Drafting Construction Contracts: Key Provisions and Common...

Drafting Construction Contracts:

Key Provisions and Common Pitfalls Enforceable Payment, Performance, Termination, Indemnification and Damages Provisions

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TUESDAY, JUNE 12, 2012

Presenting a live 90-minute webinar with interactive Q&A

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

Christopher G. Hill, Partner, The Law Office of Christopher G. Hill, Glen Allen, Va.

Craig F. Martin, Partner, Lamson Dugan and Murray, Omaha, Neb.

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Construction Contract Drafting Strategies: Crafting Enforceable Payment, Performance,

Termination and Damages Provisions

Christopher G. Hill, Esq.

The Law Office of Christopher G. Hill, PC

4870 Sadler Road, Suite 300

Glen Allen, VA 23060

(804) 205-5155

chrisghill@constructionlawva.com

Blog: Construction Law Musings

6

Payment Terms

It’s All About Expectations!

7

Method of Payment

Determines Types of Disputes

Must be Clearly Defined

Things to Consider

8

Common Methods of Payment

Lump Sum

Cost Plus

GMP

Unit Price

9

Clarity

Specific Scope

Contractor Assumes Risk (except CO’s)

Profit Margin Less Transparent

Works Well with Competitive Bidding

Lump Sum

10

Transparent

Both Sides Benefit from Efficiencies

Must Define Cost of Work

Owner Assumes Risk of Unknown

Variables

Competitively Bid Subcontracts

Limit on Self Perfomance

Cost Plus

11

All Risk on Contractor

Maximum Amount Paid by Owner Absent CO

Clearly Defined Scope of Work

Consider Sharing Savings

Guaranteed Maximum Price (GMP)

12

Definition and Breakdown of Units

Enough Info for Estimate

Contractor Assumes Risk of Rising Costs, Etc

Less Contractor Risk

Owner Takes Risk of Total Quantities

Unit Price

13

Progress Payments

Schedule of Values

Advance Payment Issues

Timing

Procedure

14

Submissions

To Whom

Architects Role

Owner Control?

Progress Payments (2)

15

Conditions Precedent?

Inspection

Lien Waivers

Certification from Contractor

Certificate of Payment

Owner Approval of Application?

PAYMENT FROM OWNER (if Sub)?

Progress Payments (3)

16

Retainage

Withheld from Each Progress Payment

Owner Protection

Must Balance Protection and Price

Usually 5 to 10 Percent

From All Work incl. Subcontractors

Check State Rules

Release

17

Withholding Payment

• Be Careful When Doing So

• Only Where Contract Allows

• Undisputed Amounts

• Define Circumstances Carefully

• Statutory Schemes

18

Final Payment

• Same Concerns as Progress Payments

• Timing

• Conditions Precedent

• Waiver of Claims on Owner or Contractor Side?

19

Conditions Precedent to Final Payment

20

Late Payment/Non-Payment by Owner

• Require Financial Info from Owner

• Information To Enforce Rights

• Interest

• Stop Work/Termination

– Use Sparingly

21

Pay When Paid

Pay when Paid v. Pay if Paid:

Pay when Paid:

Subcontractor not paid until Contractor is paid by the Owner

Restrict only timing

Pay if Paid:

Condition precedent to right to payment

Many jurisdictions will not enforce

22

Other Payment Terms

Assignment of Contract

Bonus/Penalty Clauses

Drafting Construction Contracts: Key

Provisions and Common Pitfalls

Understanding & Modifying Key Construction Contract Terms

Melissa Dewey Brumback, J.D., LEED Green Assoc.

Ragsdale Liggett PLLC Raleigh, North Carolina

919.881.2214 mbrumback@rl-law.com

My blog: www.constructionlawNC.com

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TODAY’S TOPICS

A. Scope of Services

B. Duties of Parties

C. Modifications to Project

D. Termination Issues

A. SCOPE OF SERVICES

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Address all open issues:

-- included v. excluded

-- additional services?

-- Proposal v. Contract Description

-- rounds of bidding?

-- value engineering?

-- A/E v. Owner’s rep?

27

Unit Pricing

When does it apply?

Assumptions? Exceptions?

Ex: rock unit pricing only applies when rock

measures X

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Extended Construction

Is A/E paid for additional on-site admin

where contractor delays project?

How will delays be

determined?

29

Time considerations

• “Time is of the Essence”

• Liquidated damages?

30

Contingencies & Assumptions

• No unforeseen conditions (i.e., bad soil)

• Financing considerations prior to start

• Timely delivery of Owner equipment

31

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”).

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Safe harbor provision

Agreement 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)

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B. DUTIES OF THE PARTIES

1. Owner duties

2. Design team duties

3. Contractor duties

4. Mutual duties of all parties

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1. Owner’s Duties

Access

• occupied buildings; University settings

• self-performed work cannot interfere

35

Owner’s Duties

Furnish 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

36

Owner’s Duties

Unforeseen Conditions: liability ultimately

rests with Owner

-- if Owner relied on Geotech report, they

may be liable too

37

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. . .”

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Owner’s Duties

Payment Terms

• Payment terms as specified in contract;

core Owner duty

• Non-payment: need to document reasons;

pay undisputed portion

• Figure lead time needed

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2. Designer’s Duties

Plans & 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)

40

Designer’s Duties

Owner’s representative

Acts 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?

41

Designer’s Duties

On-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.

42

Designer’s Duties

Designer 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 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.”

43

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

44

3. Contractor’s Duties

• Means & Methods, Techniques,

Sequences or Procedures

– for self-performed work

– for subcontractors

• Merchantability

• Fitness-particular purpose

• Good workmanship

45

Contractor’s Duties

Warranty:

• 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

46

Contractor’s Duties

Site Supervision

Contractor responsible for subcontractors

• should have similar duties/responsibilities

in subcontract

47

Contractor’s Duties

Scheduling & work-force

• Duty to create & keep schedule

• Duty to properly staff job

48

Contractor’s Duties

•Expediting work if behind schedule •Trade stacking issues •If acceleration due to others, timely notice to owner

49

Timeliness of Notice of Delay/Change

14 days 21 days 30 days

50

4. Mutual Duties of the Parties

51

Implied Duty Not to Hinder

•Not delay/hinder any other party •Nondisclaimable

•Includes Owner’s separate contractors; Design Team

52

Standard of Care

• Reasonableness, NOT perfection

• But: ‘highest,’ ‘best,’ or ‘most qualified’

increases the standard of performance

53

Duty to Disclose

54

C. MODIFICATION TO THE

CONSTRUCTION PLANS &

SPECIFICATIONS

55

• Mechanism for change • Allows

• In standard contracts

the Contract "Change" Clause

Flexibility

56

Changed Terms Agreed to?

Yes

No

Change Directive

EJCDC?

No

Yes

Change Order

When terms cannot be agreed upon

AIA 201

ConsensusDOCS

200

EJCDC C-700

Directive/

Instruction

Process

Construction

Change Directive

(CCD)

(lump sum; unit

prices; agreed upon

manner)

§7.3.3

Directives dealt

with in CO process

Interim Directed

Change

§8.2.1 & §8.2.2

Partial

Payment

Particulars

Partial Payment

Architect-interim

determination

§7.3.9

Payroll and labor:

15%

Payment to

subs: 5%

§12.01.C.2

Owner pays 50% of

estimate

§8.3.3

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What if there is no signed CO or CCD?

Other project: may qualify for equitable relief

Federal project: out of luck

59

What documentation required for Compensable Change?

1. description of change 2. number of days needed 3. amount 4. signature and date 5. back-up documents (consider

during negotiations) • Proposals

• Invoices

• Logs

• Time Sheets

• Emails

• Faxes

Delays to the Schedule

Excusable

Delay

Compensable

Delay

Concurrent

Delay

Not

foreseen;

Act of God

Caused by fault

(who decides?)

Fault of more

than one

party

Yes Yes Yes

No Yes (actual) Maybe (if in

contract)

D. TERMINATION & SUSPENSION

1. For convenience (Owner only)

a. Suspension

b. Termination

2. Termination for fault

a. Fault of Owner

b. Fault of Contractor

1. For Convenience

a. Suspension

AIA A201 §14.3: No more than 100% of

total days or 120 days in any 365 day period

(whichever less, after which Contractor may

terminate- see 14.1.2)

ConsensusDocs 200 §11.1: Up to 30 days

(after which Contractor may terminate- see

11.5.1.2)

EJCDC C-700 §15.01: Up to 90 consecutive

days

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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’s

If expect issues up front, can require more notice or conditions before suspension

64

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

2. Termination for Fault:

a. fault of Owner

If work stopped for 30+days, for:

stop-work, emergency, failure of prompt

payment, failure re financial capability

If worked stopped for 60+days, for:

fault of Owner

If worked stopped for 100+% of total

number of days scheduled, or 120 days

in any 365 day period

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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

66

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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

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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 work

Damages: the cost of repair/completion OR the difference in value from what was contracted

69

Melissa Dewey Brumback, J.D., LEED Green Assoc. Ragsdale Liggett PLLC Raleigh, North Carolina

919.881.2214 mbrumback@rl-law.com

My blog: www.constructionlawNC.com

CONSTRUCTION CONTRACT DRAFTING STRATEGIES

Crafting Enforceable Payment, Performance,

Termination and Damages Provisions

June 12, 2012

70

Craig F. Martin, Partner

LAMSON, DUGAN AND MURRAY, LLP

cmartin@ldmlaw.com

71

DAMAGES

Drafting Enforceable Damages Provisions in

Construction Contracts

72

•Liability under contract.

•All losses arising naturally from breach.

•This includes:

•Direct.

•Indirect, a/k/a Consequential.

BREACH OF CONTRACT DAMAGES

73

WHAT ARE CONSEQUENTIAL DAMAGES?

74

CONSEQUENTIAL DAMAGES

Owner’s Perspective.

Increased financing costs.

Lost profits.

Lost rental income.

Contractor’s Perspective.

Supplying extended on-site supervision.

Increased labor costs.

Rental expenses.

Subcontractor claims.

75

EXAMPLES OF CONSEQUENTIAL DAMAGES

Secondary damage caused by construction

defect.

Interior water damage, both to building itself and

personal property.

76

WAIVER OF CONSEQUENTIAL DAMAGES

A party agrees to waive the right to recover consequential damages from the other.

77

WAIVER CONSIDERATIONS

Is the waiver one sided or mutual?

78

FREQUENTLY USED PROVISIONS

AIA A201 Section 15.1.6.

Owner and Contractor waive consequential

damages.

Concerns.

Owner waives damages caused by delay.

Remedy.

Incorporate liquidated damages for delay.

79

CONSENSUSDOCS 200

Section 6.6 -- Mutual waiver except for

liquidated damages as agreed and losses

covered by insurance required by the

contract.

Differs from AIA.

Expanded definition of consequential damages.

Creates an exception for insurance.

80

ALTERNATIVE CONTRACT PROVISION

Strike the waiver provision.

Negotiate a limited waiver.

Identify those damages allowed or excluded.

Negotiate a not to exceed cap on damages.

Limit delay damages to liquidated damages.

81

BUT, WHAT ARE LIQUIDATED DAMAGES

Predetermined damages generally invoked when a contractor fails to meet deadlines.

82

ADVANTAGES TO LIQUIDATED DAMAGES

Limits the amount of delay damages that

may be recovered.

Avoids the obligation of proving actual

damages, i.e., lost profits, loss of use.

83

ARE LIQUIDATED DELAY DAMAGE CLAUSES

ENFORCEABLE

Maybe.

If it is a penalty, it is not enforceable.

Courts take two approaches:

Was the estimated amount of damages

reasonable at formation, regardless of actual

damage?

Prospective.

Is there a reasonable relationship between

estimated liquidated damages and actual

damages?

Retrospective 84

FREQUENTLY USED PROVISIONS

AIA A201

No form language, but reference to liquidated

damages.

This could be because architects’ insurers hate

liquidated damages clauses.

Consensus Docs 200

Paragraph 6.5.

Liquidated damages are in lieu of liability for any and

all extra costs, losses, expenses, claims, penalties

and any other damages.

85

ALTERNATIVE CONTRACT PROVISIONS

Require payment only if the delay is caused

solely by someone other than the owner.

Incorporate a bonus for early completion.

GC pays if project delayed, Owner pays if project

is completed ahead of schedule.

86

“NO DAMAGE FOR DELAYS” CLAUSE

A delayed party will be compensated only with an extension of time, no monetary compensation.

Risky for all parties.

87

NO DAMAGE FOR DELAYS

FREQUENTLY USED PROVISIONS

AIA A201

8.3 Delays and Extensions of Time.

If GC is delayed by Owner, Contract Time shall be

extended by Change Order.

Does not preclude damages for delay, but 15.1.6,

Waiver of Consequential Damages will impact

recovery.

88

NO DAMAGE FOR DELAYS

FREQUENTLY USED PROVISIONS

ConsensusDocs 200

6.3.1 If GC delayed, entitled to extension of

Contract Time.

6.3.2 If GC incurs additional costs, shall be

entitled to adjustment in Contract Price.

89

NO DAMAGE FOR DELAYS

ALTERNATIVE PROVISIONS

Prohibit recovery of damages for delay

unless active interference.

Clarify the number of days before delay

damages are triggered.

90

PAY-IF-PAID / PAY-WHEN-PAID

91

PAY-IF-PAID / PAY-WHEN-PAID PROVISIONS

Pay-if-Paid provisions excuse payment until

GC has been paid by the owner.

Pay-when-Paid provisions allow reasonable

amount of time to pay.

92

ARE THEY ENFORCEABLE?

Pay-when-Paid provisions are generally

enforceable.

Pay-if-Paid provisions may be enforceable.

Must be narrowly drafted.

States differ on enforceability.

Yes—New Jersey, Connecticut, West Virginia.

No—New York, Nevada, California.

93

PAY-IF-PAID CLAUSES

Must be drafted to clearly and

unambiguously show the parties’ intent to

shift the risk of nonpayment from the general

contractor to the subcontractor.

94

SAMPLE LANGUAGE

Subcontractor agrees to assume the risk that

the owner may fail to pay for the

Subcontractor’s work.

The Contractor shall have no obligation to

pay the subcontractor for its work unless the

owner has first paid Contractor for the

Subcontractor’s work.

95

DISPUTE RESOLUTION

What are your options?

Arbitration.

Mediation.

Litigation.

96

WHICH ONE IS BEST?

No good answer. It depends more on the

circumstances.

97

CONTRACT PROVISIONS

AIA A201

Provides a menu to select.

Arbitration.

But must pursue mediation first.

Litigation – default.

Other – whatever the parties decide.

98

CONTRACT PROVISIONS

ConsensusDocs 200

Resolution menu.

Direct Discussions.

Mediation.

Arbitration.

99

RESOLUTION PROCEDURES

Great flexibility in resolving conflicts, but you

must address it.

100

THANK YOU

Craig F. Martin, Partner

LAMSON, DUGAN AND MURRAY, LLP

cmartin@ldmlaw.com

Construction Contractor Blog:

http://www.constructioncontractoradvisor.com

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