Contracts and Claims
Timely articles covering the most pressing issues facing construction firms in the Midwest

CONTRACTING CONSIDERATIONS: Some things to consider when entering into a construction contract
J. Nick Badgerow

Risk allocation is a fundamental consideration in contracts. As a general proposition, the parties to construction contracts will seek to include provisions that limit and distribute their respective risks, duties, responsibilities and liabilities. Such provisions can be unreasonable in their attempts to shift responsibilities from one party to another, and should, therefore, be scrutinized very closely during contract formation and negotiation. Even where express contract provisions are provided, the law generally imposes implied warranties, duties, and responsibilities on the parties. Owner duties and responsibilities that have arisen in recent disputes include:

1. Funding the work.

2. Providing site surveys.

3. Securing and paying for easements.

4. Warranting the plans and specifications.

5. Warranting owner furnished materials.

6. Disclosing superior knowledge.

7. Acting on clarifications and changes.

8. Interpreting the documents.

9. Cooperating with the contractor.

DISCUSSION

1. Funding the work

Some would list this as the owner's first responsibility to the contractor, and it is probably the primary area of disputes between owner and contractor. In the case of a public bid, if the funding source had not been properly secured, it is at best unfair to those contractors who had taken the time and expended the energy (and money) to bid the project. Once the project is underway, one of the owner's primary responsibilities, as far as the contractor is concerned, is to secure funds to allow payments as prescribed in the contract. Related issues include:

(a) The timing of payables

Payments to the contractor are typically made after receipt of each invoice within the time period specified, or within the requirements of appropriate legal statutes. The contract language itself often determines which takes precedence. If the contractor has met the necessary requirements, the owner can become responsible for subsequent delay and possibly consequential damages, such as interest charges or delay damages.

Most if not all of HCG’ s cases involve disputes over owner partial payments, late payment or non-payments to contractors and/or designers.

(b) Rates and amounts corresponding to the actual job progress

If materials can be substantiated to be properly stored on the site and/or installed in-place in an acceptable manner considering all project requirements, the owner will typically pay for those materials. An alteration of the process by the owner for convenience may create a hardship on the general and subcontractors which may entitle them to compensation. On the other hand, contract abandonment and termination cases often involve disputes over the reconciliation between the aggregate amount of material delivered, installed and paid-for, and the aggregate uninstalled amount of material remaining on-site. It is not uncommon for materials to disappear after delivery to the site.

(c) Contingency for changes

Change orders are a normal part of the construction process. As such, the owner has an obligation to anticipate their occurrence. Public project funding will incorporate some additional percentage (often 5% to 7%) of the project bid amount to be budgeted to fund legitimate changes as they occur. Responsibility for the delay in the owner’s response to proper contract changes that results from lack of, or late availability of, funds will often rest with the owner.

2. Providing site surveys

It is the owner's responsibility to provide complete and accurate relevant data, as may become necessary for correct installation of the work. The contractor is typically responsible for the correct layout and execution of the work.

(a) Establishment of property lines

The most basic information provided by the owner includes the project property lines, or at least the contract limit lines within which the contractor has the right to operate. A number of disputes and litigation cases have involved damage issues and claims resulting from inaccurate existing data or the improper layout of property lines.

(b) Site material composition

If excavation is required, geo-technical data describing the soil composition that will have to be dealt with is a fundamental prerequisite. The interesting corollary here is that the boring and soils information should be given in locations properly relevant to the construction. If the boring information around the perimeter of a foundation indicates dry gravel, with a low water table, and no information regarding the soils characteristics is given within the foundation area, the contractor may assume dry gravel with no water in the way of the excavation exists throughout the entire foundation construction. When either rock or unstable soil is subsequently encountered while excavating the interior portions of the foundation (where no specific information had been given), the contractor may be entitled to additional compensation.

(c) Baselines and benchmarks

The contractor is most often responsible for the layout of the work from baselines furnished by the owner. These data should be physically located on the site, and the owner assumes responsibility for and/or warrants their correctness. If the project is then correctly laid out by the contractor relative to the baselines and benchmark, errors in the project layout transmitted from incorrect baseline or benchmark information would typically fall to the owner's account. Of course, the A/E’s could bear some liability to the owner for such issues.

(d) Utility locations

The owner is typically responsible for providing accurate locations of all existing utilities. Locations of telephone lines may be necessary to tie-in new building services or may be necessary to prevent accidental interruption. Correct sanitary and storm line locations and elevations are critical to the design of underground drainage systems and tie- ins. Invert elevations are also necessary to allow proper estimates of the amount of excavation and backfill for the respective lines. If the invert elevation indicated on the drawings is incorrect, additional excavation may require shoring or greater trench width – all at increased cost to the contractor. If this is due to an improper representation on the drawings of the subject utility location, the owner will often pay for the increased costs.

(e) Effects of adjacent properties

The relationship of adjacent properties may be significant to the construction on the site. An important piece of information that may not be disclosed in the contract documents and may not be readily apparent in a pre-bid site investigation by the contractor, for instance, are the drainage characteristics of a surrounding property. If surface water from several acres of land drains into a swale that creates an active watercourse through the site that lasts several days each time it rains, the responsibility for resulting downtime, additional drainage requirements, and rework of the affected areas would likely rest with the owner.

3. Securing and paying for easements

(a) Site access

The contractor typically expects to have access to the site, even if such access is limited or restricted, as may be the case when working within a military complex, a security area of a manufacturing facility, or some similar environment, and the particulars should be made known to the contractor prior to the bid. On the other hand, the contractor should consider the potential lost time and attendant costs associated with site access. If any type of access restrictions were not made clear prior to the commencement of the work and are not apparent in a reasonable pre-bid site investigation, the contractor will probably not be expected to carry the associated resultant additional financial burden.



(b) Agency approvals

It is often the owner's responsibility to secure all agency approvals prior to the start of work. In the absence of any noted exceptions in the contract documents, the contractor has the right to expect that such administrative matters have been taken care of. Even when the contractor is responsible for securing and paying for the building permit, as is usually the case, this responsibility amounts to a formality requiring a small amount of clerical paperwork and a payment to the jurisdiction in which the project is located. The contractor has the right to expect that, by the time the building permit is applied for, all building code requirements have been met by the design, and the permit procedure should not require any effort beyond a simple filing. If any delays in securing the building permit result from code noncompliance of the design, the owner may be responsible for the resulting costs.

4. Warranting the plans and specifications

The owner warrants the adequacy of the plans and specifications on many projects and, therefore, bears the responsibility for any defects or deficiencies in them. Such defects can exist in many forms, but tend to fall into the two categories: product and time. Most defective specifications problems involve the inaccuracy of the technical specifications. Time, then, most often becomes a consequential consideration related to the failure of the contract to provide the technical requirements accurately and completely.

5. Warranting owner furnished materials

Where the owner furnishes material and/ or equipment to the contractor for use in the work, there is a warranty that these items will be suitable for their intended purpose. Beyond the fundamental compatibility of materials, the owner is also responsible for the timing and coordination of the respective items in the same manner and extent as every other subcontractor and supplier. Shop drawings and other coordination information should be submitted and distributed correctly and in a timely manner, and material deliveries should be made within the requirements of the progress schedule.

6. Disclosing superior knowledge

The owner has a duty to disclose superior knowledge to the contractor that may directly or indirectly relate to the work, where that knowledge is either unknown by, or has not been made available to, the contractor. For example, if the boring and soils data did in fact exist for the interior portions of the construction, but the data was intentionally left out of the contract, the owner may well bear responsibility for the added cost incurred by the contractor in dealing with the unstable or inappropriate sub-surface materials. Likewise, where the owner's superior knowledge of a factor, such as the unavailability or inadequacy of a specified material, would lead to reduced costs, improved efficiency, or simply an earlier disclosure of a problem, the owner has an obligation to so advise the contractor.

Allegations relating to whether or not the owner knew or should have known that the project could not be built in the time specified in the contract commonly refer to the owner’s “superior knowledge.” If the general contractor informed the owner that, in his judgment, the project could not reasonably be built in one-year, the owner was obligated to pass that contractor’s unsolicited opinion on to the other bidders.

7. Action on clarifications and changes

Construction contracts, whether produced by and for a private owner or public agency, recognize the need and importance of timeliness with respect to issuing clarifications and reviewing change orders. This is an acknowledgment that change orders can interfere with and disrupt the orderly sequence of the work and that they should be resolved as quickly as possible to minimize their potential direct and consequential impact on construction.

The process of anticipating, identifying, pricing, negotiating and executing changes, change orders and change directives is perhaps the most prominent thread through our construction disputes. And, it is a process that exposes human frailties and faults in virtually all forms and varieties. Acts of negligence, greed, ignorance and laziness are not uncommon.

8. Interpretation of the documents

Although the architect normally researches and prepares recommendations for technical matters relating to design, when involving quality, cost and/or time, these corrections, changes, and interpretations are communicated to the owner who often controls the final disposition on the matter. Actual authority for some portion of the process may rest with the architect. Because no direct contractual tie exists between the architect and the contractor, however, responsibility for the architect's performance in these situations rests with the owner.

9. Cooperating with the contractor

Even when not expressed in the contract, it is generally understood that the owner has an implied duty to cooperate with the contractor to the best of his ability, and not to impede, hinder, obstruct, or interfere with the work. The same concept applies to the contractor. Although this sounds simple, its success or failure often boils down to the personalities involved. Both parties are focused on the traditional objectives of time, cost and budget, but to differing degrees and from different perspectives. A consistent theme in disputes is the disintegration of cooperation as a result of conflicts between owner and contractor over the achievement of time, cost and quality objectives.

The main point to consider is that all contracts, including construction contracts, impose obligations on both parties, and each party would do well – before entering into the contract – to allocate those obligations and duties in a fair manner, and then to understand and comply with those obligations once the contract has been made.