Two Important Construction Contract Provisions Implicated by Labor Shortage

As I look out my office window in Salt Lake City, I can see numerous cranes dotting the skyline. Utah has one of the most robust economies of the nation, including a healthy construction industry. Nevertheless, the construction workforce in Utah is reportedly the largest market sector in need of workers.^[i] Utah is not unique in feeling the effects of a labor shortage in the construction field. In August 2017, the Associated General Contractors reported the results of an industry-wide survey regarding this labor shortage, stating that 70 percent of construction firms were having difficulty finding qualified craft workers even though construction demand was on the rise.^[ii]

With the rising demand, contractors may be tempted to negotiate and sign contracts for future projects and worry about the labor shortage when the time comes. But, going into contract negotiations, contractors must recognize that many contractual provisions could be impacted by the labor shortage. This article addresses two such provisions—those related to safety and delay.

First, boilerplate construction contracts commonly state that the contractor’s work encompasses providing the labor necessary for proper execution and completion of the project. These same contracts often prohibit the contractor from employing unfit persons who are not skilled in the tasks assigned to them. Said differently, a contractor is responsible for providing all necessary labor, including the skilled labor necessary for the job. Failing in this responsibility not only implicates the quality of the work but also can result in a more unsafe environment and increase in workplace accidents. Many contracts require the contractor to take reasonable precautions to ensure safety of workers and prevent damage to adjacent property. The contractor oversees the safety of not only its own forces but those of its subcontractors as well. Tied to the responsibility of providing a safe workplace environment, almost every contract contains an indemnity provision requiring the contractor to indemnify the owner for bodily injury caused by the contractor or anyone employed by it.

You can see the point: hiring an unfit, unskilled, or otherwise improperly trained worker could result in poor workmanship and injury and, in turn, damages that consume all or part of the job’s profit. It is unlikely that a contractor will be able to negotiate these provisions away, but it should have its eyes wide open to the warranty and indemnity claims that could affect profits. During the labor shortage, contractors should pay special attention to assuring that their employees are properly trained, especially with regard to workplace safety. If there is a concern, they should talk to their insurer to understand whether certain coverages can protect against any increased risks.

Second, construction contracts commonly require the contractor to proceed expeditiously with adequate forces to achieve substantial completion within the contract time. The contractor can be subject to damages if it fails to do so. Of course, some delays are outside of the contractor’s control and are, therefore, excusable. A common example of this kind of delay is when the contractor is confronted with abnormal weather conditions—the proverbial “act of God.” When it comes to labor issues, however, only conditions which were truly unforeseeable at the time of contracting, such as an unforeseen labor strike, will be deemed “excusable.”^[iii] But, delays caused by foreseeable labor problems, such as the current labor shortage, are within the contractor’s control and are therefore deemed “inexcusable.”^[iv]

Damages for delay often take the form of liquidated damages. Given the difficulties during contract negotiation associated with determining the extent of loss due to delay, owners often incorporate a liquidated damages provision that states a specific sum for any actual delay caused by the contractor. This could be expressed in an amount per day after the contract completion date. Liquidated damages provisions are not always valid, particularly if they express unreasonable amounts that result in a penalty to the contractor. But, if the stipulated damages sum (which could even be less than the actual damages) might reasonably have been anticipated at the time of contracting, the provision will likely be upheld.^[v] Even if a liquidated damages provision is stricken by a court, the owner may still be able to prove damages for delays associated with the contractor’s inability to provide an adequate labor force.

Contractors should go into contract negotiations with their eyes wide open regarding these important contract clauses that could be impacted by the current labor shortage. Doing so may allow contractors to take action during negotiations, with their current labor force, and when hiring new employees to avoid stumbling into a breach claim based on these or similar boilerplate contract provisions.