Michael S. Zicherman and Robert S. Peckar | Peckar & Abramson
Regulation and compliance
Licensing procedures
Must foreign designers and contractors be licensed locally to work and, if so, what are the consequences of working without a licence?
Licensing requirements vary from state to state and even within a state. Architects and engineers typically require local licences by the states in which they provide professional services. All architects must be licensed, and engineers must be licensed to prepare, sign, seal and submit engineering plans and drawings to a public authority for approval, or to seal engineering work for public and private clients. However, engineers do not have to be licensed if they are merely working in an engineering firm and are not making final engineering determinations or filing engineering drawings. Alternatively, the laws in New York and some other states provide that a foreign engineer or architect may be granted a limited permit to perform design services in connection with a specific project.
As for contractors, not all states require contractors to have licences. States such as California have statutes requiring virtually all contractors to be licensed, while others, such as New York, do not require contractor licensing on a state-wide level, but leave contractor regulation to the municipalities. A growing number of states have also begun requiring entities that provide pure construction management services to be licensed, either by procuring a specific construction management licence issued by the state or by requiring the construction manager to possess a general contractor or mechanical contractor licence or an architect or engineering licence. Nonetheless, where a licence is required by state law, the licence must be kept current, which often requires taking continuing education classes, and the contractor must be able to demonstrate that it is properly licensed.
Practising without a licence when one is required by statute, is viewed as illegal and may subject the person to criminal prosecution. In addition, courts will typically refuse to enforce contracts with such persons. For example, the laws in many states provide that if a contractor is not licensed (when required), or if the licence has lapsed without renewal, the contractor is not entitled to compensation for the work it performed and may be required to return monies already paid. There have even been reported instances of public entities scrutinising a contractor’s licensing history and, if a technical lapse is found, filing a lawsuit to recover any monies already approved and paid. To overcome such inequities, some jurisdictions have established a ‘substantial compliance’ doctrine that allows a contractor or designer, in certain limited circumstances, to recover payment for services performed.
Competition
Do local laws provide any advantage to domestic contractors in competition with foreign contractors?
Though not intended to disadvantage foreign contractors, various local laws effectively give local contractors an advantage in public contracting. Regardless of nationality, construction companies awarded federal contracts must comply with the Buy American Act, which requires that materials incorporated into the project be made in the United States or in a trade agreement-compliant country. Otherwise, 6 per cent of the cost of the foreign materials is added to the bidder’s price proposal. Various other statutes and executive orders impose even more restrictive ‘buy American’ requirements. More than half of the individual states in the United States, as well as many local governments, have similar ‘buy local’ requirements. Thus, while foreign and domestic contractors are treated alike, foreign contractors may be disadvantaged by lack of access to domestic material suppliers and competitive pricing in the local market. The government also has a goal of awarding 23 per cent of its procurement budget to small businesses. Additional goals of 3 to 5 per cent are set for preferential classes, such as small disadvantaged businesses and service-disabled veteran-owned small businesses. Foreign contractors are explicitly excluded from these set-aside programmes, as eligibility requires the company to be organised for profit, with a place of business in the United States, and to operate primarily within the United States, or to make a significant contribution to the US economy through payment of taxes or use of US products, materials or labour.
As a consequence of the large number of contractor and designer acquisitions by large domestic and foreign companies, there have been a significant number of situations where companies have been disqualified from competing for a publicly funded project because of the role that a parent or sister company had in the project, which was perceived to create a possible advantage to the competing contractor. With the increasing frequency of contractors and designers serving at times as project managers, and contractors serving as construction managers or general contractors, depending upon the opportunity, the possibility of this organisational conflict is substantial.
Competition protections
What legal protections exist to ensure fair and open competition to secure contracts with public entities, and to prevent bid rigging or other anticompetitive behaviour?
The US maintains robust laws, on both the federal and state levels, to promote open competition for public construction works. Federally, the foundation for competitive contracting is the aptly named Competition in Contracting Act (CICA), which is the predicate for the Federal Acquisition Regulations (FARs). While the FARs provide the specific acquisition regulations for each of the various government agencies and departments, the CICA still requires (subject to certain specified exceptions) that only sealed bids are to be evaluated, and that the award of the contract is based solely on the factors specified in the publicly advertised solicitation. If a contractor believes that a bid was not properly awarded in the competitive manner required by the CICA or the FARs, the CICA allows for the contractor to protest and challenge an improper solicitation or an improperly issued award. Other federal competition-promoting laws include the Sherman Act, which prohibits price-fixing, bid rigging, bid suppression and other anticompetitive collusive behaviour; the Anti-Kickback Act, which prohibits contractors from soliciting or receiving kickbacks from subcontractors in exchange for subcontract awards; and prohibitions against payments made by contractors to influence the award of a federal contract, among other similar laws. Violations of these laws can carry serious criminal and civil consequences, including up to 10 years’ imprisonment, multimillion-dollar fines and debarment. Moreover, the FARs also obligate federal contracting personnel to report bids that they believe may violate such laws.
Most states have laws that similarly promote open competition for public works by generally requiring awards to go to the bidder that provides the lowest-priced bid and is capable of performing the construction works, thereby removing subjectivity and the potential for favouritism in awarding contracts, and allowing contractors to protest improper solicitations and improperly awarded contracts. The various states also have laws that mirror the federal anticompetition statutes and likewise provide serious consequences for their violation.
Bribery
If a contractor has illegally obtained the award of a contract, for example by bribery, will the contract be enforceable? Are bribe-givers and bribe-takers prosecuted and, if so, what are the penalties they face? Are facilitation payments allowable under local law?
A bribe is generally defined, under state and federal laws, as the giving of money or something of value to a person who can control or influence action favourable to the person making the gift. This would include giving a government contracting officer money to influence the manner in which a contract is awarded. Giving money or something of value to a purchasing agent at a private company to influence the award of a contract is a commercial bribe, but a bribe nonetheless. In this same regard, facilitation payments to expedite or secure the performance of routine government functions are likewise deemed to be impermissible bribes if made to government officials in the United States. However, these same facilitation payments are legal if made abroad by US companies and their subsidiaries, and constitute an exception to the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA). Even though facilitation payments are technically permissible under the FCPA, this exception is very narrowly construed and such payments are closely scrutinised.
Bribery is a crime punishable by imprisonment or fines, or both. Importantly, it can also result in forfeiture of the benefits of the crime, including the right to payment for services provided under the illegally procured contract. The person and the company offering the bribe will suffer criminal prosecution, will likely lose the right to be paid under that contract (even if the work was performed) and may suffer other adverse consequences as a by-product of the illegal activity, such as suspension or debarment from the right to perform work for any government agency. Bribery is taken very seriously in the United States and is zealously prosecuted.
Foreign companies working in the United States need to learn the distinctions between acceptable practice in other jurisdictions internationally and in the United States, as innocent, allowable gift-giving to a government representative in other parts of the world is looked upon harshly in the United States and can have serious legal consequences. Even treating a government employee to dinner can result in disciplinary action against the government official and, at a minimum, the suspicion of illegal bribery by the contractor. Moreover, foreign contractors should be aware that civil and criminal prosecution under the FCPA is not restricted to just US companies working abroad or foreign companies working in the United States or on a US-funded project. Instead, the FCPA is far-reaching and has been successfully used by the US government to investigate and prosecute foreign corporations for corrupt practices occurring in foreign countries on non-US projects, based merely on incidental or tangential contacts with the United States that are unrelated to the project.
Reporting bribery
Under local law, must employees of the project team members report suspicion or knowledge of bribery of government employees and, if so, what are the penalties for failure to report?
Employees of most project teams have no affirmative obligation to report suspicion or knowledge of bribery of a government official or government employee. Similarly, the employee has no obligation to report any fraudulent or criminal conduct by its employer or other project participants. However, on projects performed pursuant to contracts with the federal government or funded by the federal government, there is an obligation to self-report conduct that violates any law, thus requiring that any participation in bribery be reported. Federal contractors are obliged to maintain a compliance programme that includes, among many other elements, policies to encourage employees to report their suspicion or knowledge of such violations. Whistle-blower laws also exist pursuant to both federal and state statutes to encourage employees to voluntarily report incidents of fraud, bribery, criminal conduct and other statutory violations. These laws are designed to protect employees who report these activities against retaliation, such as by demotion or termination of employment. If an employee was retaliated against for whistle-blowing, a court can order the reinstatement of the employee to the same position, and award compensation for all lost wages and benefits, reasonable costs and attorneys’ fees, and punitive damages.
Political contributions
Is the making of political contributions part of doing business? If so, are there laws that restrict the ability of contractors or design professionals to work for public agencies because of their financial support for political candidates or parties?
Whereas bribery statutes focus on money or gifts given directly to public officials, the federal government and a growing number of states have enacted legislation that addresses attempts to influence public officials through indirect means, by way of political contributions. These statutes are commonly referred to as ‘pay to play’ laws. Pay to play is the practice of making contributions to elected officials to garner their favour and to influence their awarding of government contracts. Although particular statutory requirements vary, these laws generally prohibit any company from making campaign contributions to a political official, candidate or to a political action committee for up to several years prior to the award of a public contract. These laws further require contractors bidding on public works to disclose all previous political contributions. If the contractor discloses a political contribution during the proscribed period, the contractor will be disqualified from being awarded the contract. In addition, if the contractor intentionally fails to disclose an offending contribution, the sanctions can be severe, including a monetary penalty up to the value of the contract awarded, and the contractor may be debarred from further contracts with any public entity in the jurisdiction for years. Given such extreme sanctions, it would ordinarily be expected that there would have to be a large political contribution. However, in at least one state, the offending political contributions were as little as US$300 over the preceding 18 months.
Compliance
Is a construction manager or other construction professional acting as a public entity’s representative or agent on a project (and its employees) subject to the same anti-corruption and compliance rules as government employees?
A construction manager or other construction professional acting as a public entity’s representative or agent on a project is typically not governed by the anti-corruption restrictions that pertain to employees of the public entity, unless those restrictions are expressly made applicable to the representative in its contract with the public entity, or by other applicable statutes or regulations. However, insofar as third parties interacting with that construction manager or construction professional are concerned, they nonetheless would be wise to treat these entities as if they were the employees of the public entity. Thus, by way of example, in many US jurisdictions, a trade contractor under contract directly or indirectly to a public entity would be restrained from giving things of a certain value to the public entity employees to avoid accusations of bribery. Even if the laws and regulations do not explicitly preclude a construction manager or other professional working for that same public entity from accepting things of value from that same trade contractor, giving something of value to that manager or professional that exceeds what the public entity’s direct employee can accept could be considered a bribe. Thus, to avoid such potential pitfalls, the wise course for trade contractors is to treat managers and professionals acting on behalf of the public entity as if they were the public entity, and similarly, managers and professionals acting on behalf of a public entity should act as if they are the public entity.
Other international legal considerations
Are there any other important legal issues that may present obstacles to a foreign contractor attempting to do business in your jurisdiction?
The United States is probably one of the most welcoming jurisdictions for foreign investment or active participation in the construction industry. Although there are few obstacles to doing business in the United States, it is not a single jurisdiction like most other countries. Being a contractor in the United States requires knowledge of a spectrum of issues in the particular states in which the contractor intends to operate, ranging from basic legal principles to cultural and business practices. This is often the reason why some contractors in the United States operate within certain geographical regions and not others. Even within large states, while the law is uniform, the range of cultural issues can be quite varied. For example, Florida is a single state but has at least seven or eight different areas so culturally diverse that each could almost be considered a different state; New Jersey is divided culturally between the north (New York-centric) and the south (Philadelphia-centric); California is equal to the length of seven states on the east coast and offers a diversity of culture that would be expected in different states; and, while New York City has its own unique culture, there other parts of the state that have their own culture, none of them at all similar to New York City.
The cultural and business practices aspect of doing business in the United States is critically important. From labour relations to subcontractor relations, work practices and ‘acceptance’ of ‘out-of-towners’ (not least foreign companies), these issues will determine the potential profitability of a newcomer more than any others. Further, the ability of the foreign contractor to adapt to the way business is conducted and individuals behave in the United States is critical to success.
For example, the representatives of foreign companies assigned to work in the United States may not understand or appreciate US laws relating to conduct in the workplace (eg, sexual harassment and age discrimination), which may result in claims, litigation and other serious legal issues. That is why entrance into the market through purchasing an existing and successful US contractor, or joint-venturing with one, is initially the wisest path for a foreign company.
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26 May 2021
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