Despite passing the U.S. Senate by a bipartisan 74-22 vote earlier this month, legislation reauthorizing how our nation’s highway and transit programs are funded stalled this week in the U.S. House. Rather than vote on the Senate’s package, known as MAP-21 (“Moving Ahead for Progress in the 21st Century,” a good summary of which can be found here), the House temporarily extended the existing law, known as SAFETEA-LU, another 90 days yesterday, ostensibly to give itself more time to get its proverbial ducks in a row on a long-term bill. The Senate quickly passed the temporary extension as well, and President Obama is expected to sign it into law immediately. Assuming that occurs, it will be the ninth time SAFETEA-LU has been extended since its expiration on September 30, 2009. ENR’s coverage of this week’s events can be found here.
The previous extension of SAFETEA-LU was due to expire at midnight tomorrow, which would have thrown prosecution of existing highway and transit work into utter disarray and cost scores of construction workers their jobs. From that standpoint, a 90-day stopgap measure is certainly better than no action at all.
But this is no way to invest in our nation’s surface transportation needs.
A couple of my blog posts have mentioned the use of public-private partnerships (“PPPs”) as an alternative source of highway construction financing, including my February 6, 2012 story about NCDOT’s plans to widen I-95 (by the way, last Friday, the Federal Highway Administration gave tentative approval to tolling on I-95).
It remains unclear whether any private money might be utilized to finance the I-95 widening project. What is clear is that PPPs present a host of legal issues that all project participants (and their attorneys) would need to wrestle with should the NCDOT seek private money for I-95, or any other state highway project.
The purpose of this blawg post is to supply three resources for enhancing our collective understanding of the practical implications of PPP financing. A good place to start is this blog post from the blawg “Best Practices Construction Law,” authored by attorney Matthew J. DeVries, who practices in Virginia and Tennessee. Mr. DeVries links to the second resource you should consider, and that’s the AGC’s White Paper on Public-Private Partnerships. Contractors may want to jump to page 13 of the White Paper, which includes a chart summarizing how a PPP could shift typical risk allocations:
For additional depth, consult the National Cooperative Highway Research Program’s Major Legal Issues for Highway Public-Private Partnerships. It presents several representative case studies and concludes that several successful projects have given PPP participants the flexibility to select the optimal project delivery system for their particular project. Such flexibility, of course, could mean procurement outside the sealed bid process.
I’ll be keeping an eye on subsequent I-95 developments. Should the NCDOT begin exploring PPPs, it is hoped that these three resources will provide the contracting community with a foundation for understanding the legal ramifications of this alternative highway financing framework.
According to AGC’s Chief Economist, Ken Simonson, construction material prices for the 12-month period from October 1, 2010 – September 30, 2011 increased 8.1%, while the prices charged by general contractors for non-residential construction increased between 2% – 3%. In the AGC’s October 18, 2011 press release, Mr. Simonson was quoted as saying the following: “Feeble demand for construction is forcing contractors to absorb the bulk of materials price hikes, instead of passing them along to owners. This pattern has persisted for more than two years, and many contractors are increasingly at risk of going under.”
The AGC’s press release reminded me of 2003-2006, when the price of steel in particular was going through the roof, driven to a large extent by international demand (I’m looking at you, China!). While material cost escalation today may not be quite as dramatic as what the industry went through in the middle of the last decade, it does beg the question: what can the law do to help alleviate the pinch?
Short answer: not much. Contractors resorting to common law contractual defenses (such as impossibility, impracticability and frustration of purpose) and contract provisions (such as force majeure clauses) have found little success shifting the risk of cost increases on fixed price contracts to project owners. Part II of this series will discuss the limitations of existing law in obtaining judicial relief for material price increases. Part III will discuss how to manage your risk in light of these limitations.
Stay tuned in the days ahead for more.
There’s potentially good news on the horizon for the contracting community. The 3% withholding tax passed by Congress as part of the Tax Prevention Reconciliation Act of 2005 and scheduled to be fully implemented by January 1, 2013 has been repealed by the U.S. House of Representatives in a bipartisan 405-16 vote; the N&O’s coverage can be found here. The White House has indicated its intention to sign the bill into law if the Senate follows the House’s lead and votes for repeal.
By way of background, the 3% withholding was intended to ensure tax compliance by contractors performing work on government projects. The 2005 legislation required 3% withholding on payments for goods and services to contractors made by all branches of the federal government and its agencies and all units of state and local governments, including counties and parishes, with annual expenditures of $100 million or more.
The Associated General Contractors of America (“AGC”) has been fighting the 3% withholding with gusto, arguing primarily that it would put a squeeze on a contractor’s project cash flow, in turn raising payment bond surety risk that would lead to increased bonding costs. You can read the September 12, 2011 testimony of AGC CEO Stephen E. Sandherr to the IRS opposing implementation of the 3% withholding tax here.
Stay tuned for updates on repeal activity in the Senate.