June 1, 2005
By Gregory T. Spalj
As I was considering what I could tell contractors that they should know and do to reduce the risks of becoming involved in an expensive construction dispute, I considered these alternative themes:
- An ounce of prevention is really worth a pound of cure.
- Luck is the residue of hard work.
- You paid this year’s premium for your life insurance even though you do not expect to die this year.
- Be prepared for the worst.
You might think these topics are unrelated or at least not related to the issue of construction disputes, but hold on. Each of these statements involve the concept of readying oneself for an event or situation that may or may not ever happen. Indeed three of them deal with preparing for something you hope will not happen.
In my 24 years of litigation experience, I have found that the easiest disputes to resolve in my clients’ favor are those that my clients anticipated, prepared for, and laid the groundwork for resolution before they even arose. While acknowledging that my experience is somewhat skewed because I generally only see those construction projects in which a dispute has arisen, it occurs to me that construction disputes are as certain as death and taxes. (I have never, ever, ever had a construction contractor call me to say that the construction project it just concluded was dispute free and proceeded as planned! Having never been the recipient of good news from my construction contractor clients, and dealing only with the “problem projects” I admit that I may be a tad cynical.)
But even assuming that every construction project has the potential for a disastrous dispute having severe financial consequences to some or all parties, what can you do to make sure you are on, or at least close to, the winning end of a resolution? The answers follow.
What You Should Do Before You Bid Or Negotiate a Contract
Many conditions which have the potential for causing construction claims can be discovered, with a moderate amount of effort, before you bid or begin your contract negotiation. First, a careful pre-bid site investigation is essential. We are all familiar with clauses in construction contracts in which the contractor acknowledges that it has thoroughly investigated the project, its site, and the conditions of the locale. This is not just excess verbiage. Here’s what you should do on every project before you bid or begin negotiations for a contract:
- Investigate any subsurface conditions which might affect the work. Look at the nature of the soil, existing structures, upstream dams, nearby lakes or streams, river flow data, and the like. Ask the owner whether any geotechnical data exists for the project site. Ask about previous construction projects in the area.
- Project site accessibility can by a huge issue. How is one to gain access to the work? Has the owner obtained all of the necessary right-of-way agreements to allow your construction forces upon the property of others that might be affected? Ask the owner whether it has obtained all the appropriate regulatory permits from government agencies such as the Army Corps of Engineers, the State Historical Society, the State Department of Natural Resources, or other regulatory bodies which issue permits to disturb the natural resources and historical aspects of the construction site.
- Investigate the likely normal weather for the time during which the project is to be built. Go further and investigate the normal weather occurring during the period after the project is supposed to be complete. While the latter investigation may seem like over-kill, if the project is delayed for any reason, as many projects are, some local conditions can make it extremely expensive or downright impossible to conclude a project during certain seasons of the year. Delay is a common feature of construction projects and regardless of whose fault the delay may be, the impact of that delay will be felt by the completing contractor. You cannot know the consequences of delay without looking at the weather in which you will be working if you are delayed.
- Keep records of your investigative activity. Take notes of phone conversations with the owner and with the regulatory authorities. Use a checklist. Take pictures. Use a videocamera. These activities will serve as strong evidence of the foundation of your agreement with the owner. Should a dispute later arise as to who said what to whom, what conditions were anticipated, whether you or the owner of the project were ready for the work, or what the parties contemplated at the time the contract was signed, you will be able to prove your side of the story with your documented investigation. These activities and information will also have the beneficial side effect of making your bid or negotiated price more informed. You will learn things in your pre-bid investigation that might affect your price, but had you done no investigation, you would not even have thought about. This review might also raise issues that the owner had not thought about, including gaps or disconnects in the logic underlying the construction schedule. In short, informed contracting on both sides of the table will minimize the risks that someone’s expectations will not be met.
Do not limit your pre-bid or pre-negotiation activities to merely soliciting the lowest possible prices from your subcontractors. What you don’t know can hurt you in the context of signing on for a construction project at a fixed price or one with the guaranteed maximum price. It is likely that what you don’t know will be “the thing” that will affect the job more than anything you did know.
If you are negotiating a contract with the owner, the owner will be impressed by your thorough investigation. No one wants a construction dispute, and showing the owner that you, through thorough preparation, are addressing up front those items which may prove to be a dispute at a later time, will give the owner comfort that it is negotiating or looking at a bid from a competent and careful contractor.
What You Should Do Before you Sign the Contract
Read the contract and think of the worst case scenario and how the contract would deal with it. Whenever I think of negotiating construction contracts, I think of a client who told me that he did not have to worry about the troublesome contract clauses I suggested he attempt to eliminate because none of those things that were the subject of those clauses was ever going to happen. In some respects, and based upon experience, he might be right, but the fact that you do not expect to die this year should not cause you to drop your life insurance. Your construction contract is like insurance. It deals with the unexpected and the unknown. Most of the construction contract is designed to allocate the risk of the financial consequences of something occurring during the project that neither party fairly anticipated. Don’t let your optimism or enthusiasm for the project dissuade you from attempting to negotiate a fair balance of those risks. Some contract clauses to pay particular attention to:
- Incorporation by reference provisions
- Flow-down clauses
- Differing site conditions clauses
- Indemnification clauses
- No damage for delay clauses
- Changes clauses
Not all of the issues that arise during the course of negotiating these types of contract clauses are purely “legal.” Consider a 50-line, small print indemnification clause filled with legalese that the owner says has the net effect of making the contractor responsible for all of the damages resulting from his performance of the work. While that may sound fair, and while you may not want to hire a lawyer to interpret the legalese in the provision, consider now a situation where during the course of performing the work, the contractor was 10% at fault for something that the owner was 90% at fault for. Should the contractor have to pay 100% of the damages? The answer of course is no. This is matter of fairness, not just a matter of legal interpretation or negotiation. Strive for a contract that places the burden of events which you control on you and the consequences of events that the owner controls on the owner. Your indemnity clause should fairly require you to indemnify the owner for your mistakes and the owner to indemnify you for its mistakes.
Further, do not agree to broad “no damage for delay” clauses. The delay you might end up suffering through is one that puts you into constructing during the winter for which you included no provision in your price. If you cannot recover damages for delay and only get your contract price which assumed you were going to be constructing in normal summer and fall weather, you may well bear the financial consequences of delay regardless of the fact that the delay may have been caused by the owner or by something outside the control of either party.
Long story short: talk to a construction lawyer who has drafted, and tried cases about, construction contracts. We are all cynics for the reasons explained above. We have seen the worst case scenarios and how the construction contract can reduce your risk. The lawyer’s fee for an ounce of prevention is miniscule compared to the fee for a pound of cure.
There are several things you can do from “day one” on the project to prepare you well in the event of a construction dispute. They all involve “paperwork.” The paperwork will not only serve as evidence if a dispute later arises; it will impose a discipline on your project management team, forcing them to look at the job on a critical level during every day of the project.
- Job diaries are essential. Construction lawyers always look at project diaries prepared by the project manager, superintendent and owner’s representative. If you are claiming that something happened during the course of the project that resulted in you losing millions of dollars and there is nothing in those job diaries that reflect any problems occurring on the project, you will have a hard time persuading the jury that your claim is nothing but an after-the-fact correction of a bad bid. We expect to see notations in those diaries of that about which you complain. The problem with job diaries is that you don’t know which problem will amount to a “hill of beans.” Therefore, you must report every problem. Every owner interference must be noted. If job progress is impeded by something someone else did, it must be noted in the diaries. A job diary, prepared at the time in question, is one of the single-most convincing pieces of evidence that a contractor or an owner can present to a court or arbitration panel.
- Use pre-printed forms. In order to make your superintendents’ and foremen’s lives easier, prepare pre-printed forms on which they can note, on a daily basis, information that might be pertinent in a subsequent construction dispute. Provide blank spaces for: the daily weather; the number of workers on-site; what work is being accomplished and where; what inspectors had been on the job; to note any significant delays, whose fault were they and why; any admissions, statements or instructions given by the inspector or other owner’s representative; and specific problems arising during the course of the day and how they were resolved.
- Use change orders wisely. In negotiating any one specific change order, do not ignore the impact that that changed work might have on unchanged work. Do not ignore the cumulative impact that 100 changes may have on unchanged work. All too often, contractors use change order forms that specifically state that the compensation paid under the change order is the sole and exclusive compensation to be paid to the contractor and that the contractor shall make no other claim related to the changed work, including impact claims or loss of productivity claims. However, at the time, the contractor does not know that there are 700 more changes coming when he signs change order number 2, 3, 4, 5 . . . 699. Consider the death of a thousand cuts. Although each individual cut may not be fatal, eventually you will bleed to death. If you are not absolutely sure of the impact of a change order on your costs and expenses of the work, do not give your rights away.
- Comply with notice requirements. Every contract has deadlines by which a contractor is required to submit certain documents in order to preserve the contractor’s rights. Under many court decisions, valid contractor claims have been lost due to the failure on the part of the contractor to provide the required notice of the claim within the time specified under the contract. Prepare a chart of all of the notice requirements contained in the contract documents and provide it to your project manager. She should know that if differing site conditions are encountered, he must give notice of that claim immediately before the conditions are disturbed. The project manager should know that if he intends to claim extra compensation with regard to any item of the construction work, he must do so within ten days of events giving rise to the claim. The project manager should know that if she disputes an engineer’s or architect’s determination, she must submit an arbitration demand within 30 days of the architect’s or engineer’s decision. The time deadlines should be prominently posted in the job trailer or inserted into the project manager’s notebook.
- Keep accurate job cost reports. While construction contractors frequently look at the “bottom line,” they seldom look at how the numbers are being accumulated. If you are experiencing a significant delay on the project, or if you are performing work for which you intend to make a claim, you should allocate your specific increased costs to that delay or change. You must alert your accounting department to set up cost codes for such events. You must instruct your project personnel to code invoices, timesheets, and other job cost documents to that specific job cost accounting code dedicated to the claim. If you do not, it will be difficult, time consuming and tremendously expensive to have a forensic financial accountant reconstruct your job costs so as to isolate the extra costs you incurred as a result of something you claim is caused by the owner. In addition to direct costs, you need to account for idle labor and equipment, extended job site overhead, storage costs, lack of productivity, extra inspection, and unabsorbed home office overhead.
MAKE A RECORD! While a picture is worth a thousand words, a document is worth at least five hundred. People tend to believe what is recorded before a dispute became a full-blown lawsuit or arbitration. Records created at a time during which neither party had an incentive to “bend” or “stretch” the truth are far more persuasive than documents generated with lawyer’s spin.
If you don’t follow my recommendations, don’t worry, I’m here to help you get out of the mess.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T