Highway to Hell or Strawberry Fields Forever
Identifying and Dealing with Avoidable Project Risk
Today’s Presenters
Andrew Atkinson – Minard Ames Insurance Services, LLC
Justin Kelton – McCarthy Building Companies, Inc.
Julianne Wheeler, Partner – Jennings, Haug & Cunningham
Section I
SPOTTING RISK
• Difficult Owner
• Feds
• Inexperienced Owners
BAD CONTRACT DOCS
• “Poor Boyed” Plans / Exotic Plans
– Do you really know the designer?
– Specifications from Hell – Are LDs really all that
bad?
– ADR – Do you mind if the Owner appoints the
Judge?
BAD CONTRACT DOCS
AND BAD COMPANY
• Bottom line – Collaboration / Partnership
• And if you can’t…
– …taking a losing job is not the best business model
Section II
INSURANCE
Notice of Claim Requirements
• You must see to it that we are notified as soon as practicable of
an event or offense which may result in a claim.
• If a claim is received by an Insured, you must:
1. Immediately record the specifics of the claim and the date
received; and
2. Notify us as soon as practicable
INSURANCE
• Just pay for it…. but don’t you dare use it,
right Andrew?
Section III
FINANCING
Questionable / Insufficient Financing
• Your money should not be on the dark side of the moon
• You should fight for your right to know how the Project is being
financed.
• AIA Provision
• ConsensusDoc Provision
• When the Owner refuses
6.
OWNER'S RESPONSIBILITIES Any information or services to be
provided by Owner shall be provided in a timely manner so as not to delay
the Work.
6.1
FINANCIAL INFORMATION Prior to commencement of
the Work and thereafter at the written request of the Contractor,
Owner shall provide Contractor with evidence of Project financing.
Evidence of such financing shall be a condition precedent to
Contractor's commencing or continuing the Work. Contractor shall
be notified prior to any material change in the Project financing.
Consensus Docs #205
§ 2.2.1 Prior to commencement of the Work, the Contractor may request in
writing that the Owner provide reasonable evidence that the Owner has
made financial arrangements to fulfill the Owner’s obligations under the
Contract. Thereafter, the Contractor may only request such evidence if (1)
the Owner fails to make payments to the contractor as the Contract
Documents requires; (2) a change in the Work materially changes the
Contract Sum; or (3) the Contractor identifies in writing a reasonable
concern regarding the Owner’s ability to make payment when due. The
Owner shall furnish such evidence as a condition precedent to
commencement or continuation of the Work or the portion of the Work
affected by a material change. After the Owner furnishes the evidence, the
Owner shall not material vary such financial arrangements without prior
notice to the Contractor.
QUESTIONABLE/INSUFFICIENT FINANCING
• Is the scope of work realistic? Is there enough
funding for likely costs of construction?
• Banking on change orders and the interplay
with clauses
– Termination for Default
– Termination for Convenience
§ TERMINATION BY THE OWNER FOR CAUSE
§ 14.2.1 The Owner may terminate the Contract if the Contractor
.1
repeatedly refuses or fails to supply enough properly skilled workers or
proper materials;
.2
fails to make payment to Subcontractors for materials or labor in
accordance with the respective agreements between the Contractor
and the Subcontractors;
.3
repeatedly disregards applicable laws, statutes, ordinances, codes,
rules and regulations, or lawful orders of a public authority; or
.4
otherwise is guilty of substantial breach of a provision of the Contract
Documents.
AIA A201 (2007)
19.2
TERMINATION BY THE OWNER If, within seven (7) Days of receipt of a
notice to cure pursuant to Paragraph 19.1, Contractor fails to commence and
satisfactorily continue correction of the default set forth in the notice to cure,
Owner may notify Contractor that it intends to terminate this Agreement for
default absent appropriate corrective action within fourteen (14) additional Days.
After the expiration of the additional fourteen (14) Day period, Owner may
terminate this Agreement by written notice absent appropriate corrective action.
Termination for default is in addition to any other remedies available to Owner
under Paragraph 19.1 If Owner's costs arising out of Contractor's failure to cure,
including the cost of completing the Work and reasonable attorney's fees, exceed
the unpaid Contract Price, Contractor shall be liable to Owner for such excess
costs. If Owner's costs are less than the unpaid Contract Price, Owner shall pay
the difference to Contractor. In the event Owner exercises its rights under this
Paragraph, upon the request of Contractor, Owner shall furnish to Contractor a
detailed accounting of the costs incurred by Owner.
Consensus Docs #205
§ 14.4 TERMINATION BY THE OWNER FOR CONVENIENCE
§ 14.4.1 The Owner may, at any time, terminate the Contract for the Owner's
convenience and without cause.
§ 14.4.2 Upon receipt of written notice from the Owner of such termination for
the Owner's convenience, the Contractor shall
.1
cease operations as directed by the Owner in the notice;
.2
take actions necessary, or that the Owner may direct, for the
protection and preservation of the Work; and
.3
except for Work directed to be performed prior to the effective date
of termination stated in the notice, terminate all existing subcontracts
and purchase orders and enter into no further subcontracts and
purchase orders.
§ 14.4.3 In case of such termination for the Owner's convenience, the
Contractor shall be entitled to receive payment for Work executed, and costs
incurred by reason of such termination, along with reasonable overhead and
profit on the Work not executed.
AIA A201 (2007)
QUESTIONABLE/INSUFFICIENT FINANCING
• Bottom Line: Transparency is a Two-Way
Street
Section IV
RISKY PROJECTS, BY DEFINITION
Is there federal money available?
• If so, under what program?
• HUD
• Davis Bacon
• Company Killers
RISKY PROJECTS, BY DEFINITION
• Nature of project: solar, WWTP, prison, reservation, school, job, etc.
Need for waiver on reservation job, conditions versus technical.
• Location: remote or tight site
• Unrealistic schedule demanded by Owner
• Labor: Material Ratio – increasing the risk
• Market Conditions and Labor Availability
– He who controls the labor, controls the market
– Particular concern on very aggressive schedule
Section V
MINIMIZING CONTROLLABLE RISK
• Finding the right Owner liaison
• Owner Personalities / Project Experience
• Renegade architect
MINIMIZING CONTROLLABLE RISK
• Buying the risk down with insurance
• Consensus Docs promoting assumption of
only insurable risk
• Need to negotiate
• Working together to determine who can most
efficiently purchase the desired coverage and
divvying up the cost
§11.3.7 WAIVERS OF SUBROGATION
The Owner and Contractor waive all rights against (1) each other and any of their
subcontractors, sub-subcontractors, agents and employees, each of the other, and
(2) the Architect, Architect's consultants, separate contractors described in Article
6, if any, and any of their subcontractors, sub-subcontractors, agents and
employees, for damages caused by fire or other causes of loss to the extent
covered by property insurance obtained pursuant to this Section 11.3 or other
property insurance applicable to the Work, except such rights as they have to
proceeds of such insurance held by the Owner as fiduciary. The Owner or
Contractor, as appropriate, shall require of the Architect, Architect's consultants,
separate contractors described in Article 6, if any, and the subcontractors, subsubcontractors, agents and employees of any of them, by appropriate agreements,
written where legally required for validity, similar waivers each in favor of other
parties enumerated herein. The policies shall provide such waivers of subrogation
by endorsement or otherwise. A waiver of subrogation shall be effective as to a
person or entity even though that person or entity would otherwise have a duty of
indemnification, contractual or otherwise, did not pay the insurance premium
directly or indirectly, and whether or not the person or entity had an insurable
interest in the property damaged.
AIA A201 (2007)
17. LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES Excluding losses covered
by insurance required by the Contract Documents, the Owner and Contractor agree to
waive all claims against each other for any consequential damages that may arise out of or
relate to this Agreement, except for those specific items of damages excluded from this
waiver as mutually agreed upon by the Parties and identified below. The Owner agrees to
waive damages including but not limited to the Owner's loss of use of the Project, any
rental expenses incurred, loss of income, profit or financing related to the Project, as well
as the loss of business, loss of financing, principal office overhead and expenses, loss of
profits not related to this Project, loss of reputation, or insolvency. The Contractor agrees
to waive damages including but not limited to loss of business, loss of financing, principal
office overhead and expenses, loss of profits not related to this Project, loss of bonding
capacity, loss of reputation, or insolvency. The provision of this Paragraph shall also apply
to the termination of this Agreement and shall survive such termination.
18. RISK OF LOSS Except to the extent a loss is covered by applicable insurance, risk of
loss and/or damage to the Work shall be upon the Contractor until the Date of Substantial
Completion, unless otherwise agreed to by the Parties.
Consensus Docs #205
MINIMIZING CONTROLLABLE RISK
• Consider a project mediator, or shall we say,
“Partnering Liaison”
Section VI
CONCLUSION, Q & A
For more information…
Julianne C. Wheeler
jcw@jhc-law.com
602-234-7826
Andrew Atkinson
aAtkinson@insurica.com
602-393-3524
Justin Kelton
jKelton@McCarthy.com
480-449-4700