But they can still be applied on an agency-by-agency and contract-by-contract basis, according to an analysis that appeared in last spring’s issue of a newsletter for the VSB Construction Law Section.

“What FARs will they try to apply? What law will apply if someone tries to bring a False Claims Act case? There’s no definite answer about anything,” Fullerton said.

FARs can touch on everything from wages to immigration to safety. Whether a particular construction company is familiar with the government contracting process may depend on how old it is, and how quickly it has grown. Many contractors in the traditional locales for government contracts practice – NoVa, Hampton Roads and Richmond – know the drill.

But others may be looking to crack that market.

“I tell people I’ve seen this movie before,” Fullerton said, referring to the shift between the private and public sector. “For the next couple of years, public procurement is going to be the whole ball game.”

Fullerton said that companies that want to gear up for public sector work are boning up on certifications that can keep them in the running, such as a Small Business Administration certification or a “Section 8A certification,” because many federal contracts require involvement of small businesses and/or minority or women-owned businesses.

Fullerton said that VDOT has “these mega-projects. VDOT asked us to help them with their outreach efforts.” He said his partner, May Han, volunteered to attend meetings with minority contractors to provide information that helps to “demystify” the bidding process. Both general contractors and subs need to understand how to document work in order to get paid.

The subs “may be small family-owned businesses with limited experience and VDOT wants to develop that segment of the industry,” Fullerton said.

Contractors are trying to see if they can either qualify for preferential status or form partnerships, joint ventures or mentor-protégé relationships, according to Howley.

Another open question is application of federal wage requirements under the Davis-Bacon Act, said Virginia Beach lawyer Jack Rephan.

“Will every project have to pay union wage rates?” he asked. Such a requirement could boost income for the workers, but “will hurt small contractors,” Rephan said.

“We’re hearing the good news is there’s going to be more federal projects to bid on, particularly in the Hampton Roads area,” which could be “sort of a buffer” in the area, economically, Rephan said.

But mostly, Rephan is still hearing construction companies say “we don’t have enough work.”

“The construction market in general is still pretty depressed,” said Tidewater lawyer Patrick A. Genzler. But there has been “increased interest” in government work from “those who did not want to do federal government work before,” he said. You also see “some larger scale contractors willing to take on smaller jobs,” and contractors “who previously were not interested in federal work, going for it,” he said.

The pace of both commercial and residential development is still slow, lawyers around the state say.

Harrisonburg lawyer Gregory T. St. Ours, current chair of the VSB Construction Law Section board of governors, said he is not sure the federal stimulus funds are having that much of an impact in the western part of the state.

In the residential market, “out here in the Shenandoah Valley, anecdotally, there’s a sense of things are improving,” or at least, within the past 90 days, “closings are starting to pick up,” he said. There has been a lot of “frustration over lender requirements and underwriter requirements” that have slowed the pace of business.

It’s not just financing that has tightened for residential developers. St. Ours said that builders and developers in his area are very concerned over the proposed new statewide storm water regulations, which were the subject of a July 1 meeting at the Augusta County Government Center. Adoption of more restrictive environmental regulations could disperse development, driving up builders’ costs.

Roanoke lawyer K. Brett Marston says that construction companies that do commercial projects are “really looking hard. It’s still a very tough market in private construction,” although “road builders are keeping their fingers crossed.”

Competitive bidding has gotten more competitive. Marston said he has heard from clients that they have bid on projects that have been re-let for bid for some reason, and on the next go-round, the number of bidders has swelled from 10 to 20 or 30. With so many bids, “it’s very hard to get in there and cut their margins” and still make some profit.

About a year ago, pre-project contract review was still a large part of law practice, according to Marston. But now, contracts are being reviewed with an eye toward fixing blame when something went wrong on existing projects.

“Things that maybe used to slide by,” contractors now think “we’ve got to go back and recoup some” of our losses, Marston said. With “projects that have gone sideways,” the question now is, “who can be blamed for delays or extra costs?”

There is a consensus among those who practice construction law that their work has shifted to fighting over recent projects rather than helping clients take on new work.

It’s “mechanic’s liens, Miller Act issues, payment bonds,” Rephan said. Contractors take the position, “We need more work, and are hoping this will shake the tree a little bit.”

Bid protests pick up too. If some “rather profitable new work comes around, bidders will be looking very hard at the low bid for any challenge” they can make, Rephan said.

“Any time the money is tight and the work scarce, you’ll see a lot more cases” that try to wring more dollars from old projects, according to Rephan.

But if lawyers are looking to pick up a profitable new practice area, they should “consider bankruptcy,” said Howley.