Legal Aspects of
Construction Management
ADSC West Coast Chapter
31st Annual Meeting
B. Scott Douglass
DOUGLASS LAW GROUP
(415) 297-0796
scott@dlglaw.co
DLG
Presentation Overview
• Risk Identification and
Management
• Managing the Project
• Changes
DLG
2
Risk Identification And Management
Overview
•
Sources of Claims
•
General Risk Management
Considerations
•
Contractual Risk Management
Tools
DLG
3
Risk Identification And Management
•
Sources of Claims
•
Delayed Issuance of Notice to Proceed
•
Restricted Access
•
Differing Site Conditions
•
Adverse Weather
•
Defective Plans/Specs
•
Design Changes
•
Change in Code/Law
•
Cardinal Change
•
Delay of Approvals/RFI Responses
•
Destruction or Damage to Work
DLG
4
Risk Identification And Management
Sources of Claims (Cont’d)
•
•
Improper Inspection/Testing
•
Labor Issues
•
Suspension of Work
•
Termination of Contract
•
Cost Escalation
•
Constructive Acceleration
•
Early Completion Prevented
•
Faulty Owner-Supplied Equipment
DLG
5
Risk Identification And Management
• General Risk Management Considerations
• Understand the risks – the contract identifies them
• Understand who controls a given risk – the contract
identifies responsible party
• Retain critical risks – risks critical to own performance
• Protect against such risks
• Insurance
• Bonds/Subguard
• Reasonably shift risks
• Increased risk equals increased price – risk premium
• E.g., subsurface conditions
DLG
6
Risk Identification And Management
Contractual Risk Management Tools
• Contractual Liability Limitations
•
Limit type of damages – e.g., specific type of damages –
direct or indirect
•
Limit amount of damages
•
Contractual Waivers - e.g. consequential
•
Indemnity Provisions – what is indemnity?
•
“Type I” clauses shift risk of all liability, except the
indemnitee’s sole negligence or willful misconduct
•
•
Void and unenforceable as of 1/1/13 to extent claim arises
from indemnitee’s active negligence
“Type II” clauses shift the risk of only active negligence
by indemnitor
DLG
7
Risk Identification And Management
Contractual Risk Management Tools (Cont’d)
•
Liquidated damages
• Cannot be a penalty – milestones tied to costs/use?
• Reasonable estimate of actual damages
• Recoverable even if no damages actually incurred
• LDs as a backdoor for Owner’s indirect costs?
•
Consequential/Indirect Damages (Waiver Clause?)
• Owner’s lost profit/revenues - rents, casino revenue, etc.
• Owner’s financing costs
• Owner’s internal staff costs
• Contractor’s home office overhead
•
Direct Damages
• Owner’s rent for alternate facility
• Owner’s additional contract administration by A/E or CM
• Contractor’s job site overhead
DLG
8
Risk Identification And Management
Contractual Risk Management Tools (Cont’d)
•
Pay-if-paid vs. pay-when-paid clauses
•
•
Pay-if-paid unenforceable in CA
No-damages-for-delay clauses
•
•
Generally unenforceable in CA
Price Escalation – labor and materials generally cost
more with the passage of time – e.g., steel, cement, etc.
•
AGC Document No. 200.1
•
Identify “Potentially Time and Price-Impacted Material(s)”
•
Create a baseline and adjustments method
•
Equitable adjustments for increase and decrease
•
Adjust both time and cost.
DLG
9
Risk Identification And Management
Contractual Risk Management Tools (Cont’d)
• Lease/Rental Agreements and Purchase Orders
• Used for jobsite trailers, materials, equipment, etc.
• Same contractual tools and concepts apply
• Issues to focus on:
• Overtime fees and other fees
• Indemnity
• Transportation
• Anything impacting price, time or quality
DLG
10
Managing The Project
Overview
•
Risk Identification and Management
•
Managing the Project
•
Bidding Phase
•
Construction Phase
•
Changes
•
Statutory Remedies
DLG
11
Managing The Project
•
Bidding Phase
•
GCs “Locking In” Subs’ Bids
•
Binding contract usually requires an offer, acceptance
and consideration (i.e., something of value that is not a
pre-existing obligation)
•
Prime contractor’s dilemma – binding sub without
accepting sub’s bid prior to award of contract
•
•
Must rely on sub’s bid in preparing bid to owner
•
Must await award before accepting subcontractor’s bid
Promissory Estoppel
•
Equitable doctrine - enforces promise in the absence a
contract based on offer & acceptance
DLG
12
Managing The Project
Bidding Phase (Cont’d)
•
•
Bidding Principles - Promissory Estoppel
•
The elements of promissory estoppel
•
A promise
•
Reasonable and detrimental reliance
(e.g., reasons to suspect inaccuracies)
•
Injustice if the promise is not enforced
•
Damages - cost differential
•
May also protect offerror (Sub)
•
Protect expectation of award to low bidder
•
Must be implied promise to award to the lowest bidder
•
Recovery may be bid preparation expenses and/or
non-speculative lost profits
DLG
13
Managing The Project
Bidding Phase (Cont’d)
•
Subcontracts - Is the Sub’s Bid part of the Subcontract?
•
•
Yes - bid/proposal is incorporated into the Subcontract by
reference – exclusions and assumption apply.
•
No – bid not incorporated by reference and the
Subcontract includes an integration clause –
exclusions/assumptions do not apply, unless specified in
the Subcontract.
•
But – if there’s an ambiguity in the Subcontract, the
bid/proposal may be considered to resolve the ambiguity.
•
Other factors to resolve ambiguities – parties’ behavior
before dispute arises and custom and practice.
DLG
14
Managing The Project
•
Construction Phase Overview
•
Contract Administration
• General principles
• Cost
• Schedule
• Quality
• Record Keeping
DLG
15
Managing The Project
Construction Phase (Cont’d)
•
•
Contract Administration - General principles:
•
Read The Final Contract – requirements and timing
•
Contractor generally controls means and methods
•
Design-bid-build projects - Owner responsible for
adequacy and completeness of plans/specs
•
Spearin Doctrine
•
Creates liability gap for owner
•
Problem of the mixed design spec and performance spec
•
Broad application – specified equipment, designers, etc.
•
Betterment Rule – limitation on designer’s liability for
omissions on design-bid-build projects.
•
Design-build projects - DBer responsible for adequacy of
design and fitness for purpose.
•
Betterment rule does not usually apply
DLG
16
Managing The Project
•
Construction Phase (Cont’d)
•
Contract Administration - Cost Control
•
Schedule of Values
•
Front-end loading – violates False Claims Act on public
projects
•
Weekly job cost reports – variance between budget
and costs
•
Monthly Payment Applications
•
•
Inspections to determine percent complete – FCA
liability?
•
Certification - (1) amount now due, and (2) amounts
previously received have been paid to subs/suppliers
FCA Horror Stories – Subguard, bond mark-up, etc.
DLG
17
Managing The Project
Construction Phase (Cont’d)
•
•
Contract Administration - Schedule Control
•
Baseline Schedule (CPM)
•
Rules of thumb:
•
Activity durations < 20 days
•
10-15% of activities on CP
•
100 activities/$1.0 million
•
Monthly Schedule Updates
•
Time Impact Evaluations (TIEs or frag nets)
•
•
COs and other events causing delay
Recovery Schedules
•
Ordered Acceleration/Contractor-Required Acceleration
DLG
18
Managing The Project
Construction Phase (Cont’d)
•
•
Contract Administration - Schedule Control
•
Delay Claim Classification - Excusable and
Compensable
• Contractor entitled to a time extension and compensation for
extra costs.
• Delayed Issuance of Notice to Proceed
• Delayed Site Access – e.g., Lack of Right-of-Way
• Delayed Permits
• Defective Plans/Specs (D-B-B)
• Delayed Reviews/Approvals/Decisions/RFI Responses
DLG
19
Managing The Project
Construction Phase (Cont’d)
•
•
Contract Administration - Schedule Control
•
Delay Claim Classification - Excusable and NonCompensable
• Contractor entitled to a time extension, but is not compensated
for extra costs resulting from the delay.
• Unanticipated force majeure-type events, such as:
• Labor strikes
• Severe weather
• Acts of God
• Contracts usually identify such events
• Concurrent delay
• Owner and Contractor are separately responsible for delays
that occur at the same time.
• Contractors assert their inexcusable and non-compensable
delay was really a pacing delay.
DLG
20
Managing The Project
Construction Phase (Cont’d)
•
•
Contract Administration - Schedule Control
•
Delay Claim Classification - Inexcusable
• Contractor is entitled to neither a time extension nor
compensation.
• Contractor is responsible for extra costs resulting from the delay
and for Owner’s delay damages if Contractor does not make up
time through acceleration.
• Owner’s delay damages are L/Ds or actual damages if no
L/Ds clause exists.
DLG
21
Managing The Project
•
Construction Phase (Cont’d)
•
Contract Administration - Quality
•
Inspections
•
Coordination before work covered
•
Weekly Owner-Architect-Contractor Meetings
•
Proactive Involvement and Communication
•
Document issues as they arise – identify the issue, how it
was resolved and why it was resolved in the way it was.
Such as:
•
Change in design; or
•
Directed change to means and methods.
DLG
22
Managing The Project
• Construction Phase (Cont’d.)
• Record Keeping
• Written Notice
• Contractors must provide timely notice of changes per
Contract requirements. Greg Opinski Constr., Inc. v. City of
Oakdale (2011).
• Form and content of notice:
• Describe Event or occurrence giving rise to the change
• Explain Effect on the contractor’s work
• Cost resulting from the change
• Delay resulting from the change
• Meeting minutes?
DLG
23
Managing The Project
• Construction Phase (Cont’d.)
• Record Keeping – Written Notice – Typical Clause
•
AIA - “21 days after occurrence of the event giving
rise to such Claim or within 21 days after the claimant
first recognizes the condition giving rise to the Claim,
whichever is later.”
•
Other contracts require “prompt” notice or
“reasonable” notice
•
Review the specific timing requirements in each
contract and follow it.
DLG
24
Managing The Project
• Construction Phase (Cont’d.)
• Record Keeping – Written Notice - Purpose
• Allows the recipient of the notice to:
• Assess the implications/options and potential
liability that may be created under various options
• Investigate whether the claimed item truly is an
“extra” to the original contract – e.g., DSC
• Allows for costs incurred in performing the extra
work to be documented
• Allows for fair adjustment to the contract price while
the issues are still fresh
• Provides informed consent for the extra work
DLG
25
Managing The Project
• Construction Phase (Cont’d.)
• Record Keeping – Written Notice – Waiver/Estoppel
• If oral notice is provided, and Owner recognizes that a
change has been requested, and Owner subsequently
considers the change, Owner has arguably waived any claim
that notice was insufficient
• If Owner lulls Contractor into foregoing the required notice
until after the notice period has passed, Owner is arguably
estopped from relying on failure to comply
• Best Practice – fully comply with the contract’s
notice requirements
DLG
26
Managing The Project
•
Construction Phase (Cont’d)
•
Record Keeping – Documenting the Project
•
“Official” Meeting Minutes – volunteer to do this
• Deemed approved unless objected to within 7 days
• Submittals/Approvals
•
•
Value engineering – who assumes the risk of failure?
•
Generally, party proposing a VE change assumes the risk
that of the VE proposal’s success.
•
Important to disclaim any warranties re the VE proposal,
unless its success is certain.
Requests for Information
•
•
Turnaround time can be critical
Change Orders
•
Timely pricing and processing
•
Timely seeking schedule extensions
DLG
27
Managing The Project
•
Construction Phase (Cont’d)
•
Record Keeping
•
Payment Application
•
Conditional/Unconditional Waiver and Release Upon
Progress/Final Payment (Preliminary Notices)
•
Daily Logs & Diaries
•
Photos/Video
•
Correspondence/Emails
• Body of letter
• Reason for letter
• Relay circumstances
• One topic per letter
• Third-party/two-year test
• Two years later, will a third party understand the letter?
DLG
28
Managing The Project
• Construction Phase (Cont’d.)
• Record Keeping
• Email
• Beware! Beware! Beware! Beware!
• Typically very informal and not carefully considered
• Widely circulated
• Cannot be permanently erased
• Source of very damaging evidence
• E-mail is so easy, people don’t hesitate in relaying
their thoughts – Twitter, blogs, etc.
• GC vs. Sub – sometimes better to just pick up the phone
DLG
29
Changes Overview
•
Risk Identification and Management
•
Managing the Project
•
Changes
•
•
Sources of Changes
•
Classification of Changes
•
Affect on Contract
Statutory Remedies
DLG
30
Changes
•
Sources of Changes
•
•
Owner-initiated changes materially affecting
•
Design
•
Construction performance
•
Completion
Circumstances beyond the control of the parties
•
Unforeseeable site conditions
•
Extreme weather
•
Change in laws/code
•
Changes to material quantities
•
Value engineering
•
Commonly proposed by contractor
DLG
31
Changes
•
Classification of Changes
•
Typically classified by
•
Source: owner or contractor initiated
•
Formality
•
•
Express written order or directive
•
“Constructive change” arising from Owner’s conduct
Affected activities
•
Design: changes to plans and specifications
•
Time: modify time for completion
•
Construction: alter method, manner, or sequence
•
Risk / Responsibility changes: alters the obligations of
the parties
DLG
32
Changes
•
Affect on the Contract
•
Written Change Orders - modifies contract terms
•
•
Typical procedure
•
Proposed by contractor or requested by owner
•
Negotiated with owner
•
Documented
Content
•
Description of changed work
•
Adjustment to contract price, if any
•
Adjustment to contract time, if any
•
Release of all direct and indirect costs
•
Reservation of rights?
DLG
33
Changes
Affect on the Contract (Cont’d)
•
•
Waiver of CO Requirement
•
Waiver Doctrine: “Where the terms of a written contract
require that extra work be approved in writing, such
provision may be altered or waived by an executed oral
modification of the contract.” Healy v. Brewster, 251
Cal.App.2d 541, 552 (1967).
•
More compelling when
•
Contractor confirms oral change in writing
•
Owner previously paid on oral changes
•
There is repeated disregard for the writing requirement
•
Courts will permit contractor to recover reasonable value of
work
•
Prevents owner’s unjust enrichment
DLG
34
Changes
DLG
35
Statutory Remedies
•
Risk Identification and Management
•
Managing the Project
•
Changes
•
Statutory Remedies
•
Stop Work Order
•
Mechanic’s Liens
•
Stop Payment Notices
•
Prompt Payment Laws
DLG
36
Q&A
B. Scott Douglass
DOUGLASS LAW GROUP
(415) 297-0796
scott@dlglaw.co
DLG