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Best Practices in Construction Law
Jennifer M. Horn, Esquire
&
MARIA PANICHELLI, ESQUIRE
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BEST PRACTICES IN
CONSTRUCTION LAW
PRESENTED BY:
JENNIFER M. HORN, ESQUIRE
&
MARIA PANICHELLI, ESQUIRE
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BEST PRACTICES IN
CONSTRUCTION LAW
PRESENTED BY:
JENNIFER M. HORN, ESQUIRE
&
MARIA PANICHELLI, ESQUIRE
BEST PRACTICE TIP NO. 1
 UNDERSTAND ESSENTIAL CONTRACT TERMS
– Increase Scope of Work.
• Change Orders
• Constructive change directives
• Minor changes in work.
7
PROACTIVE PROJECT MANAGEMENT
 From Start to Finish
– Pre-Contract
• Turnover Meeting Between Estimating and
Project Management Team.
– Contract Negotiation
– Construction Performance
8
BEST PRACTICE TIP NO. 2
KEYS TO SURVIVAL
– Adaptability – Understand how the Project is
changing and be nimble enough to adapt to
recognize new risks or opportunities.
9
WHAT IS A “CHANGE ORDER”?
 AIA A201§7.2.1 A Change Order is a written
instrument prepared by the Architect and signed by
the Owner, Contractor and Architect, stating their
agreement upon all of the following:
1.
a change in the Work;
2.
the amount of the adjustment in the
Contract Sum, if any; and
3.
the extent of the adjustment in the
Contract Time, if any.
10
OTHER PROVISIONS MODIFYING THE WORK
 Constructive Change Directives
 Minor Changes in Work
11
STANDARD AIA CONTRACT PROVISIONS –
CONSTRUCTIVE CHANGE DIRECTIVES
 §7.3.1 A Constructive Change Directive is a written
order prepared by the Architect and signed by the
Owner and Architect directing a change in the Work
and stating a proposed basis for adjustment, if any, in
the Contract Sum or Contract Time, or both. The
Owner may, by Construction Change Directive,
without invalidating the Contract, order changes in
the Work within the general scope of the Contract
consisting of additions, deletions or other revisions,
the Contract Sum and Contract Time being adjusted
accordingly.
12
STANDARD AIA CONTRACT PROVISIONS –
MINOR CHANGES IN WORK
§7.4.1 The Architect will have authority to order minor
changes in the Work not involving adjustment in the
Contract Sum or extension of the Contract Time and not
inconsistent with the intent of the Contract Documents.
Such changes shall be effective by written order and shall
be binding on the Owner and Contractor. The Contractor
shall carry out such written orders promptly.
13
BEST PRACTICE TIP NO. 3
KNOW THE LAW
Many remedies exist for non-payment or untimely
payment:
– Mechanics’ Liens
– Payment Bond Claims
– Trust Fund Claims
– Prompt Payment Act Claims
– Litigation/Arbitration/Mediation to Enforce
Contractual Payment Breaches
14
WHAT ARE PROMPT PAYMENT ACT CLAIMS?
 Essentially: Claims created by state statute that
impose unfavorable consequences on those who fail
to timely pay for materials and labor provided by
others.
15
STATES BEGAN ENACTING PROMPT PAYMENT ACTS
IN THE EARLY TO MID-1990S AND CONTINUING INTO
THE NEW MILLENNIUM
This happened two ways:

States modified/bolstered existing acts (e.g., Delaware’s
Construction Prompt Payment Act, which added prompt pay
provisions to a much older trust fund statute).

Created entirely new acts (e.g., Pennsylvania’s Contractor and
Subcontractor Payment Act (CASPA)).
16
TODAY:
All States (save for N.H.) Have Enacted Prompt Payment Acts for
Public Sector Construction; and
Most States Have Enacted Prompt Payment Acts for Private Sector
Construction
(19 Exceptions: Alaska, Arkansas, Colorado, Idaho, Indiana, Iowa,
Massachusetts, Michigan, Nebraska, New Hampshire, North Dakota,
Oklahoma, Rhode Island, South Dakota, Virginia, Washington, West
Virginia, Wisconsin, Wyoming).
17
STATUTES:

Share Many Things In Common (e.g., require timely payment by
persons in multiple construction tiers, impose unfavorable
consequences such as statutory interest and penalties, etc.)

Have Many Differences (e.g., timing of payment; range of
remedies including percentage of interest, penalties, attorneys’
fees; availability of remedies among tiers; ability to stop work;
requirements of bad faith; etc).
18
YOUR GAME PLAN:
A. Examine these statutes together, answering the following
questions:
 To what contracts does the Act apply?
 To whom does the Act apply?
 Who can make a claim under the Act?
 To what payments does the Act apply?
19
TODAY’S GAME PLAN (CONTINUED)
 What is untimely payment to a prime contractor?
 What is untimely payment to a subcontractor?
 What is a proper basis to withhold payment?
 What is the consequence of untimely payment?
 How does one make a claim under the Act?
20
BEST PRACTICE TIP NO. 4
 PURPOSE OF BOND
 Protects the Owner
 Assures subcontractors and suppliers down the chain
receive payment for their services via third party
(surety) promise to pay
21
PARTIES
Obligee (Owner or GC)
Principal/Obligor
(Contractor or Sub)
Surety
22
PARTIES
One More:
 The Beneficiary = Subcontractors and Suppliers
23
BONDS ON FEDERAL PROJECTS:
THE MILLER ACT
 40 U.S.C.A. §3131 -34.
 A bond is required for the "construction, alteration, or
repair of any public building or public work of the
United States for an amount greater than $100,000.”
 Why?? Alternate security b/c no mechanics’ liens
allowed
24
PROTECTED PARTIES
Federal Government
Prime Contractor/Principal
Supplier
Supplier
Subcontractor
Supplier
Subsub
25
PROTECTED COSTS
 Labor = physical work
– Not designers (unless perform on-site supervision)
– Not warranty/corrective work
26
PROTECTED COSTS
 Materials used or consumed on the project
– Reasonable expectation that material will be
“substantially consumed”
– No utility or value to contractor after project
– Delivery to site ≠ presumption of use
27
PROTECTED COSTS
 What about delay damages?
– Considered part of “sums justly due” UNLESS
contract has no damages for delay
 What about Payment Act damages?
– Maybe (US ex rel. Don Siegel Const. v. Atul Const.,
85 F. Supp. 2d 414 (D.N.J. 2000)
28
NON-PROTECTED COSTS
 Punitive damages (unless there is bad faith by
surety)
 Attorneys’ fees (unless allowed by bonded contract to
which claimant is a party or bad faith by surety)
 Lost profit
29
WHEN MILLER ACT APPLIES
 Contracts of more than $100,000 for construction,
alteration, or repair of any public building or public
work of Federal Government.
 Alternates allowed for contracts more than $25,000
and less than $100,000:
– Bond, Letter of Credit, Escrow Agreement, CD,
Cash
30
WHEN MILLER ACT APPLIES
 What is “public work”?
– Not defined by Act
– Government owns the building and hires Kor
– Mere government funding not enough
31
HOW TO MAKE A MILLER ACT CLAIM
(1ST TIER SUBS)
 No notice required
 Must wait 90 days from non-payment – waiting period
to give bond principal a chance to make payments
 Must file suit within 1 year of last work performed or
materials supplied (statute of limitations)
32
HOW TO MAKE A MILLER ACT CLAIM
(2ND TIER SUBS)
2nd Tier Subcontractor (i.e., a subcontractor with a
direct contract with a 1st tier subcontractor):
Same claim procedure as 1st tier PLUS:
MUST provide notice to prime contractor (not the
surety) within 90 days (strictly construed!) of supply of
last labor or supplies
33
HOW TO MAKE A MILLER ACT CLAIM
(2ND TIER SUBS)
 Notice MUST state:
– Amount claimed with “substantial accuracy”
– Name of party to whom labor or supplies provided
– Claim is being made against bond principal
34
HOW TO MAKE A MILLER ACT CLAIM
(2ND TIER SUBS)
 Purpose of notice provision for 2nd tier subs:
– Allows prime to protect itself by withholding $$
– Avoids double payment by prime
35
HOW TO MAKE A MILLER ACT CLAIM
(2ND TIER SUBS)
 What is “substantial accuracy”:
– Estimate is sufficient
 What if notice says “several thousand dollars”?
– Yes (U.S. ex rel. Pool Constr. Co. v. Smith Road
Constr. Co., 227 F. Supp. 315 (N.D. Okla. 1964)
36
HOW TO MAKE A MILLER ACT CLAIM
(2ND TIER SUBS)
When does 90 day time begin to run?
Fed.R. Civ.P. 6(a) – day after last day
Replacement goods does not extend
Warranty work does not extend
Service of notice v. receipt of notice
37
COMMON DEFENSES
 Surety can assert all defenses of its principal (or the
sub if a 2nd tier claimant), unless precluded by bond
language:
– Breach of contract
– Recoupment/setoff
– Failure to mitigate
38
COMMON DEFENSES
 Pay-When-Paid and Paid-If-Paid Defenses
– Paid-If-Paid shifts risk downstream
– Paid-When-Paid is timing mechanism
Arguments exist on both sides
 Payment – no defense to 2nd tier claim even if
principal paid in full
– Contrast Pa safe harbor provisions
39
BEST PRACTICE TIP NO. 5
• MEANWHILE, BACK ON THE PROJECT SITE…
• BEWARE DIFFERING SITE CONDITIONS
• Type One
Different than contract indicates
Examples: soils, utility lines, existing materials, inaccurate
measurements
40
DIFFERING SITE CONDITIONS
• Type Two
Contract is silent
Could not be anticipated
Examples: buried obstructions, layers of demolition
Problems: nature of work, common knowledge, local
practices
• Type Three
Hazardous waste
– Not responsible for any hazardous conditions at the site
– Owner must remediate
41
DIFFERING SITE CONDITION CLAIMS
Prompt notice to the public owner
– Notice clauses upheld
– Verify conditions
– Modify plans
Site inspection Clause: “Reasonably Prudent Bidder”
test
Withhold information: “Superior knowledge”
Disclaimers: “As is” clause
No DSC Clause: Risk on Contractor?
42
DIFFERING SITE CONDITION CLAIMS
Notice requirements
•
Claims for money
•
Claims for time
43
BEST PRACTICE TIP NO. 6
WHAT IS A CLAIM? KNOW THE ANSWER
TO THIS QUESTION AS IT PERTAINS TO
YOUR PARTICULAR PROJECT.
Look to your contract!
§ 4.3.1: A claim is a demand or assertion by one of
the parties seeking, as a matter of right, an adjustment
or interpretation of Contract terms, payment of money,
extension of time or other relief with respect to the
terms of the Contract.
44
BEST PRACTICE TIP NO. 7
KNOW YOUR NOTICE CLAIM
Avoid notice provisions which require notice within a
short period of time
Avoid notice provisions which require the full amount
and scope of the damages
Know what the prime contract requires
45
NOTICE OF DELAY/TIME EXTENSIONS
What does your contract require?
§ 4.3.3 Time Limits on Claims. Claims by either party
must be made within 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. Claims must be made by
written notice. An additional Claim made after the
initial Claim has been implemented by Change Order
will not be considered unless submitted in a timely
manner.
46
NOTICE OF DELAY/TIME EXTENSIONS
§8.3 Delays and Extensions of Time
§ 8.3.1 If the Contractor is delayed at any time in the
commencement or progress of the work by an act or neglect of
the Owner or Architect, or of an employee of either, or of a
separate contractor employed by the Owner, or by changes
ordered in the Work, or by labor disputes, fire, unusual delay in
deliveries, unavoidable casualties or other causes beyond the
Contractor’s control, or by delay authorized by the Owner pending
mediation and arbitration, or by other causes which the Architect
determines may justify delay, then the Contract Time shall be
extended by Change Order for such reasonable time as the
Architect may determine, provided Contractor gives written notice
within 21 days of the first occurrence of any delay.
47
ADVERSE WEATHER
§4.3.7.2 If adverse weather conditions are the basis
for a claim for additional time, such claim shall be
documented by data substantiating that weather
conditions were abnormal for the period of time, could
not have been reasonably anticipated and had an
adverse effect on the scheduled construction.
48
BEST PRACTICE TIP NO. 9
WHAT IS YOUR DISPUTE RESOLUTION
PROVISION
• Litigation
• Arbitration – AAA Rules
• Mediation
• Timing – not only when but what needs to
happen before suit can be brought
• Avoid “choice of forum” clauses
49
AGAIN, KNOW YOUR CONTRACT RE: CLAIMS
1.
Unfortunately, it is the rare construction contract
that does not involve issues that ultimately lead to
a claim, whether it be for more money, a time
extension or both.
2.
Recovery is dependent on the Contractor being
able to substantiate and support the claim.
3.
In order to substantiate and support a claim
a.
Create, locate and maintain all pertinent documents,
records, correspondence, photos, etc.
50
CLAIMS
4.
Claims are often important not only to recover money, but
also to negotiate offsets against claims asserted by another
party.
5.
When deciding whether or not to pursue a claim
a.
The decision should be made by senior
management
and
a.
6.
Look to economic and/or political reasons
Recognize potential claims early in order to take necessary
steps to preserve and support the claim.
51
NOTICE OF DELAY/TIME EXTENSIONS
What does the contract require?
Questions for end of each month:
– Are we following the original schedule?
– If not, why not?
– What should we do about it?
– Take appropriate action
Don’t assume! Protect!
52
DELAY CLAIMS
1.
Nonexcusable Delay – fault lies with you and no
compensation will follow.
2.
Excusable but Noncompensable Delay – no
one is at fault. You get more time, but no money.
3.
Excusable and Compensable Delay – fault lies
with the other party. You get time and money if
you can prove it.
53
CAUSES OF DELAYS
1.
Failure to provide access or limited access only
2.
Unforeseen subsurface condition
3.
Impossible to perform work
4.
Design changes
5.
Failure to have shop drawings and samples
prepared and approved in a timely manner
6.
Failure to have material and equipment delivered
in a timely manner
54
CAUSES OF DELAYS
7.
Acts of God – flood, storm, etc.
8.
Weather
9.
Strikes and labor disputes
10. Low productivity
11. Cash flow restrictions
12. Lack of project coordination
13. Labor mobilization
14. Delayed by another contractor on the project
55
COSTS ASSOCIATED WITH DELAY
1.
Extended job supervision and field overhead
2.
Extended equipment costs
3.
Wage escalation
4.
Inefficiency
5.
Finance costs
6.
Reduced job opportunities
7.
Profits
56
QUESTIONS ABOUT DELAYS
• How do you notify Owner or General
Contractor of delay?
• Should your notice identify specific areas of
work impacted by delay?
• Should your notice identify the manner in
which you are being damaged by delay?
• How do you quantify days of delay?
57
BEST PRACTICES TIP NO. 8
DAILY REPORTS – CRITICAL TO ESTABLISH
WHAT ACTUALLY TOOK PLACE ON THE JOB
• Documentation
• Write clearly, avoid slang
• Note where crews are working and crew sizes
• Note delays and problems, including potential
problems
• Note important conversations
• Document weather
58
DAILY REPORTS
• Document materials delivered
• Note discrepancies in plans
• Describe out-of-sequence work
• Make your company look good!
• Make your own schedule – preferably one that fits in
the foreman’s back pocket.
59
CORRESPONDENCE
• Be an advocate – support your position.
• Notice letters don’t need to be adversarial to be effective
(consider email).
• Object is to put other side on notice so they can deal
with the problem.
• Answer every letter in writing and defend your position
with facts. (Do not let inaccurate information remain
unchallenged, it may come back to haunt you!)
• Keep signed copies and confirmations of fax
transmittals.
• Date stamp all incoming documents.
60
MEETING MINUTES
• Review immediately for accuracy
• Supplement any minutes IMMEDIATELY that do not
accurately reflect information at the meeting
• Do not allow inaccurate information to remain
unchallenged.
61
Jennifer M. Horn, Esq.
Maria Panichelli, Esq.
Cohen Seglias Pallas Greenhall & Furman PC
30 S. 17th Street, 19th Floor
Philadelphia, PA 19103
Phone: 215.564.1700
jhorn@cohenseglias.com
www.cohenseglias.com
62
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