How to Avoid Contract Breaches During a Construction Labor Shortage

Contractors must fully understand the provisions outlined in contracts to ensure they’re not impacted by labor availability

contractors must fully understand the provisions outlined in Contracts to ensure they’re not impacted by labor availability. An honest mistake could spell disaster for a company that’s legally unprepared.
contractors must fully understand the provisions outlined in Contracts to ensure they’re not impacted by labor availability. An honest mistake could spell disaster for a company that’s legally unprepared.

Despite early reports of job growth in the U.S., the labor shortage is still a major issue in the construction industry especially as commercial and residential projects continue to skyrocket through 2018. In fact, according to a recent spending forecast, sourcing and hiring labor has become the number one impediment to growth for most companies leading into the latter half of this year.

To combat this widespread shortage, many companies have started offering aggressive incentive programs that include increased wages, additional benefits and more overtime opportunities that can extend from local areas to neighboring regions. However, these solutions are only a temporary fix and, over time, could open companies up to increased liability if the potential impact of labor issues is left unaddressed.

On a parallel track, labor shortages are also typically indicative of a growing market segment. According to the 2017 Commercial Construction Index compiled by USG Corporation and the U.S. Chamber of Commerce, contractors have “steady optimism about revenue forecasts and their backlog of work” in 2018, and each day analysts are tracking aggressive building plans popping up all over the country. However, as tempting as it may be to hasten contract negotiations for the sake of profit, contractors must fully understand the provisions outlined in contracts to ensure they’re not impacted by labor availability. An honest mistake could spell disaster for a company that’s legally unprepared.

Common contract pitfalls

Though each construction contract is different, every agreement will include provisions that dictate payment and project timing both of which could be adversely affected by a labor shortage. When reviewing contracts, companies should address these issues up front to avoid potential liabilities down the road for all parties.

Labor provisions

During a labor shortage, one of the most common ways projects fall into legal hot water is through a breach of labor requirements. From a contractual standpoint, most agreements will hold the general contractor (GC) responsible for providing adequate labor to execute the work outlined. It’s important to ensure companies can provide the appropriate amount of labor required for the project before entering into an agreement. Conversely, if an owner discovers that its GC can’t meet the proposed deadlines listed in the contract due to staffing concerns, it may be time to reassess the project.

Project delays

In addition to specific labor provisions, companies should also review contract language surrounding project timing and delays, especially as it relates to labor. These provisions can be tricky to identify because they often are not listed in the labor provisions noted above but have similar repercussions if not followed. Depending on the contract language, failure to meet deadlines outlined in the contract due to a labor shortage could either be viewed as a direct breach of contract by the GC or as an uncontrollable market condition that all parties will have to endure. Regardless of the language, it’s important to understand the potential repercussions if deadlines are not met due to a lack of sufficient labor.

Liquidated damages

For projects that require a hard, specific completion date based upon the business of their owners (such as schools, restaurants or retail establishments), owners often will include contract provisions setting forth liquidated damages that could be enforced for failure to meet project deadlines. These are primarily included as financial protections for the owner, ensuring it will be compensated should the project not reach completion on time. In reviewing these provisions, owners and GCs should take time to determine a game plan for dealing with possible labor issues that could impact the project schedule and threaten timely completion of the work.

Payment structures based on contract milestones

Sometimes, contracts will contain clauses that govern payment terms by completion of project milestones. For instance, a project beginning in April may be scheduled for final completion in November. However, the owner may require 50% of the work to be completed by August in order for the GC to be compensated for 50% of the job. This means GCs will need to plan their schedules accordingly, projecting out labor needs based on work status.

Other ways to protect your company

Beyond the confines of a contract, there are a host of other ways companies can protect themselves during a labor shortage especially for ongoing projects that are currently in progress.

Invest in training new workers

Industry labor shortages often result in higher employee churn rates. Construction companies can become so desperate for more help that they end up hiring less-than-qualified employees for a specific job. In these instances, it’s important to remember that quality over quantity is key simply having more bodies on a job doesn’t mean it will be executed correctly or on time. Instead, consider instituting an apprentice program focused on training new talent. Showing a commitment to cultivating and retaining workers gives owners added confidence that the work scoped in contract agreements will be completed accurately and timely. Plus, companies will always have a pool of eager workers that are trained and ready in the event of an unexpected project.

Be proactive when it comes to worker safety

The construction industry is inherently fraught with risk, and in a tight labor market, every employee matters. Construction companies should consider revisiting current safety protocols to limit the number of workplace accidents. This may include reviewing daily walk-around procedures, checking common risk zones like scaffolding, holes in flooring, ladders, etc., and hosting regular safety demonstrations.

Make sure your insurance is adequate and up to date

Most construction companies do not review their insurance policies regularly, opening them up to a host of unnecessary liabilities. Is your professional liability coverage enough to protect a company in the event of a labor shortage delay? Should you consider purchasing a supplemental policy or policies? Are your limits sufficient? All these questions should be addressed when reviewing current insurances and projecting potential future insurance needs. Consulting with a qualified insurance broker familiar with the construction industry is key. 

Above all, owners and GCs alike should take note of this economic shift and be open and honest with each other during the initial project and contract development phases. Be sure to carefully scope all timelines, budgets and staffing schedules to avoid surprises once work begins. And, as always, taking time to have contracts reviewed by a qualified legal team who knows your business is the best way to make certain that available risk mitigation options have been explored.

Joshua Lorenz is an attorney at Pittsburgh-based law firm Meyer, Unkovic & Scott. He focuses his practice on construction law and litigation. Josh can be reached at jrl@muslaw.com

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