As I mentioned, I was one of three amigos who spoke on a Construction Contract webinar last week. We had a good turn out and lots of very astute questions during the Q&A portion. While you will miss all of my
witty insightful helpful commentary, you can check out the slides for my portion, on understanding and modifying key terms, here:
Safe Harbors- not just for Sailors anymore (or, why advance planning can prevent claims of defective plans & specs) (law note)
Have you ever considered a “Safe Harbor Provision” for your Owner-Architect or Owner-Engineer contract? Maybe it is time that you do.
As you are (probably too well) aware, on every construction project there are changes. Some of these are due to the owner’s change of heart, value engineering concerns, contractor failures, and material substitutions. Some may be because of a design error, omission, or drawing conflict. It happens.
A “Safe Harbor Provision” is a provision that establishes an acceptable percentage of increased construction costs (that is, a percentage of the project’s contingency). The idea is that if the construction changes attributable to the designer is within this percentage, no claim will be made by the Owner for design defects.
An example provision is provided in the EJCDC documents (Exhibit I, Allocation of Risks, of Form E-500), which provides
Agreement Not to Claim for Cost of Certain Change Orders: Owner recognizes and expects that certain Change Orders may be required to be issued as the result in whole or part of imprecision, incompleteness, errors, omissions, ambiguities, or inconsistencies in
the Drawings, Specifications, and other design documentation furnished by Engineer or in the other professional services performed or furnished by Engineer under this Agreement (“Covered Change Orders”). Accordingly, Owner agrees not to sue or to make any claim directly or indirectly against Engineer on the basis of professional negligence, breach of contract, or otherwise with respect to the costs of approved Covered Change Orders unless the costs of such approved Covered Change Orders exceed __% of Construction Cost, and then only for an amount in excess of such percentage. Any responsibility of Engineer for the costs of Covered Change Orders in excess of such percentage will be determined on the basis of applicable contractual obligations and professional liability standards. For purposes of this paragraph, the cost of Covered Change Orders will not include any costs that Owner would have incurred if the Covered Change Order work had been included originally without any imprecision, incompleteness, error, omission, ambiguity, or inconsistency in the Contract Documents and without any other error or omission of Engineer related thereto. Nothing in this provision creates a presumption that, or changes the professional liability standard for determining if, Engineer is liable for the cost of Covered Change Orders in excess of the percentage of Construction Cost stated above or for any other Change Order. Wherever used in this paragraph, the term Engineer includes Engineer’s officers, directors, members, partners, agents, employees, and Consultants.
[NOTE TO USER: The parties may wish to consider the additional limitation contained in the following sentence.]
Owner further agrees not to sue or to make any claim directly or indirectly against Engineer with respect to any Covered Change Order not in excess of such percentage stated above, and Owner agrees to hold Engineer harmless from and against any suit or claim made by the Contractor relating to any such Covered Change Order.
[Emphasis added to key provisions by me].
Essentially, the EJCDC safe harbor provision includes the following:
- Owner’s acknowledgement that change orders are standard operating procedure on construction projects
- Owner’s agreement not to sue or bring any claims against the engineer unless the costs of such exceed a negotiated percentage of the construction cost.
- Owner’s acknowledgment that not all change orders over the allocated percentage are the designer’s responsibility, as the aggregate amount does not include costs that the project owner would have incurred if the work covered by the change order had been included originally (the “betterment” to the owner).
- Owner’s acknowledgement that only the overages attributable to the design are compensable – notably, nothing changes the professional liability standard for determining if the engineer is liable in excess of the percentage.
Again, this is one of those “don’t try this at home” moments. A poorly written safe harbor provision could do more harm than good. It may be seen as establishing a warranty, and that would be an uninsurable loss. If not properly crafted, it may create the expectation that all overages fall on the designer. Proceed with caution!
When well-drafted, however, a safe harbor provision can provide you with some level of comfort for the inevitable discoveries that happen when the drawings hit the pavement.
Have you ever used a “safe harbor” provision in your Owner-Designer agreement? Did it work to your advantage, or did it create unreasonable expectations that change orders were capped at that amount? Share your experience below.
Photo: Boats in safe harbor, Roseau, Dominica via teletypeturtle/Creative Commons license.
You know how they say the best laid plans can go awry? Just as unforeseen issues pop up in construction, they also pop up in the practice of law. So, while it is still Tuesday, I apologize for the late hour of my post.
I bring you good tidings, despite my lateness. Right now, in the North Carolina General Assembly, is a proposed bill that would require a Certificate of Merit to be filed in civil litigation against an architect, engineer, or a design firm. If it passes, this would require that an unbiased, third party (who is also a licensed professional) has reviewed the claim and believes it has merit.
Such a pre-lawsuit requirement has long been a right that doctors enjoy. Now, there may a chance for architects and engineers to also enjoy protection from otherwise frivolous lawsuits.
The bill has been introduced, had its first reading, and has been referred to the Judiciary Committee. While the bill is a long way from passage, it is a good sign that the public recognizes too often professionals are the targets in lawsuits simply because of their “deep pockets” (really!) or their insurance coverage.
You can keep track of the progress of Senate Bill 435 here.
(h/t to Kathryn Westcott, ACEC-NC Executive Director)
Photo: (c) John Dolan via Flickr/Creative Commons License.
As previously discussed on this blog, one of the form contract sets available for construction projects is that of ConsensusDocs. ConsensusDocs was created in 2007, based on the (now discontinued) Associated General Contractors of America forms.
The newest ConsensusDocs forms have been released–three years early. As explained by Chris Hill on his Construction Law Musings blog, the early release is due to the many changes in the construction industry since the release of the first documents in 2007.
Now there is a free webinar that will discuss the changes to the revised ConsensusDocs forms, including topics such as:
- Building Information Modeling (BIM)
- Green construction considerations
- Claims mitigation
The webinar will take place:
Thursday, March 31st from 3:00 PM- 4:30 PM ET
Questions about ConsensusDOCS or other form contract documents? Drop me a line in the comment section, below.
UPDATE: Designers may file Notices of Commencement when they start their work, which should eliminate or significantly reduce the priority date concerns expressed below. See this post for more details. — mdb 3/4/11
The work of the NC Bar Association’s Construction Section Lien Law committee continues, and it may drastically change the lien law landscape for architects and engineers.
On February 18, the Construction Law Section Council, the governing body of the Section, voted 11-4 to accept the latest draft version which must still be approved by the NC Bar Board of Governors. After approval by the Board, it will then need sponsorship at the General Assembly. The lien law changes have divided the construction industry – some believe the changes are beneficial, while others worry about new requirements contained within the bill.
Of particular note for architects and engineers, the new lien law envisions a new Notice of Commencement which would then act as the first date of service for everybody who works on the project. The new law would give almost everyone on a project the same priority date. Almost all liens would then relate to and take effect as of the Notice of Commencement date.
In other words, designers and others who perform work very early in the project would have no stronger lien rights than those who perform work at the very end of the project. If there are insufficient funds to satisfy all of the liens, the net result is that architects and engineers will have to share pro rata will all contractors and subcontractors from the owner’s assets. (And, to answer a question posed to me the other day, yes, architects and engineers have lien rights on projects in North Carolina!)
Is there a way around this for designers and other early performers? Yes and no. One way a designer can protect his priority is by filing a Claim of Lien before the Owner files the Notice of Commencement. (See section 44A-10 of the new draft bill). However, as you can imagine, filing a Claim of Lien before construction has even started is likely to be frowned upon by the Owner. Furthermore, the lien would have to be timely perfected, which involves actually suing the Owner. Obviously, use of the Claim of Lien to beat the proposed Notice of Commencement date will have limited, if any, practical use for construction professionals who are working on a project and want to maintain a good relationship with the Owner.
There are many good things in the new bill: a way to streamline payment issues to ensure subcontractors are timely paid when the general contractor is paid, for example, as well as an attempt to provide lien rights to parties even after a bankruptcy filing, which had been made impossible by recent cases. However, the priority issue is definitely bad for designers, as well as others who do their work very early in the project.
To learn more about the bill, check out this good article from North Carolina Construction News.
Comments, questions, or thoughts about the proposed changes? Let me know in the comment section, below. And sign up for regular email updates from this Blog, so you never miss a post.