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Eliminating the Surprise Factor from Your Construction Contracts:
Tips for Owners and Developers
Scope of Work
Compliance with Schedule
Meeting Owner’s Target for Budget
Changes in the Work
Indemnification - Allocation of Risk
SCOPE OF WORK
The starting point for any construction contract is the project. Whether it is new office
headquarters, a mixed-use residential building or new hospital wing, the contract must fully define the scope of the project and obligate the contractors to deliver it. Otherwise, the owner will face a series of unexpected additional costs. The starting point for scope definition are the plans and specifications prepared by the design team. However, the technical documents do not cover all of the contractor's obligations, and owners must identify all of the key issues that need to be addressed in the contract.
At the outset, the ownershi pteam must select the appropriate project delivery system, whether it is the retention of a general contractor, a construction manager as agent or a construction manager at risk. The contract must obligate the contractor to confirm its familiarity with the project site and that its observations of the site correlate with the contents of the documents. The contractor must also affirm that it has carefully reviewed the contract documents and that these documents provide all of the required information for construction. The contract must establish a mechanism for identifying and resolving "gaps" in the documents and mandate the appropriate performance standards for the project.
A comprehensive agreement that protects an owner's interests must identify the external requirements that may affect the project, beginning with obtaining all required public approvals for construction. Many projects also involve specific conditions that must be addressed, such as accommodati ng a major utility installation or transit facilities or remediating hazardous materials. The contract must specify the contractor's role in addressing these types of issues. If the project is slated for LEED certification, the contractor's responsibility for satisfying this requirement must also be outlined. Additionally, the agreement must delineate third party requirements such as the terms of a zoning lot development agreement, protections for adjacent properties and the requirements of lenders providing project financing. It must also address any critical points raised by the project's insurers.
COMPLIANCE WITH SCHEDULE
One of the most critical elements in any owner's construction project is the timeline. In order
to protect the owner, any well-crafted construction contract should have several provisions that deal directly with the time allocated to the construction manager (typically at risk) or the general contractor to get the job done. Typically, a well-constructed contract will have an initial project schedule along with all the necessary milestone dates needed to finish the project.
The construction contract must provide numerous clauses obligating the contractors (or the construction manager) to establish and commit to an agreed-upon project schedule. It must also include clauses which allow the owner to properly gauge how well the project is moving towards completion. In this regard, a construction agreement should address scheduling dates that are significant to the owner and the consequences if those dates are not met. Conversely, the contract may also include incentives to motivate the construction manager or general contractor to meet or beat the agreed-upon schedule or target dates for the project.
Topics such as delays and extensions of time, excusable delays, delay deadbands, acceleration, no-damage for owner-generated delays and similar items need to be considered. If appropriate, these items should be included in the contract to establish the owner's expectations as well as the construction manager/general contractor's requirements and obligations regarding schedule. The precise wording of these clauses will depend upon the particular project, but these provisions must be carefully considered and properly drafted to protect the owner's interests.
The contract may include incentives to motivate the construction manager or general contractor to meet or beat the agreed-upon schedule or target datesfor theproject.
It seems obvious that the budget would be of paramount importance, but without proper contractual provisions establishing the primacy of the budget and serious repercussions for over-spending, it can easily become a fading goal as opposed to a rigid requirement.
5 CHANGES IN THE WORK
While they may not have the same certainty as death and taxes. changes on construction
projects of any significance are undeniably ubiquitous. Changes come in various forms, shapes and sizes. The most common way to resolve the impact of a mutually agreed to change is through a change order for contractors or an additional service for design professionals. Like nearly every issue that arises in connection with a construction project, the best advice is to address the issue directly in construction contracts with design professionals, construction managers, trade contractors
Regardless of the change itself, it is imperative that contracts include sufficient notice provisions. The onus is properly placed on the party seeking the change. They should be required to provide prompt, written notice so as not to otherwise delay the project. Prompt notification of a potential claim based upon a change permits owners (1) to review the applicable project records and speak with the pertinent parties before memories invariably begin to fade; (2) to document contemporaneously the costs of the work involved in the claim; (3) to explore other less costly solutions for performing the work; and (4) to negotiate a prompt resolution of the claim. For all of these reasons, there should be real consequences if proper notice is not furnished.
Notice is the first step towards resolution of a claim based upon a change in services or work. Approval of a change should be contingent upon the justification and substantiation of the change itself. The ultimate approval should also be conclusive rather than simply authorizing the work to proceed and kicking the proverbial can down the road. In other words, all direct and indirect costs and schedule impacts should be addressed in the change order. Not all changes can be, nor should be, treated equally. Many contracts will use terminology that triggers a change if the change is "minor", "substantial" or "material". Of course that begs the question what substantial or material mean. Better results will likely be achieved if the contract language provides some frame of reference for the context of the changes to the specific project.
Arguably the most difficult situation to address comes about in the event of a failure to agree whether something qualifies as a change or the cost/schedule impacts as a result of the change. Without adequate contract language to unequivocally bind the design and construction team members to continue performing the work, a project could be at serious risk. Proper and fair contract language negotiated upfront will help mitigate the consequences of changes.
6 INDEMNIFICATION - Allocation of Risk
Owners face enormous risk of liability for work performed by the construction team on a project.
A critical purpose of a construction contract is to appropriately address risk allocation, and indemnification is one of the most effective tools for accomplishing this. A priority for owners is obtaining appropriate indemnification protection from the construction manager and general contractor and confirming that this obligation is also embraced by the subcontractors. While some contractors will seek to limit their indemnity obligation to claims for personal injury and property damage, such a limited indemnity leaves the owner exposed to substantial risk. Some indemnity clauses exclude protection for property damage to the work itself, assuming that such damage is covered by insurance. These limited indemnity provisions ignore the fact that the contractor's breach of its agreement may cause substantial damages that are not covered by insurance, but will cause the owner to sustain substantial out of pocket losses. If the contractor's indemnity extends to damages incurred by the owner as a result of its breach of contract, the contractor is responsible for those damages and it must defend the owner against additional claims which are likely to arise.
Often the owner needs to obtain indemnity protection that includes third parties, such as investors, affiliated companies, lenders and, in some cases, other parties with properties in the vicinity of the project site. A construction contract must also provide appropriate protection for the owner against statutory liabilities, such as the duties imposed on owners and contractors for state and federally mandated site safety procedures. Since an owner or developer cannot control site safety, it must obligate its construction team to implement an effective safety program and assume full responsibility for job site accidents and injuries. Indemnification is a key part of this protection. Contractors often benefit from statutory limits on liability to their own employees who are injured on the job, so it is especially important that they be obligated to indemnify the owner against potential worker claims.
Contractors often seek limitation of their total liability and their obligations to provide indemnity protection to the owner. These limitations can take the form of exclusions from the indemnity itself, waivers of consequential damages and specific dollar amounts. Owners need to avoid pitfalls in connection with these terms so they get the full protection they bargained for.
When considering insurance for a construction project, first and foremost, it is important to work with a broker who is intimately familiar with the construction industry.
While ownership may believe it is protected by the contract with the general contractor or construction manager, it will be much better served by reviewing and verifying the subcontractor agreement and often by adding specific provisions.
ABOUT ZETLIN & DE CHIARA LLP
Zetlin & De Chiara LLP is a leading national construction law fi committed to providing sophisticated and innovative legal and business advisory services related to real estate, design, and construction for a wide spectrum of industries. Our fi represents leading commercial and residential developers and
property owners ranging from single building developers to public, corporate and large institutional owners.
The fi provides comprehensive counsel throughout the planning, design and construction process, from drafting and negotiating contracts to outlining risk management strategies. We have extensive experience representing clients in litigation and alternative dispute resolution, and also advise on business formation, licensing and corporate issues. Our attorneys include individuals with in-house construction counsel experience, degrees in the design professions, and LEED accreditation.
Zetlin & De Chiara has been on the forefront of new approaches, solutions and models for advancing the construction process for clients. We advise clients on the benefi s and challenges of new technologies, innovative methodologies, alternative construction delivery methods and industry trends, including:
Public-Private Partnerships (P3s) Project Labor Agreements (PLAs) Building Information Modeling (BIM) Integrated Project Delivery (IPD)
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Disclaimer: The material presented in this publication is for informational purposes only. Always consult your attorney for guidance and direction in connection with a specific set of facts and circumstances.
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