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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
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 [email protected]
My blog: www.constructionlawNC.com
24
TODAY’S TOPICS
A. Scope of Services
B. Duties of Parties
C. Modifications to Project
D. Termination Issues
A. SCOPE OF SERVICES
26
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
28
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”).
32
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)
33
B. DUTIES OF THE PARTIES
1. Owner duties
2. Design team duties
3. Contractor duties
4. Mutual duties of all parties
34
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. . .”
38
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
39
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
58
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
63
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
65
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
67
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
68
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 [email protected]
My blog: www.constructionlawNC.com
CONSTRUCTION CONTRACT DRAFTING STRATEGIES
Crafting Enforceable Payment, Performance,
Termination and Damages Provisions
June 12, 2012
70
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
Construction Contractor Blog:
http://www.constructioncontractoradvisor.com
101
