Highway to Hell or Strawberry Fields Forever

Identifying and Dealing with Avoidable Project Risk

Today’s Presenters

Andrew Atkinson – Minard Ames Insurance Services, LLC

Justin Kelton – McCarthy Building Companies, Inc.

Julianne Wheeler, Partner – Jennings, Haug & Cunningham

SPOTTING RISKSection I

• Difficult Owner• Feds• Inexperienced Owners

BAD CONTRACT DOCS

• “Poor Boyed” Plans / Exotic Plans– Do you really know the designer?– Specifications from Hell – Are LDs really all that

bad?– ADR – Do you mind if the Owner appoints the

Judge?

BAD CONTRACT DOCS AND BAD COMPANY

• Bottom line – Collaboration / Partnership• And if you can’t…– …taking a losing job is not the best business model

INSURANCESection II

Notice of Claim Requirements

• You must see to it that we are notified as soon as practicable of an event or offense which may result in a claim.

• If a claim is received by an Insured, you must:1. Immediately record the specifics of the claim and the date

received; and 2. Notify us as soon as practicable

INSURANCE

• Just pay for it…. but don’t you dare use it, right Andrew?

FINANCING

Section III

Questionable / Insufficient Financing

• Your money should not be on the dark side of the moon• You should fight for your right to know how the Project is being

financed.• AIA Provision• ConsensusDoc Provision• When the Owner refuses

6. OWNER'S RESPONSIBILITIES Any information or services to be provided by Owner shall be provided in a timely manner so as not to delay the Work.

6.1 FINANCIAL INFORMATION Prior to commencement of the Work and thereafter at the written request of the Contractor, Owner shall provide Contractor with evidence of Project financing. Evidence of such financing shall be a condition precedent to Contractor's commencing or continuing the Work. Contractor shall be notified prior to any material change in the Project financing.

Consensus Docs #205

§ 2.2.1 Prior to commencement of the Work, the Contractor may request in writing that the Owner provide reasonable evidence that the Owner has made financial arrangements to fulfill the Owner’s obligations under the Contract. Thereafter, the Contractor may only request such evidence if (1) the Owner fails to make payments to the contractor as the Contract Documents requires; (2) a change in the Work materially changes the Contract Sum; or (3) the Contractor identifies in writing a reasonable concern regarding the Owner’s ability to make payment when due. The Owner shall furnish such evidence as a condition precedent to commencement or continuation of the Work or the portion of the Work affected by a material change. After the Owner furnishes the evidence, the Owner shall not material vary such financial arrangements without prior notice to the Contractor.

QUESTIONABLE/INSUFFICIENT FINANCING

• Is the scope of work realistic? Is there enough funding for likely costs of construction?

• Banking on change orders and the interplay with clauses– Termination for Default– Termination for Convenience

§ TERMINATION BY THE OWNER FOR CAUSE§ 14.2.1 The Owner may terminate the Contract if the Contractor

.1 repeatedly refuses or fails to supply enough properly skilled workers or proper materials;.2 fails to make payment to Subcontractors for materials or labor in

accordance with the respective agreements between the Contractor and the Subcontractors;.3 repeatedly disregards applicable laws, statutes, ordinances, codes,

rules and regulations, or lawful orders of a public authority; or.4 otherwise is guilty of substantial breach of a provision of the Contract Documents.

AIA A201 (2007)

19.2 TERMINATION BY THE OWNER If, within seven (7) Days of receipt of a notice to cure pursuant to Paragraph 19.1, Contractor fails to commence and satisfactorily continue correction of the default set forth in the notice to cure, Owner may notify Contractor that it intends to terminate this Agreement for default absent appropriate corrective action within fourteen (14) additional Days. After the expiration of the additional fourteen (14) Day period, Owner may terminate this Agreement by written notice absent appropriate corrective action. Termination for default is in addition to any other remedies available to Owner under Paragraph 19.1 If Owner's costs arising out of Contractor's failure to cure, including the cost of completing the Work and reasonable attorney's fees, exceed the unpaid Contract Price, Contractor shall be liable to Owner for such excess costs. If Owner's costs are less than the unpaid Contract Price, Owner shall pay the difference to Contractor. In the event Owner exercises its rights under this Paragraph, upon the request of Contractor, Owner shall furnish to Contractor a detailed accounting of the costs incurred by Owner.

Consensus Docs #205

§ 14.4 TERMINATION BY THE OWNER FOR CONVENIENCE§ 14.4.1 The Owner may, at any time, terminate the Contract for the Owner's convenience and without cause. § 14.4.2 Upon receipt of written notice from the Owner of such termination for the Owner's convenience, the Contractor shall

.1 cease operations as directed by the Owner in the notice;

.2 take actions necessary, or that the Owner may direct, for the protection and preservation of the Work; and

.3 except for Work directed to be performed prior to the effective date of termination stated in the notice, terminate all existing subcontracts and purchase orders and enter into no further subcontracts and purchase orders.

§ 14.4.3 In case of such termination for the Owner's convenience, the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.

AIA A201 (2007)

QUESTIONABLE/INSUFFICIENT FINANCING

• Bottom Line: Transparency is a Two-Way Street

RISKY PROJECTS, BY DEFINITIONSection IV

Is there federal money available? • If so, under what program?

• HUD• Davis Bacon• Company Killers

RISKY PROJECTS, BY DEFINITION

• Nature of project: solar, WWTP, prison, reservation, school, job, etc. Need for waiver on reservation job, conditions versus technical.

• Location: remote or tight site• Unrealistic schedule demanded by Owner• Labor: Material Ratio – increasing the risk

• Market Conditions and Labor Availability – He who controls the labor, controls the market– Particular concern on very aggressive schedule

MINIMIZING CONTROLLABLE RISK

Section V

• Finding the right Owner liaison

• Owner Personalities / Project Experience

• Renegade architect

MINIMIZING CONTROLLABLE RISK

• Buying the risk down with insurance• Consensus Docs promoting assumption of only

insurable risk• Need to negotiate• Working together to determine who can most

efficiently purchase the desired coverage and divvying up the cost

§11.3.7 WAIVERS OF SUBROGATIONThe Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect's consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect's consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.

AIA A201 (2007)

17. LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES Excluding losses covered by insurance required by the Contract Documents, the Owner and Contractor agree to waive all claims against each other for any consequential damages that may arise out of or relate to this Agreement, except for those specific items of damages excluded from this waiver as mutually agreed upon by the Parties and identified below. The Owner agrees to waive damages including but not limited to the Owner's loss of use of the Project, any rental expenses incurred, loss of income, profit or financing related to the Project, as well as the loss of business, loss of financing, principal office overhead and expenses, loss of profits not related to this Project, loss of reputation, or insolvency. The Contractor agrees to waive damages including but not limited to loss of business, loss of financing, principal office overhead and expenses, loss of profits not related to this Project, loss of bonding capacity, loss of reputation, or insolvency. The provision of this Paragraph shall also apply to the termination of this Agreement and shall survive such termination.

18. RISK OF LOSS Except to the extent a loss is covered by applicable insurance, risk of loss and/or damage to the Work shall be upon the Contractor until the Date of Substantial Completion, unless otherwise agreed to by the Parties.

Consensus Docs #205

MINIMIZING CONTROLLABLE RISK

• Consider a project mediator, or shall we say, “Partnering Liaison”

CONCLUSION, Q & ASection VI

For more information…Julianne C. Wheeler jcw@jhc-law.com 602-234-7826

Andrew AtkinsonaAtkinson@insurica.com602-393-3524

Justin KeltonjKelton@McCarthy.com480-449-4700