Construction Contract Drafting...

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Construction Contract Drafting StrategiesCrafting Enforceable Payment, Performance, Termination and Damages Provisions

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, SEPTEMBER 7, 2011

Today’s faculty features:

Karen A. Denys, Drinker Biddle & Reath, Princeton, N.J.

Melissa Dewey Brumback, Partner, Ragsdale Liggett, Raleigh, N.C.

Stephanie L O'Rourke, Principal, Cokinos Bosien & Young, San Antonio

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Construction Contract Drafting Strategies:Crafting Enforceable Payment, Performance,

Termination and Damages Provisions

K A D EKaren A. Denys, Esq.Drinker Biddle & Reath, LLP

105 College Road EastP O B 627P.O. Box 627

Princeton, New Jersey 08542(609) 716-6698

[email protected]

Payment Terms• Primary concern of parties to a construction contract• Commonly disputed during contract negotiations and one of the leading causes of

disputes during construction• The following payment terms should be carefully reviewed and negotiated:

1) Method of Payment2) Progress Payments3) R t i3) Retainage4) Withholding Payment5) Final Payment6) Late Payment/Non-Payment by Owner6) Late Payment/Non Payment by Owner7) Payment/Non-Payment of Subcontractors

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Method of Payment• Method of Payment often dictates the types of disputes that will arise during the

project• Parties must clearly define the Method of PaymentParties must clearly define the Method of Payment• In deciding which Method of Payment to utilize, the parties should consider:

– The size and scope of the project – Owner’s budget for the project– The stage of the plans and specifications– Unknowns and contingencies that may arise during project– Risks to be assumed by both Owner and Contractor

S hi ti ti f th O– Sophistication of the Owner– Requirements of the Lender

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Common Methods of Payment• Lump Sum:

A single fixed price is set for all the work to be performed by the Contractor. Often used where detailed plans and specifications already exist, for smaller ( d tl i d) j t d/ h th O h littl i i(modestly priced) projects, and/or where the Owner has little experience in construction management.

• Cost Plus: The Owner pays Contractor for the actual cost of labor and materials plus aThe Owner pays Contractor for the actual cost of labor and materials plus a specified fee (which can be either fixed or a percentage of cost of work) for overhead and profit. Often used in the absence of detailed plans and specifications.

GMP• GMP: A Cost-Plus Contract wherein a set price for a specific scope of work is established that cannot be exceeded. Often used on fast-track projects or when the design is incomplete at the time construction starts.

• Unit Price:The Contractor performs a unit of work for a fixed price with the total quantity of material and labor being uncertain. Often used on public infrastructure projects (e g roads runways)

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(e.g., roads, runways).

Lump Sum• Clarity and certainty as to price, rights and obligations• Requires complete and well-defined plans and specifications and specific scope of

workwork• Contractor assumes most of the risk. If Contractor makes a mistake in the estimate

for labor or materials, the Contractor bears the loss.• Owner likely to pay a premium because of unknowns and contingencies• Minimum Owner supervision required• Contractor may cut corners on quality or quantity to maximize profits• Owner should specify the materials that Contractor is required to use• Less transparency as to Contractor’s profit margin• Owner assumes risk for any changes after the contract is executed• Scope of work needs to be clearly defined because any omissions or mistakes may

result in expensive Change Ordersresult in expensive Change Orders• Works well if there is to be competitive bidding for project

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Cost Plus• Provides transparency missing from Lump Sum• Both Owner and Contractor share in benefits that come from more efficient work and costs that

are closer to original estimates• Very important for parties to specifically identify what does and does not qualify as the Cost of the

Work and hat is a reimb rsable e penseWork and what is a reimbursable expense• High maintenance for both Owner and Contractor as the Contractor must keep detailed records of

costs actually incurred for labor, materials and equipment used on project and Owner must scrutinize those records

• Owner does not pay for unknown variables that do not occur as with Lump Sum• Owner does not pay for unknown variables that do not occur as with Lump Sum• Contractor has no incentive to cut quality or quantity because it is paid for all labor and materials

that go into project• Owner assumes risk of unknown variables and contingencies

O h ld b ild i “ b k” i i d th i ht t dit h t th t l t ti• Owner should build in “open book” provisions and the right to audit what the actual construction costs are

• Owner should require Contractor to competitively bid subcontracts• Owner should cap General Conditions to prevent improper use of cost savings and to avoid being

nickel and dimed by Contractornickel and dimed by Contractor• Parties should negotiate upfront what size or type of credit change order should include a credit

for the Contractor’s fee• Owner should prohibit practice of charging rent for tools already owned by Contractor

P ti h ld ti t d t bli h hi h W k b lf f d b C t t

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• Parties should negotiate and establish which Work may be self-performed by Contractor

Guaranteed Maximum Price (GMP)• Used to temper risks to Owner by acting as cap on the total amount the Owner will be

required to pay Contractor• No increase in price except for approved Owner changes• All risk is on the Contractor• Need a clearly defined scope of work• Owner should consider sharing any savings (difference between the GMP and final

t f th k) ith C t t t id th C t t ith i ti t kcost of the work) with Contractor to provide the Contractor with an incentive to keep costs to a minimum

• Contingency provision must be carefully negotiated and address issues, including but not limited to, what the contingency may be used for and how it is to be managed

• Owner should build in “open book” provisions and the right to audit what the actual construction costs are

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Unit Price• Requires adequate breakdown and definition of work units

• Requires sufficient (not complete) design definition to estimate quantities

• Contractor assumes risk of rising costs availability of labor weather etcContractor assumes risk of rising costs, availability of labor, weather, etc.

• Contractor’s risk is less than in a Lump Sum Contract because an error in estimating the job does not stick the Contractor with overages

• Owner assumes risk for total quantities and of higher total cost of constructionq g

• Tends to draw unbalanced bidding

• Additional staff needed to measure, control and report on units completed

• May be used in conjunction with lump sum or cost plus methodsMay be used in conjunction with lump sum or cost plus methods

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Progress Payments (1)• Periodic payments constituting partial payment of the contract sum

• Construction contract should clearly define how and when progress payments are to be made

• Detailed Schedule of Values is imperative

– Contractor should prepare a detailed Schedule of Values for the Owner and Architect’s approval early on in the project

– Should accurately break down the scope of work into component parts and each part should be assigned a value

– Applications for Payment should be measured against the approved Schedule of Valuesa ues

• Advanced Payments

– Be mindful of statutory schemes and state laws that limit advanced payments

– May create issues with surety under performance bondsMay create issues with surety under performance bonds

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Progress Payments (2)• Timing of Progress Payments

– Typically made monthly based on the progress made on the project through the date on which the Contractor submits its application for payment

C l b d t i il t– Can also be made on certain milestones

– When setting the time-frame within which progress payments must be made, parties should consider the following:

• Who must review and approve Application for Payment (e g Architect?• Who must review and approve Application for Payment (e.g., Architect? Owner? Lender?)

• Specific Lender requirements regarding payment

• Statutory requirements that govern the time within which an Owner must payStatutory requirements that govern the time within which an Owner must pay the Contractor (e.g., Prompt Payment Acts)

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Progress Payments (3)• Procedure for Progress Payment

– Set forth in detail what the Contractor must do in order to get paid during the job A li ti f P t

g y ( )

– Application for Payment• Should include (1) the amount of the work in place, (2) the cost of materials

stored on (and possibly, off) site, (3) the cost of labor to date, (4) the amount of retainage, (5) previous payments, (6) a summary of change orders (if any), and (7) the amount of payment currently being requestedany), and (7) the amount of payment currently being requested

• May also include various certifications of Contractor– That the work included in the Application for Payment has been

completed in accordance with the contract documentsTh t C t t h id it S b t t /S li f W k th t th– That Contractor has paid its Subcontractors/Suppliers for Work that the Owner has previously been paid for

– That the payment shown in the application is due and owing• Sample Forms: AIA Document G702, ConsensusDOCS 291 & 292

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Progress Payments (4)• Submitting Application for Payment

– Who should the Application for Payment be submitted to (Architect? Owner? Both?)

– Architect’s role with respect to Application for Payment

• Is the Application for Payment submitted first to the Architect for review and approval

• Will the Architect issue a Certificate for Payment to the Owner

– Application for Payment is usually reviewed and certified by the Architect (in the form of a Certificate for Payment) and then submitted to the Owner for paymentto t e O e o pay e t

• Set specific time-frame (x days from receipt) within which Architect must review and issue Certificate for Payment

– The Owner may want to retain control over Application for Payment process

– At very least, Owner should require that Owner’s approval of Application for Payment and/or Certificate for Payment is a condition precedent for payment

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Progress Payments (5)• Conditions Precedent to Progress Payment

– Inspection of work

– Partial Lien Waivers and Releases from Contractor and Subcontractors/SuppliersPartial Lien Waivers and Releases from Contractor and Subcontractors/Suppliers

– Certification from Contractor

– Certificate for Payment from Architect

Owner approval of Application for Payment and Architect’s Certificate for– Owner approval of Application for Payment and Architect s Certificate for Payment

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Retainage• Portion of the contract price that is withheld by Owner from each payment

• Purpose is to ensure the project is completed and to protect the Owner against Contractor default, liens and claimsContractor default, liens and claims

• If there is a payment or performance bond, retainage may not be needed

• Amount of retainage withheld and timing of its release are critical and hotly negotiated

– If amount is too low or released too early a Contractor facing a costly punch list– If amount is too low or released too early, a Contractor facing a costly punch list may have little incentive to complete job

– If amount is too high or withheld too long (e.g., final completion), Contractor may price the cost into its bid depriving Owner of lowest price

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Amount of Retainage• Typically 5-10%

• Retainage should be withheld from both Contractor and Subcontractor Work

St t t li it ti t b id d• Statutory limitations must be considered

– Some states limit the percentage of retainage

– Some states require that retainage be held in an interest bearing account

– Some states require retainage to be released or reduced after a certain percentage of the Work is completed

– Statutory regulations vary depending on whether public or private project

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Release of Retainage (1)• Period between substantial completion and final completion is often contentious

– Owner uses retainage as leverage to get punch list items completed

– Subcontractors that have finished their work may file liens based on retainageSubcontractors that have finished their work may file liens based on retainage that Contractor is withholding from them

• Clearly establish when retainage is to be released

– Be mindful of statutory requirementsy q

• Typically released at Substantial Completion

• Owner should hold on to some portion of retainage until Final Completion to ensure punch list items are completed

– Recommend 150-200% of cost to complete punch list items

– Parties must consider who determines cost to complete such punch list items

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Release of Retainage (2)• Retainage may also be released or percentage may be reduced at certain milestones

in the work (e.g., upon 50% or 75% completion of the work)

– Parties must consider who determines when milestones are reached

– Owner may want to make reduction in its sole discretion

– Owner may also may want to make reduction contingent on continued satisfactory performance by the Contractor

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Withholding Payment (1)• Disputes often occur when the Architect or Owner withholds payment• Construction contract should require payments of amounts not in dispute• Construction contract should define/limit circumstances when payment may be

withheld Circumstances may include:withheld. Circumstances may include:– Defective work not remedied– Third party claims filed or reasonable evidence of probable filing of such claims

unless security acceptable to the Owner is provided by the Contractor– Failure of Contractor to make payments to Subcontractors/Suppliers– Reasonable evidence that the Work cannot be completed for the unpaid balance

of the contract sumDamage to the Owner or separate contractor– Damage to the Owner or separate contractor

– Reasonable evidence that the Work will not be completed within the contract time and that the unpaid balance will not be adequate to cover actual or liquidated damages for the anticipated delay

– Failure to carry out the Work in accordance with the contract documents• Contractor should carefully review and understand when payment may be withheld

because a number of the circumstances involve assumptions and judgment calls

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Withholding Payment (2)• Be mindful of statutory schemes (particularly Prompt Payment Acts) which dictate

when and how payments should be made and how and when payments may be withheld

Some statutory schemes require payment on construction within a certain– Some statutory schemes require payment on construction within a certain number of days after request unless there is a “good faith dispute” (e.g., Texas Prompt Payment Act – Ch. 28 of Texas Property Code)

– Some statutory schemes have strict notice requirements if the Owner intends to withhold payment (e.g., New Jersey Prompt Payment Act - N.J.S.A. 2A:30A-1, et. seq.)

– If such procedures are not followed, the Owner could be held in breach of the contract and waive its rights incur interest on unpaid amounts and be held liablecontract and waive its rights, incur interest on unpaid amounts, and be held liable for damages and attorney’s fees

– If such procedures are not followed, Contractor and/or Subcontractors may have the statutory right to stop Work without breaching the contract

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Final Payment• How and when Final Payment is to be made should be clearly defined

– Final Payment should typically be made 30-45 days after Contractor completes all punchlist items

– Owner should expressly provide that time period for final payment does not start to run until all conditions precedent to Final Payment have been satisfied

• Concerns regarding timing and procedure for Final Payment are similar to those for Progress PaymentsProgress Payments

• Contractor should understand whether acceptance of Final Payment means waiver of all claims other than those in writing and identified as unsettled at the time of Final Application for PaymentO h ld t ik i i hi h id th t th i i l i• Owner should strike any provisions which provide that they are waiving any claims against Contractor by issuing Final Payment

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Conditions Precedent to Final Payment• Conditions precedent to Final Payment should be carefully reviewed and negotiated.

Conditions may include:– Final inspection by Architect and/or Owner

Final Certificate for Payment– Final Certificate for Payment – Owner’s approval of Final Application for Payment and Certificate for Payment– Local jurisdiction approval (e.g., Certificate of Occupancy)– Affidavits– Proof of Payment– Final Lien Waivers and Releases from Contractor and all Subcontractors/

Suppliers (with any lien claim bonded around)Satisfaction of all Lender and Project Close Out Requirements– Satisfaction of all Lender and Project Close-Out Requirements

– As-built surveys and drawings– Warranty information– Express warranties regarding Workp g g– Consent of Surety

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Late Payment/Non-Payment by Owner• Main concern for the Contractor and Subcontractors/Suppliers• Drafting strategies to protect Contractor from late or non-payment

R i O t h id f fi i l t ffi i t t th– Require Owner to show evidence of financial arrangement sufficient to cover the costs of construction

– Require Owner to furnish information necessary for Contractor to evaluate, give notice, and enforce mechanic’s lien rights

– Obligate Owner to pay interest on late payments• Owner should make sure interest rate/penalty is reasonable

– Retain Contractor’s right to stop work and/or terminate the construction contract for late and/or non-paymentfor late and/or non payment

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Payment/Non-Payment of Subcontractorsy y• Be mindful of Prompt Payment Act requirements• Be mindful of statutory limitations on retainage• Be wary of and pay particular attention to “Pay when Paid” and “Pay if Paid” clausesBe wary of and pay particular attention to Pay when Paid and Pay if Paid clauses

– Pay when Paid: • Subcontractor agrees not to be paid for his or her work until the Contractor is

paid by the Owner C t i t t th l t t i t l th ti i f t• Courts interpret these clauses to restrict only the timing of payment

– Pay if Paid: • Payment from Owner to Contractor is a condition precedent to

Subcontractor’s right to payment from Contractor • Many jurisdictions will not enforce and have ruled that such clauses are

against public policy

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Enforcement of Pay If Paid Clauses• Difficult to enforce Pay if Paid clauses • Some jurisdictions will enforce where the clauses are extremely clear and have the

requisite language– To be enforced, clause must emphasize the following as a minimum:

• Payment to Contractor is a condition precedent to payment to a Subcontractor

• The Subcontractor bears the risk of Owner’s insolvencyy• The Subcontractor’s payment is to come from a fund, the sole source of

which is the Owner’s payment to the Contractor

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Risks to Owner Where

• Non-payment of Subcontractors can result in liens being filed against the Owner's

Subcontractor is Not Paid (1)p y g g

property or interest in property

• Drafting strategies to protect Owner’s interests:

– Require open access to all accounting records

– Require evidence of payments to all Subcontractors/Suppliers before issuing any payment (e.g. Partial and Final Lien Waivers and Releases)

– Require Application for Payment include Contractor’s certification that Contractor has either paid all its Subcontractors/Suppliers for the Work reflected onhas either paid all its Subcontractors/Suppliers for the Work reflected on Application for Payment and/or has utilized the payments from the last payment to pay Subcontractors/Suppliers for Work through the last Application for Payment to the instant one

– Require Contractor to prohibit Subcontractors/Suppliers from claiming liens

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Risks to Owner Where

– Require Contractor to satisfy or bond off liens within a specified time period and

Subcontractor is Not Paid (2)q y p p

to indemnify Owner for same

– Retain right to pay Subcontractors/Suppliers directly and deduct from amounts due to Contractor

– Retain right to issue joint checks to Contractor and Subcontractors/Suppliers• Joint checks and Owner direct payment options subvert Contractor’s right to

withhold payment under subcontract. Contractor should review these provisions carefully and consider deleting these and any clauses which allow p y g yOwner into Contractor’s relationship with Subcontractor/Supplier to give Contractor more flexibility

– Require Contractor to furnish a performance and/or payment bond

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Other Payment Termsy• Assignment of Contract

– If contract can be assigned by Owner, Contractor should insist upon language that requires full payment for Work prior to assignment (including retainage) andthat requires full payment for Work prior to assignment (including retainage) and before Contractor commences work for assignee

– Contractor should also require assignee to prove acceptable financial arrangements

• Bonus/Penalty Clauses– Provide a positive/negative incentive for Contractor to comply with schedule– A bonus is paid for timely or early performance– Liquidated damages are assessed for untimely performance

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Construction Contract Drafting Strategies:C fti E f bl P t P f T i tiCrafting Enforceable Payment, Performance, Termination

and Damages Provisions

Melissa Dewey BrumbackR d l Li PLLCRagsdale Liggett PLLCRaleigh, North Carolina

[email protected]

t ti l NCMy blog: www.constructionlawNC.com

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TODAY’S TOPICSTODAY S TOPICS

• Scope of ServicesScope of Services• Duties of Parties

M difi ti t P j t• Modifications to Project• Termination Issues

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Discuss Performance Expectations D i N ti tiDuring Negotiations

-- Good communication-- Good communication-- Clear expectations

The Contract is the key!

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Scope of Services

Detailed list ofDetailed list of Included Scope

&

Detailed list of Excluded Scope

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Scope of ServicesScope of Services

Additional ServicesAdditional Services• Proposal v. Contract Description

C ti ?• Compensation?• Value engineering reflected?

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Unit PricingUnit PricingDefine when unit pricing applies

Ex: rock unit pricing only applies when rock measures X

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Extended ConstructionExtended Construction

I A/E id f dditi l it d iIs A/E paid for additional on-site admin where contractor delays project?

How will delays bedetermined?

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Time considerationsTime considerations

“Ti i f th E ”• “Time is of the Essence”

• Liquidated damages?

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Contingencies & AssumptionsContingencies & Assumptions

N f diti (i b d il)• No unforeseen conditions (i.e., bad soil)• Financing considerations prior to start• Timely delivery of Owner equipment

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Example of Contingency GMP ContractExample of Contingency GMP Contract• Owner shall use best efforts to monitor and accelerate the Project’s plan

approval, permit applications, and financing. Upon completion of said tasks, and in any event no later than July 1, 2011, Owner shall notify Contractor in writing that Owner is ready to execute the Commencement Amendment and commence construction (the “Recalculation Notice”).

• Upon receipt of the Recalculation Notice, Contractor shall update theUpon receipt of the Recalculation Notice, Contractor shall update the budget for the Project using then-current pricing for identical Project materials as were previously priced. Within fourteen (14) days of receipt of the Recalculation Notice, Contractor shall provide an updated GMP to Owner reflecting the revised budget (the “Revised GMP”). g g ( )

• Within seven (7) days following Owner’s receipt of the Revised GMP and budget from Contractor, Owner shall notify Contractor of its acceptance or rejection of the Revised GMP. If Owner accepts the Revised GMP, theor rejection of the Revised GMP. If Owner accepts the Revised GMP, the parties shall execute an Amendment to the Contracts reflecting the Revised GMP and incorporating any other additional terms, modifications, or Change Orders agreed upon by the parties in the interim (the “Commencement Amendment”).

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)

Scope of Services

Safe harbor provisionAgreement Not to Claim for Cost of Certain Change Orders:

“. . .Owner agrees not to sue or to make any claim directly or indirectly against Engineer on the basis of professional negligence breach ofagainst 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 percentageamount 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. . .”

42(EJCDC, Ex. 1, Alloc of Risks, Form E-500)

Scope of ServicesScope of ServicesSafe harbor provision (cont.)[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 claimOwner 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.”g y g

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Duties of the PartiesDuties of the Parties

• Spell out in advanceSpell out in advance• Confirm role of A/E team

C f l f O t ti• Conform role of Owner representative• Establish schedule & how delays handled• Determine procedures for changes

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Owner’s DutiesOwner s Duties

AccessAccess• occupied buildings; University settings

lf f d k t i t f• self-performed work cannot interfere

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Owner’s DutiesOwner s DutiesFurnish surveys and data re: site

The Owner shall furnish surveys describing physical characteristics, legal limitations and p y , gutility locations for the site of the Project, and a legal description of the site. The Contractor shall be entitled to rely on the accuracy ofshall be entitled to rely on the accuracy of information furnished by the Owner but shall exercise proper precautions relating to the safe performance of the Worksafe performance of the Work.

AIA201 § 2.2.3

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§


§ 3.7.5 Concealed or Unknown Conditions. If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealedconditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature, that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the charactergenerally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if th A hit t d t i th t th diff t i ll dthe Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different fromdetermines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as

id d i A ti l 15

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provided in Article 15.


Unforeseen Conditions– liability ultimatelyUnforeseen Conditions liability ultimately rests with Owner-- if Owner relied on Geotech report, they may be liable too

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Owner’s DutiesOwner s DutiesPayment Terms• Payment terms as specified in contract;

core Owner duty• Non-payment: need to document reasons;

pay undisputed portionp y p p• Figure lead time needed

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Designer’s DutiesDesigner s Duties

Plans & Specs (Spearin doctrine)

[I]f the contractor is bound to build according to plans and specifications prepared by the owner, the

t t ill t b ibl f thcontractor will not be responsible for the consequences of defects in the plans and specifications. This responsibility of the owner is not overcome by the usual clauses requiring builders to visitovercome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work, ...”

United States v. Spearin, 248 U.S. 132 (1918)

Designer bears ltimate liabilit !50

Designer bears ultimate liability!

Designer’s DutiesDesigner s DutiesOwner’s representative

Acts as Owner’s representative during t ticonstruction

Authority to act only as provided in Contract documents

§ 4.2.1

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On-site Observation

§ 4.2.2 The Architect will visit the site at intervals appropriate to the stage of construction or as otherwiseappropriate to the stage of construction, or as otherwise agreed with the Owner, to become generally familiarwith the progress and quality of the portion of the Work completed and to determine in general if the Work iscompleted, and to determine in general if the Work is being performed in a manner indicating that the Work, when fully completed, will be in accordance with the Contract Documents However the Architect will not beContract Documents. However, the Architect will not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work

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Work.


• Designer should spell out in detail whatDesigner should spell out in detail what observation services are/are not part of contract

• i.e.: “Designer will make X number of visits during the Y Phase of Construction. These visits gwill only be to ensure general compliance with the plans. Not every portion of the job will be

b d l d li ill bobserved; only random samplings will be observed at any such field visit.”

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Designer’s DutiesDesigner s Duties• Review and certify Applications for

P tPayment• Reject work that does not conform to

Contract• Review, approve, take appropriate action , pp , pp p

on shop drawings, samples, etc.• Initial arbitrator of disputesInitial arbitrator of disputes

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Construction AdministrationConstruction Administration§ 4.2.10 If the Owner and Architect agree, the

Architect will provide one or more project p p jrepresentatives to assist in carrying out the Architect’s responsibilities at the site. The duties, responsibilities and limitations of authority of such project representatives shall be as set forth in an exhibit to be incorporated in theforth in an exhibit to be incorporated in the Contract Documents.

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If additional services/duties are desiredIf additional services/duties are desired, spell out in detail in Exhibit to contract

• What is “construction observation”?• What is construction observation ?• What is entailed in “periodic observation”?• What is encompassed in on-site

construction supervision?

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Contractor’s DutiesContractor s Duties

Means & Methods Techniques SequencesMeans & Methods, Techniques, Sequences or Procedures

• for self performed work• for self-performed work• for subcontractors

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• MerchantabilityMerchantability• Fitness for a particular purpose

G d k hi• Good workmanship

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Warranty:Warranty:• materials & equipment of good quality and

materials will be newmaterials will be new• the Work will conform to the requirements

f th C t t D tof the Contract Documents • the Work will be free from defects

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Site SupervisionSite Supervision

C t t ibl f b t tContractor responsible for subcontractors• should have similar duties/responsibilities

in subcontract

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Contractor’s DutiesContractor s DutiesScheduling & work-force

D t to create & keep sched le• Duty to create & keep schedule• Duty to properly staff job

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Contractor’s Duties

•Expediting work ifExpediting work if behind schedule

•Trade stacking issues

•If acceleration due to others, timely notice to owner

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Timeliness of Notice of Delay/Change

14 days

21 days

30 days30 days

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Mutual Duties of the PartiesMutual Duties of the Parties

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Implied Duty Not to Hinder

•Not delay/hinder any other party•Not delay/hinder any other party

•NondisclaimableNondisclaimable

•Includes Owner’s separateIncludes Owner s separate contractors; Design Team

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Standard of CareIn acceptance with standard of others employed in sameprofession--"reasonableness”

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Standard of CareStandard of Care

• The accepted definition of ‘Standard ofThe accepted definition of Standard of Care’ does NOT contain the word perfectionperfection.

U f d h h ‘hi h t ’• Use of words or phrases such as ‘highest,’ ‘best,’ or ‘most qualified’ increases the t d d f f t dstandard of performance expected.

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Duty to Disclose

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Modification to the Construction Plans & Specifications

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the Contract "Change" Clause

• Mechanism for change• Mechanism for change

• Allows Flexibility• Allows

• In standard contracts

FlexibilityIn standard contracts

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Contracts Compared

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Changed Terms Agreed to?

No

YesEJCDC?

NoNoYesChange Order

72Change Directive

When terms cannot be agreed upon

AIA A201 at 7.3.3:

C t ti Ch Di ti (CCD)Construction Change Directive (CCD)• mutual acceptance of lump sum

it i t t d i t t• unit prices stated in contract• cost in "a manner agreed upon"

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When terms cannot be agreed pon (Partial Pa ment)upon (Partial Payment):

AIA A201 at 7 3 9:AIA A201 at 7.3.9:

• Architect-interim determination c ec e de e a o• Claims can be asserted later

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When terms cannot be agreed upon:

Consensus Docs 200 at 8.2.1 & 8.2.2: Interim Directed Changeg

Consensus Docs 200 at 8.3.3:Owner pays 50% of estimate

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When terms cannot be agreed upon:

EJCDC C-700 at 12.01.C.2:

Directives dealt with in CO process

• Payroll and labor: 15%• Payment to subs: 5%

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What if there is no signed CO or CCD?What if there is no signed CO or CCD?

Federal project: out of luck

Other project:project: may qualify forfor equitable relief

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relief

What documentation required for Compensable Change?Compensable Change?

1. description of change1. description of change2. number of days needed3. amount 4. signature and date 5. back-up documents

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Back Up Documentation– ProposalsProposals– Invoices– Logsg– Time Sheets– Emails– Faxes

Should consider what will be required when contract is

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when contract is negotiated

Delays & SchedulingDelays & Scheduling

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Excusable Delay

N t f bl-- Not foreseeable-- Unusual weather

Act of God-- Act of God

What docs will beWhat docs will berequired? NOAA?

Time extension only

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only

Compensable Delay

C d b F lt h d id ?•Caused by Fault: who decides?

•Time extension•Time extension& money (actual damages)

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Concurrent Delay

•Caused by Fault of more than one partyCaused by Fault of more than one party

•Time extension & money only if perTime extension & money only if per contract

•Actual damages must be provenmust be proven

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Termination & SuspensionTermination & Suspension

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Termination: the Ultimate ThreatTermination: the Ultimate Threat

• Non-breaching party can terminate without penaltyF C t t i l d t b i id• For Contractor, includes not being paid

• For Owner, includes Contractor’s failure to pay b f il t t ff j b k hi isubs; failure to staff job; workmanship issues

T i ti l i itiTermination: losing propositionfor both parties!

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Termination/SuspensionTermination/Suspension for Convenience (by Owner)

• Only the owner can terminate/suspend for convenienceconvenience

• Requires written notice• Completely discretionaryCompletely discretionary• Contract sum & time

are adjusteda e adjustedIf expect issues up front, can require more

notice or conditions before suspension

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Termination/Suspension for C i ( t )Convenience (cont.)

U i t f itt ti t t• Upon receipt of written notice, contractor shall (1) cease operations as directed;(1) cease operations as directed;(2) take action to preserve the work; (3) terminate all subcontracts & P O s(3) terminate all subcontracts & P.O.s.

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Termination/Suspension for C i ( t )Convenience (cont.)

• If terminated/suspended for convenienceIf terminated/suspended for convenience, Contractor entitled to:(1) payment work executed(1) payment work executed(2) costs due to termination (3) profit on work not(3) profit on work not

performed

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Contractor’s Termination for O ’ D f ltOwner’s Default

If work stopped for 30+days, for: pp y ,stop-work order, national emergency, failure of prompt payment, failure to show p p p y ,financial capability

If worked stopped for 60+days, for:pp y ,fault of Owner

If worked stopped for 100+% of totalIf worked stopped for 100 % of totalnumber of days scheduled, or 120 days in any 365 day period

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y y p

Contractor’s Proper Termination for Owner’s Default

• If termination necessary, MUST provide a 7 dayIf termination necessary, MUST provide a 7 day written notice to the owner. (Time can be adjusted up front)– -- opportunity to cure

• Contractor’s damages: payment for work executed & for proven losses

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Owner’s Termination for Contractor’s Default

Owner can terminate for cause for materialOwner can terminate for cause for material breach by contractor:

fails to supply enough properly skilled– fails to supply enough properly skilled workers and/or proper materials; f il t b t t– fails to pay subcontractors;

– disregards laws;– fails to comply with plans & specs – Otherwise is guilty of substantial breach of

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Otherwise is guilty of substantial breach of a provision of the Contract Documents

Wrongful Termination of Contract by Contractor

If a contractor wrongfully terminates a contract & leaves job, liable for the j ,difference between the owner’s cost to complete and the remaining contract p gbalance

[Cost to Complete] – [Remaining Contract Balance] = Amt Contractor owes in

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Balance] = Amt Contractor owes in damages

Owner’s Proper Termination of C t t f CContractor for Cause

Prior to termination, MUST give a 7 daywritten notice to the contractor. (Time can be adjusted upfront.)

Aft t i ti th i itt d tAfter termination, the owner is permitted to choose any reasonable method for completing the workcompleting the work

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Owner’s Damage RemediesOwner s Damage Remedies

Owner’s Damage Remedy for properOwner s Damage Remedy for proper termination of contractor:

(1)the cost of repair/completion, or(1)the cost of repair/completion, or (2)the difference in value from what was

contracted.contracted.Exception to the cost of repair method of calculating damage: a substantial portioncalculating damage: a substantial portion of the completed work would be destroyed to undertake the repair

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y p

M li D B b kMelissa Dewey BrumbackRagsdale Liggett PLLCRaleigh, North Carolina

[email protected]

My blog: www.constructionlawNC.com

95

Construction Contract Drafting StrategiesStrategies

Crafting Enforceable Payment, Performance, Crafting Enforceable Payment, Performance, g yg yTermination and Damages ProvisionsTermination and Damages Provisions

September 7, 2011September 7, 2011

COKINOS BOSIEN & YOUNG

Stephanie L O’Rourke Stephanie L O’Rourke PrincipalPrincipalStephanie L. O Rourke, Stephanie L. O Rourke, PrincipalPrincipalCOKINOS COKINOS BOSIENBOSIEN & YOUNG& YOUNG

San AntonioSan Antonio HoustonHouston Dallas/Fort WorthDallas/Fort Worth

http://www.cbylaw.com/attorney/50/ohttp://www.cbylaw.com/attorney/50/o--rourkerourke--stephaniestephanie--llsorourke@[email protected]


DAMAGES

Drafting Enforceable Damages Provisions in Construction ContractsConstruction Contracts

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Consequential Damages

• Direct v. Indirect Damages

• May include calculated consequential damagesdamages

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Waiver of Consequential Damages

• Clause does not limit “direct damages ” but those• Clause does not limit “direct damages,” but those that flow as a consequence of a breach of contract

• AIA A401 exampleAIA A401 example• “The Contractor and Subcontractor waive claims

against each other for consequential damages arising f l h b ”out of or relating to this Subcontract…”

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• Damages specified in a contract to be paid in the event of an unexcused

Liquidated Damages• Damages specified in a contract to be paid in the event of an unexcused

delay

• Typical Clause:• Typical Clause:“If subcontractor should default in performance of the work or otherwise commit any act which causes delay to the prime contract work, Subcontractor shall be liable for all losses, costs, expenses, liabilities and damages, including p g gconsequential damages and liquidated damages, sustained by Contractor, or for which Contractor may be liable to Owner or any other party because of Subcontractor’s default.”

• Make sure you comply with notification requirements of delays and otherwise document any work that falls outside the schedule you are required to adhere to

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required to adhere to

Liquidated Damages

• Liquidated damages clauses may or may not be• Liquidated damages clauses may or may not be enforceable • Depends on the statep

• Check with legal counsel

• Damages must be reasonable and be a fair assessment of what damages truly would have been

Li id t d d t b d lt• Liquidated damages cannot be used as penalty

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“No Damage for Delays” Clause• Clause that provides that in the event of delay the delayed party will• Clause that provides that in the event of delay the delayed party will

be compensated only with an extension of time, but no monetary compensation

• Extent of risk taken in a contract with a "no damage for delay"• Extent of risk taken in a contract with a no damage for delay clause cannot be overemphasized• For owners

• For general contractorsFor general contractors

• For subcontractors

• Construction delays, and the damages that result, are the cause of most claims in the construction industrymost claims in the construction industry

• "No damage for delay clause" can be, and frequently is used to thwart any attempts to collect damages as a result of delays

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“No Damage for Delays” Clause

• Will begrudgingly give time extensions• Will not want to pay true cost for delay

f• If any delay damages at all, will try to limit them to Actual Cost • no inefficiency claimsno inefficiency claims, • no actual vs. as‐built analysis, • no home office overhead, • limited extended general conditions

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• Clearly enforceable in most jurisdictions

• Varies by state

• Example: Colorado and Oregon maintain statutes which prohibit the enforcement of these clauses on public works projects

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• These clauses are often used in proprietary• These clauses are often used in proprietary subcontract forms to declare that the General Contractor has no liability to the Subcontractor for d ldelays.

• Example:• If Subcontractor is responsible for any delays in theIf Subcontractor is responsible for any delays in the

time and sequence of the schedule, Subcontractor shall pay Contractor for all costs and damagessuffered by Contractor as a result of such delays,suffered by Contractor as a result of such delays, including any damages against Contractor under the Contract Documents.

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Example cntd:Example cntd:• In the event that Subcontractor’s performance of the Work

is delayed or interfered with, for any reason and for any period of time by acts or omissions of Owner Contractorperiod of time, by acts or omissions of Owner, Contractor of other subcontractor, Subcontractormay request an extension of time for performance of the Work, but shall not be entitled to any increase in the Subcontract price ornot be entitled to any increase in the Subcontract price or to damages or additional compensation as a consequence of such delays or interference, except to the extent that the Contract Documents entitle Contractor to compensation for psuch delays, and then only to the extent of any amounts that Contractor may, on behalf of Subcontractor, actually receive from Owner for such delays.

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• Most of the case law from all jurisdictions has shown• Most of the case law from all jurisdictions has shown that the application of these exceptions to a "no damage for delay" clause is extremely limited

• Exceptions to enforceability:• (1) fraud, misrepresentation, or bad faith;• (2) active interference by the owner with the contractor's• (2) active interference by the owner with the contractor s

performance; • (3) unreasonable delay, particularly delay which amounts

to abandonment of the project; andto abandonment of the project; and • (4) delay not intended or contemplated by the parties to

be governed by the provision.

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Dispute Resolution Terms• Clearly define the procedures to be followed when a dispute arises

• Identify and set forth in detail the dispute resolution mechanism(s) to be used

– Mediation

– Arbitration

– Litigation

• Identify prerequisites to Mediation, Arbitration or Litigation

– Informal Discussions/Direct Discussions

– Determination by Initial Decision Maker (IDM) or Architect

– Dispute Mitigation Procedure such as Project Neutral or Dispute Review Board (DRB)

• Identify law to govern dispute and venue where dispute is to be resolved• Identify law to govern dispute and venue where dispute is to be resolved

• Provide that Work must continue during dispute

• Notice provisions should be closely followed

• Carefully document disputes so that they are preserved and so that Lien and Prompt Payment Act y p y p p yclaims are not established by non-payment

• If using a form contract, be mindful of and understand its dispute resolution provisions

• Form dispute resolution provisions can and should be modified

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Comparison of AIA and ConsensusDOCS Di t R l ti P i iDispute Resolution Provisions

AIA A201 ConsensusDOCS 200

Litigation is default

Parties must explicitly choose arbitration by checking appropriate box

A third party (IDM or Architect) must assist in

No express default for litigation

Parties choose ADR mechanism

No initial decision requirement prior to mediation, arbitration or litigationA third party (IDM or Architect) must assist in

dispute resolution process

Initial decision from IDM or Architect is to be issued prior to proceeding to mediation, arbitration or litigation

arbitration or litigation

Require “direct discussions” first between representatives and then between senior executives before submitted to dispute mitigation and/or resolution proceduresor litigation

Mediation is prerequisite to arbitration

ADR process administered by AAA

and/or resolution procedures

Parties can choose a Project Neutral or Dispute Review Board as dispute mitigation procedure

Does not specify an organization to administer ADRADR process

Construction Industry Mediation Rules of AAA apply to mediation/arbitration unless parties agree otherwise

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MediationAdvantages Disadvantages

Relatively quick May not be suitable where parties require

Generally, inexpensive

Confidential

Focuses on the interests of the parties

a court judgment (e.g. injunction)

May not be appropriate in fraud cases

Potential for exposure of legal strategies Focuses on the interests of the parties (business relationships, external pressures, reputational issues, etc.) and not just their legal rights

and weaknesses to other side

Provides parties with the opportunity to appraise their case with a mediator in confidence

Process is conciliatory and outcomeProcess is conciliatory and outcome consensual

Procedure is flexible to suit parties and dispute

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Topics to be Addressed in Mediation Provision (1)Mediation Provision (1)

• Prerequisites to Mediation (Direct Discussions, Initial Decision, etc.)• Mandatory or Voluntary

S t ifi ti f f• Set specific time frames for:– Making demand for mediation– Selecting mediator– Conducting mediationConducting mediation

• Mediation Forum– Entity/Person(s) that will administer the mediation

• AAA, JAMS or similar service • Court• Private

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Topics to be Addressed in Mediation Provision (2)

• Mediator– Mediator selection

• Parties agree on mediator

Mediation Provision (2)

Parties agree on mediator• IDM or Architect select mediator if parties cannot agree• May want to identify potential mediator in advance of dispute in contract• Court appointedCourt appointed

– Requisite experience of mediator• May want to require some experience with construction disputes or other

expertise relevant to project• May want to require substantial mediation experience

• Venue for mediation• Required attendance at mediation

– Person with authority to settle dispute should be in attendance– Persons (such as project manager or party representative) that were involved in

the matter in dispute should be in attendance• Costs associated with mediation should be shared evenly

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• Costs associated with mediation should be shared evenly

ArbitrationAdvantages DisadvantagesAdvantages Disadvantages

More informal than litigation

Faster and cheaper (generally)*

No right of appeal (except under very limited circumstances)

Arbitrator(s) likely to be knowledgeable in construction law

Parties have more control over process and schedule

No right to complete discovery

Possibility of unknown bias and competency of arbitrator(s)

No juryschedule

Parties control amount of discovery, if any

Exclusionary rules of evidence do not apply; evidence comes in as long as relevant and

l ti

No jury

Arbitrator(s) may make award based on broad principles of justice and equity and not on rules of law and evidence or the contract languagenon-cumulative

Can be confidential because no public hearing or public record

Less exposure to punitive damages and run away

g g

Very high possibility of compromising or splitting the baby awards

Less likely to get fees and punitive damagesp p g yjuries

Award is final; normally, no right of appeal

No reasoned opinion unless asked for

Scheduling on consecutive days can be a challenge

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* Arbitration is commonly thought to be faster and cheaper than litigation, but in reality it can cost just as much, if not more, than litigation due to the number of parties, arbitrators, amount of permitted discovery, complexity of the issues, and arbitration fees

Topics to be Addressed in Arbitration Provision (1)Arbitration Provision (1)

• Prerequisites to Arbitration (Direct Discussions, Initial Decision, Mediation, etc.)• Set specific time frames for:

– Making demand and responding to demand– Selecting arbitrator(s)– Conducting discovery

Conducting arbitration proceedings– Conducting arbitration proceedings– Issuance of award

• Arbitration Forum– Entity/Person(s) who will administer the arbitration y ( )

• AAA, JAMS or similar service • Private• Court

– When selecting Arbitration Forum pay close attention to the forum’s costs, arbitration panel members, and rules

– If decide to privately administer arbitration, consider adopting AAA, JAMS or similar service’s rules

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Topics to be Addressed in Arbitration Provision (2)

• Arbitrator(s)– Number of Arbitrators should be an odd number, such as 1 or 3– Arbitrator(s) Selection

( )

• Parties agree on all arbitrators• Parties each select 1 arbitrator and the selected arbitrators appoint a third as

chair • May want to consider identifying potential arbitrators in advance of dispute in• May want to consider identifying potential arbitrators in advance of dispute in

contract– Requisite experience

• May want to require a certain number of years experience in construction law or some other expertise relevant to project

• May want to require case management expertise• Venue for arbitration

Di P t• Discovery Parameters– Limit document and deposition discovery

• Set specific number for eachR i di b di tl l t d t i

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• Require discovery be directly related to issues– Set tight timeframes for completion of discovery


• May want to provide for dispositive motions• Arbitrator(s) Award

– Consider remedy parameters

( )

Consider remedy parameters• High/low limitations• Baseball arbitration• Elimination of punitive damages• Award of attorney’s fees to prevailing party• Award of arbitration fees and costs to prevailing party

– Consider requiring the arbitrator’s decision to comply with applicable substantive lawlaw

– Require arbitrator(s) to issue a reasoned opinion– Set time-frame for issuance of award

• May want to provide for consolidation of arbitrations and joinder of other parties

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• Standard for Review

– Consider providing for an appeal to an appellate arbitrator or to Court

( )

• Arbitration Costs

– Generally, parties share evenly the arbitration costs

– Consider requiring the losing party to pay all arbitration costs (forum fee, q g g p y p y (arbitrator(s) costs, etc.)

– Consider requiring the losing party to pay all legal costs (attorney’s fees, etc.)

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LitigationAdvantages Disadvantages

Large body of substantive law controls dispute May take a long time to get to trial

Set procedures exist that govern dispute

Parties do not have to create their own rules

Judge must be impartial

Minimal limitations to discovery (“paper war”)

Costly legal fees

Schedule controlled by judge and courthouse

Right to appeal

Trial on consecutive days

Judge will more strongly police the parties and counsel

Lack of finality due to right to appeal

Trier of fact (judge or jury) may not have any knowledge of construction law and issues

Ability to appeal award based on proceduralcounsel

Judge/jury more likely not to split the baby

More likely to get punitive damages (although still hard to get)

Ability to appeal award based on procedural issues

Proceedings are open to the public

Judges hate construction cases because they lack e pertiselack expertise

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Topics to be Addressed in Liti ti P i iLitigation Provision

• Prerequisites to litigation (Direct Discussions, Initial Decision, Mediation, etc.)

• Choice of law and choice of venue clause

• May want to consider waiving trial by jury

• May want to consider adding a clause that prevailing party is entitled to legal costs (attorney’s fees, court costs, etc.)

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Other Dispute Resolution Mechanisms (1)• Parties should feel free to fashion whatever dispute resolution mechanism works for

them• Research ADR options in applicable jurisdiction • Other options utilized in the construction context include:

– Standing Project Neutral: • One or more individuals identified in construction contract (or appointed

later) to be on-call to a construction project to assist the parties if a disputelater) to be on call to a construction project to assist the parties if a dispute arises. The Standing Project Neutral can assist the parties in agreeing upon dispute resolution procedures, facilitating discussions/negotiations, mediating disputes, and rendering recommended proposals for settlement.

– Standing Dispute Review Board: • Group of individuals, usually with both substantive and procedural

experience, identified in construction contract (or appointed later) to hear all disputes and render non-binding determinations on a construction project.

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Other Dispute Resolution Mechanisms (2)– Expert Determination:

• Expert appointed by the parties to resolve dispute usually over highly technical issue. The appointment of the expert, his/her terms of reference,technical issue. The appointment of the expert, his/her terms of reference, and his/her powers are generally addressed in separate agreement.

– Mini-Trial/Mini-Arbitration:

• Non-binding mini-proceedings, wherein judge(s) or arbitrator(s) issue non-g p g j g ( ) ( )binding decisions based on limited evidence and arguments by counsel. Matter is usually submitted via affidavits, expert reports and/or memoranda.

– Private Judging:

• There are three general types of private judging: (1) a temporary judge, with the agreement of the parties and approval of the court, serves all judicial functions required at the trial level, including rendering a judgment, (2) a private judge, appointed by the court, acts as a general referee to take evidence and render a report to the court which the court may adopt as a judgment, and (3) a special master, appointed by the court, performs a specific judicial function such as controlling discovery or handling accounting or other technical evidence.

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Other Dispute Resolution Mechanisms (3)– Med-Arb:

• Parties undertake mediation. If it is not successful, the mediator changes roles and arbitrates the same dispute.

– Arb-Med: • Parties undertake arbitration. Before the award is delivered, the parties

undertake mediation to attempt to resolve the dispute by agreement. If a settlement is reached, then the award is never handed down. If no settlement is reached within a set time limit the award is handed down andsettlement is reached within a set time limit, the award is handed down and binding on the parties.

– High-Low Arb: • Parties establish, prior to the hearing, a range in which the arbitration award

must be lf the award is between the high and low figures then it is final Ifmust be. lf the award is between the high and low figures, then it is final. If the award is above the pre-set maximum, it is adjusted to the agreed-upon high figure and if the award is below the pre-set minimum, it is adjusted to the agreed upon low figure. Parties often agree to not inform the arbitrator of the high-low range.

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Other Dispute Resolution Mechanisms (4)Other Dispute Resolution Mechanisms (4)

– Baseball Arbitration:

• The arbitrator(s) are asked to decide which party in dispute has the more reasonable position. Whichever side the arbitrator(s) take, the arbitrator(s) are required to accept that party’s position, without revision.

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