Beginning with a sound construction contract can have a significant impact on a firm’s profit, loss, reputation and overall ability to manage a project. Risk shifting is the contracting norm, and attorneys across the country scrutinize contract clauses when deciding which client will prevail.
In the sterile vacuum of negotiation, the owner and contractor presumably reached an understanding of the meaning of the contract terms. However, once a dispute arises that impacts costs or project milestones, the meeting of the minds becomes cloudy.
While not every dispute can be resolved just by reading the contract, an owner and contractor can plan for building contingencies, and the effect on each party, through written notice requirements, indemnity, limitations of liability, dispute resolution, liquidated damages, contingent-pay clauses, differing site conditions, force majeure, warranty, local and state laws affecting contractors and buildings, workforce requirements and insurance.
Each of these topics should be discussed with an attorney in the project’s state to understand the impact on the contractor’s bid and performance. A particular state’s statutes or laws may void certain contract provisions, while other states or cities may have building codes that significantly increase costs and time.
It is also crucial to review the contract documents provided by the owner, engineers and architect, if available or referred to in the construction contract. Failing to review the reports or other documents can result in unexpected costs that some states will not reimburse to the contractor, absent fraud or actual misrepresentation. Understanding the economic impact of these clauses can refine the contract bid and negotiation to better manage the risk of non-compliance, changes or delays.
Coping With Project Changes
Contractors bid on projects in which the plans and specifications are not final or complete, or the contractor has not conducted a thorough site inspection or due diligence before commencing work. Incomplete plans and specifications should be addressed through written change orders, RFIs and written answers (and approvals) from the owner, architect or engineer, as contractually required.
Discussing changes in the field without documenting the changes is not prudent. Given technological advances, providing written documentation of changes (in the manner required by the contract) is easier to manage in the field. Sophisticated software can assist contractors in tracking changes with the required approval to ensure the contractor is complying with the contract terms.
Frequent disputes arise when work is done outside the contract or at the direction of personnel without the contractually required authority to make changes. A handshake or someone’s word may have worked in the past, but disputes now center on the terms of the contract and whether the terms were followed.
Constructors should be aware that they control the means and methods of construction, not the owner. When an owner enlarges the scope of the original contract, the contractor should know the implications based on the contract terms.
When problems do arise, adverse field conditions can be easily documented with drone technology, photos taken with smartphones and other means. It is beneficial to know that a change is needed; however, most construction contracts do not require the contractor to have the knowledge and experience of the project’s engineer or architect. Nevertheless, owners expect sophisticated contractors to know when the plans and specifications are incorrect or unclear and send a request for information. Training key personnel to thoroughly review the plans and specifications and document adverse conditions might assist a judge, jury or arbitrator in seeing firsthand the issues in the field if a dispute arises.
Inspecting the project site and reviewing the reports—or other surveys identified in the bid, plans, specifications or contract—is critical when site conditions differ from the contractor’s understanding. In some jurisdictions, absent a “cardinal change,” the contractor will not be able to collect damages for additional costs to complete the project. In other locales, the contractor also must address unexpected changes in plans due to revisions in building codes or laws before the project is final. The inability to recoup costs for unexpected conditions can translate to millions of dollars lost in time, profit, personnel and resources for other projects.
Understanding the Impact of Delays
Workforce shortages, materials supply issues and sequencing trades can all lead to delays in the project milestones. Owner directives can impact the project scheduling as well. The contract should define delays and provide for either time or money to compensate for them. The owner will likely prefer additional time as the sole remedy for delays, but time is too often inadequate as a measure of the contractor’s additional costs.
Owners may impose liquidated damages for delays in project turnover. When the owner assesses liquidated damages, the cost can be crippling to a contractor, especially if the owner is retaining funds or withholding progress payments. A contractor should negotiate with the owner if delays arise. Some states have pro-contractor laws that provide a remedy for untimely payments from an owner. Knowing the state’s contractor protection laws is key to managing a project when delays arise.
A thorough negotiation of owner or contractor-caused delays can address costs for owner acceleration or suspension, workforce supplementation, mobilization or escalation costs, weather or other delays. If problems arise early in the project, a contractor can hire an independent expert to assess schedule delays and begin building the claim for additional compensation. Force majeure clauses can protect a contractor in the event of unforeseen delays, but in some locales, performing a project in snow, rain or heat may be reasonable job conditions.
One unexpected and generally non-compensable delay is approval by local building officials. The contractor should be familiar with the current permitting and building inspection processes to avoid unexpected delays.
Understanding the impact of these concepts can assist contractors in navigating the risks and adjusting their bids to more accurately account for unknown contingencies or claims. Often a project’s complexity or appeal will require the contractor to grant concessions to an owner on some of the contract terms, but by evaluating the economic impact, the contractor can balance a desire for more business with the distaste of a frustrating build.