American Subcontractors Association, Inc.

1004 Duke St., Alexandria, VA 22314-3588 • • (703) 836-3482 fax

FOR RELEASE Sept. 7, 2012
Contact: David Mendes, (703) 655-1954,

ASA and ASA of Texas Challenge Unprecedented Expansion of Subcontractor Obligations Under Contractual Site Investigation Clauses

ALEXANDRIA, Va. — An appeals court’s interpretation of a standard site investigation clause in a construction contract threatens to expand subcontractors’ obligations far beyond investigations of physical conditions. The decision threatens to shift huge new risks to subcontractors, ASA and ASA of Texas told the Supreme Court of Texas in an amicus curiae brief filed on Aug. 31.

ASA and ASA of Texas told the high court that the appeals court in the case of Southern Electrical Services, Inc., and the Morganti Group, Inc., v. City of Houston wrongly held that a site investigation clause shifted the risk of determining prevailing wages to contractors, instead of the City of Houston. Texas law requires public entities, not contractors, to determine the applicable prevailing wage rates and specify those rates, the associations noted.

“The First Court of Appeals incorrectly concluded that the site investigation clause in the contract … required the contractor to ascertain local prevailing wage rates. In so holding, the court of appeals’ overly broad interpretation of a standard site investigation clause in a construction contract vitiated obligations that were both contractually and statutorily imposed on … public entity owners,” ASA and ASA of Texas wrote. “In the past century, site investigation clauses have been applied to require an investigation of ascertainable physical conditions in the environment of the construction project. No Texas court, other than the court’s opinion … ever applied a site investigation clause to prevailing wage rates.”

In 1999, the City of Houston solicited bids to construct a new central concourse at the William P. Hobby Airport in Houston, and provided prevailing wage rates calculations in the bidding documents. The construction contract specifically required that the contractor use the prevailing wage rates provided as its minimum wage and that the contractor was not responsible for ascertaining whether the contract documents were in accordance with applicable laws, statutes, ordinances, codes, and regulations.

Southern Electrical entered into a subcontract to perform work on the project. Both Morganti and Southern Electrical were out-of-state contractors that relied on the prevailing wage information that the city provided to prepare and calculate their lump-sum bids in accordance with the terms of the contract. Three years after the work started, the city directed use of different prevailing wage information than had been provided when the bid was solicited. The city wrote that it would reimburse the contractors and subcontractors for the variance, but later denied the contractor’s claims for reimbursement on behalf of the subcontractors and itself.

The trial court granted summary judgment in favor of the city and dismissed all of Morganti and Southern Electrical’s claims. The appeals court affirmed the trial court by holding that the site investigation clause imposed a duty on Morganti and Southern Electrical to investigate and know the prevailing wage rates in the area.

ASA and ASA of Texas urged the Texas Supreme Court to reverse the appeals court’s opinion, which “ignores, without significant analysis, nearly a century of development of Texas law applicable to the construction industry.”

“To apply this [site investigation] clause to prevailing wages, which would not be ascertainable through an inspection of the project documents or the physical location, would be to place the construction industry in the situation it historically faced at the beginning of the twentieth century. That is, the risks associated with inaccurate information and unforeseen economic conditions (specifically, that of labor) would be borne entirely by the contractor, who would have to build a contingency into its bid for such events. The resulting increase in bids and costs … will inevitably result,” ASA and ASA of Texas wrote. “This is unwise public policy. This is why the legislature allocated the responsibility for surveying prevailing wage rates to the public entities in the Government Code.”

ASA’s Subcontractors Legal Defense Fund paid the fees associated with the filing. The SLDF supports ASA’s critical legal activities to protect the interests of all subcontractors and is funded solely by contributions. SLDF funds are invested in precedent-setting cases across the country.

Founded in 1966, ASA amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. ASA’s vision is to be the united voice dedicated to improving the business environment in the construction industry. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity.

No comments yet.

Leave a Reply