March 1, 2014
By Private: Kristine Kroenke & Dean B. Thomson
As most contractors that contract with the Minnesota Department of Transportation are already aware, MnDOT has significantly revised its Standard Specifications for Construction. The 2014 Standard Specifications went into effect for projects let on or after December 2, 2013. In developing the 2014 Standard Specifications, MnDOT stated that its intent was to make grammatical revisions that emphasized the active voice, to increase consistency, and to reduce redundancy. Despite MnDOT’s stated intent, the 2014 Standard Specifications include significant changes to nearly all Division I sections that could greatly increase contractors’ risk and raise the procedural hurdles for recovery on claims. Dramatic changes have been made to sections on claims (Sections 1402, 1403, and 1517); progress schedules (Section 1803); extensions of time (Section 1806); and additional compensation (Sections 1903-1907). When MnDOT released the initial draft of what is now the 2014 Standard Specifications, we in consultation with the Minnesota AGC, MAPA, and other industry groups, provided comments to try to balance the risk to contractors and to conform the revised specifications with the law.MnDOT accepted some important change, but it would not change many others. The result is that the 2014 Standard Specifications increase risks to contractors and increase the obligations of contractors that will contract with MnDOT.
The changes made by MnDOT are so many that they cannot be covered completely or in detail in only one Briefing Paper, so we are issuing three on this topic. Recently, our firm gave a seminar on these changes at which we were able to discuss them in much more detail. If a more complete discussion interests you, we videotaped the seminar and you can listen to it at the following link (which you can also find on our website): http://www.fwhtlaw.com/files/pdf/MnDOT_Update_Seminar_Sept_2013.pdf. This three part briefing paper will provide an overview of each section of Division I to highlight some of the risk shifting provisions in the 2014 Standard Specifications as compared to the 2005 Standard Specifications. However, it is not intended to explain every change that potentially adds risk or cost to the contractor. Part 1 will focus on Sections 1100 through 1400.
Can MnDOT Even Do This?
As a preliminary consideration, the 2014 Specifications are far broader than technical contract revisions and far exceed changes to the technical requirements on how Contractors should build roads and bridges. Instead, the new Specifications limit and change Contractors’ existing legal remedies, change existing Supreme Court precedent, and in many respects, govern precisely how a Contractor must schedule and account for its business operations. When a state agency attempts to make such significant changes to people’s rights and remedies, it must usually go through a process known as formal Rulemaking that requires public hearings to be scheduled and public testimony offered about the appropriateness of the new rules. Minnesota law requires that rules be adopted in accordance with specific notice and common procedures established by statute, and if MnDOT does not comply with these necessary procedures, the rules are invalid. See Minn. Stat. §14.45.
Minnesota Statutes §14.02, subd. 4 defines a “Rule” as “every agency statement of general applicability and future effect . . .adopted to implement or make specific the law enforced or administered by that agency or to govern its organization or procedure. ”MnDOT has denied that the changes to its 2014 Standard Specifications constitute Rulemaking, but Minn. Stat. §161.32, subd. 1(a) is a statutory basis for MnDOT’s authority to create its standard specific specifications, and that statute states that contracts for work on trunk highways must be based on specifications prescribed by the Commissioner of Transportation. The word “specification” is not defined in MnDOT’s enabling statute, but Minnesota case law has already found that certain aspects of the standard specifications are in fact Rules to implement or make specific the law enforced or administrated by MnDOT.
The issue becomes important because when one considers the broad risk shifting and law changing provisions in the new Standard Specifications, the question will arise if these provisions are enforceable or whether certain provisions of them have to go through Rulemaking before MnDOT can impose them on and enforce them against Contractors.
Section 1100 – Shifting Risk Through New and Changed Definitions
Section 1100 of the 2014 Standard Specifications includes about 170 definitions. More than 70 of these definitions are new and very few definitions from the 2005 Standard Specifications were left unchanged. While not every definition creates added risk, there is risk if the Contractor assumes that it knows what a defined terms means. The many changes mean that Contractors need to review the definitions in the 2014 Standard Specifications along with the other sections because, if you think you know what something means in your contract with MnDOT, you may be wrong.
More troubling than the 2014 Standard Specifications containing so many changes to the definitions is that some of the definitions that MnDOT has included create potential ambiguities and even conflict with standard industry meanings. Definitions are supposed to assist in clarifying contract meaning, but the definitions in the 2014 Standard Specifications, in several instances, do the opposite.
As an example of a troubling definition is the definition of “Errors and Omissions,” a new definition that the 2014 Standard Specifications defines as “A deficiency in the Contract that results in multiple interpretations of a requirement, as determined by the Engineer, except for those resolved by the orders of precedence in 1504, ‘Coordination of Contract Documents.’” This definition is not the model of clarity, but its greatest problem is that it gives “errors and omissions” a non-standard meaning. The concept of “errors and omissions” is generally understood to mean a mistake by a person, not a contract deficiency. More typically, “errors and omissions” refer to mistakes by an engineering or design professional. Notwithstanding the commonly used meaning of errors and omissions, the 2014 Standard Specifications instead state that “Errors and Omissions” are essentially ambiguous provisions of the Contract – and then only if the Engineer says so.
The definitions begin to demonstrate the increasing burdens and complications of the 2014 Standard Specifications. More than twenty of the new definitions pertain to the new and expanded scheduling requirements in Sections 1803 and 1806. Changes to §1800 will be discussed in Part 3 of this briefing paper series, but some of the new definitions themselves demonstrate that Contractors will have to become or will have to hire scheduling experts.
This briefing paper would be as long as the Standard Specifications if it highlighted the problems of each of the Section 1100 definitions, but the main Section 1100 take away is that potential risk lurks everywhere. You cannot take for granted that you know what a Contract term means.
Section 1200 – Increasing the Pre-Bid Investigation Burden on the Contractor
Section 1200 contains the bidding requirements and conditions. In the 2014 Standard Specifications, MnDOT has placed expanded requirements for investigation and information on the Contractor while attempting to restrict its own risk regarding unknown conditions or differing site conditions.
Section 1205.1 includes an expanded list of inspection requirements. The 2014 Standard Specifications provide a list of what constitutes “a reasonable site investigation,” including an investigation of the Project Site, borrow sites, utility property, “all other locations related to the performance of the Work,” and any additional information that MnDOT makes available. The Contractor has the burden to be “satisfied with quality, quantities, and conditions to be encountered” and it is up to the Contractor to request any “additional information” if it believes that it needs any – MnDOT would not agree to include language in the 2014 Standard Specifications that it would be required to disclose all information in its possession. Section 1205.2 only states that MnDOT “may” make information in its possession available. Nevertheless, Bidders are deemed to have knowledge of any information in MnDOT’s possession whether or not MnDOT actually gives it to the Bidders.
MnDOT also does not imply a warranty on the information that it does provide. Section 1205.2 states that the Bidder’s review of information provided by MnDOT “is not a substitute for a Bidder’s own evaluation, interpretation, or judgment,” is not part of the Proposal Package, and will not become part of the Contract. MnDOT also expressly does not warrant the completeness or accuracy ofborings. The 2014 Standard Specifications attempt to undercut a project owner’s implied warranty of accuracy. Whether this attempted “boiler plate” disclaimer will be effective remains to be seen.
MnDOT has also expanded its authority in the consideration of bids. A Bidder can be disqualified from bidding if it “failed to perform on a previous contract with the State.” MnDOT states that its authority for this provision is Minn. Stat. §161.32, subd. 1d., which permits MnDOT to reject the bid of a bidder that failed to perform on a previous contract with the State. Neither the statute nor the Standard Specifications provides any discussion on what the vague phrase, “failure to perform,” means. Does a delay constitute failure to perform? Does the existence of repair work constitute a failure to perform? This language should not be applied to effectively debar a Contractor without debarment requirements being followed.
Section 1200 take away – Beware of the information that you have and what you do not have. Always ask MnDOT in the pre-bid stage to release all information in its possession relating to the project. Inform MnDOT of what you have investigated and to what you have been provided access and specifically request MnDOT to inform you if it believes that other investigation is required.
Section 1300 – No Major Changes to Bid Consideration and Award of Bids
There are no major risk allocation changes in Section 1300 from the previous 2005 version of the Standard Specifications.
Section 1400 – Muddying the Scope of Work and Restricting the Claims Process
The modifications to Section 1400 of the 2014 Standard Specifications may be summarized under two main points: (1) MnDOT is expanding the Contractor’s scope of work without compensation, and (2) MnDOT is increasingly restricting the Contractor’s ability to assert claims for extra time and compensation.
1. An Expanding Scope of Work
Multiple changes in Section 1400 potentially expand the Contractor’s scope of work for MnDOT’s benefit. Under the definition of Work, in addition to the performance of the duties required under the Contract, the Contractor is required to provide all labor and equipment and “other incidentals necessary or convenient for successful completion of the Project.” This language is problematic for its breadth, its lack of clarity, and its potential subjectivity. Who determines what is necessary or convenient? Who determines what is “successful” completion? The Project can also be broader than the limited Work that is the subject of the bid. Section 1401 does not help to increase the clarity when it states that the Contract “may not fully describe every detail” or “make allowances for all probable exceptions.” If the Contract fails to provide a description, it is up to the Contractor to “perform in accordance with the best general practice.” MnDOT further leaves itself the discretion to enforce the Contract unequally.
In §§1402.1 and 1402.3, MnDOT, through the Engineer, may also change quantities and Work “for reasons of the Department’s interest” or “as are necessary to satisfactorily complete the project.” This is broader than previous specifications, which permitted alteration of details if that was in the public interest. A determination that a change was in the public interest often required that MnDOT make factual findings – it is uncertain whether there would be a requirement of factual findings to determine what is in MnDOT’s interest.
2. Contractor’s Narrowing Rights on Contract Revisions
The 2014 Standard Specifications permit the Contractor to assert that any of these changes constitute a Contract Revision and to claim additional time and/or payment. However, the 2014 Standard Specifications restrict the Contractor’s ability to assert such a claim. The Contractor must give notice of a claim for extra work according to the requirements of §1403 or, under the 2014 Standard Specifications, it waives the claim. And if the Contractor performs the extra Work before it receives a signed Supplemental Agreement, the Work may be considered unauthorized and it shall be at Contractor’s expense.
Section 1403 sets forth the multi-step “Contract Revision” process. Under the new specifications, “the Engineer will consider requests for Contract revisions only if the notification procedures in this section are followed.”
If the Contractor is successful in navigating the new “Contract Revision” requirements, the 2014 Standard Specifications state that the Contractor is solely limited to an “adjustment,” meaning “compensation in accordance with 1904, ‘Compensation for Contract Revisions,’ 1905, ‘Compensation for Eliminated Items,’ and 1907, ‘Payment for Surplus Material,’ and the granting of a time extension in accordance with 1806, ‘Determination and Extension of Contract Time.’” There are further limitations to additional compensation. If the Contract Revision is the result of significant changes to the character of the Work, compensation (but not lost profit) is due only “if alterations or changes in quantities significantly change the character of the work.” The Variation in Estimated Quantities clause only applies to “major” contract items, which is defined as a Contract item equal to greater than 5% of the original Contract amount. This arguably means that MnDOT alterations to non-major contract items are non-compensable.
If the Contractor disagrees with the Engineer’s decision, it must make a claim under Section 1517 within 5 Business Days of receiving Engineer’s final written response or if “Engineer’s response is untimely.”
MnDOT has stated that it believes that the new multi-step process is more clear and easier to follow. Only a brief review, however, suggests that the new process may instead create confusion, delay, and problems for the Contractor and MnDOT. Among other problems, this process is at least three weeks (15 business days) and during this entire time, the Contractor may be unable to proceed with the Work. If the Engineer asks for more information, the Work stoppage could last at least an additional 10 business days or longer depending on how long it takes to compile the additional requested information. Additionally, while MnDOT permits the Engineer not to respond at all to the Contractor’s notices, MnDOT will argue that the Contractor has waived its claims if the Contractor does not submit its notice within the short time periods provided. The Contractor is on a restrictive time clock and may not wait for the Engineer to respond. It would be prudent practice for the Contractor to always provide the written notice of a Contract Revision within 5 days of the oral notice – or even better, at the same time as the oral notice.
Section 1400 take away – Contractors must be prepared to start the claims process early and document the claim from its start.
Part 2 will focus on some of the key risk changes in the 2014 Standard Specifications Sections 1500 through 1700.
*Dean Thomson and Kristine Kroenke are shareholders in the firm’s Construction Law Department and were retained by MnAGC, MAPA, and other industry groups to review and comment on the new Standard Specifications. Dean Thomson can be reached at firstname.lastname@example.org or 612-359-7624. Kristine Kroenke can be reached at email@example.com or 612-359-7628.
A MnDOT representative informally mentioned to us that the 2005 Standard Specifications may still be used for some projects let after December 2, 2013.However, the representative provided no details on what those projects might be.
The first part of this MnDOT update seminar deals with DBE issues, but the link provides a menu if you are only interested in changes to the new MnDOT specifications.It also allows you to jump to a particular section of Division 1 as well.
This discussion is generalized in nature and should not be considered a substitute for professional advice.© 2014 FWH&T