Spring Cleaning: 6 Contract law tips for limiting risk on construction projects

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cleaning suppliesIt’s springtime! That means spring cleaning. Out with the old and in with the new. This is also a good time to think about cleaning up your systems for limiting your risk on construction projects. Here are a few short things to consider as you attempt to improve your construction contracts:

  1. Do you have a standard written contract or proposal for every project, no matter how small or how long the client has been doing business with your company? This should be your number one priority. If it is a standard form, it shouldn’t be a big deal to use even on short projects. And if you think your longtime customers will be offended, blame it on the attorneys! That’s what construction attorneys are here for– we’re tough and can take being the bad guys.
  2. Has your contract or proposal been reviewed by your insurance carrier? This is an important step you can take to limit any risk issues in your contract. Many insurance carriers will review your contracts at no cost to you– they view it as a good loss prevention measure. Check with your insurance agent or broker to see if your carrier offers this service. This is also a good time to see if your insurance coverage is sufficient for the amount of work you are currently performing.
  3. Has your contract been reviewed by your attorney? If your insurance carrier has an attorney licensed in your jurisdiction review your contract, you can skip this step. Otherwise, strongly consider having the contract reviewed by a professional, preferably an insurance defense attorney. Measure twice and cut once applies to the legal world, too.
  4. Does everyone on your staff know to use the contract or form proposal and where on your system to find it? It does you no good to have a great contract template that some of your employees don’t use. Educate them on the importance of all contracts and proposals being produced in a uniform, systematic way.
  5. Is there a follow up procedure in place, in case a construction contract or proposal is not returned executed by the client? Someone should be tasked with making sure a completely executed contract or signed proposal is obtained, and that it is filed in an easily accessible location for future reference. One idea: do not open a new client or matter number to bill against until the contract is in place.
  6. Consider whether it is worth getting current verbal agreements translated into written agreements. If you have an ongoing project that is only based on a verbal agreement, consider the potential for risk on that project. It might be worth it to ask the client to execute a new written agreement. Again, you can blame it on the lawyers. This *may* not be possible, or it may simply be too awkward to ask for this in the middle of a project that is going well. But at least consider all of your current projects to see if this is a possibility.

Happy Spring Cleaning!

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Photo “Kane Cleaning  Supplies”  by Collin Anderson via Flickr via Creative Commons License

What is not in your construction contract can be just as important as what is in the contract

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Ever wonder why lawyers like to write contracts that seem to go on, and on, and on? By nature, lawyers are doomsayers. We try to minimize risk, and sometimes that takes the form of a contract that “only a lawyer could love”.

We will cover important contract terms in future blog posts, but for now, did you know that what is not in your construction contract is just as important as what is in there? Many times the heart of a construction dispute stems from confusion or mistaken assumptions about what, exactly, was agreed upon.

In addition to having a very detailed “Scope of Services,” in which you specify exactly what you will be doing on a project, you should also develop a standard “Exclusions from Services” list, and that list should be a part of every contract.

Such an exclusion list should include:
— anything you were specifically asked not to perform
— anything the owner indicated was to be provided by others
— anything which involves specific contractor coordination (unless
you are providing this service)
— a listing of anything above and beyond normal conditions (for
example, “attendance at more than X meetings a month”)
— a general “catch all” statement that anything not specifically
specified in the Scope of Services is not covered

Of course, what specific things should be listed in your Exclusions list depends on what field of construction you are in. Design professionals need to focus on coordination issues, duties with respect to other design professionals on a large project, duties relating to oversight of contractor work, and related issues. Contractors should focus on their responsibility to work with and/or around other trades as well as related work that the owner does not intend to pay for which can result in scope creep.

While it might seem like wearing belts and suspenders at the same time to write out a Scope of Services and also include an Exclusion from Services list, the minimal extra effort in developing such an Exclusion list will pay you back in volumes should a dispute on the project ever arise.

Photo (c) Markus Spiske.

Risks in designing for LEED certification

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“Green” building is a hot topic for construction professionals, and the coveted LEED certification (Leadership in Energy and Environmental Design) is the gold standard in demonstrating a commitment to environmentally friendly building.

According to the US Green Building Council which developed the LEED system, LEED is “an internationally recognized green building certification system, providing third-party verification that a building or community was designed and built using strategies aimed at improving performance across all the metrics that matter most: energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental quality, and stewardship of resources and sensitivity to their impacts,”

Because LEED certification is relatively new, the legal implications of designing to obtain a specific LEED certification are still being hammered out. Potential risk in designing to a specific LEED standard is the failure of a building, once built, to meet the green criteria it was supposed to meet.

Case in point: Charlotte’s ImaginOn, a Children’s Theatre and Public Library facility. Designed as one of Charlotte’s first LEED buildings, ImaginOn is not meeting the green requirements it was designed to meet. This is due, in large part, to the popularity of the Center, which has led to an increase in operating hours and, of course, associated energy costs.

As noted in the Charlotte Observer, “the episode illustrates gaps between energy-saving potential and actual performance.”

Whether or not the increased hours should be considered as foreseeable, questions remain. Should such a situation be considered a breach of warranty? A changed condition? Or a little of each?

Until these matters get resolved in the Courts, it is wise practice to design with LEED goals but not certification or performance guarantees. All parties should recognize that circumstances may change which will prevent LEED certification or which will in other ways limit or eliminate any energy efficiencies which are anticipated.

Update:  For more risks in designing for LEED certification, check out my post: Legal risks in designing a Construction project for LEED certification (take 2)

 

Failure to Coordinate in Design-Bid-Build case costly mistake

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In a recent Business Court decision, an architecture firm was hit with a $2.3+ million judgment stemming from the design and construction of the kitchen exhaust and HVAC ductwork systems in the Charlotte Bobcats Arena.

The project was a “fast track” project, and the architecture firm claimed they were only contracted to provide diagrammatical drawings of the arena’s ductwork system. Subcontractors on the project sued for their cost to perform extra work to remedy alleged design deficiencies. Post-trial relief is currently being sought by the architectural firm (including a motion for judgment notwithstanding the verdict, a new trial, or a new trial on the damages issue).

Whether or not such post-trial motions are granted, however, the case raises the very real issue as to architectural responsibility versus contractor coordination responsibility, especially in fast-track projects. This case highlights the risks to architects in failing to make their responsibilities and contractual limitations explicitly clear to both owners and contractors. The case also highlights the need to explicitly review shop drawings for coordination issues that might be present.

The case is Hunt Construction Group Inc. et al. v. City of Charlotte, North Carolina, and Ellerbe Becket Inc., case number 08-11915, in the Mecklenburg County Superior Court.

Exceptions to the Economic Loss Rule

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As discussed in my last post, there are exceptions to the economic loss rule which will allow you to recover under for your damages (that is, your “injury”) under a negligence theory, even though you have a contract with the other party which may otherwise limit your recovery.

The four exceptions are:

(1) The injury is to a person or property of someone other than the promisee;

(2) The injury is to property of the promisee other than the property which was the subject of the contract, or was a personal injury to the promisee;

(3) The injury to the property is one in which the promisor is charged by law, as a matter of public policy, with the duty to use care in the safeguarding, as in the case of a common carrier, an innkeeper or other bailee.

(4) The injury was intentional on the part of the promisor, or was a conversion of the property by the promisor.

These are generally called the Ports Authority exceptions to the economic loss rule. Ports Authority v. Fry Roofing Co., 294 N.C. 73, 81, 240 S.E.2d 345 (1978), rejected in part on other grounds, Trustees of Rowan Tech. v. Hammond Assoc., Inc., 313 N.C. 230, 242, 328 S.E.2d 274, 281 (1985).

Be aware that if one of these exceptions does not apply, the economic loss rule may bar any negligence action, including an action for contribution or indemnity.

For example, where the owner sues the general contractor for construction issues, the general contractor cannot bring a contribution or indemnity action against his subcontractors, as there is a contract between them and only contractual remedies will apply. Kaleel Builders, Inc. v. Ashby, 161 N.C.App. 34, 42, 587 S.E.2d 470, 476 (2003).