AMERICAN COLLEGE OF REAL ESTATE LAWYERS
MID-YEAR MEETING
MARCH 12, 2005
WHAT YOU SHOULD KNOW BEFORE YOU START THE
CONSTRUCTION PROJECT
TIPS FOR DIRT LAWYERS
By
STANLEY P. SKLAR, ESQ.
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TABLE OF CONTENTS
Page
I.
II.
PRICING MECHANISMS FOR CONSTRUCTION CONTRACTS ................................1
A.
The Lump Sum Contract ..............................................................................1
B.
Cost Plus A Fee Contracts ...........................................................................1
C.
Guaranteed Maximum Price ........................................................................3
NEGOTIATING THE CONSTRUCTION CONTRACT ...................................................3
1.
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Qualifying the Contractor-The Owner’s View ........................................................3
A.
Organizational Matters.................................................................................3
B.
Financial .......................................................................................................4
C.
Experience....................................................................................................4
D.
Trade Relations ............................................................................................4
E.
Claims ..........................................................................................................5
F.
Bonding ........................................................................................................5
G.
Insurance ......................................................................................................5
H.
Safety ...........................................................................................................5
I.
Licensing ......................................................................................................6
J.
Technology ..................................................................................................6
K.
References ....................................................................................................6
L.
Due Diligence Questionnaire .......................................................................6
(i)
Organization .....................................................................................6
(ii)
Licensing ..........................................................................................7
(iii)
Experience........................................................................................7
(iv)
Subcontractors and Vendors ............................................................7
i
III.
(v)
Technology/Equipment ....................................................................7
(vi)
Financial Statements ........................................................................8
(vii)
Bonding ............................................................................................8
(viii)
Insurance ..........................................................................................8
(ix)
Claims ..............................................................................................8
(x)
Safety ...............................................................................................9
(xi)
References ......................................................................................10
CHECKLIST FOR CONSTRUCTION CONTRACTS ....................................................10
THE TROUBLED CONTRACTOR - THE OWNER’S VIEW........................................12
IV.
A.
Slow start followed by a mad rush to complete .........................................12
B.
Failure of the general contractor to assign qualified supervisors to
the project resulting in poor coordination of the trades. ............................12
C.
Excessive change orders usually are the precursor of problems, and
can be the fault of the contractor or its subcontractors ..............................12
D.
Frequent changes of the contractor’s superintendent or other key
personnel often indicates the existence of a problem with the
general contractor’s management ..............................................................13
E.
Changes in subcontractors without proper explanation regarding
their termination .........................................................................................13
SELECTED CONSTRUCTION CONTRACT ISSUES ...................................................13
A.
Time .......................................................................................................................13
B.
Change Order Procedures ......................................................................................13
C.
Payment Procedures ...............................................................................................13
E.
Delay Claims ..........................................................................................................14
F.
Completion.............................................................................................................14
G.
Attorney’s Fees and Costs .....................................................................................14
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I.
PRICING MECHANISMS FOR CONSTRUCTION CONTRACTS.
Too often, there is confusion between the Construction Delivery System selected and the
pricing mechanism1 used to establish the contract price in a construction contract. Bear in mind
that any pricing mechanism selected may be adapted to any delivery system chosen for the
project. What is important is to understand the distinctions between them.
A.
The Lump Sum Contract
This most familiar pricing mechanism is where the contractor agrees to perform the work
specified in the contract for a stipulated or lump sum amount. This has been defined as the
“fixed price for an agreed upon project or amount of work” whereby “the contractor or
subcontractor performs a specified scope of work for a fixed cost agreed upon prior to
commencement of construction and altered only by changes in the work agreed upon by both
parties.”2 Often, the term “fixed price” or stipulated sum” are used interchangeably with the
term “lump sum.”
The contractor assumes the risk of additional costs if it fails to complete the project
within the agreed amount. The trade is that the contractor achieves a greater profit if it is able to
effect efficiencies that reduce the cost to complete the work, since the owner has agreed to pay
the flat, stipulated sum to the contractor. One major problem with the lump sum contract is that
it inherently pits the contractor against the owner and the owner’s design professional when the
costs do exceed the lump sum and the contractor seeks to recover the excess by making claims
for extra work allegedly not within the agreed scope of work or that may not have been
reasonably anticipated, such as those caused by unforeseen conditions. While this pricing
mechanism is popular with owners because of its predictability, its success depends greatly upon
the quality and completeness of the plans. Plans that are not sufficiently complete, such as those
one would expect to see in a Fast Track project, usually would not support the use of the lump
sum price. Thus, that pricing mechanism is best used where the owner has thoroughly defined
the scope of work and the plans and specifications are complete; it is particularly well-suited for
public projects where competitive bidding statutes are in effect and the public owner must award
the contract to the lowest responsible bidder. This approach is most often used with the DesignBid-Build delivery system. It is not appropriate where price cannot reliably be determined in
advance.
B.
Cost Plus A Fee Contracts
Usually, these contracts are used where the price cannot be accurately determined in
advance and they are negotiated contracts. This type of contract has been defined as a negotiated
agreement between owner and contractor in which “the costs of labor and material are billed to
1
Construction Contracts, Ch. 6., Construction Contracting, Clough & Sears, Wiley InterScience
2
Project Delivery Systems for Building Construction, Robert W. Dorsey, Associated General
Contractors of America 1997, p. 268
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the owner plus the contractor’s overhead and profit, the latter of which is a fixed fee or a
percentage of the costs.”3 Many variations on this theme are available such as (i) the pure cost of
the work plus a fee, (ii) the cost of the work plus a fee but subject to a guaranteed maximum
price, or (iii) the cost of the work plus a fee but subject to a guaranteed maximum price with a
savings clause where the savings may all be returned to the owner shared between owner and
contractor based upon an agreed percentage. The savings concept can lead to problems, such as
by causing the contractor to focus too much on the savings that it might achieve and not enough
on doing a first-rate job on the construction.
This pricing mechanism works most effectively when the contractor is brought into the
construction process early, so it can participate in the planning and can offer suggestions based
upon so-called “value engineering.”
The major drawback to this approach is that the total cost of the project may not be
known at the time the contract is entered into. Except in the case of an emergency where time
and performance are so critical that cost to the owner takes on secondary significance, the Cost
Plus A Fee contract usually is negotiated with a cap or maximum price beyond which the
contractor assumes the risk of loss.
Great care must be taken when considering the costs to be reimbursed to the contractor.4
For example, reimbursement of the contractor’s overhead expenses must be carefully defined so
that the owner is paying only for overhead attributable to the specific project. An alternative
method to defining the overhead costs to be reimbursed is to agree to a percentage of total costs
that will be considered as overhead or to eliminate the contentious issue entirely by negotiating
an increased fee and requiring the contractor to assume the entire overhead burden.
Another issue is leased equipment used for the project. Associated General Contractors
of America publishes The Blue Book, which sets forth the customary costs to a contractor for
leasing equipment used in a job. Under some circumstances, the contractor may purchase the
equipment as part of its contract obligations and contract price and at the conclusion of the
project, ownership of the equipment will be passed to the owner of the project who may retain or
sell the equipment for its own account. On the other hand, the contractor should be allowed
some reasonable leeway for reasonable errors of judgment or for accounting errors.
Accordingly, contractors often seek to limit their liability to pay back to the owner “improper”
reimbursable costs to the amount that exceeds an agreed percentage.
A Cost Plus A Fee Contract, with nothing more, provides no incentive for the contractor
to minimize the cost of the project, which is why it is used only in limited circumstances, such as
emergencies or where the parties know and trust each other well. It is also for that reason that its
3
Project Delivery Systems for Building Construction, Robert W. Dorsey, Associated General
Contractors of America 1997, p. 262
4
See AIA A111, Standard Form of Agreement Between Owner and Contractor, where the
basis of payment is the Cost of the Work Plus a Fee, With or Without a Guaranteed
Maximum Price, 1997 Edition.
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use generally is based upon a negotiated maximum price or so-called “upset” price, which gives
the owner an upper limit of protection (and keeps the contractor somewhat honest). It also may
include a “shared savings” concept, where the difference between the maximum cost and a lesser
actual cost is shared between the owner and the contractor on a pre-determined percentage.
C.
Guaranteed Maximum Price
Often confused with, and difficult to differentiate from, the Lump Sum Price, is the
Guaranteed Maximum Price Contract, an arrangement where the contractor agrees to construct
the project in accordance with the plans and specifications for a price not to exceed a negotiated
maximum price, for which risk assumption the contractor will receive a fee. It has been defined
as “an agreement for a project where the exact costs are not known at the time of the agreement,
the final costs are anticipated to be equal to or lower than the Guaranteed Maximum Price and
the contractor must absorb any costs above the Guaranteed Maximum Price.”5
II.
1.
NEGOTIATING THE CONSTRUCTION CONTRACT
Qualifying the Contractor-The Owner’s View
For any major project, owners should require that the proposed contractor complete a
detailed questionnaire that explores areas of concern for the owner. The following may help you
develop your own questionnaire:
A.
Organizational Matters
Obtain the following information:
5
(a)
The number of years the firm has been in existence, and the type of
organization, i.e., corporation, etc., as well as the names and addresses of
the owners and officers. The latter will, among other things, shed light on
whether the contractor has an absentee ownership, and help the owner
determine whether the contractor has the capability to perform projects in
several states.
(b)
Prior names under which the contractor operated, and the names of
subsidiaries or other divisions.
(c)
The number of full -time employees, especially in management, which
helps to determine the depth of the management team available to this
project.
Project Delivery Systems for Building Construction, Robert W. Dorsey, Associated General
Contractors of America 1997, p. 266
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B.
Financial
The financial viability of the general contractor is always a major concern to the owner
and a review of the contractor’s financial statements can be revealing. One good indicator is
profit margins, and whether they have declined in recent (say, 5) years, which could indicate an
erosion of profits attributable to poor bidding/contract structure or poor management.
Make an analysis of historic volume for the same period of time. Declining volume could
signal an approaching inability even to cover overhead costs. However, if the volume is
increasing, consider the rate of that increase. If the contractor’s volume of work is
mushrooming, that frequently puts pressure on management resources that prove too thin to
handle the suddenly increased load; similarly, the contractor’s working capital and other
financial resources can be inadequate to cover such a rapid increase in volume.
If both categories are declining, the owner should seriously consider stopping at that
point and looking elsewhere for a contractor. Analyze the contractor’s working capital to
determine if it can carry the project between draws, especially if it is “at risk,” such as a Design
Bid Builder, Construction Manager as Constructor or Design Builder.
C.
Experience
Consider the focus of the contractor’s business. Does it have the expertise and
management team to deal with your project, or does this represent brave new territory and a
learning experience (at your possible expense)? Ask for a list of the projects that the contractor
has worked on for the preceding 10 years (including all current projects), and the value of those
projects. Try to focus on particulars of the projects as well, e.g., office building of more than 15
stories with attached 5-story garage.
Determine the allocation of projects between the various types of construction delivery
systems/pricing mechanisms discussed earlier. Also determine with which owner sector it has
had experience, private or public. If public, what level? – federal, state, municipal or local?
Dealing with an experienced Contracting Officer under FAR (Federal Acquisitions Regulations
which regulate all construction contracts with the Federal government) is very different from
dealing with the local library board. Find out which management personnel are being assigned
to your project and their experience, and include a contractual obligation that the proposed
Project Manager or Superintendent, or both, will not be reassigned without the owner’s prior
consent. The contractor should be able to advise the owner of the allocation of its business
between delivery systems (Design Bid Build, Design Build etc.) and pricing systems, such as
lump sum, cost plus a fee with or without a cap, or negotiated contract prices.
D.
Trade Relations
Inquire about the contractor’s relations with trade subcontractors. Does the contractor
use a “short” list of subcontractors with whom it has built up a good working relationship, or
does it bid-shop to take advantage of lower trade costs (without passing the lower costs on to the
owner)?
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E.
Claims
Determine if the contractor is litigious. Review relevant court and administrative records
to determine the volume and the nature of complaints filed by and against it. Too many workers’
compensation claims may signify that a contractor has an inadequate safety program. Personal
injury claims by third parties likewise offer insights into the contractor’s safety experience.
Contract claims brought by the contractor may suggest a pattern of trying to make up for
a low bid by filing and then litigating claims for extras. On the other hand, if the contractor
employs mediation and arbitration of certain claims, that can indicate a business-minded, not
litigation-minded, contractor. Perhaps the most important factor is the number of judgments
entered against the contractor and how many remain unsatisfied. Similar questions also may be
asked about senior management and the project management staff.
Require the contractor to provide information about the reasons for a failure to complete
any projects.
F.
Bonding
Even if the project will not be bonded, ask for relevant bonding information, such as
names and A.M. Best & Co. rating of its bonding companies, and bonding capacity or other
limitations. A good bonding company won’t take unnecessary risks and, therefore, usually
covers only quality contractors. In addition, the bonding company will have already done a due
diligence review of the contractor, and would not issue a bond unless it was satisfied that the
contractor was financially responsible. Another good check is to determine whether the bonding
company is listed in U.S. Treasury Circular 570.1, which lists all sureties authorized to issue
bonds on federal projects and discloses mailing addresses, the states in which the surety is
authorized to issue bonds, and the amounts and the types of bonds. Finally, determine the
contractor’s current total bonding capacity and the amount of capacity available for this project.
G.
Insurance
Obtain the names of the property and liability insurance carriers, together with their
ratings from A.M. Best & Co. Also helpful in shedding light on safety experience are the
General Liability Rate (GL Rate) and the Interstate or Intrastate Worker’s Compensation
Experience Modification Rate for the contractor for the past three years, as discussed in more
detail in H., below.
H.
Safety
A good indicator of the quality of a contractor’s safety program is the contractor's
Insurance Modifier Rate for its Commercial General Liability and Workers Compensation
Insurance. The better the rating, usually the more safety -conscious (or lucky!) the contractor.
Investigate its Safety Incidence Rating and the qualifications and experience of its Safety
Officer, as well as its safety policy and program, including Substance Abuse Programs and the
frequency of Tool Box Safety Meetings. Explore OSHA history by asking for a summary of the
contractor’s injury and fatality experience for the past five years, using its OSHA No. 200 as the
source of information. Obtain the names of the insurance carriers and their A.M. Best & Co.
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ratings. The General Liability Rate (GL Rate) should be provided, as it is indicative of the safety
issues raised below. Similarly, obtain the Interstate or Intrastate Worker’s Compensation
Experience Modification Rate for the contractor for the past three years, to assist in the safety
evaluation.
I.
Licensing
The owner should learn whether the contractor has ever been barred or suspended from
performing work for any federal, state or municipal entity or any governmentally -insured or
supervised entity. If it has, an explanation should be demanded. In addition, verify the good
standing of the contractor in the various states in which in it engages in business, as a basic,
threshold issue.
J.
Technology
The owner should ask the contractor to explain its use of computer technology to track its
costs, establish and monitor budgets, and establish and monitor the scheduling of the project.
The owner should obtain exemplars of the types of periodic financial reports that this contractor
typically provides to owners, and ask the contractor how it will prepare and monitor payment
requests for itself and its trade contractors.
K.
References
Last, but not least, ask for trade and bank references that you may contact, and for any
other relevant references, such as other owner-clients whom you may contact.
L.
Due Diligence Questionnaire
To assist you, a copy of a Due Diligence Questionnaire developed by the Construction
Practice Group of Bell, Boyd & Lloyd is set forth below.
(i)
Organization
A.
Number of years your firm has been in the general contracting business.
B.
Type of organization (corporation, etc.), date and state of organization, names of
executives (officers, etc.) and owner(s).
C.
State the approximate number of employees in each department of your firm,
including their geographic location if you are a multi-office firm, during both
active construction seasons and inactive seasons.
D.
If you do not have an office in the project area, state whether or not you would
establish a temporary office for this project. If not, describe how you would
manage the project from another office.
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(ii)
E.
Describe how much of your business in the last three years has been general
contracting (on a lump sum or a cost-plus basis) versus construction management,
as a consultant or advisor (on a fee basis).
F.
State how much of your business is for private versus public owners.
G.
Provide an organizational chart of your firm’s team structure for this project and
the names of the Project Manager and Field Superintendent you would use.
H.
Describe the experience of the proposed Project Manager and Field
Superintendent.
Licensing
A.
(iii)
(iv)
(v)
List the jurisdictions and trade categories in which your firm is legally qualified to
do business.
Experience
A.
List the categories of work that your firm normally performs with its own
employees.
B.
List the projects your firm has completed in the last 10 years or currently has in
progress involving an office building with more than 10 stories and/or a parking
garage with more than 5 stories, including the names of the project, the owner and
architect and the contract amount.
C.
Briefly describe your experience in partnering, if any, and state whether or not
your firm prefers to engage in partnering.
Subcontractors and Vendors
A.
List the major subcontractors and vendors you feel will be required to complete
the project.
B.
List the names of two or three firms you would recommend for each of the major
trades.
C.
List the names of two or three firms you would recommend for each of the major
vendors.
Technology/Equipment
A.
Describe the computer technology utilized by your firm.
B.
Describe how your firm utilizes technology on its projects, especially with respect
to tracking costs, budgeting and scheduling.
C.
Describe the periodic financial reporting you provide to owners.
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D.
(vi)
(vii)
List or describe any construction equipment you own or lease, as opposed to rent
on a project-by-project basis.
Financial Statements
A.
Provide income statements and balance sheets, preferably audited, for the past
five years and those available for the current year.
B.
List the name and address of the firm that prepared the financial statements.
C.
Confirm that the entity for whom you have provided financial statements would
act as the guarantor of the construction contract, or state otherwise.
Bonding
A.
State the name of your surety.
B.
State the A.M. Best & Co. rating of the surety.
C.
State the total bonding capacity of your firm.
D.
State the bond premium rate for your firm.
(viii) Insurance
(ix)
A.
State the name(s) of your insurance carriers.
B.
State the A.M. Best & Co. rating of the insurance carriers.
C.
State the general liability rate (GL Rate) for your firm.
D.
State the Interstate or Intrastate Worker’s Compensation Experience Modification
Rate for your firm (as shown on your worker’s compensation insurance policy)
for the last three years.
Claims
A.
State whether or not your firm has ever failed to complete any project. If yes,
please explain.
B.
State whether or not there are any judgments, suits pending or arbitration
proceedings pending or outstanding against your firm involving more than
$10,000. If yes, please explain.
C.
State whether or not your firm has filed any lawsuits or demanded arbitration
regarding construction matters in the past five years. If yes, please explain.
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D.
(x)
State whether or not any officer or principal of your firm has ever been an officer
or principal of a firm that has failed to complete any project. If yes, please
explain.
Safety
A.
Summarize your injury and fatality experience for the past three years by
reference to the OSHA No. 200 Log.
B.
Provide a copy of your OSHA No. 200 Log for the past three years.
C.
Please answer the following safety questions:
--Has your firm has been cited by OSHA in the past three years and, if so, explain
the citation(s).
--Do you have a documented safety policy and program? If yes, please provide a
copy.
--Do you have a Safety Officer/Department?
--Do you have a Personal Protective Equipment (PPE) Policy or Program (e.g.,
mandatory hard hats, safety glasses, etc.)? If yes, please describe.
--Does your safety program comply with the following OSHA Standards:
--Hazardous Communications Standard (29 CFR 1910.1200); and Process Safety
Management (29 CFR 1910.119)?
--Do you have a Substance Abuse Program designed to provide a Drug Free
Workplace? If yes, please describe any drug testing programs you employ.
--Do you require on-site supervisors to have completed the OSHA 30 Hr.
Training Course?
--Are your foremen trained in First Aid and CPR?
--Are jobsite foremen’s safety meetings required? If yes, state frequency.
--Are weekly toolbox safety meetings required? If yes, state frequency.
--Are regular safety audits conducted? If yes, state frequency.
--Do you have an accident investigation procedure? If yes, describe briefly.
--Do you require subcontractors to meet the safety standards you employ?
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(xi)
References
A.
Provide trade references that we may contact.
B.
Provide bank references that we may contact.
III.
CHECKLIST FOR CONSTRUCTION CONTRACTS
While it is clear that no one contract form will cover all situations, the following checklist
may prove helpful to an owner, contractor or subcontractor.
A.
Identify the owner and contractor and the legal structure, i.e. corporation,
partnership or sole proprietorship, of each party to the contract.
B.
Describe the project in detail, with specific references to drawings, special
contracts, bid documents, addenda and specifications; try to avoid performance specifications.
C.
Include the specific time of commencement, and establish a completion date with
reasonable and realistic deadlines. Neither insist upon nor accept unrealistic schedules or
deadlines.
D.
Set forth the contract sum, subject to provisions for additions and deductions by
properly approved change orders.
E.
Set forth in detail the change order procedures, to avoid disputes about whether
work was approved or authorized.
F.
Establish progress payment schedules and identify documentation required as a
condition to payment. Typically, payments will not be made without at least waivers of
mechanics' lien and an architect’s certification of completion. Subcontractors should be careful
when tendering waivers of lien in advance of receiving payment (or a reliable, unconditional,
promise to pay).
G.
State the final payment guidelines to clearly provide when the contractor and
subcontractors are entitled to final payment.
H.
To discourage frivolous payment delays by general contractors, the documents
should provide for interest, usually tied to the local prime rate, to accrue on amounts not timely
paid to the subcontractor.
I.
State with particularity the working conditions and scheduling responsibilities
between the specialty trades, to avoid overlapping responsibility and conflicting access to the
site.
J.
Set forth the respective insurance responsibilities of owner, contractor and
subcontractor.
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K.
Provide for rights and remedies of the parties, in the event of contract disputes.
Consider requiring arbitration for claims of less than a fixed amount, i.e., $250,000. When more
money is at issue, the resolution probably should be left to litigation. Establish procedures for
selecting arbitrators and rules of arbitration at the time the contract is negotiated.
L.
Clearly define the owner's and contractor's rights and liabilities regarding
stopping the work prior to completion. However, all parties will want to avoid such a drastic
remedy if there is any other possible resolution available.
M.
Define risk of loss for stored materials, and establish responsibility for protecting
and insuring the materials.
N.
Provide for extraordinary or unanticipated delays caused by severe and unusual
weather conditions not usually encountered, to permit time extensions when any such condition
prevents timely performance.
O.
Contractors should provide for extra compensation for unforeseen sub-surface
conditions, which could not reasonably have been contemplated or discovered by the parties.
P.
If Performance Bonds and Labor and Material Payment Bonds are required by the
owner, then the cost should be paid for by the owner.
Q.
Establish progress schedules for each subcontractor; use of bar charts or Critical
Path Method is advised.
R.
Key funds retention should to performance, not punishment, and provide for line
item reductions as each trade completes its portion of the contract.
S.
Document in writing delays, extensions of time, and change orders. If a writing
cannot be obtained at the site, then prepare and distribute to all parties a follow-up letter, or job
site memorandum, to permit time to objection to them.
T.
Establish guidelines for a subcontractor's right to payment when an owner or
general contractor wrongfully fails to pay, including any right of the subcontractor to be paid
extra shutdown cost amounts.
U.
Define “substantial completion” and clearly state how it is established.
V.
Spell out change order procedures and requirements, including stipulating a
procedure to be followed when the parties are unable to reduce change orders to writing because
of "practical" difficulties, e.g. field conditions.
W.
To avoid any statutory prohibition against the recovery of attorney’s fees, provide
in the contract for the award to the prevailing party of attorney’s fees, if you want to preserve the
right to seek recovery from a party.
X.
Prepare a contract notification checklist, to make sure that rights are not lost by a
failure to act.
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THE TROUBLED CONTRACTOR - THE OWNER’S VIEW
Much has been said about the owner who fails to pay its contractors and thereby creates a
default; but much less has been said about the owner whose construction problems are caused by
the defaulting contractor. For example, how can an owner protect itself where the contractor or
subcontractors cause problems that result in delayed completion, or where subcontractors file
mechanics’ liens against the project because the general contractor has failed to pay them on a
timely basis? The alert owner or building manager should be able to spot certain events during
the course of construction that alert them to impending trouble long before the contractor’s
default throws the entire project into disarray, confusion and possible termination.
The problems can result from cost overruns caused by an unrealistic bid issued by the
contractor and naively accepted by the owner, or the inability of contractors properly to bid
because of vague and incomplete plans (e.g., when the project is a fast -track project where bids
are based upon certain assumptions that later are proven to be erroneous by more detailed plans,
or the action of the general contractor to front-end-load its draw requests by taking funds in
amounts that exceed the actual labor performed or materials furnished, thus taking out more than
is actually earned at that time.
What then are some of the signals that can alert an owner or building manager and help
them to head off problems.
A.
Slow start followed by a mad rush to complete:
This generally will occur where the contractor has failed to properly schedule the project
– a sign that this is happening is very little activity on the site at the beginning of the project,
with increasing activity as the project completion date nears. Change orders requesting
overtime or delay claims can be anticipated from the contractor. This should be dealt with by
strictly enforcing the scheduling requirements of the project from the first day, and not allowing
that gap to build up over time.
B.
Failure of the general contractor to assign qualified supervisors to the project
resulting in poor coordination of the trades.
Often this results in a “stacking” of the trades, which occurs when one trade starts to
work while another trade is still working on the same portion of the project. Accumulation of
materials or workmen standing around with little to do are common indicators. They are “in
each other’s way.”
C.
Excessive change orders usually are the precursor of problems, and can be the
fault of the contractor or its subcontractors.
Do not be misled by concluding that, just because the general contract requires that all
change orders be in writing, there is no obligation of the owner to pay for work done pursuant to
an “oral” change order. There often is a fact dispute over whether the parties’ conduct
effectively waived their right to insist on a written change order.
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D.
Frequent changes of the contractor’s superintendent or other key personnel often
indicates the existence of a problem with the general contractor’s management.
Inquire about the changes. An inadequate explanation is a sure warning sign.
E.
Changes in subcontractors without a proper explanation regarding their
termination .
For example, the general contractor may have been able to obtain a cheaper, though not
necessarily a better, subcontractor. With a fixed price contract, the cost benefit would inure to
the contractor and not to the owner.
IV.
SELECTED CONSTRUCTION CONTRACT ISSUES
The seeds of many construction conflicts can be found in contracts that contain
provisions so onerous as to be unconscionable. Although owners and their corporate counsel
take comfort from contractual terms that impose responsibility without regard for ability to
control the events that create liability, there eventually is a price -- the cost of construction
claims. Some of the more common areas of conflict are:
A.
Time:
Failure to establish realistic commencement and completion dates creates scheduling
problems for contractors, who will seek additional compensation. Acceleration creates a demand
for overtime; delay creates a demand for reimbursement for idle equipment and overhead.
Schedules should be carefully agreed to and realistically coordinated to avoid delay or
acceleration claims. Establish flexibility or “float” within the schedule of performance, based
upon realistic and reasonable expectations, and ensure that milestone dates are clearly
understood by all parties.
B.
Change Order Procedures:
Field changes are those that cannot effectively be subject to required written approval
because of time constraints relating to construction scheduling at the site. The vagaries of the
field conditions should be taken into account and procedures established for “after the fact”
approval, if possible. Avoid the “do it now, and get paid later” syndrome -- that almost always
leads to conflict. Try to resolve change orders at the earliest possible time, and have the general
contractor advise the owner on a regular basis of the status of approved, non-approved, and
pending change orders. With regard to rejected or non -approved change orders, be certain that
the general contractor has documented the basis of the rejection and the response of the claimant.
C.
Payment Procedures:
Maintaining a regular schedule of payments assures the contractor that it will be able to
meet its obligations to its trades. Do not believe that by arbitrarily withholding payment you will
resolve all problems in your favor. Disrupting the schedule or withholding payments for any
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reason, except a material one, will cause a ripple effect throughout the trades, resulting in claims
for mechanics’ liens and possibly termination by the contractor. Trades operate on thin margins,
and if they are not timely paid, they can go out of business, with their suppliers’ filing liens.
Owners should give consideration to the Direct Payment Procedure as sponsored by the
American Subcontractors Association to avoid claims for mechanics’ liens and assure timely
payments to the trades.
D.
Delay Claims:
Often, delay claims provide for an extension of time but do not provide for additional
compensation. If this is the intent, then clearly provide for that. The owner should take steps to
ensure that it was not the owner’s actions that caused the delay, which would negate the claim.
The responsibility for delay should be based upon the ability of the party to control the event
giving rise to the delay, and not based upon leverage in the negotiation process.
E.
Completion:
“Substantial completion” should be clearly defined, including to produce the results that
final payment is not due and warranties do not commence, until the building is accepted by the
owner or is being used for the purpose contemplated by the owner.
F.
Attorney’s Fees and Costs:
Under most states’ laws, including Illinois’, attorney’s fees are not recoverable unless
provided by statute or by contract. Therefore, the drafter should clearly provide for
reimbursement of attorney’s fees and costs, and other expenses of litigation. This will provide
the contractor who wants to make up for a bad bid on a claim for extras or delay damages, some
“food for thought” before it commences such a claim.
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Stanley P. Sklar is a member of Bell, Boyd & Lloyd LLC in Chicago, Illinois, concentrating in
Construction Law and Alternative Dispute Resolution methods. He is a past president of the
American College of Construction Lawyers and an elected member of the American College of
Real Estate Lawyers. He also is current President of the Society for Illinois Construction
Attorneys. Mr. Sklar is a certified Mediator and Arbitrator for the American Arbitration
Association and a member of its National Training Faculty for Commercial Arbitrators, a
member of its National Construction Disputes Rules Committee and Panel for Large Complex
Commercial Cases. He is a Fellow in the College of Commercial Arbitrators and a member of
its Board of Directors. He is an Adjunct Professor at John Marshall Law School (Construction
Law) and is a former member of the Board of Governors of the ABA Forum on the Construction
Industry which recently presented him with the 2004 Cornerstone Award for outstanding
contributions in the field of Construction Law. He is also a member of Lambda Alpha Honorary
Real Estate Society. He is a contributing author to several Aspen Law publications on
construction related topics. He has also written the chapters on Construction Liens and
Arbitration for the Matthew Bender Publication, Construction Law.
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