Date: 11 March 1999
The Year 2000 Problem and the Construction Industry California Constructor June 1998
The so-called Year 2000 or Y2K problem presents serious liability risks for businesses. It arises because most software until recently utilized two-digit year-dates (i.e., 99=1999) and therefore will fail to recognize the millennium change and will incorrectly interpret the year 2000 as the year 1900. This programming error can cause date-sensitive data and calculations to be corrupted (e.g., inventory controls, scheduling programs, billing information) and the equipment controlled by that software to shut down. The problem extends beyond computers to systems and equipment with embedded chips that use date logic in their function (e.g., elevators, security systems).
Certain business sectors obviously are at greater risk than others due to their heavy reliance on date-sensitive data and systems (e.g., banking, healthcare, securities, airlines). Although the Year 2000 problems confronting the construction industry may not be as obvious, they still require careful attention. One such effort is the Public Building Service of the General Service Administration that is actively investigating building-related components that will likely be impacted (see, globe.lmi.org/lmipbs/y2k products/search.htm).
This article will identify some of the risks facing the construction industry and discuss actions that can be taken to minimize those exposures.
What Are The Risks For The Construction Industry?
The Year 2000 risks racing the construction industry can be divided into three broad categories: internal operations, dependencies on others, and liabilities to third parties.
Internal Operations:
Malfunctioning internal systems present the most obvious A millennium bug@ problems. Even minor glitches in internal accounting/payroll and informational database applications and other mission-critical applications may result in cascading adverse consequences. Hardware and operating systems therefore must be assessed and, if necessary, remediated to make them Year 2000 compliant. Other date-dependent items, such as office environmental systems and electronic data exchange connections, should not be overlooked.
Dependencies on Others: The Year 2000 risks arising from dependencies on others are not as well recognized but still pose significant issues for the construction industry, for example:
Insurance: Will you be covered by insurance for Year 2000 losses? Risk Managers can expect to receive Year 2000 audit inquiries on their insurance placement or renewal applications. Not surprisingly, the insurance industry has adopted a cautious approach to this problem and many are predicting Year 2000 exclusions, at least for those companies that do not have adequate Year 2000 compliance plans. Risk Managers will need to know how to respond to these inquiries and the potential restriction(s) on coverage.
Accounting: What will your financial partners expect from you? Companies should expect their accountants/auditors to inquire about their Year 2000 compliance program. While there is no consensus in the accounting profession regarding many year 2000 issues (e.g., who should certify that a Year 2000 program is in place? how should it be audited? how should it be reported?), your company=s Year 2000 plan - or lack thereof - may well have to be disclosed in its financial statements, particularly given the SEC=s recent guidelines indicating that most public companies must disclose their Year 2000 issues. (See, SEC January 12, 1998 Staff Legal Bulletin No. 5.)
Vendors/Business Partners: When will another company=s Year 2000 problem become yours? Construction firms may fac Ablindside@ liability if their critical vendors or business partners experience Year 2000 failures. In the increasingly interdependent business community, even companies that have successfully remediated their own internal systems may face unexpected liability if an important supplier or business partner suffers a Year 2000 collapse that initiates a domino effect.
Liabilities to Third Parties: Warranty/Strict Liability: Liabilities to third parties may arise if building systems or products with embedded chips (e.g., environmental systems, security systems, fire safety systems) that you specified, supplied or installed Afail@ due to the Year 2000 problem. Customers will claim the systems are defective, exposing your company to contractual and/or tort liability.
Recommended Actions To Minimize The Risks: Actions can and should be taken to reduce your company = s Year 2000 exposure, including: 1) create a high-level committee to investigate the extent of your Year 2000 problem and develop a compliance plan; 2) assess and remediate internal operating systems; 3) assess whether your key vendors and business partners are Year 2000 compliant; 4) assess your potential liability and your rights against those who provided non-Year 2000 compliant systems to you, including evaluating any limitation of liability, warranty and statute of limitation issues; and 5) prepare contingency plans to reduce losses if, despite your best efforts, Year 2000 failures occur.
In summary, the Year 2000 challenge to the construction industry is substantial, but can be met if an organized, pro-active approach to the problem is adopted. (For more information on Year 2000 liability issues, please refer to our Year 2000 dedicated website: www.2000law.com.)
Posted with permission from the California Constructor. This file cannot be downloaded from this page.
