The Infrastructure Investment and Jobs Act (“the IIJA” or “the Act”) was signed into law on November 15, 2021. Among other things, this historic legislation designated $550 billion to be invested in infrastructure over the next five years, a large portion of which is allocated to repairing and rebuilding America’s transportation infrastructure. Nearly $110 billion is specifically designated toward road, bridge and railroad projects. Described by policymakers as a “once-in-a-generation investment,” the construction industry can expect the Act to generate a substantial number of new projects – and new jobs for America’s construction workforce – generally triggering an immense uptick in public sector work. According to the White House, the funds from the IIJA will be used to improve approximately 173,000 miles, or 20% of the nation’s highways and major roads, and an estimated 45,000 bridges. While this work is set to take place over the next decade, construction work is projected to start rolling out as soon as mid-2022. And despite the promise of industry growth – jobs and projects alike – contractors are no strangers to the challenges that have been plaguing the industry in recent years, including labor shortages, material delays, and inflation, all of which have been exacerbated by the ongoing pandemic. In light of the anticipated increase in federal and state funded projects, what should construction professionals consider as they bid on infrastructure projects in coming months and years?
Labor Shortages and Material Delays
A compelling aspect of the IIJA is its commitment to job growth. Indeed, job creation is a central feature of the Act’s appeal. But the economy is simultaneously facing unprecedented changes to the job market. And severe labor shortages are troubling many industries across the country. The construction industry is no different. While the job pool is expected to experience significant growth, it may prove difficult to fill emerging positions on a national and on regional levels. According to the results of a recent workforce survey conducted by the Associated General Contractors of America and Autodesk, “76% of construction companies are having difficulty hiring construction workers.” Results from the AGC survey further reveal that the lead reason for hiring difficulty is that candidates are simply not qualified to work in the industry. Industry professionals in Southern California are all too aware of the decline of readily-available and qualified construction labor in recent years. The pandemic has only worsened the challenges of finding qualified workers. And for their part, workers complain of feeling overworked and underpaid. As new infrastructure work generated by the IIJA increases demand for skilled labor, contractors should expect competition for quality personnel along with potentially substantial increases in the cost of those workers. Substantially higher wages may prove to be the one thing that brings idle skilled workers back to the workforce. In the interim, as the demand-supply ratio worsens, skilled labor shortages must be expected to continue.. Construction firms should consider this when bidding for work, as labor shortages are likely to cause project delays, and all the attendant risks and liabilities. Build these considerations into bidding on and committing to future projects.
Similar delays will likely arise from ongoing supply chain disruptions. In these unprecedented times, material delays aren’t novel. Like COVID-19 itself, they appear to be becoming endemic. How can contractors prepare and protect themselves against ongoing supply chain challenges?
In both instances, while there can be no silver bullet, one answer is diligent attention to contract language. Careful contract language – that is realistic about the risks of labor-cost increases and material delays and costs increases – can only help to reduce the risk of delays. It is critical that contractors understand that labor shortages, increased wages, and material distribution delays will for the foreseeable future impact competition (and potential profitability) for projects in Southern California and beyond. Thus, when negotiating contracts and bidding for work, it is imperative to incorporate risk management strategies to mitigate risk down the line.
It is no secret that the construction industry is feeling the effects of our nation’s shifting economic posture. Inflation is at historic levels. Talk of interest rate hikes dominate the economic news. This is, at least in large part, a result of the pandemic and steps taken to lessen the impact of it on the economy. Regardless, inflation can have catastrophic impact on construction projects, especially for businesses engaged in fixed fee contracts. While fixed fee contracts have been a cornerstone of the construction industry, in an inflationary cycle, they pose unique risks. For businesses mired in fixed fee contracts, it may be worth discussing with legal counsel whether there are contractual tools that allow for change orders under the unique circumstances. For businesses negotiating contracts for future projects, consider whether fixed fee contracts make sense. It may be that in the near to medium term they do not, or at least not without robust language that protects against the effects of the seismic shifts in the economic landscape of the current time.
Incorporating tools such as escalation clauses can offer some protection in these times of economic instability. Contractors and owners need to consult with legal professionals in order to ensure that their contracts afford them the greatest protection.
While the IIJA is a springboard to long overdue revitalization of the nation’s infrastructure, private enterprise needs to be incentivized by potential profits to undertake the work. Concern is growing amongst owners, contractors, and design professionals, as each recognize the potential increase in project price tags and related risks to the bottom line. Naturally, no one will voluntarily assume the responsibility or risk for additional costs. As with recovering from the pandemic, reasonableness and cooperation in contract negotiation will be needed on all sides to allow for the full potential of the IIJA to be realized. Contractors are encouraged to consult legal counsel to learn how to best position themselves to fare well in the coming time of great opportunity to rebuild.
Meg Rogers is an experienced paralegal at DDWK. She graduated from the University of Oregon, and received her paralegal certificate from the University of California, Irvine. Meg is from a family of design professionals and routinely assists attorneys on employment, construction defect, transportation and business law matters. Meg is considering attending law school in the near future.
Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects.