< Previous30 The VOICE ● Issue 4, 2019 ●●● Taking a Deep Dive into Labor Continued Generally speaking, there has also been a steady decline in appropriate governmental funding over the years to meet the needs of the national economy as it relates to public education and workforce development. This must change if the construction industry has any hopes in meeting the workforce demands of the future; both through direct funding, incentive programs, and streamlined governmental funding programs. Many regions across the U.S. have come to grips with the reality of the current situation and are beginning to address their local shortages through stronger collaborations between government, education, and industry. In addition to this, America’s youth – as well as their parents – are becoming increasingly aware of the inadequacy of a university or college degree for today’s available job market (not to mention the crushing student debt associated with said degrees) and are once again exploring other career paths, such as the skilled trades. Yet, in spite of these positive signs, the task ahead is monumental and there is still a great deal of work to be done on the national level in reversing the last 30 years of workforce decline. “However, I am more optimistic about the health of our workforce than I was a few years ago,” says Taylor. “I believe we are starting to steer away from the cliff and that the construction industry – particularly the owners – are realizing that the shortage of skilled craft professionals is a major threat and are beginning to take real action.” ● Why Train? If 1% of a Project’s Labor Budget Were Invested in Training… RT-231Expected Average Improvement Capital ProjectsMaintenance Projects Productivity 11%10% Turnover Cost 14%14% Absenteeism 15%15% Injury 26%27% Rework 23%26% CII members have launched a new research program focused on “Workforce 2030.” Two research topics are already underway: RT-371 – Offsite Fab impact on Workforce RT-370 – Modeling the Composition of the 2030 Workforce If you are interested in seeing some completed CII research on this topic, please see CII’s Knowledge Base (www.construction- institute.org/resources/knowledgebase/knowledge-areas) and click on the Knowledge Area for: Human Resources Management, to find summaries on workforce issues like: RT-335 – Improving the U.S. Workforce Development System RT-325 – Best Practices for Succession Planning References • RT-318, Is There a Demographic Labor Cliff That Will Affect Project Performance? www.construction-institute.org/topic- summaries/rt-301-399/rt-318-is-there-a- demographic-craft-labor-cliff • RT-335, Improving the U.S. Workforce Development System. www.construction-institute.org/ resources/knowledgebase/10-10- metrics/result/topics/rt-335 • RT-231, Construction Industry Craft Training in the United States and Canada. www.construction-institute.org/topic- summaries/rt-201-300/construction- industry-craft-training • NCCER Build Your Future www.byf.orgThe Construction Users Roundtable 31 C FEA TURE National Conferences CURT’s National Conference typically sets the tone for the year ahead, and the 2019 National Conference held last February in Orlando was no exception, exploring innovation, technology, and Driving Business Results for Owners. Attendees had the opportunity to hear from such noted speakers as Megan Kreiger of the United States Army Research and Development Center about the hype and realities of 3D printing and Rich Karlgaard from Forbes about thriving in the age of smart machines. “The National Conference provides a great opportunity to learn, network, and openly discuss issues that are facing our members on a daily basis,” says Angela Skow, Aon Senior Account Executive, and CURT Board Member. “The caliber of the attendees and the discussions that go on are outstanding, and you will not leave without learning valuable information, making new contacts, and generally feeling impassioned; like you can impact the industry with your participation.” The upcoming 2020 National Conference (February 10-12) in Chandler, Arizona, is looking to build upon the success of conferences past. Among the highlights will be a sobering – yet vitally important – discussion on construction industry suicide prevention from Cal Beyer of the National Alliance for Suicide Prevention; Inspirational speaker Chef Jeff Henderson will share his redemptive journey from drug dealer to TV celebrity to nationally acclaimed speaker; and returning crowd-favorite, Anirban Basu of Sage Policy Group, will be back again with his always entertaining and informative financial update. Summits/Workshops 2019 was an informative year for CURT, thanks – in large part – to the 2019 has been a busy year for CURT; there have been a lot of accomplishments, a lot of learning opportunities at various workshops and summits, and a lot of achievements to be proud. Let’s take a moment to look back at the year that was, and look ahead at what’s to come. Looking Forward Looking Back continued on page 3232 The VOICE ● Issue 4, 2019 ●●● Looking Back, Looking Forward Continued excellent slate of Summits and workshops presented to its attending member companies. The Technology Summit in April carried on the discussion from the National Conference on the topic of innovation in construction. June’s Safety Summit in Salt Lake City, Utah, proved to be truly exceptional, with external speakers sharing alarming stats about the human and business costs related to drug abuse and suicide, and the surprising prevalence of these issues in construction today. Then, in September, the Lean Summit detailed the characteristics necessary in the building of a successful integrated team. “Attending these Summits allows you to broaden networks in your vertical market and beyond,” says CURT’s Director of Membership, Rob Fischer. “Everyone who attends these events has a singular goal in mind; that is improving the ROI for their organization. Everyone being in the same room gives the ability to share best practices and do root- cause analysis of what’s working and what’s not, to have candid discussions, and exchange ideas that really speak to bettering our industry.” All Summit topics are planned a year in advance and are driven by the various CURT committees. The Summits are then facilitated and coordinated by those with field experience to best ensure that the issues being addressed are current and relevant to the construction industry of today. International Meetings CURT’s International Committee facilitates a number of international meetings to bring together owners with capital projects outside of North America. Their face-to-face meetings provide global footing and a conduit for CURT members to share best practices, as well as success stories, on common areas of interest, such as safety, workforce challenges, cultural differences, and local building regulations, among others. “Local regulations in the countries are always changing, and it continues to bring on new construction experiences and challenges for our members,” says Joe Gionfriddo, CURT Special Projects. “Being an active member of these meetings confirms common challenges and opportunities in a much faster way by providing networking opportunities amongst companies that have a common goal in building or retrofitting facilities in another country.” In October, CURT owners converged in Dublin, Ireland, for the European Construction Symposium, which gave attendees a chance to share greater European perspectives and learn about digital construction applications. This one-day event covered such topics as the use of new technologies to simplify the tasks of supervision in the field, industry’s movement from 2D modeling to a multi- dimensional modeling environment, and emerging advanced work packaging techniques. It concluded with a discussion of where owners want to move forward. Looking ahead, there have been some discussions of where to go next, and planning efforts are underway for the Philippines as a potential meeting location in 2020. Locations and topics are determined by CURT member companies via a fall survey that will be sent out shortly to help determine where the International Committee’s energy would be best focused for 2020-21. Young Professionals Summits The construction industry across the U.S. is continuing to grow while, at the same time, the number of baby boomers who are retiring is increasingly dramatically. Some studies have shown that approximately 41 percent of the current construction workforce and management roles will retire by 2031, which will pile on the current shortage of skilled trades within industry. As such, it is critical for future industry leaders to step up and fill these vacant roles. “It is very important for companies to send their young professionals to CURT’s meetings and Summits, as both the young professionals and the employer benefit from the events,” says Colton Brown, Superintendent at APTIM. “The young professionals have an opportunity to network with not only other YPs, but also with more experienced leaders, and to gain industry knowledge about different aspects of construction. And the employers will gain the opportunity to help their young professionals grow into future leaders within their respective organizations.” CURT Awards of Excellence Every November, CURT’s Awards of Excellence Gala honors and celebrates owners and contractors who are achieving excellence in safety, workforce development, and productivity. “This is a great evening and a top-notch event for our industry,” says Fischer. “You get a chance to see what the industry’s best are doing on their projects and then hear about what they did to make those projects so outstanding; things that you may be able implement in your work.” Earning an Award of Excellence is a tremendous peer-recognition. Categories include safety (for both owners and contractors), project excellence, and workforce development. The applications for the 2020 CURT Awards of Excellence will be available in May and can be obtained at www.curt.org. What’s next? All of CURT’s events throughout 2019 were very well-received by those in attendance, and they ambitiously kept pace with the many changes happening throughout industry. “This year was an exciting year as we constantly strived to raise the bar for ourselves and our “The young professionals have an opportunity to network with not only other YPs, but also with more experienced leaders, and to gain industry knowledge about different aspects of construction.”The Construction Users Roundtable 33 FEA TURE members,” says Skow. “It is clear that we are looking towards the future and identifying those issues that are relevant for our industry.” In 2020, CURT’s Board will continue its efforts addressing the issues facing the construction industry, as well as generating greater value for its members. Going forward, CURT will look to build on the success of the Construction Labor Market Analyzer (CLMA) and its Safety Benchmarking tool, as well as continuing its collaboration with the Construction Industry Institute (CII) in developing Operating System 2.0 (OS2), and improving data analytics for its members. “We are hearing members ask for data analytics,” says Donna Parry, Global Construction Leadership Team, Procter & Gamble, and CURT Board Member. “Data should guide the work that CURT undertakes and our members need input for their business decisions. Our members also recognize that we must expand our sphere of influence to achieve significant improvements in construction results. Their companies must do more with less and they seek more from CURT. The Board is responding by offering more resources to Committee chairs in order to amplify the contributions of our Committees.” The Board is looking forward to what 2020 is sure to bring and is eager to see the impact its Young Professionals will have as they integrate more deeply into CURT Committee work. CURT is confident that the addition of exceptional new members and their contributions will truly set the pace for another strong year, in regard to both content and deliverables. ●34 The VOICE ● Issue 4, 2019 AAn ever-present risk for owners of large-scale construction projects is contractor default. Whether due to a contractor bankruptcy, failure to perform, or other disaster, contractor default can cause project costs to skyrocket. However, there are several forms of performance security that can mitigate these risks, including a letter of credit, parent guarantee, retainage, and performance bonds. Each form of security must be included in the agreement between the parties, and each has advantages and disadvantages for the contractor and owner. Letter of credit A letter of credit is a guarantee by a bank to pay the beneficiary (the owner) on behalf of the contractor under certain circumstances. These circumstances are set forth in the letter of credit and the parties’ contract, and may include default, non-payment of liquidated damages, or the failure to meet performance standards. If one of the enumerated conditions occurs, the owner may draw upon the letter of credit on demand. A letter of credit generally offers an owner the most security because a letter of credit can typically be drawn upon without any delay or costly litigation. These funds are immediately available; the owner merely has to inform the bank that the required circumstances have been met. This immediate availability means that even on projects with large up-front mobilization costs, the owner is covered. Further, it is very difficult for a contractor to stop the owner from drawing on a letter of credit. This is because the bar to obtain a preliminary injunction is a high one. To obtain such injunctive relief, the contractor generally must show (1) irreparable harm; (2) “a likelihood of success on the merits, or a serious question going to the merits to make them a fair ground for trial”; and (3) that the public interest favors an injunction.1 Courts have found that irreparable harm is the most important of these elements,2 and monetary losses are rarely found to constitute irreparable harm.3 Moreover, the UCC imposes an additional requirement that the contract must demonstrate fraud to prevent drawing on a letter of credit.4 Breach of contract or warranty allegations are insufficient as a matter of law.5 For these reasons, it is difficult to stop an owner from drawing on a letter of credit. Moreover, even if the contractor declares bankruptcy, some jurisdictions hold that the owner’s rights under the letter of credit are not affected because the letter is not considered part of the contractor’s estate. Instead, it has been held to be an independent obligation on the part of the bank.6 Further, because it is so difficult to prevent an owner from drawing on a letter of credit, and drawing on a letter can have significant negative consequences for a contractor (including an inability to obtain future credit and bonding), a letter of credit greatly incentivizes contractors to perform. By David Kiefer, Jessica Sabbath, and Gregg Jacobson, King & Spalding LLP Mitigating the Risk of Contractor DefaultThe Construction Users Roundtable 35 LEGAL BRIEF Owners should, however, be mindful that the amount upon which they can draw is limited to the amount set forth in the agreement. Thus, a letter of credit may not cover large losses resulting from excessive delays or catastrophic defects. Related-party guarantee A related-party guarantee is a formal guarantee executed by an entity related to the contractor, generally the parent or ultimate holding company. The guarantee is typically executed at the same time as the contract between the contractor and owner. The contract between the contractor and owner should specify the terms of the related-party guarantee, including the conditions for asserting a claim, any limit on the amount of payment, and the impact, if any, that an assignment or amendment of the contract will have on the guarantee. The dispute resolution language in the contract should also specify that the guarantor may be brought into any litigation or arbitration between the owner and contractor. A related-party guarantee may be the second-best option for an owner, as long as the related party is projected to be solvent for the duration of the project. Because a guarantee is essentially worthless in the event of insolvency, an owner should ask to review the guarantor’s financial statements prior to the time of contracting. Assuming a viable guarantor, however, a related- party guarantee may provide an owner with greater coverage than a letter of credit because the guarantee is generally not limited to a set amount; instead, it typically guarantees all of the contractor’s obligations under the agreement. Moreover, the guarantor’s risk of liability should incentivize the related party to monitor and influence the contractor’s performance. Contractors may likewise prefer this form of security because it has no impact on their cash flow. A drawback, however, is that unlike a letter of credit or retainage, the money to cover performance shortfalls is not immediately available to an owner because the owner must prevail on the underlying dispute before it can recover. In many cases, this will require litigation because the guarantor will attempt to avoid payment. Thus, a guarantee may be more difficult to enforce than other types of performance security. Retainage Retainage is another common form of security, particularly for smaller contracts. The owner retains an agreed- upon amount (often 10 percent) of each invoice the owner pays. At the end of the project (or upon substantial completion, if required by law), the retainage is released back to the contractor in accordance with the terms of the contract. Many states have laws regulating retainage, including the maximum amount of retainage that may be withheld and the duration of withholding, so it is important to review applicable laws at the time of contracting. One benefit of retainage is its simplicity and accessibility. The amount of retainage is agreed upon in advance, so there are no surprises on either side. Further, once retained by the owner, the funds are immediately available. However, a downside to owners is that unlike the other forms of performance security, it takes time to accrue a meaningful sum. Because funds are only retained as invoices are paid, the total amount of retainage may not become significant until the project is well under way. This can be especially important if there is a large mobilization payment, as a contractor default after this payment – but before the owner has paid many invoices – can leave owners in the red. One solution is for parties to agree to a letter of credit and retainage at the beginning of the project, and for the owner to release the letter of credit once the retainage reaches a specified amount. This allows the owner to have immediate access to funds in the event of a default early in the project, and also enables the contractor to eliminate the risk of a letter of credit as the project progresses. Performance bond A performance bond is a three-party contract between a surety, a contractor (principal), and an owner (obligee). If the contractor does not perform its contractual obligations, the surety steps into the shoes of the nonperforming contractor and undertakes to complete the work. Because the surety is generally a financial institution or insurance company, this usually involves paying the owner to complete the contractual scope of work. As the obligee of a performance bond, the owner may sue the contractor and the surety on the bond in the event of contractor default. If the surety pays on behalf of a non-performing contractor, the contractor will be required to indemnify the surety. Performance bonds are generally used on smaller projects where owners may not want to pay for more expensive letters of credit (and smaller contractors may not have sufficient credit to obtain letters of credit). They are the least desirable form of performance security for an owner. Because the surety is not incentivized to spend its money to complete the project and assumes all of the claims and defenses of the contractor, the owner will often find itself in litigation against the surety, arguing over the same claims the contractor asserted before it defaulted. Some contractors prefer bonds to other forms of security because they are less expensive than letters of credit and less risky than related-party guarantees, while others may be deterred by the obligation to indemnify the surety for any loss. Conclusion A contractor’s failure to comply with its contractual obligations can have serious consequences for owners. However, there are many types of performance security that can enable owners to shift this risk of default to a third-party or other source of funds. During contract negotiations, it is important to consider which method – or combination of methods – is best-suited to address the risks on a particular project. ● David Kiefer is a partner in King & Spalding LLP’s Trial and Global Disputes practice. His practice focuses on construction disputes arising from large energy and infrastructure projects. Jessica Sabbath is an attorney in King & Spalding LLP’s Trial and Global Disputes practice. She focuses her practice on construction-related disputes, particularly those arising from energy projects, in addition to commercial litigation and arbitration. Gregg Jacobson is continued on page 3636 The VOICE ● Issue 4, 2019 ●●● Mitigating the Risk of Contractor Default Continued an attorney in King & Spalding LLP’s Corporate, Finance, and Investments practice. He represents owners, developers, and lenders in their global construction projects, particularly those in the energy sector. References 1. Metro. Taxicab Bd. of Trade v. City of N.Y., 615 F.3d 152, 156 (2d Cir. 2010). 2. Faiveley Transp. Malmo AB v. Wabtec Corp., 559 F.3d 110, 118 (2d Cir. 2009). 3. E.g., Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979). 4. UCC § 5–109(b)(4); Lenox Hill Hosp. v. Am. Int’l Grp., Inc., 873 N.Y.S.2d 512 (Sup. Ct. 2008). 5. Am. Bell Int’l, Inc. v. Islamic Republic of Iran, 474 F. Supp. 420, 425 (S.D.N.Y. 1979) (finding no basis for preliminary injunction preventing draw on letter of credit because “[w]hile fraud in the transaction is doubtless a possibility, plaintiff has not shown it to be a probability”); Chelsey Originals, Inc. v. D&Art, Inc., No. 91 CIV. 5394 (CSH), 1992 WL 176597, at *4 (S.D.N.Y. July 15, 1992); Lurgi, Inc. v. Ne. Biofuels, LP, No. 509-MC-0024 GTS/ GHL, 2009 WL 910042, at *5 (N.D.N.Y. Apr. 2, 2009). 6. While many courts have found that a bankruptcy stay does not impact the ability to draw on a letter of credit, some courts have prevented draws where the applicant is bankrupt. E.g., Matter of Twist Cap, Inc., 1 B.R. 284, 285 (Bankr. M.D. Fla. 1979); Wysko Inv. Co. v. Great Am. Bank, 131 B.R. 146, 147 (D. Ariz. 1991).The Construction Users Roundtable 37 INDEX TO ADVER TISERS Contact ssavory@matrixgroupinc.net or call (866) 999-1299 We are now booking space in all of our 2020 editions! for information on how to advertise in the magazine and on the CURT website! COMMERCIAL/INDUSTRIAL INSULATORS CONSTRUCTION CONTRACTING FIRMS Performance Contractors Inc. .............. 15 CONSTRUCTION MAINTENANCE CONSTRUCTION RELATED SERVICES CONSTRUCTION TRAINING PROGRAMS DISPUTE RESOLUTION American Arbitration Association ......... 10 ELECTRICAL CONSTRUCTION ELECTRICAL ENGINEERING AND CONSTRUCTION HEAVY INDUSTRIAL LIFTING AND TRANSPORTING Barnhart Crane and Rigging ................ 33 INDUSTRY EVENTS LABOR MANAGEMENT TRUST Ironworker Management Progressive Action Cooperative ............................ 30 LABOR ORGANIZATION LABOR PROGRAMS United Association (UA) .................20, 21 MILLWRIGHT PROFESSIONALS Southern Millwright Regional Council ....................... inside front cover OFFSITE CONSTRUCTION SAFETY SERVICES TRAINING/EDUCATION UTILITY CONSTRUCTION CONTRACTOR Michels Corporation............................. 14 WOMENS CONSTRUCTION EDUCATION Next >