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Drafting Construction Contracts


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Understanding and modifying key construction contract terms

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Drafting Construction Contracts

  1. 1. Drafting Construction Contracts: Key Provisions and Common Pitfalls Understanding & Modifying Key Construction Contract TermsMelissa Dewey Brumback, J.D., LEED Green Assoc. Ragsdale Liggett PLLC Raleigh, North Carolina 919.881.2214 mbrumback@rl-law.comMy blog:
  2. 2. TODAY’S TOPICSA. Scope of ServicesB. Duties of PartiesC. Modifications to ProjectD. Termination Issues 2
  4. 4. Address all open issues:-- included v. excluded-- additional services?-- Proposal v. Contract Description-- rounds of bidding?-- value engineering?-- A/E v. Owner’s rep? 4
  5. 5. Unit PricingWhen does it apply?Assumptions? Exceptions?Ex: rock unit pricing only applies when rock measures X 5
  6. 6. Extended ConstructionIs A/E paid for additional on-site admin where contractor delays project? How will delays be determined? 6
  7. 7. Time considerations• “Time is of the Essence”• Liquidated damages? 7
  8. 8. Contingencies & Assumptions• No unforeseen conditions (i.e., bad soil)• Financing considerations prior to start• Timely delivery of Owner equipment 8
  9. 9. Example of Contingency GMP Contract• 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.• Within seven (7) days …, Owner shall notify Contractor of its acceptance or rejection of the Revised GMP. If Owner accepts…, the parties shall execute an Amendment to the Contracts reflecting the Revised GMP and incorporating any other additional terms. . .agreed upon by the parties in the interim (the “Commencement Amendment”). 9
  10. 10. Safe harbor provisionAgreement Not to Claim for Cost of Certain Change Orders: “. . .Owner agrees not to sue or to make any claim. . . unless the costs of such approved Covered Change Orders exceed __% of Construction Cost, and then only for an amount in excess of such percentage. Any responsibility of Engineer for the costs of Covered Change Orders in excess of such percentage will be determined. . . .but will not include any costs that Owner would have incurred if the Covered Change Order work had been included originally. . .” (EJCDC, Ex. 1, Alloc of Risks, Form E-500) 10
  11. 11. B. DUTIES OF THE PARTIES1. Owner duties2. Design team duties3. Contractor duties4. Mutual duties of all parties 11
  12. 12. 1. Owner’s DutiesAccess• occupied buildings; University settings• self-performed work cannot interfere 12
  13. 13. Owner’s DutiesFurnish surveys and data re: site “The Contractor shall 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 Work.”AIA201 § 2.2.3 13
  14. 14. Owner’s DutiesUnforeseen Conditions: liability ultimatelyrests with Owner-- if Owner relied on Geotech report, theymay be liable too 14
  15. 15. Owner’s Duties§ 3.7.5 Concealed or Unknown Conditions. If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially . . .or (2) unknown physical conditions of an unusual nature, . . . the Contractor shall promptly provide notice to the Owner and the Architect. . . [within] 21 days. The Architect will promptly investigate . . . and, if the 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. . .” 15
  16. 16. Owner’s DutiesPayment Terms• Payment terms as specified in contract; core Owner duty• Non-payment: need to document reasons; pay undisputed portion• Figure lead time needed 16
  17. 17. 2. Designer’s DutiesPlans & Specs (Spearin doctrine) [I]f the contractor is bound to build according to plans and specifications prepared by the owner, the contractor 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 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) 17
  18. 18. Designer’s DutiesOwner’s representativeActs as Owner’s rep.Authority to act only as provided in Contract documents § 4.2.1• What is “construction observation”?• What is entailed in “periodic observation”?• What is encompassed in on-site construction supervision? 18
  19. 19. Designer’s DutiesOn-site Observation§ 4.2.2 The Architect will visit the site at intervals appropriate to the stage of construction, or as otherwise agreed with the Owner, to become generally familiar with the progress and quality. . ., and to determine in general if the Work is being performed in a manner indicating that the Work,. . . will be in accordance with the Contract 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. 19
  20. 20. Designer’s DutiesDesigner should spell out in detail what observation services are/are not part of contracti.e.: “Designer will make X number of visits during the Y Phase of Construction. These visits will only be to ensure general compliance with the plans. Not every portion of the job will be observed; only random samplings will be observed at any such field visit.” 20
  21. 21. Other Duties of Designer• Review and certify Applications for Payment• Reject work that does not conform to Contract• Review, approve, take appropriate action on shop drawings, samples, etc.• Initial arbitrator of disputes• Other work IF in contract 21
  22. 22. 3. Contractor’s Duties• Means & Methods, Techniques, Sequences or Procedures – for self-performed work – for subcontractors• Merchantability• Fitness-particular purpose• Good workmanship 22
  23. 23. Contractor’s DutiesWarranty:• materials & equipment of good quality and materials will be new• the Work will conform to the requirements of the Contract Documents• the Work will be free from defects 23
  24. 24. Contractor’s DutiesSite SupervisionContractor responsible for subcontractors• should have similar duties/responsibilities in subcontract 24
  25. 25. Contractor’s DutiesScheduling & work-force• Duty to create & keep schedule• Duty to properly staff job 25
  26. 26. Contractor’s Duties •Expediting work if behind schedule •Trade stacking issues •If acceleration due to others, timely notice to owner 26
  27. 27. Timeliness of Notice of Delay/Change14 days21 days30 days 27
  28. 28. 4. Mutual Duties of the Parties 28
  29. 29. Implied Duty Not to Hinder •Not delay/hinder any other party •Nondisclaimable •Includes Owner’s separate contractors; Design Team 29
  30. 30. Standard of Care• Reasonableness, NOT perfection• But: ‘highest,’ ‘best,’ or ‘most qualified’ increases the standard of performance 30
  31. 31. Duty to Disclose 31
  33. 33. the Contract "Change" Clause • Mechanism for change • Allows Flexibility • In standard contracts 33
  34. 34. Changed Terms Agreed to? No Yes EJCDC?Change Order No Yes Change Directive 34
  35. 35. When terms cannot be agreed upon AIA 201 ConsensusDOCS EJCDC C-700 200Directive/ Construction Directives dealt with Interim DirectedInstruction Change Directive in CO process ChangeProcess (CCD) (lump sum; unit §8.2.1 & §8.2.2 prices; agreed upon manner) §7.3.3Partial Partial Payment Payroll and labor: Owner pays 50% ofPayment Architect-interim 15% estimateParticulars determination Payment to subs: 5% §7.3.9 §12.01.C.2 §8.3.3
  36. 36. What if there is no signed CO or CCD? Federal project: out of luck Other project: may qualify for equitable relief 36
  37. 37. What documentation required for Compensable Change? – description of change – number of days needed – amount – signature and date – back-up documents (consider during negotiations) • Proposals • Invoices • Logs • Time Sheets • Emails • Faxes 37
  38. 38. Delays to the Schedule Excusable Compensable Concurrent Delay Delay Delay Not Caused by fault Fault of more foreseen; (who decides?) than one Act of God party Yes Yes Yes No Yes (actual) Maybe (if in contract)
  39. 39. D. TERMINATION & SUSPENSION1. For convenience (Owner only) a. Suspension b. Termination2. Termination for fault a. Fault of Owner b. Fault of Contractor
  40. 40. 1. For Convenience a. SuspensionAIA A201 §14.3: No more than 100% oftotal days or 120 days in any 365 day period(whichever less, after which Contractor mayterminate- see 14.1.2)ConsensusDocs 200 §11.1: Up to 30 days(after which Contractor may terminate- see11.5.1.2)EJCDC C-700 §15.01: Up to 90 consecutivedays
  41. 41. 1. For Convenience b. Termination• Only for owner• Requires written notice• Discretionary• Upon receipt of written notice, contractor shall – cease work; preserve work; terminate all subs and PO’sIf expect issues up front, can require more notice or conditions before suspension 41
  42. 42. Recover Expected Profit on Work not Performed? Yes [A201 § 14.4.3] No, but “premium” [200 §11.4.3] No [C-700 §15.03B]; but costs to break subcontracts recoverable 42
  43. 43. 2. Termination for Fault: a. fault of OwnerIf work stopped for 30+days, for: stop-work, emergency, failure of prompt payment, failure re financial capabilityIf worked stopped for 60+days, for: fault of OwnerIf worked stopped for 100+% of total number of days scheduled, or 120 days in any 365 day period
  44. 44. 2. Termination for Fault: a. fault of Owner (cont)Must provide a 7 day written notice to the Owner (opportunity to cure)Damages = payment for work executed & for proven losses
  45. 45. 2. Termination for Fault: b. fault of Contractor– fails to supply workers and/or materials;– fails to pay subs;– disregards laws;– fails to comply with plans & specs– Otherwise guilty of substantial breach 45
  46. 46. 2. Termination for Fault: b. fault of Contractor (cont)At least 7 day written notice to the contractor. (Time can be adjusted upfront.)Any reasonable method to complete the workDamages: the cost of repair/completion OR the difference in value from what was contracted 46
  47. 47. Melissa Dewey Brumback, J.D., LEED Green Assoc. Ragsdale Liggett PLLC Raleigh, North Carolina 919.881.2214 mbrumback@rl-law.comMy blog: 47