Author Archives: Melissa Dewey Brumback

Construction Contract Drafting Webinar– a chance to hear me speak! (Oh boy!)

Posted on by

Interested in learning about contract drafting strategies?  Make plans now to attend a live webinar entitled “Construction Contract Drafting Strategies: Crafting Enforceable Payment, Performance, Termination and Damages Provisions”.  

I will be one of 3 speakers for the webinar, which will be held Wednesday, September 7th from 1:00 PM-2:30 PM Eastern Time.

——————————————-

Speaking troll
(This is *not* a realistic rendering, I promise!)

—————————————-

This CLE webinar will include best practices for counsel to owners, contractors, and design professionals to mitigate risk and resolve contract disputes.

Questions addressesd will include:

  • What are the critical provisions in construction contracts that demand careful attention and negotiation by owners and contractors?
  • What are the most commonly disputed issues during construction contract negotiations and what are some effective strategies for resolving them?
  • What are the best practices for counsel to building owners, contractors, and design professionals to minimize liability for their clients when entering construction contracts?

To register, click here.  Early registration discounts end on August 19th, so don’t delay!

 —————————————-

Photo:  “Public  Speaking” by JASElabs via Creative Commons License.

 

 

 

 

 

Safe Harbors- not just for Sailors anymore (or, why advance planning can prevent claims of defective plans & specs) (law note)

Posted on by

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.

safe harbor provisions

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.

Sometimes, ya just gotta tell them the donkey is alive! (Tue Tip)

Posted on by

Recently, I saw a very amusing sign while visiting the farm animal section of the Museum of Life and Science in Durham on an extremely, blisteringly hot summer day.  The sign said:

donkey signIn case you can’t see the sign clearly, it reads: 

Sometimes our donkey likes to lay [sic] flat out in the sun. 

Don’t be alarmed. . . HE IS STILL ALIVE! (-:

I was very amused that the museum needed a sign proclaiming the non-deathness of its donkey.  However, the sign also struck me as a good tip for all of us involved in the construction business.  Sometimes, you just have to state the obvious.  You may think that it is glaringly obvious that, for example, an extended construction duration will increase the scope of your contract administration fees accordingly.  You might be wrong.  Sometimes it is not obvious, or at least, not something the owner will admit is obvious.  Don’t rely on common sense– go ahead and spell out everything you can in your contract with the Owner.

In the same way the donkey sign keeps the museum patrons from sounding the alarm, a detailed and thorough contract can keep you from having to answer and/or argue about scope of work issues later on.

Sometimes ya just gotta tell everyone in advance that the donkey is alive!

——————————–

Photo in this post: Creative Commons License

Construction Bottomed Out? NOT YET! (Guest Post)

Posted on by

Today we have a guest post by Joel H. Miles, President of Miles Consulting, Inc., a management consulting firm specializing in the construction industry.  Joel has 40 years’ experience in the industry, working in the areas of finance, strategy, operational management, ownership transfer, mergers and acquisitions, valuation, and litigation support.

Joel Miles headshotThe construction industry has been one of the hardest hit by the economic turmoil of the last several years. Generally, non-residential construction is experiencing volume levels roughly half of those of 2007. According to Engineering News Record, the level of unemployment in the industry is 16.3% (in May 2011, compared to 7.4% in 2007).

While there have been a number of bankruptcies already among construction firms, as well as suppliers to the industry, in the last two years, there is reason to believe that there could be a significant number of new failures in the next year. One reason is that for a long time after the onset of the recession, contractors were working off the backlogs of uncompleted work acquired during the strong years of 2005-2007. This has merely postponed the day of reckoning. In an industry traditionally known to have overcapacity, the downturn in the overall amount of work will exacerbate this problem, and inevitably lead to a number of firms “leaving” the market, either voluntarily (strategic decision making) or, more likely, involuntarily (bankruptcy or insolvency). There appear to be a number of general building, specialty trade, and civil contractors who are in financial trouble.

A telling statistical indication of trouble for the immediate future is the Carolinas AGC Construction Activity report for the first quarter of 2011. The dollar amount of construction awards for the first quarter, by category of work, with the percentage change from the same quarter of 2010, are as follows:

table of NC construction stats

This means that already-depleted backlogs are getting worse, not better. There will be further financial “dislocations”, bonding companies will probably be taking over work where their surety bond customers are unable to complete on-going projects, and construction litigation will almost certainly increase. This is not a pretty picture, and those who have long predicted that the overcapacity problem will be corrected by a reduction in the number of contractors may finally prove their case.

Those with a vested interest the financial health of the contractors and construction industry suppliers (i.e., owners of on-going projects, banks with outstanding construction loans or other loans to contractors, surety companies, and employees of affected contractors) may be in for a period of uncertainty and those with the ability to mitigate the ensuing damage should make every effort to do so.

As with all periods of major change, opportunities are presented. For the strongest in the industry, the time is right for strategic acquisitions (when valuations certainly are favorable to buyers). For banks and bonding companies, active participation may mitigate losses, as opposed to a reactionary stance after the damage has become unavoidable and large. An industry specialist can help.

Joel and I welcome your thoughts and opinions in the comments section, below.

The Expert Weighs in on construction contract “orders of precedence” (Guest Post)

Posted on by

Phil Kabza headshotThis past week, my post on the concept of contract “orders of precedence” generated a lot of comments and feedback from blog readers.  One reader, an expert in MasterSpec documents, weighed in with a weighty response that deserved a post of its own.  What follows is a Guest Post by Phil Kabza, FCSI, CCS, AIA.  Phil is a partner with SpecGuy, providing specifications and technical consulting and training to architects, engineers, and facility owners. 

Phil is a graduate of the University of Michigan College of Architecture and Urban Planning and WesternMichiganUniversity, and holds certifications as a construction specifier, contract administrator, and LEED professional. He has over 30 years experience in architectural and construction quality management and instruction. He is Past Chair of the AIA MasterSpec Architectural Review Committee, a contributor to The Construction Specifier magazine, and founding Chair of the Charlotte Building Enclosure Council. He is a Fellow of the Construction Specifications Institute and a member of Specifications Consultants in Independent Practice.

Your posting on order of precedence clauses covers a topic that is near and dear to the professional specifier’s heart. AIA contract documents and professional specifier practices maintain that order of precedence clauses are typically not called for – the drawings and specifications are a unified whole, and any conflict between or within them is subject first to interpretation by the architect/engineer, and if not resolved, is subject to resolution through the claims process.

What happened in the fuel tank replacement case you cite is the bidding subcontractor, whom we can assume to be reasonably competent and fully aware of the conflict between the two documents, sought a bid advantage by withholding their discovery of the product note conflict and by bidding the less expensive product, perceiving that the chances that they will be held to the higher product standard were low enough to take the risk of reversal of their claim.

Bidding subcontractors/suppliers are responsible for reading and interpreting a small portion of the drawings and one or two specifications sections out of the 200 or more sections on a project, the work results for which they are held to be specialists. The architect/engineer is responsible for preparing all of several hundred drawings plus the 200 or more specification sections describing work results for which they are held to be reasonably knowledgeable under their respective standards of care. So let’s keep in mind that the bidding subcontractor/supplier is in a position of superior specialty knowledge and is electing to withhold discovered information about the architect/engineer’s documents for his/her own business advantage.

To incorporate an order of precedence clause declaring that either a drawing note or a specification clause should take precedence in the contract will mean that 50 percent of the times where there are conflicts within the documents (I’m guessing the percentage), the owner will be entitled to receive a component that does not meet their design intent. The architect/engineer has either prepared or carried over a drawing note that includes erroneous information, or a specification has been written that is not coordinated with the drawing note or otherwise does not reflect the owner’s design intent in the product selection indicated by the architect/engineer.

Upon discovery of the conflict during the submittal process (assuming that it is discovered), the owner’s alternative is to negotiate for the appropriate component in a setting in which they have only one party with whom to negotiate – a contractor who is already under contract, who may have a financial interest in exploiting a delay through the negotiation, and who often has little incentive to provide the appropriate component for a reasonably adjusted price. While the order of precedence clause may make contract interpretation simple, it does nothing to ensure that the owner will obtain their design intent at a reasonable price – it just shifts the difficulty to the later price negotiation. Or worse.

What’s most troubling is the assumption that an order of precedence clause plus the normal submittal review process will protect the owner in such an instance by revealing the conflict already concealed by the bidding subcontractor. This is because the architect/engineer’s review of the contractor’s submittals takes place in a very different environment compared to the design environment in which the original product selection decision was made and the drawings and specifications were developed. Someone knew which underground fuel tank was required; was it the drafter of the drawings, or the specifier? Which should take precedence?

Submittal reviews are not as comprehensive and coordinated an architect/engineer activity as is design. Submittal reviews are not necessarily carried out by the designing architect or engineer. The purpose of submittal review is to establish basic conformance between the contractor’s submittals and the requirements of the contract documents – not to comprehensively review the content of the design documents. So the likelihood that the reviewer would miss the drawing note and your GC’s owner would receive a UL 142 underground fuel tank only to have it rejected by the authorities having jurisdiction during an onsite inspection is rather high – or worse, to have it installed and fail, resulting in an environmental calamity and giving rise to an extraordinarily expensive claim and drawn out resolution process that will cost thousands of times the difference in price between the two tanks.

It is in order to avoid such expensive experiences that the standard AIA documents place the management of the risk for the result of conflicting requirements in the contract documents in the hands of the party that they know is in the best position to perceive and handle the conflict:  the contractor whose specialist subcontractor/supplier has a high financial incentive to take note of the conflict and who can decide to handle it responsibly – or not. This is not an argument in favor of architect/engineers avoiding responsibility for their design errors; this is a case where the overriding interest of the owner and the public in achieving design intent should take precedence, because the potential for enormous loss to all parties plus their insurers is greatly reduced.

The AIA and professional specifier position that the bidding subcontractor should not withhold information but should seek interpretation during the bidding process is not unreasonable, even if it is not a popular one among contractors jostling for bidding advantage. One or two well published case precedents that uphold the contract clause requiring the contractor to provide the “more stringent requirement or expensive product” likewise would be enough to curtail the bidder practice of deliberately withholding information in order to secure a contract.

As for the specifics of the contract your party is wrestling with, a couple of well-deserved whacks on the architect/engineer’s mousing hand for placing specification information in the drawings, and for not relying on carefully prepared specifications to address this topic. Engineers are especially prone to doing this. That is one reason why two-thirds of architect’s potential claims result from their consultant’s poorly prepared documents. The Construction Specifications Institute’s maxim to “say it once, say it correctly, and say it in the proper place” is often ignored by the engineering community at their and their architect clients’ peril.

Let’s not let the owner off the hook, either. Words matter, and use of the term “more stringent” without the accompanying “or more expensive” phrase likely comes from the owner’s own custom contract and certainly gives the contractor something to hang their hat on in this dispute. It shouldn’t. The “more stringent” term is not in the AIA contract documents nor does it appear in MasterSpec, the AIA’s master specification library. (Disclosure:  We are a consultant to ARCOM, MasterSpec’s publisher and have produced several recent updates to the MasterSpec Division 01 General Requirements.)  This suggests that the owner has their own contract clauses or supplementary conditions that include the phrase “more stringent.”

Professional specifiers throughout the country decry the deplorable conditions of most public agency contracting documents, and this one is likely no exception. Case in point:  the State of North Carolina’s construction general conditions document OC-15 that intermingles the requirements for bidders and for the contractor, which apply to two different entities in two different phases of the project and should be well separated. The OC-15 also conflicts with the state’s own supplementary conditions document. The state also  dictates architect/engineer performance that conflicts with the professional standard of care. That’s not to mention the nearby city government whose general conditions consist of the 1976 AIA A201, much modified, and probably thoroughly misunderstood as well. Add to that any contract where the owner’s attorney incorporates the bidding requirements documents in the construction contract – unnecessarily providing meat for more interpretations, claims, and disputes, and fees.

It’s a wonder that anything gets built.  That it does is testimony to the many people in our industry who are determined to do good if imperfect work, build things, make a living, and stay out of court.

[Melissa here again]:  Well said, Phil.  Thanks for providing me a much better understanding of the Specifier’s position concerning “order of precedence” clauses.  The attorney in me still likes them, but I can understand your point that contractors can abuse their position by failing to inform the design team of conflicts in the documents.  I represent many such architects and engineers who have experienced such after-market bidding by contractors.  Sometimes it is difficult to know whether the contractor honestly missed the conflicts, or whether he saw it and is taking advantage of the situation.  I certainly agree that the contractor should bear some responsibility for reviewing his scope of work completely prior to submitting his bid.

Do you agree with Phil?  What is your position on the role and interplay of contract documents on the construction project?  Share your thoughts with Phil and me in the comments below.