Consequential Damages: What are they? Should I waive them? (law note)

A client asked me about a contract he was asked to sign in which consequential damages were being waived.  Consequential damages are those things that cost money which arise indirectly out of a failure of a party on a construction project.   dollar signsThey can include:

  • loss of use
  • loss of rent
  • loss of profit
  • loss of bonding capacity
  • extended overhead
  • extended equipment rental fees
  • increased material costs
  • interest

Note that this is not an exhaustive list, and other consequential damages may be applicable depending on the project.

Often, like my client, you may be asked to waive consequential damages.  This is a double edged sword.  If the waiver is mutual (something on which you should insist), then the provision may save you money in the event your design or services delay the project.  The Owner has agreed that it cannot seek to recover indirect, consequential damages.  On the other hand, if you are the one suing the Owner, it means that there may be costs that you cannot be compensated for if a project goes awry.

The standard industry contracts all have at least some waiver of consequential damages, as noted in this chart.

waiver in form contractsBottom line: waiver of consequentials can be a good thing or a bad thing, but you will not know which when you are signing on the dotted line.

Just make sure that if there is a waiver, that it is mutual on both sides.  Good luck, and “be safe out there

Your turn.  Have you ever waived your right to consequentials?  Horror story to share about paying someone else’s costs?  Share in the comment section.

Dollar Photo (c) sivlen001.
Chart (c) Melissa Brumback Creative Commons License

Which Contract Form Should You Use? (Guest Post)

Nathan Hinch

Today’s Guest Post is by Nathan B. Hinch, an associate at Mueller & Reece, LLC in Bloomington, Illinois, concentrating in the practice of commercial, construction, environmental, and real estate law.  He can be reached at [email protected] and on twitter @NathanHinch. 

 Form Construction Contracts – How Do They Compare, and How Should They Be Used?

By Nathan B. Hinch

Imagine that you are a contractor from the mythical State of Verbalville, a land where the handshake deal is the norm and no one ever puts anything in writing.  If a developer/owner awarded you a project and asked you to sign an AIA Document A101™ form construction contract, along with AIA Document A201™ General Conditions, would you sign it without reading the document?  Of course not.  Assuming that you were willing to consider bucking the verbal trend and sign the document at all, you would likely read it over very carefully first.  You might also consult an attorney, to help you understand the potential risks and liability issues involved with the contract, including the enforceability of the contract under Verbalville State law, and suggest changes to the document.

Now imagine that you are a contractor in my home State of Illinois and are awarded a project in North Carolina.  If the developer/owner handed you a ConsensusDOCS® 200 form construction contract with general conditions and asked you to sign, would you do so without reading it?  Would you consult a professional attorney before signing?  What if you were familiar with the form documents from your work in Illinois?  Would it matter if it was an EJCDC document instead?

I have worked with AIA, ConsensusDOCS®, and EJCDC form documents, and all three are excellent resources that in the right hands can help save time and money for construction projects.  But here’s the point – form contracts are wonderful tools that can help allocate risk and clarify the roles and responsibilities of the parties, but that is all they are.

In the construction field, the leading form contracts have been drafted by teams of experts representing the interest groups in general and supporting teams of attorneys.  If you have never used or read one of these before, I would encourage you to take an evening and read through at least one of those mentioned above.  Given the detail of the documents, it may be difficult to imagine that these forms, without editing, are likely not specific enough for your project.  But keep in mind as you read that these are national forms and are meant to be of use throughout the U.S.  By definition these forms do not generally consider 1) variations in State law requirements and 2) your particular project needs or goals.  For that reason, credible forms such as those produced by AIA, ConsensusDOCS®, or EJCDC will encourage users to consult an attorney before using the document for specific projects.  They are not meant for “plug and play” use.

For a great reference comparing these forms, see Gillies, Heckman, and Perlberg, THE Construction Contracts Book: How to Find Common Ground in Negotiating Design and Construction Clauses, American Bar Association 2008.  The EJCDC and ConsensusDOCS websites both provide a matrix from this book for PDF download.  The book may be purchased from the ABA website here.

[Ed note:  I second Nathan’s book recommendation, which is a great resource for anyone considering the pros and cons of each set of form documents.]

Nathan and I look forward to answering your comments, thoughts, and questions.  Drop us a note!


EJCDC Document Training (Tue Tip)

Document Updates sign

Photo (c) EJCDC

We’ve talked previously about Form Construction Contracts, including ConsensusDocs, AIA, and even shown a comparison chart between the two.  Now it is the Engineer’s Joint Contract Documents Committee’s (EJCDC’s) turn. 

The American Council of Engineering Companies (ACEC) is holding a training seminar on key parts of the EJCDC form contracts.  The seminar, entitled “Critical Design-Build Contract Provisions: Understand Legal Issues That Can Put Your Firm in Hot Water“, is scheduled to address several topics and the EJCDC take on those issues, including:

  • Errors and Omissions–Handling of E & O under design-build is complicated due to inability to invoke the betterment rule.
  • Licensing Laws–Since the Design-Build entity holds itself out to be both the “designer-of-record” and the “constructor-of-record”, appropriate professional registrations and business licenses need to be in place.
  • Protests of D-B Bids and Proposals–What to do with protests of design-build procurements includes practical lessons for engineers
  • Design Reviews–Conduct of design reviews under design-build may differ from traditional periodic reviews, because an owner can place itself in a responsible position by dictating changes during the review process rather than relying on the D-B entity to deliver an end-result in conformance with the design.
  • Performance Guarantees–In some instances, owners seek to tie the design-builder to some strict performance standard.
  • Who Owns the Design–On some government design-build contracts, the owner is insisting on owning the design product.
  • Teaming Arrangements–There are many ways for engineers to participate in design-build contracts. Is your risk tolerance such that your firm can go “at risk” or would it be advisable for the firm to retain its agency status?

The Webinar is scheduled for Wednesday, April 20th from 1:30 to 3:00 PM, Eastern Time.  Fees are $199 (members) /$299 (nonmembers).  Click here to register.

Upcoming on the blog:  a guest post discussing one practitioner’s use of each of  three main form documents.  Stay tuned!

ConsensusDOCS- are they an improvement over AIA construction contracts?

Have you had occasion to use the (relatively) new ConsensusDOCS? Having just completed my manuscript for the North Carolina Construction Law seminar I’m speaking at in May, I’ve been spending a lot of time comparing the American Institute of Architect’s standard contract general conditions, the AIA A201 (2007) to the ConsensusDOCS 200 (2007) and the Engineering Joint Contracts Document Committee (EJCDC) standard general conditions of the contract, C-700 (2007).

I haven’t yet seen litigation over the ConsensusDOCS, so how courts will interpret its provisions remains to be seen. One major difference: the ConsensusDOCS do diminish some of the architect/design professional’s role on the project.

For example, in the change order process, instead of the architect being involved in the contract price and time adjustment (see AIA A201 Section 7.2.1), the ConsensusDOCS 200 calls for the owner and contractor to negotiate in good faith. No mention is made of the design professional’s role. (See 8.1.2).

If you’ve had occasion to work under the ConsensusDOCS, drop me a line and tell me the advantages and disadvantages over other form contracts.

Holidays and downtime on the job

google lego calendarThis time of year, folks look forward to taking time off from their jobs and spending time with family.  Most of your workers, subconsultants, and vendors do, too.  Add to that that many owners may be unreachable during the holidays, and it seems that sometimes it is impossible to get anything done during December.

Despite all the festive good cheer, be careful not to let the holiday season turn into a claim for delay on a project.  Project holidays are usually set at the beginning of a job.  It is a good idea to review your contract and any set calendars agreed to prior to making assumptions about what days will be considered non-work days.  Discuss anticipated absences early in the month, and determine back-up plans for when a needed individual (for example, the architect) is not reachable.  If the owner will be unavailable, has he delegated decision making authority in his absence?  Anticipating potential problems and solutions to them can make the difference between a productive month and weeks of float creep.

If you experience problems due to the vacation of others, be sure to document the delays and timely request an extension of time.  Under AIA A201 8.3.1, the contract time shall be extended by change order  if the contractor is delayed in the progress of the Work by an act or neglect of the Owner, Architect, or a separate contractor employed by the Owner.  Contract adjustments due to the delay are also available.  Likewise, Consensus DOCS 200, at 6.3.1, contains a similar provision for compensation for delay damages caused by others.

Under EJCDC documents, however, only an extension of time, and not an equitable cost increase to the contract, is the remedy for a delay experienced by a contractor.  EJCDC C-700 12.03.

Regardless of the form of contract on your Project, be sure do document all delays experienced due to the unavailability of others.  Make claims for time and/or money adjustments in accordance with your contract for all such delays to avoid finding yourself short on time at the end of the Project.

Oh, and happy holidays!

Photo:  google lego calendar by keso s via Creative Commons license.