In the latest issue of The Wright Toolbox:
- A Primer on the Davis-Bacon Act – read now
- Does a Commercial General Liability Policy Cover Defective Work by Others? – read now
A Primer on the Davis-Bacon Act
Simply summarized, the Davis-Bacon Act, 40 U.S.C. §3141 et seq. (the “Act”) requires that laborers and mechanics be paid not less than the “prevailing wage,” as determined by the Secretary of Labor, on all federal construction contracts and federally funded construction contracts over $2,000.00. The Act was enacted into law in 1931. It was followed by similar legislation in the manufacturing and service industries. Indeed, at the present time, there are in excess of 60 federal laws related to prevailing wages. Many states have also enacted Little Davis-Bacon prevailing wage legislation.
However, between 1979 and the present, there have been widespread efforts to repeal prevailing wage statutes, including the Act itself. Nine states have repealed their statutes and legislation has been introduced in Congress for the past several years to repeal or limit the Act. Such repeal legislation is broadly supported by the U.S. General Accounting Office, Associated Builders & Contractors, U.S. Chamber of Commerce and others. Most, arguing in favor of repeal, cite inflated costs for government projects, excess administrative costs to the government and contractors, as well as adverse impact on small and minority firms and unskilled laborers. Despite these challenges, the Act continues to be applicable to hundreds of millions of dollars in public construction projects.
The Act itself is fairly short and not overly complicated. Initially, the Act establishes that it applies to every contract over $2,000 for construction, alteration, or repair of public buildings and public works to which the federal government is a party or for which federal funding is provided. Pursuant to the Act, all applicable contracts must have a provision stating the minimum wages to be paid. The “minimum wages” are to be established by the Secretary of Labor based on the determination of the prevailing wages for the classes of labor employed on projects of a similar character in a similar location in which the work is to be performed. The statute further provides that every applicable contract must have a provision requiring payment of laborers and mechanics at least once a week, at the wage rates stated in the specifications and that the contractor will post the scale of wages in a prominent place at the site of the work. If a contractor fails to pay the established minimum wages, the statute authorizes the contracting officer to withhold contract funds from the contractor in an amount considered necessary to pay to laborers and mechanics the difference between the prevailing wage rates and the wages actually paid to the laborers and mechanics.
In addition to the authority to withhold contract funds the Act also provides for termination of the contractor if the contracting officer finds that any laborer or mechanic employed by the contractor has been paid at rates below the determined prevailing wage rate. If the contractor is terminated, the Act states that, “[t]he Government may have the work completed, by contract or otherwise, and the contractor and the contractor’s sureties shall be liable to the Government for any excess costs the Government incurs.” Congress also provided that the Comptroller General shall pay directly to the laborers and mechanics any accrued payments withheld under the contract which are found to be due under the Act. If the funds withheld by the government are not sufficient to satisfy the amounts found to be due to the laborers or mechanics under the Act, such persons have the same right to bring a civil action and intervene against the contractor and the contractor’s sureties as is conferred by law on persons furnishing labor or materials. Finally, the Act provides that the Comptroller General shall maintain and distribute to all departments of the federal government a list of names of persons found to have violated the Act. The Act states “[n]o contract shall be awarded to persons appearing on the list or to any firm, corporation, partnership, or association in which the persons have an interest until three years have elapsed from the date of publication of the list.”
To implement the requirements of the Act, the Secretary of Labor has issued regulations designed to assure coordination of administration and consistency of enforcement of the Act and the other related statutes. Those regulations are set forth in Title 29 of the Code of Federal Regulations (CFR), Subtitle A, Parts 1 through 7. Part 1 provides procedures for predetermining the prevailing wage rate, Part 3, requires submission of weekly payroll data by contractors, Part 5 provides guidelines for application and enforcement of the Act and Part 7 contains procedures governing the practice before the Department of Labor’s Wage Appeals Board.
Under the framework established, the contracting agency has the initial responsibility to determine the appropriate prevailing wage rate by either referring to an existing “General Area Wage Determination” from the Department of Labor or by requesting a “Project Specific Wage Determination.” “Prevailing Wage” is defined as “the wage paid to the majority (more than 50 percent) of the laborers or mechanics in the classification on similar projects in the area during the period in question.” Any interested person may seek reconsideration of a wage determination or a decision of the Administrator regarding application of a wage determination. If the person is not satisfied with the response of the Administrator on reconsideration, an appeal to the Administrative Review Board may be filed. However, the substantive correctness of the Administrator’s wage rate determination is not subject to judicial review. Some courts have taken the view that limited judicial review may be had with respect to issues such as denial of due process or legality of procedures employed by the Department of Labor.
Once the prevailing wage has been established for a project, the contractor is required to submit weekly payroll statements containing information regarding the wages paid to its employees. The contractor is also required to retain and maintain its payroll records for a period of three years. The contracting agency or the Department of Labor may inspect such records and interview employees to ensure compliance with the Act. Failure to maintain and submit the payroll documentation for inspection and review upon request can result in suspension of further payments on the project and may be grounds for debarment.
Courts have uniformly recognized the Act’s dual purpose to give local laborers and contractors a fair opportunity to participate in building programs when federal money is involved and to protect local wage standards by preventing contractors from basing their bids on wages lower than those prevailing in the area. Further, given the nature of the Act, courts generally hold that the Act should be liberally construed to effectuate its purpose. Moreover, the protections of the Act are not waivable by the contractor, employee or agency. However, the Secretary of Labor may make variations, tolerances and exemptions from the regulatory requirements, but not the statutory requirements.
Does a Commercial General Liability Policy Cover Defective Work by Others?
A commercial general liability (“CGL”) policy is one of a number of insurance products that help protect against the risks associated with operating a business. Generally speaking, a CGL policy covers damages that the insured is legally obligated to pay for property damages or bodily injury that is caused by an “occurrence.” The policy usually defines an occurrence as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
A CGL policy will typically contain a number of exclusions that limit the coverage. The most notable is the “Your work” exclusion that eliminates coverage to repair or replace the insured’s own defective work. Absent other exclusions, however, courts generally hold that damages to a third party’s property is covered by a CGL policy.
In a recent case the Ohio Northern University entered into an $8 million contract with Charles Construction to build an Inn and conference center. After the project’s completion, the University noticed that the project had experienced water intrusion from hidden leaks. During the subsequent repairs, additional structural defects were located, which resulted in more than $6 million in total damages.
The University sued the general contractor, which in turn sued its subcontractors. The general contractor also submitted a claim to its CGL carrier, claiming that the damages arose from the defective workmanship of one or more of its subcontractors which should be covered by its CGL policy. The insurer intervened in the lawsuit and filed a motion for summary judgment, claiming that, while non-insured property was damaged, there was no “occurrence” sufficient to trigger coverage because, under applicable law, an “occurrence” must be an accident and poor or defective workmanship is not considered an accident.
The Ohio Supreme Court agreed with the insurer. The court stated that CGL policies are not intended to protect companies from ordinary business risks; instead, they are intended to insure the risk of an insured causing property damage or bodily injury to another. However, the court noted, although there was damage to the property of another (the University), it was not the result of an accident. In the court’s view, an accident must involve “fortuity” or chance, and poor workmanship is not the result of fortuity. Thus, the CGL policy did not cover the GC’s claims, even though the damages were caused by one of its subcontractors.
The Ohio Northern court’s opinion sharply contrasts with most other jurisdictions. So, although Kentucky and Illinois join with Ohio, most other states, including Maryland, hold that negligent work can constitute an accident and thus an occurrence sufficient to trigger CGL coverage where it causes bodily injury or property damage to another.
It is therefore crucial to identify the law that governs your CGL policy, which is not always easy. Here are a couple of hints that may help. First, look at the policy itself. Sometimes it contains a so-called “choice of law” provision that will identify what law governs. That is usually sufficient. Second, if the policy has no choice of law provision, look at the geographic location of the project and the parties. If they are all located in the same jurisdiction, that jurisdiction’s law will most likely apply to the policy. If, however, neither of these situations apply to your policy, you may want to consult a lawyer. The determination may become much more complicated. If you have questions about your CGL policy or any other insurance coverage questions, please contact Wright, Constable & Skeen.
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