The roundtable Q&A session in Ward and Smith’s virtual 2020 Construction Conference covered a range of issues, from employment matters to vetting private clients, based on questions from attendees.

Ward and Smith attorneys and consultants provided insights so construction companies can make smarter decisions for their ongoing business operations.

Should employers have force majeure clauses in employment agreements? 

Ken Gray, who leads Ward and Smith’s Labor and Employment Practice Group, said that prior to the pandemic, force majeure clauses were rarely seen in employment agreements. 

“Since the pandemic, we certainly have been putting them in certain contracts,” he said. “When you promise somebody they’re going to get paid $80,000 a year as an exempt employee and their compensation’s not tied to certain deliverables, and if there’s a hurricane or any other act of God or a pandemic and the business is slowed down, then those people still expect to get paid $80,000.”

A force majeure clause generally releases parties to a contract from some or all of their contractual obligations if certain events occur that are beyond their control and make performance of the contract impossible or impracticable. 

“A force majeure clause would allow the company to do something different and perhaps agree to a scaled-back approach,” he said. “It certainly was something that many employers I dealt with back in March and April wished they had had in their employment agreements.” 

He noted, however, that these clauses can make employment contracts less appealing, so companies considering them will have to decide if including them might harm their recruiting and hiring process, especially for high performers who may have more negotiating clout.

What documentation is needed to show that Paycheck Protection Program (PPP) funds were actually spent on payroll costs? 

Tom Zamadics, a Ward and Smith attorney who’s focused on PPP loan forgiveness, said there are several things to keep in mind when it comes to documenting how a company has spent PPP loan proceeds. 

First, he said, it’s important to remember that “payroll costs” have a specific definition under PPP rules. Among the considerations is the cap on compensation: PPP funds can’t be used to pay for payroll costs in excess of $100,000 per year per employee on an annualized basis. 

Employers will want to collect bank account statements, reports from their third-party payroll providers, and tax forms, such as Form 941—the employer’s quarterly federal tax return that they have filed or will file. 

“Show your work,” Zamadics advised. “Show that the loan was used for your specific payroll costs that are eligible under the program.”

What are some best practices for vetting private construction clients? 

Hank Harris, with Ward and Smith Business Consulting and construction industry veteran, said there are several ways contractors can vet a prospective private sector construction client. 

One simple way of checking out a client is to talk to other contractors who have worked with the client before, he said. If you don’t know — or don’t want to ask — another general contractor that has a history with the client, some of your subcontractors may be able to provide insight if they’ve worked for a GC that has done work for the client. 

Another option is to do some due diligence on the client’s senior management team. Understanding who those people are can help you understand how they might make decisions. 

Harris also noted that how a client negotiates a contract can provide a lot of insight into what they are going to be like to work with.

“Some clients are ‘Take it or leave it. If you won’t sign it, the next guy will,’” he said. “Whatever they’re trying to shove down your throat, if there’s no give at all, that tells you something.” 

Some of his clients, Harris said, use detailed clauses in the contract to reduce their risk. He cited one Florida contractor that will not finalize a guaranteed maximum price on a building until 80% of the project has been bought out.

If there is a serious construction market contraction, at what point should we consider serious overhead cost reductions? 

When a construction firm should start cutting overhead costs will depend on its situation and track record. 

For many mid-sized contractors, a good rule of thumb might be to ensure that at least half of your fixed overhead is covered by the end of the first quarter (assuming the fiscal year starts in January). If it’s not, Harris said, it might be time to consider taking action. 

But every company is unique, so it’s important to understand your situation. 

“Go back into your history and look at how much backlog you carry into a given year vs. your revenue for that year and try to come up with your own rule of thumb,” he said. 

And it’s not just revenue. The key consideration is gross margin — how much income from projects flows through and is available for overhead costs. 

“They’ve probably got 50 other things like that,” he said. “They’ve got a lot of detail in the contract that hedges their risk and their exposure.”

Must notices of payment be issued by certified mail, or is an email with a read receipt sufficient?

Luke Tompkins, a commercial and construction litigator, answered this question related to using the notice of contract mechanism in North Carolina lien law to avoid the risk of double payments. This risk can arise when a general contractor pays a subcontractor, but that sub fails to flow payments down to its lower-tiered subcontractors, who then assert a subrogation lien on real property. 

Tompkins noted that the state statute requires notices of payment be sent by FedEx, UPS, or registered mail with receipt confirmation. 

“The best practice is to make sure you’re getting a receipt of delivery when you send those notices of payment,” he said. “I think sending an email with the mailed notice is a good — it’s not going to be harmful to send an additional notice — but that notice needs to be sent by mail as required by the statute.”