PCCA Journal 1st Quarter 2010

The Official Publication of the Power & Communication Contractors Association 1st Quarter 2010 Power & Communication Construction: Where Are We Headed? Also Inside • Contract Review: An Important but Often-Overlooked Aspect of Bidding • New USDA Broadband Funds Focus on Middle- and Last-Mile Projects • DOT Issues New Rules for Pipeline Safety

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1st Quarter 2010 President Ron Tagliapietra Michels Corporation President-Elect Kevin Mason ElectriCom, Inc. 1st Vice President Larry Libla Libla Communications 2nd Vice President Tommy Muse Aubrey Silvey Enterprises, Inc. Treasurer Glen Amerine Amerine Utilities Construction, Inc. Secretary Steve Sellenriek Sellenriek Construction Officer Directors Official Publication of the Power & Communication Contractors Association Board of Directors David Aubrey Okay Construction Tony Briggs Vermeer Manufacturing James Dillahunty Henkels & McCoy, Inc. John Fluharty Mears Group, Inc. Herb Fluharty Mears Group, Inc. Timothy D. Killoren North States Dan Levac Preformed Line Products Todd Mix ElectriCom, Inc. Todd Myers Kenneth G. Myers Construction Robert Orr Sherman & Reilly, Inc. Larry Pribyl MP Nexlevel, LLC Brad Radichel Condux International Austin Shanfelter MasTec, Inc. Matt Trawick Trawick Construction Co., Inc. Bryan Westerman MasTec, Inc. Publication Staff Publisher Timothy Wagner twagner@pccaweb.org Associate Publisher Cheryl Stratos stratosc@pccaweb.org Editor Michael Ancell mancell@pccaweb.org Advertising Sales Manager Victoria Geis vgeis@pccaweb.org Power & Communication Construction: Where Are We Headed? 7 By Mark Bridgers and Dan Tracey Your view of the power and communication construction market depends on two characteristics: where you sit geographically and your ability to understand what energy asset owners and operators and cable and telecom system operators will need. Economic conditions are improving and financial constraints are easing, but the uncertainty of governmental influence is raising the risks and challenges in this market. Contract Review: An Important but Often-Overlooked Aspect of Bidding 23 By Gregory T. Spalj An often-overlooked aspect of determining the appropriate price for construction work is a review of the terms of the construction contract, which can have a profound impact on the costs of construction and the payment therefor. This article provides a short list of the more important terms and conditions found in many construction contracts and subcontracts to which the contractor should at least pay attention in the pre-bid stage of construction contracting. 2010 PCCA Convention Sponsors 21 New Briefs 29 Safety News 37 Helping Hands in Africa Update 40 PCCA Member News 43 Industry Calendar 46 Advertiser Index 46

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PCCA Journal|1st Quarter 2010 7 During 2009, Ayn Rand’s 52-year-old novel Atlas Shrugged ranked as high as #33 on Amazon.com’s top-selling books list. The story of a dystopian United States provides a timely example of government intervention through economic policy and regulation. Today it is especially relevant to the domestic power and communication industry given the significant and broad government influence on the design and construction of this infrastructure. FMI forecasts a very modest combined growth of 1.5 percent for power transmission and distribution and communications related construction in 2010 (Exhibit 1). Obviously, this is not the double-digit figures hoped for, and in many ways expected, as a result of the American Recovery and Reinvestment Act (ARRA). For those of us in the construction industry, the low growth rate is not a surprise given the slow speed of the stimulus funds roll out. While the overall forecasted growth in 2010 is low, the individual performance of each sector and its subsectors varies significantly. As an example, replacement pipeline and electric transmission activity are demonstrating growth at much higher levels than the communications market, which FMI forecasts to continue shrinking in 2010. Growth in all sectors is negatively impacted by the excess housing inventory, which FMI does not anticipate being absorbed until 2011, at which point gas and electric distribution and telecom sectors will rebound. The governmental impact on the electric and gas T&D markets and the telecom market is significant, far reaching, and certainly not what Ayn Rand would have preferred. At the federal level, there is generally a more positive impact on design and construction spending (Exhibit 2). State, local, and municipal impacts tend to serve as more significant obstacles. The lone exception is public utility commissions, where the number of favorable rulings in rate cases has increased dramatically Power & Communication Construction: Where Are We Headed? By Mark Bridgers and Dan Tracey Continued on page 8 “The state of the economy calls for action, bold and swift, and we will act—not only to create new jobs but to lay a new foundation for growth.We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.” – President Barack Obama, Inaugural Address, January 20, 2009

PCCA Journal|1st Quarter 2010 8 over the last three to five years. Regulatory Research Associates reports approximately 71 gas or electric rate cases in 2007 versus 65 cases in for 2008 and an additional 65 or more cases in 2009, representing a marked increase in activity from the previous ten years. Transmission & Distribution John Maynard Keynes saw the government as a spender of last resort during economic crises and was confident it could be effective in taking a longterm view to organize and encourage investment. President Obama may have torn a page from the Keynesian dogma. Of all power segments, transmission and distribution (T&D) construction is the most positively impacted by federal government oversight, regulation, and funding. T&D construction is the focus of much attention as a result of President Obama’s promise to upgrade our ailing grid and create a “green” superhighway for power. But is a high-voltage transmission system built to accommodate renewable energy wishful thinking? FMI forecasts a healthy 6 percent growth in T&D-related construction in 2010 (Exhibit 3). The overall growth rate for this segment will not begin aggressive acceleration until the housing inventory is absorbed, which FMI does not anticipate until 2011. Electric Transmission & Distribution There are four dominant drivers of electric transmission and distribution construction in FMI spending forecasts: Homebuilding/electricity demand 1. Smart grid 2. Aging infrastructure/reliability efforts 3. Renewable power generation 4. FMI forecasts a slow resumption of growth for homebuilding and energy demand through at least 2011 and aging infrastructure issues are well understood. In the descriptions below, we focus on understanding the impact smart grid and renewable power will have on the T&D sector. Market Forecast Continued from page 7 Continued on page 10 “I expect to see the state, which is in a position to calculate the marginal efficiency of capital goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment....” – John Maynard Keynes,The General Theory of Employment Interest and Money, 1935.

PCCA Journal|1st Quarter 2010 10 Smart Grid Impact In the utility world today, few topics are as hot, yet as confusing, as the smart grid. With companies like Cisco predicting the underlying communications network will be “100 or 1,000 times larger than the internet,” there is good reason to be excited.1 Experiments in converting cities over to a “smart grid” are well under way, with Boulder, Colo., and Austin, Tex., leading the way. In Boulder, Xcel Energy invested $100 million to build one version of a smart grid. All in, Xcel installed 200 miles of fiber optic cable, 4,600 residential and small business transformers, and more than 16,000 smart meters. The project has been a success. Customer complaints about voltage fluctuation were reduced to zero from 60 a couple years earlier.2 Xcel’s work in Boulder is one example of a smart grid, but how else might the concept be applied and how will it impact construction spending? While there is no consistently accepted definition, a smart grid generally consists of a spectrum of opportunities, some of which are already in high use (Exhibit 4). It is FMI’s opinion that the impacts to both distribution and transmission construction activity are years away with the exception of meter replacement, which is accelerating. With the grid approaching capacity and more power set to come online, the Department of Energy’s (DOE) Office of Electricity Delivery and Energy Reliability has partnered with industry to begin shoring up transmission lines using high-temperature superconducting (HTS) cables. The first such project was completed in April 2008 when the American Superconductor Corporation and Long Island Power Authority energized a 2,000-ft., 138-kV cable capable of transmitting 574MW of energy. The project cost $58.5 million and would not be possible without a $28.5 million subsidy by the DOE. Also underway is a $39 million project on New York City’s network, operated by ConEdison. Dubbed “HYDRA,” the project is dependent on the Department of Homeland Security for $25 million in funding.3 As NRG Energy CEO David Crane explained, “If we are not doing things completely differently by 2030, we will be in a world of hurt....”4 The ARRA, better known as the stimulus program, appropriated $6 billion to support the DOE’s loan guarantees of $60 billion for renewable energy and electric transmission projects. While undoubtedly a noteworthy and positive measure, utilities and transmission developers are having trouble obtaining permit approval to site and build transmission lines. Standing in their way is a maze of both state and federal regulations, with the two sets often misaligned. In California, a state known for its progressive stance on regulating transmission construction, Governor Schwarzenegger announced he would veto legislation requiring 33 percent of the state’s energy to come from renewable sources by 2020, instead choosing to mandate the change through executive order. His action is out of concern for what his communication director called a “poorly drafted, overly complex bill...that will kill the solar industry in California and drive prices up like the failed energy deregulation of the late 1990s.”5 The source of the conflict was a provision that allowed California utilities to buy power from outside the state. Renewable Power Impact “The United States...lacks a modern interstate transmission grid to deliver carbon-free electricity to customers in highly populated areas of the country...’Green power superhighways’...carrying electricity from remote to populated areas...the key to any cost-effective plan is the use of high-voltage transmission lines in place of the low-voltage lines commonly deployed in the U.S. Market Forecast Continued from page 8 Continued on page 12

PCCA Journal|1st Quarter 2010 12 today.”6 Green transmission corridors, particularly those in support of wind energy, are already a significant driver of transmission construction across the U.S. and at the same time address reliability and aging infrastructure concerns. A number of transmission congestion studies and work by the Federal Energy Regulatory Commission (FERC) resulted in the start of a process to accelerate transmission grid infrastructure build out. Exhibit 5 identifies 21 areas where major (over 345-kV and more than 50 miles long) transmission lines have been proposed, planned, or are under construction. These projects range in cost from hundreds of millions to billions of dollars and represent a large chunk of total U.S. transmission spending between 2010 and 2014. The wind power market accounted for 42 percent of new electricity generation in 2008 with roughly 8,500 MW brought online.7 While the 2009 numbers had not been released at the time of publishing, the year is likely to finish with somewhere in the neighborhood of 7,000 MW being added. Wind energy is the fastest growing, most significant, and therefore the most relevant of renewable energy sources today. Given the incentives incorporated into the ARRA, FMI expects it will continue to thrive. Texas remains the clear leader in wind power generation with over 8,700 MW installed, although Pennsylvania and Wyoming both saw more growth during 2009. Visibility has raised competition dramatically in this segment for designers and contractors who have operated in it for years. Looking forward to 2010, many analysts predict a banner year for wind farm construction as the legislative environment appears to be moving in favor of renewable energy. While FMI is in agreement that 2010 through 2012 will likely be some of the strongest years on record for domestic wind energy construction, we are also mindful of tight credit markets, utility power purchase agreements demand, and an investor community reluctant to fund riskier renewable energy projects. Nearly everyone is optimistic on wind power construction, but a soon-to-be-released report from Ion Consulting of Denver, Colo., is much more pessimistic. In “Near-Term Outlook for U.S. Wind Market Sector,” Ion cited four drivers that will significantly constrain wind power construction: Ignorance of the role a utility has in determining the 1. demand for new wind additions The bubble of merchant wind projects where a util- 2. ity was signing their very first PPA Lower demand for power that will likely defer 4,500 3. MW of new renewables Financial market constraints that will likely con- 4. Market Forecast Continued from page 10 tinue through 2011 While FMI is not nearly as pessimistic, we see significant challenges beyond 2012 when domestic wind power growth will likely slow significantly as the industry faces severe interconnection and transmission infrastructure challenges. Gas and Liquid Transmission & Distribution FMI forecasts positive but unbalanced growth for gas pipeline construction in 2010 forward. New service construction is essentially nonexistent, while higher-pressure distribution and pipeline replacement work are exhibiting significant growth. Also affecting gas T&D is the uncertainty around emission standards, which continue to discourage the development of new coal-fired assets, and with nuclear power still five to seven years off, gas-fired capacity will be a vital part of base load generation construction going forward. Overall, FMI forecasts 3 to 5 percent annual growth for the

PCCA Journal|1st Quarter 2010 13 gas and liquids T&D construction market. This cumulative growth rate will accelerate once the housing inventory is absorbed, which FMI does not anticipate happening until at least 2011. FMI’s forecasted growth rates for the four main 1. pipeline categories include: Gas distribution: An unbalanced growth rate of 3 to 2. 5 percent Gas submarkets/gathering: Peaked in 2007/2008 3. with flat or slow growth until gas prices rebound Gas transmission: Growth of 6 to 10 percent, mostly 4. in large, long-duration projects Liquids transportation: Growth in a wide range of 3 5. to 8 percent, dependent on $60/barrel oil and regulatory pressure to purchase oil from North American resources Submarkets/Gathering Lines A report released in June 2009 from the Potential Gas Committee8 estimated U.S. reserves of natural gas are 35 percent higher than two years ago, thanks in large part to new hydraulic fracturing technology that allows extraction from shale.9 Extraction of shale gas, particularly from the Rocky Mountain and Appalachian regions, has grown rapidly and now accounts for approximately 5 percent of total U.S. production, according to the Gas Technology Institute. The growth in domestic reserves has driven the construction of gathering line networks over the last five years, but it has not been without its problems. Evidence is beginning to surface that hydraulic fracturing puts nearby drinking water at risk of becoming contaminated with methane, 2-butoxyethanol phosphate, and other chemicals used in the extraction process. In Pavilion, Wyo., for example, the Environmental Protection Agency (EPA) is investigating the potential contamination of several drinking wells.10 Also, according to the EPA, roughly 3 trillion cubic feet of methane leak into the air every year. The energy department projects worldwide gas production to rise nearly 50 percent in the next 20 years; emissions through undetected leaks could soar unless monitoring is significantly expanded. But this isn’t necessarily bad news. Despite the $11,000-per-well head price, British Petroleum began introducing methane-catching devices on New Mexico well sites. From 2000 to 2004 emisvisit our Web site www.condux.com Continued on page 14

PCCA Journal|1st Quarter 2010 14 sions there dropped 50 percent, and by 2007 they had essentially ended.11 Over the long-term, FMI expects growth in the construction of gathering lines to be directly related to the upstream gas sourcing and drilling efforts. More stringent environmental and permitting requirements will slow or lengthen this effort. According to Neil Ellerbrook, chairman and CEO of Vectren Corp., “Our industry will probably see more regulation, especially in the area of access to new natural gas supply. On the other hand, given the fact that our customers have been leaders in energy efficiency and conservation for the past 40 years, we are well positioned....”12 Gas Transmission Transmission and largediameter pipe will see 6 to 10 percent growth, particularly to support the natural gas fired power generation market. As of fall 2009, 74 natural gas-fired generation projects valued at more than $20 billion were scheduled for construction kickoff during 2010 alone.13 Many of these will require significant pipeline construction to supply the facility with fuel. Much of the current spending for 2010 is carry-over projects begun in previous years. According to Jeff Wright, director of energy projects for FERC, 2009 had 172 miles of transmission pipe approved for construction and was a slow year compared to 2008, in which 2,140 miles were approved. Many of the larger projects that fall under FERC jurisdiction follow multi-year timelines, and therefore construction activity cannot always be directly tied to permitting. Wright said the recent decline is likely a result of the market catching up from the blazing rate of permitting, approval, and construction activity over the past few years, and he is optimistic that 2010 will be much stronger. There are currently 2,600 miles of pipeline under review or in pre-filing stages. Rock-bottom natural gas prices and expanding domestic supply result in varied construction activity. Though extraction activity has slowed as the natural gas price has fallen, pipelines are still being constructed to support additional generation capacity from a cheap, relatively clean fuel source. The various forms of natural gas have very few or only one carbon atom, making it the cleanest fossil fuel in terms of carbon emissions (Exhibit 6). More than 17,000 of the 27,000 miles of pipeline planned or under construction before 2012 will transport natural gas.14 Domestic pipeline construction is driven by low commodity prices, which slow some distribution construction but accelerate gas use in power generation. Many 2009 projects, however, have been pushed to 2010 due to the economic downturn, declining energy demand, and financial constraints (Exhibit 7). Case in point, U.S. crude oil production for the month of October 2009 averaged 5.36 million barrels per day, a five-year low last seen in 2005.15 Pipeline owners and operators are particularly wary of the federal government’s more widespread regulaMarket Forecast Continued from page 13

PCCA Journal|1st Quarter 2010 15 tion of emissions. The EPA’s final rule on who has to report greenhouse gas emissions leaves out interstate pipelines, but it remains unclear as to whether the pipeline industry will be mentioned specifically in yetto-be published requirements. Pipelines generate greenhouse gases from at least two sources: the engines that run compressors and the methane from the compressor itself. Liquids and Crude Transport Canada is becoming an increasingly important trading partner as the U.S. looks to hit the previous President’s goal of reducing foreign oil imports by 75 percent by 2025. Currently, Canada is the largest source of crude and crude product imports to the U.S., and the only supplier that sends oil over land.16 Once reaching the U.S., the vast majority of movement of crude is via pipeline (Exhibit 8). The Alberta Clipper Pipeline project has received approval from U.S. State Departments and construction has begun on the $3 billion project from Hardisty, Alberta, to Superior, Wis. The 672-mile Canadian leg is already mechanically complete, and the pipeline will go into service when construction has finished on the remaining 328 miles in the U.S. The $12 billion Keystone pipeline is currently under construction to bring oil from the oil sands of northeastern Alberta to refineries in Patoka, Ill., and CushContinued on page 16

PCCA Journal|1st Quarter 2010 16 ing, Okla. The Illinois leg is complete, and work is progressing on the Oklahoma leg.17 Communications FMI forecasts 2009 will close with communication construction spending down 35 percent, as compared to 2008 (Exhibit 10). This drop of nearly $9 billion in put in place work is not unexpected and is projected to continue into 2010 with an additional drop of 9 percent. As we discussed in last year’s utility construction outlook, these relatively wild swings in communications-related spending are not unexpected as the communications market tends to amplify broad economic swings because of the quick-turn and fast-pace of many communications infrastructure projects. Mobile infrastructure will likely lead the way as communicationrelated construction looks to rebound. According to a new report by ABI Research18, even under the worst recovery scenarios mobile service revenues should continue to grow at roughly 1.2 percent annually through 2014.19 Even communications construction growth Market Forecast Continued from page 15 Continued on page 18 2010 PCCA Mid-Year Meeting, July 7 - 10 The Lodge at Torrey Pines, La Jolla, California

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PCCA Journal|1st Quarter 2010 18 will not occur without governmental impact, however, as stimulus packages bolster Asian-Pacific communications firms thereby increasing their ability to compete in North America. Exhibit 9 illustrates the United States’ lackluster performance in linking the country wirelessly, with only one city making DiscoveryTech’s “Top 10 Wireless Cities.” The list was compiled by surveying attendees at the 2008 International Summit for Community Wireless Networks. As more funding continues to encourage smart grid build out, competition for the communications aspect of these projects will increase. Major defense contractors are leveraging their experience in setting up secure military communications to provide similar services for domestic utilities. Last summer, for example, Southern California Edison named Boeing a “security partner” on a $62 million project to connect a 32 MW energy storage facility to the grid. Lockheed Martin, too, is involved with eight utilities positioning themselves for DOE funds. In particular, they are chasing a $150 million project proposed by AEP and a $38 million pilot project by PPL Electric Utilities in Harrisburg, Pa.20 Two firms sure to make headlines for their ambitious infrastructure upgrades in 2010 are Verizon and Clearwire. This year Verizon will complete the first phase of its massive system upgrade to FiOS, and BroadbandDSLReports.com said there may be a delay before the next phase of construction begins. Karl Bode, a frequent writer and blogger on broadband topics, explained, “We’re seeing every indication that Verizon wants to pause and try to ramp up subscriber uptake in the areas they’ve deployed to before building out further.”21 Over the past five years Verizon has invested more than $17 billion in its communications grid. The mobile WiMax firm Clearwire LLC may be even more ambitious than Verizon in 2010, with the goal of 120 million users by year end. This will require quadrupling its current footprint. Clearwire CTO John Saw said, “We just raised another $2.8 billion, and I’m going to spend all of it.”22 Conclusion Your view of the power and communication construction market depends on two characteristics: where you sit geographically and your ability to understand what energy asset owners and operators and cable and telecom system operators will need. Economic conditions are improving and financial constraints are easing, but the uncertainty of governmental influence is raising the risks and challenges in this market. Owners of energy and communications infrastructure will tend to be more conservative and focused in their spending habits over the next two years, while designers and contractors will need to have clarity about the direction, velocity, and behavior of the markets they serve. One size will not fit all in the power and communication markets over the next two to three years, and FMI encourages firms to take the time to understand the dynamics of governmental oversight and regulation, funding availability, and economic demand factors on the markets they serve. Unlike many private companies, utility, cable, and telecom owners have long been guided by governMarket Forecast Continued from page 16 Continued on page 20

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PCCA Journal|1st Quarter 2010 20 mental and regulatory pressures. Perhaps this is why Americans who revile at the thought of state-controlled enterprise in industries such as banking and insurance are happy to put pressure on Washington to improve our nation’s utility and telecom infrastructure. In closing, this quote from President John F. Kennedy reminds us of the unique government and regulatory environment that utilities, telecom companies, and the design and construction firms that serve them will be forced to navigate: “Washington is a city of Southern efficiency and Northern charm.” Mark Bridgers and Dan Tracey are consultants with FMI Corp., which provides management consulting, training, and investment banking services to the worldwide construction industry. They can be reached at (919) 785-9351 or mbridgers@fminet.com. For more information, visit www.fminet.com. END NOTES “Wiser Wires,”The Economist, October 10, 2009, 1. Page 71. Chakrabarty, Gargi,“Beyond Boulder,” EnergyBiz, 2. November/December 2009, Pages 28-29. Rowland, Kate,“It’s all in the wires,” Intelligent 3. Utility, Pages 46-47, February/January 2009. Carey, John,“Rewiring the Utility Business,” Busi- 4. nessWeek, October 12, 2009. “Schwarzenegger to Veto Renewable Energy 5. Bills,”The Associated Press. As appeared in the NY Times, September 12, 2009. Gramlich, Rob, Goggin, Michael, and Gensler, 6. Katherine,“Green Power Superhighways - Building a Path to America’s Clean Energy Future”, American Wind Energy Association (AWEA) and Solar Energy Industries Association (SEIA), February 2009, pg 1. American Wind Energy Association Annual Wind 7. Industry Report Year Ending 2008, American Wind Energy Association. Potential Gas Committee,“Potential Supply of 8. Natural Gas in the United States,” December 31, 2008. Potential Gas Committee, headquartered in 9. Golden, Colo., consists of volunteer experts who are associated with a wide variety of natural gas industry, governmental, and academic institutions but share a common, keen interest in the Nation’s future natural gas supply.The committee currently has about 105 members. Most are active participants in Area Work Committees (AWC) corresponding to seven geographic areas of the country.They are geologists and engineers engaged in exploration for and development of natural gas within the area. Every effort is made to recruit the most knowledgeable experts because they are responsible for preparing resource estimates for each of the geologic provinces within their area. Natural gas recoverable from coal seams is evaluated through joint efforts of the AWCs and a Coalbed Methane Work Committee. More information on the group can be obtained at http://geology.mines. edu/pgc/aboutpgc.html. Mouawad, Jad and Krauss, Clifford,“Dark Side 10. of a Natural Gas Boom,”The New York Times, December 8, 2009. Revkin, Andrew and Krauss, Clifford,“Curbing 11. Emissions by Sealing Gas Leaks,”The New York Times, October 15, 2009. Kauffmann, Bruce G.,“Focusing on the Future,” 12. American Gas, July 2009, pg. 18-23. Burt, Britt,“New Natural Gas-Fired Projects on 13. an Upswing,” Power Magazine, September 2009, Pages 56-58. Ives, Buddy,“Pipeline Activity May Slow But 14. Won’t Be At Crawling,” Pipeline & Gas Journal, March 2009. Energy – American Petroleum Institute’s (API) 15. Monthly Statistical Report - October, Vol. 33, No. 10, November 18, 2009, pg. 2 (http://www.api. org/statistics/accessapi/index.cfm). Trench, Cheryl and Miesner,Thomas,”The Role 16. of Energy Pipelines and Research in the United States,”The Steering Committee on Energy Pipelines and Research, May 2006, http:// www.hunton.com/files/tbl_s47Details/FileUpload265/1697/Role_of_Energy_Pipelines_ and_Research_in_the_United_States.pdf. “TransCanada, ConocoPhillips To Expand Key- 17. stone To Gulf Coast,”TransCanada Corp., DownstreamToday, July 16, 2008. For more information, see www.abiresearch. 18. com. “Worldwide Mobile Service Revenues Continue 19. to Grow,” Last Mile Online, June 24, 2009. St. John, Jeff,“Defense Contractors Pursue the 20. Smart Grid,” greentechgrid, September 9, 2009. Bode, Karl,“First Phase of Verizon FiOS Build 21. Coming to an End, BroadbandDSLReports.com, January 12, 2010. Jones, Dan,“Clearwire Preps NY & SF Markets,” 22. Unstrung, January 11, 2010. Market Forecast Continued from page 18

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PCCA Journal|1st Quarter 2010 23 The pre-bid stage of a construction project involves many forms of inquiry, fact gathering, and analysis, all designed to determine the digits to the left of the decimal point in the lower righthand corner of the last page of the bid form. Contractors may conduct site investigations, review technical specifications for the work, evaluate the financial results of previous, similar work, and solicit quotes from subcontractors and suppliers. But one often-overlooked aspect of determining the appropriate price for construction work is a review of the terms of the construction contract. The terms and conditions in the contract can have a profound impact on the costs of construction and the payment therefor. While a review of the proposed contract by the contractor’s construction lawyer is always advisable, often the size of the contract may not justify the expenditure associated with a comprehensive legal analysis of the risks. There are, however, certain general contract provisions that substantially increase a contractor’s risk and therefore deserve special attention when determining the appropriate price for the work. If the job is a significant one for the contractor, the contractor should send the proposed contract to its construction lawyer for review and ultimate negotiation with the owner. Even in the rare case where the owner may refuse to negotiate its contract terms, a legal review will alert the contractor to risks that it is undertaking on the project so that the price can be adjusted accordingly. Those of you who have heard me speak or have read papers I have authored on the “art” of contract negotiation know that I consider it a form of risk brokering. In a perfect world, risks would be assumed based on who controlled the likelihood of their materializing and who could, therefore, best protect against the risk. In other words, the financial consequences of a risk controlled by an entity should be borne by that entity and no other, and the risk no one controls should be insured against. Risks involving more than one parties’ conduct should be shared according to fault. But in reality, what generally happens in contract negotiation is that the owner attempts to shift as much risk as possible on the contractor, and the contractor in turn tries to pass as much of that risk to subcontractors and suppliers as it can. Consequently, savvy contractors will review the contract terms and object to unacceptable terms before submitting a bid. If the owner refuses to negotiate (or is a governmental entity that cannot negotiate) and if the project’s contract terms pose greater risk to the contractor, the contractor should expect a greater reward, and therefore the contractor’s price should be adjusted upward. For example, if the contract contains a differing site conditions clause, the contractor may lower its price because the contractor knows that, should subsurface conditions differ from those anticipated, the contractor may demand that the owner pay the ensuing extra costs. (More about that later in this article.) The key here is: read the contract terms. You cannot make intelligent decisions without “intelligence,” which in this case means reading the contract you are being asked to sign. What follows is a short list of the more important terms and conditions found in many construction contracts and subcontracts—and some that are implied by the courts regardless of the language of the contracts—to which the contractor should at least pay attention in the pre-bid stage of construction contracting. Flow Down Clauses The project owner can exert its influence on contract terms between the contractor and its subcontractors by including a contract provision requiring the contractor to bind its Contract Review: An Important but Often Overlooked Aspect of Bidding By Gregory T. Spalj Legal Watch Continued on page 24

PCCA Journal|1st Quarter 2010 24 subcontractors to the terms of the general contract. A typical provision, found in many industry standard forms, will read something like this: The contractor shall require each subcontractor, to the extent of the work to be performed by the subcontractor, to be bound to the contractor by the terms of the contract documents, and to assume toward the contractor all the obligations and responsibilities which the contractor, by these documents, assumes toward the owner and the architect. All subcontracts shall preserve and protect the rights of the owner with respect to the work to be performed by the subcontractor so that the subcontracting thereof will not prejudice such rights. All subcontracts shall allow to the subcontractor, unless specifically provided otherwise in the contractor-subcontractor agreement, the benefit of all rights, remedies and redress against the contractor that the contractor by these documents, has against the owner. Where appropriate, the contractor shall require each subcontractor to enter into similar agreements with his sub-subcontractor. The effect of this clause, when combined with the subcontract provisions discussed below, is to bind the subcontractors to the terms of the general contract. These clauses are important for two reasons. First, contractors must obtain agreements with their subcontractors that actually incorporate the terms of the general contract into the subcontract. Otherwise, the general contractor will find itself bound to the owner for the failure of its subcontractor to perform, but without a corresponding remedy against the subcontractor. Second, the subcontractor must be aware of such a provision and ascertain that the terms of the general contract are acceptable. Differing Site Conditions and Site Investigation Clauses Most contracts attempt to allocate the responsibility for extra costs resulting from unexpected site conditions to the contractor, the owner, or both. A typical differing or changed condition clause would read something like this: Should concealed conditions encountered in the performance of the work below the surface of the ground or should concealed or unknown conditions in an existing structure be at variance with the conditions indicated by the contract documents, or should unknown physical conditions below the surface of the ground or should concealed or unknown conditions in an existing structure of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in this contract, be encountered, the contract sum shall be equitably adjusted by change order upon claim by either party made within 20 days after the first observance of the conditions. Differing or changed conditions clauses were developed by the federal government so that its contractors did not have to bid “worse-case scenario” for risks that might lurk underground. The theory is that if there is a mechanism for allowing a price adjustment if conditions differ from what should have been anticipated, then the contractor can bid a lower price as it has less risk of the unexpected. However, these clauses are usually coupled with a site investigation clause requiring the contractor to do its homework and preventing a contractor from recovering any compensation for differing or changed conditions that would have been disclosed had the contractor performed an investigation beforehand: By executing the contract, the contractor represents that he has visited the site, familiarized himself with the local conditions under which the work is to be performed, and correlated his observations with the requirements of the contract documents. Incorporation by Reference Provisions Your initial task is to determine exactly what documents and clauses are included in your contract. Exactly what is incorporated into a particular contract varies between the different standard form contracts and may be modified or altered in any given situation. For example: The Instructions to Bidders, the Proposed Description of Assembly Units, Material and Construction Specifications, Construction Sheets, Special Drawings, and Plans are hereby by reference incorporated herein and together with the Construction Agreement constitute the Contract. A document incorporated by reference into a contract is just as much a part of the contract as any of the language in the contract itself. Such documents are equally binding and should be reviewed by the contractor prior to bidding. This is especially significant in federal government and federally funded construction contracts. These agreements often incorporate by reference specific regulations, statutes, and contract clauses that are published in the Federal Register. The text of these clauses is frequently omitted from the bid documents or contract documents, but because of the “Incorporation by Reference” clause in the contract, the contractor will be bound in accordance with their terms. Subcontractors should be particularly careful of the incorporation by reference clause. Many standard subcontract forms say that the subcontractor acknowledges receipt of the general contract, the General Conditions, plans, and specifications and that the terms of those documents are to be incorporated into the subcontract to the extent they apply to the subcontractor’s work. Legal Watch Continued from page 23

PCCA Journal|1st Quarter 2010 25 There are many risk shifting clauses typically found in the General Conditions, and the subcontractor should insist upon receiving and carefully reviewing these documents before incorporating their terms into the subcontract. Indemnification Clauses The owner usually attempts to require the contractor to indemnify the owner for all losses incurred related to the construction work. Unsurprisingly, owners prefer to make the contractor liable for anything and everything that happens on the job related to the project. For example: The Contractor shall indemnify and hold the Owner, its employees, agents, officers and other contractors, harmless from any and all claims, suits, liabilities or actions of any kind arising out of or relating to the work of the Contractor and its agents, officers, employees, and subcontractors and suppliers at any tier. Such a clause can put all liability onto the contractor even for problem caused by or otherwise the responsibility of the owner. For example, assume that the owner’s representative drives his truck into a backhoe of the contractor and is injured. As the liability for the employee’s claim “relates to the work” of the contractor, the contractor would be liable for all damages regardless of the fact that the owner’s employee may have been negligent. The effectiveness of such indemnification provisions is limited by many statutes that render indemnification agreements unenforceable to the extent that they attempt to shift liability from a negligent party to a non-negligent party to a construction contract. It is important to note, however, that this limitation may be overcome if the contracting parties provide for effective insurance coverage for indemnity. Contractors should avoid these allinclusive indemnity clauses. Instead, liability for claims on a construction project should be allocated based on fault. In other words, if the owner or its agents are 90 percent at fault and the contractor is 10 percent at fault, the contractor should only be required to pay 10 percent of the loss. This is an equitable division of liability that encourages each party to control all risks in their own power. No Damages for Delay Clauses An owner will frequently attempt to limit its liability to the contractor for delay damages by including Continued on page 26 www.aevenia.com • 218.284.9500 3030 24th Ave So. Moorhead, MN 56560 We are Aevenia, Inc., a premier energy and electrical construction company. We offer a powerful bundle of services and back it up with 40 years in the energy and electrical construction industry. Every day, we show our customers what it’s like to do business where trust, integrity, efficiency and quality are principal values. We are Aevenia. The way energy moves. TRANSMISSION & DISTRIBUTION • DATA COMMUNICATIONS RENEWABLES • SUBSTATIONS • URBAN & RURAL TELECOM POWER PLOWING & TRENCHING • ELECTRICAL CONTRACTING VISIT US AT BOOTH #7020 DURING WINDPOWER 2010 CALL TO SCHEDULE YOUR MEETING TODAY

PCCA Journal|1st Quarter 2010 26 a clause in the contract that merely allows the contractor to receive an extension of time and no monetary damages for owner-caused delay. A typical provision is as follows: If the contractor is delayed by the owner or architect or any agent or employee of either, the contractor’s sole and exclusive remedy for the delay shall be the right to a time extension for completion of the contract and not damages. This provision does not preclude the owner’s recovery of damages for contractor-caused delay under other provisions of the contract documents. Most of the standard contract forms do not include a clause limiting the contractor’s recovery of damages for delay. “No Damages For Delay” clauses are generally enforceable, but they are strictly construed by the courts. The contractor may circumvent such a clause and recover additional damages if the delay (a) was not contemplated by the parties, (b) amounted to an abandonment of the contract by the owner, (c) resulted from the owner’s bad faith or arbitrary action, or (d) resulted from the owner’s active hindrance or interference with the contractor’s work. Notice Requirements If a contractor is going to recover extra compensation or time extensions from the owner, it must comply with contractual notice requirements. Every contract requires the contractor to provide the owner with some type of notice for various claims, and the contractor should be careful to adhere to these notice provisions. Notice provisions vary, so identify and be familiar with the ones in your particular contract. Pay particularly close attention to those claims for which notice is usually required, including differing site conditions, changes, and delays. Also determine how much notice the owner must give the contractor if it wishes to take over the work or terminate the contract. Like all contract provisions, notice obligations may be waived or modified by conduct or informal agreement. For instance, the owner’s actual knowledge of and acquiescence in the work has been held by the court to impliedly waive the notice requirement. Other instances in which the notice requirement has been waived include: (1) a course of dealing that repeatedly disregards the requirement, (2) a promise to pay for extra work orally requested by the owner and performed in reliance upon the promise, or (3) any other actions or omissions by the owner inconsistent with an intent to insist upon the requirements. However, it is never advisable for a contractor to neglect to comply with notice requirements in the expectation that a court will conclude that the owner waived its right to notice. A legal case is an expensive proposition, particularly when it is a case for waiver of clear contractual notice requirements based on he-said-shesaid oral evidence. Pay-When-Paid and Pay-If-Paid Clauses The general rule is that, as between the contractor and the subcontractor, the contractor bears the risk of an owner’s insolvency or an architect’s refusal to certify an application for payment. This rule flows from the relationship between the parties. The contractor is in privity of contract with the owner and thus is in a position to protect itself from the risk of late payment or insolvency through the use of contract clauses, guarantees, and similar devices. A subcontractor, in contrast, is not in privity with the owner and therefore is not able to protect itself from the owner’s late payment or insolvency. Contractors have attempted to shift the risk of the owner’s late payment or insolvency to subcontractors through the use of “pay-if-paid” clauses. In most jurisdictions a payif-paid clause will be effective only if written in unequivocal, unambiguous language. An effective pay-ifpaid clause would likely be created by the following: “Payment by the owner to the general contractor is a condition precedent which must occur before the general contractor will be obliged to pay the subcontractor. The subcontractor hereby assumes the risk of the owner’s insolvency or of late payment by the owner to the general contractor and agrees that payment to the subcontractor will be made only with funds received by the general contractor from the owner in payment for work performed by the subcontractor.” If clear and unambiguous language is not used, the courts will likely interpret the clause as a “paid-when-paid” clause, meaning only that the contractor will pay the subcontractor either after it gets paid by the owner or within a reasonable period of time after the subcontractor’s payment application. This is more a matter of the timing of payment as opposed to the right to it. Termination Clauses Termination clauses also vary considerably from contract to contract. A typical termination provision provides for termination by the contractor and the owner as follows: Termination by the Contractor If the work is stopped for a period of 30 days under an order of any court or public authority having jurisdiction, or as a result of an act of government, such as a declaration of a national emergency making materials unavailable, through no act or fault of the contractor or a subcontractor or their agents or employees or any other persons performing any of the work under a contract with the contractor, or if the work should be stopped for Legal Watch Continued from page 25

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