Countdown FiveOver the past year, many states experienced budget crises that threaten public works spending and, in some cases, caused entire project shut downs. In Pennsylvania, a stalemate over the budget for Fiscal Year 2016-2017 lasted almost nine months, causing companies and non-profit grant recipients who had contracts with the Commonwealth to suspend their services or temporarily close. In New Jersey, Governor Christie and the legislature deadlocked over taxes, including an increase to the gas tax that would fund the Transportation Trust Fund (“TTF”). As a result, Governor Christie issued Executive Order No. 20, which shut down all construction projects funded by the TTF that were not “absolutely essential for the protection of the health, safety, and welfare” of New Jersey citizens. The Executive Order was issued on June 30, 2016, a list of projects subject to shut down was published on July 6, 2016 and the projects were shut down by July 8, 2016.

Indeed, funding shortages and quick project shutdowns can have serious effects on those companies performing public construction work. In the event a public project you are working on encounters a funding shortage or is suspended or shutdown due to budgetary concerns, consider the following:

  1. Your Contract May Limit Recovery of Costs – Many public contracts include language that limits the enforceability of the contract or the recovery of damages by a contractor as a result of a funding shortage. Be aware of any limitations written into your contract, as this language may not be enforceable, depending on the state.
  2. Mitigation – All parties to a contract have a duty to mitigate their damages, i.e., take reasonable measures to reduce the damages that will be incurred as a result of a breach of contract by another party. In the case of a highway project shut down , this may mean demobilizing equipment or returning rented items. Depending on the circumstances, it could also require that the contractor actively pursue other projects.
  3. Be careful about Employment Decisions – In the event of a project shutdown, you may be tempted to lay off employees to reduce your costs. Before making any employment decisions and to avoid unnecessary employment litigation down the road, be sure to review any applicable employment contracts and consult with an attorney about proper documentation.
  4. Notice – Give immediate written notice any time you anticipate being impacted, incurring damages or if the project will be delayed as a result of a suspension or shut down. If the project resumes, your notices can support a change order request for time and/or money.
  5. Home Office Overhead – A contractor may be able to recover home office overhead costs if a project is suspended for a certain time period. Recovery of those costs may be reimbursed since the contractor cannot seek or acquire other work during the suspension because the project is expected to restart.

Many states continue to encounter budget crises, which means that more contractors may face the difficult situations experienced by contractors in New Jersey and Pennsylvania. Even though it may seem “out of your hands,” knowing your rights and obligations during a project suspension or shut down is critical to protecting your business and avoiding financial losses.

Brian A. Lawton is a Partner in the Firm’s Pittsburgh office. He delivers skilled and practical legal guidance to businesses of all sizes. The industries Brian serves run the gamut of oil and gas, manufacturing, distributing, construction, professional services, and banking.

Jennifer R. Budd is an Associate at Cohen Seglias and a member of the Firm’s Construction Group. Jennifer also has experience assisting clients with issues related to green building and sustainability.