Qualifying the project requires that management evaluate all aspects of the work and the probable conditions affecting performance. This evaluation should be done systematically to provide management with an effective tool to qualify the project and to evaluate the company’s ability to complete the work successfully. A practical first step in this process is to answer an initial series of yes/no questions about the potential project, such as those set forth in Table 15.1.

The term “relevant experience” is especially important and is intended to ascertain that the experience reflects, in large part, contemporaneous experience of the company’s current employees. Depending on the nature of the question and the response, senior management should carefully review the decision to compete for the work. That review should include an analysis of the project risks, the actions to mitigate those risks, as well as the potential benefit or profit from performing the work.

Every company should develop an overall business plan, which addresses the company’s goals in terms of volume, project size and type, and geographic market. There is no right plan for all companies. One firm might decide to seek only work within a defined geographic area or radius of the home office. Another might focus on particular types of work. The key is to develop a realistic risk assessment plan and evaluate potential projects against that plan.

B. Qualifying the Project Participants

Project participants often dictate the project’s destiny, hence qualifying the project participants is one of the first steps in avoiding claims. Many headaches and actual losses can be avoided simply by investigating the past performance record of the other parties rather than looking solely at the lowest price or the opportunity to obtain new work. By dealing with reputable companies and individuals with a proven ability to perform, by running credit checks, and by inquiring about the experience of others with that particular company, major risks and big mistakes may be avoided.

Traditionally, the owner is in the best position to control the selection of the project participants, because under many project delivery systems, the owner separately selects the designer and the contractor.¹ The owner also can have a significant impact on subcontractor selection through the use of a subcontract award approval clause. The prime contractor, standing in an analogous position to the owner, has greater control over the selection of subcontractors, as does the architect or lead designer over the selection of its subconsultants. When the choice of a specific party would create a risk of performance failure, claims, or disputes, to the extent that any reasonable return would be jeopardized, that party should not be used on the project, regardless of price. Although the prime contractor cannot select the project’s owner or developer, it can decide whether it will do business with a particular party. Likewise, subcontractors can, and should, carefully select the contractors with whom they do business. Sometimes the risks of a project or of doing business with a particular owner, design professional, contractor, or subcontractor are simply too great, and prudence dictates that certain opportunities be forgone.

Higher-volume and a substantial backlog figure can be very misleading if they engender unnecessary risks and do not translate to profit. Despite the time crunch and euphoria often associated with the beginning of a project, everyone involved should consider certain key factors when evaluating or selecting project participants: the financial condition of the parties, their qualification for bonds, evidence of their technical skills, and their reputation in the industry. Even a cursory investigation of potential project participants may yield clues to future problems.

Similar to the routine use of a checklist to qualify the project, the development of a checklist approach to qualifying the potential participants in a project may help identify situations with an unacceptable level of potential risk or a potential for claims. Table 15.2 contains a series of topics and questions that are intended to facilitate the qualification of the project participants.

Depending on the nature of the answers to these questions, the potential project participants may be able to “qualify” the other participants on the project and to identify circumstances or conditions that indicate unusual risks or a potential for disputes. Prudent application of a tailored prequalification checklist should be as essential to risk management as the customary site visit.

Development and consistent use of a standard form to obtain a statement of qualifications on a contractor or subcontractor can facilitate the receipt of information consistent with the goal of qualifying prospective participants in the project. By providing prospective contractors or trade contractors with a document outlining the categories to be addressed, it is possible to increase the likelihood of making apples-to-apples comparisons and to elicit more relevant information. Attached to this chapter at Appendix 15.1 is a copy of ConsensusDocs 221 Constructor’s Statement of Qualifications for a Specific Project. This document is part of the ConsensusDocs 200 Series of documents and provides an excellent tool to solicit prequalification information in its current form or modified for specific trade contractors. In addition, the AIA A305 Contractor’s Qualification Statement, produced by the American Institute of Architects, provides a similar tool for obtaining the qualifications of a prospective project participant. See Section IV.A in this chapter for a discussion of standard contract forms, including the ConsensusDocs, AIA, EJCDC, and DBIA contract documents.

Obviously, money is the source of many disputes and claims that arise on a construction project. The owner’s financial resources are of paramount concern. An underfinanced owner virtually dooms any project. Although the possibility of lien rights might provide some comfort for a contractor, if the owner goes under, the probability of full and complete payment to the contractor is very low. Considering the owner’s preeminent influence on the success or failure of a project, contractors and design professionals are wise to subject the owner’s background to an informal “prequalification” process, like that used on other project participants, to confirm that the owner has the capacity to meet its commitments. In addition to other independent sources that may be available to obtain information about the owner’s finances, some industry standard form contracts expressly obligate the owner to provide evidence of project financing at the project’s inception. Other form contracts require the owner to provide reasonable evidence when requested in writing by the contractor.

For example, Section 4.2 of the Standard Agreement and General Conditions Between Owner and Constructor, ConsensusDocs 200 (© 2011, Revised 2014) obligates the owner to provide to the contractor evidence of financing of the project before the work commences and, at any time thereafter upon written request of the contractor. In addition, that section provides that evidence of financing is a condition precedent to the contractor’s obligation to commence or continue with the work. The standard General Conditions of the Contract for Construction published by the American Institute of Architects (AIA), AIA Document A201–2007, contain a provision requiring the owner to provide reasonable evidence of project financing prior to commencement of the work, but only if requested in writing by the contractor. During performance, the contractor’s right to such financial information is further limited to specifically described factual circumstances. As a result the AIA form limits the contractor’s rights as compared to the ConsensusDocs general conditions.

Both the ConsensusDocs and the AIA form documents address the owner’s obligation to furnish information pertaining to the property title. ConsensusDocs mandate that the owner disclose such information and other relevant information regarding the site.² The comparable section of AIA A201 requires the owner to furnish information regarding title only when requested by the contractor.³ Regardless of the form of the contract, prospective contractors should routinely inquire about and seek from the owner any relevant information regarding the site and its characteristics.⁴

The financial condition of contractors and subcontractors is also extremely important. A subcontractor that has insufficient working capital may bring myriad problems, such as slow deliveries of materials as suppliers grow concerned about the subcontractor’s ability to pay. This can have a ripple effect on other work. Similarly, a contractor needing cash flow may front-load its proposal and pay requests. The early overpayment caused by front-loading may result in the contractor suffering cash flow problems or, worse, defaulting during the latter part of the project as contract funds run out. Unfortunately, there are few, if any, effective remedies against an unbonded, insolvent contractor. The typical action to recover completion costs is often pointless when the default resulted directly from the contractor’s financial problems.

An obvious source of financial protection for owners is to require payment and performance bonds. Bonding serves two purposes. First, the contractor’s competence and financial well-being are reviewed by the surety’s underwriting department, which is also trying to avoid bad risks. If a contractor is incapable of obtaining bonding, it means sureties are not convinced that the contractor has the resources to complete a project. That warning is probably best heeded. Second, and more directly, the bonds represent a financial guarantee. A performance bond usually means that if the contractor defaults and fails to complete, the surety will complete performance or pay damages up to the limit of the bond’s penal sum. In contrast, a labor and material payment bond helps assure the owner that labor and materials will be paid for, and creates alternatives to the filing of liens on the project. (Many general contractors require that subcontractors furnish payment and performance bonds for similar reasons.) (See Chapter 16 and Chapter 17 for discussions of payment and performance bonds, respectively.)

Even if provided, payment and performance bonds are not a cure-all. It is also necessary to carefully consider the financial stability of the surety itself. Sureties can suffer bankruptcy. Moreover, even solvent, well-financed sureties are far from an automatic source of relief. Claims under the bond can themselves be the subject of lengthy disputes and litigation. Trade associations such as The Associated General Contractors of America (AGC) can provide useful materials on topics such as bonds and bond claims. For, example, the AGC’s Surety Bonding and Risk Management Forum has released multiple publications on bonds and bond claims, which is available from that organization.⁵

Of course, there are concerns about technical qualifications that go beyond money. For example, licensing requirements provide some protection from incompetent and inexperienced contractors, particularly in the skilled areas such as electrical and mechanical work. Licensing should be deemed a bare minimum requirement, however, not an endorsement of qualifications for any type of work authorized by a particular license. Inquiries into the contractor’s experience on particular types and sizes of projects should also be made. There is a significant difference between installing plumbing in a low-rise apartment building and coordinating and installing the complex mechanical systems for a major healthcare facility. The owner’s technical capabilities and qualifications to handle a particular type or size of project are also relevant. An owner’s limited experience may, however, be offset by the association of capable consultants.

More subjective reports about other parties should also be considered, but perhaps be given lesser weight. For example, engaging a subcontractor with a reputation for shoddy or defective work may result in the general contractor being required to remedy unsatisfactory work at its own expense. A particularly litigious owner may refuse to negotiate a settlement in the event of a claim or dispute, forcing the contractor into more expensive arbitration or court battles.

Even if an owner, design professional, contractor, or subcontractor appears to have good qualifications and an established track record, it is important to consider the personnel it will assign to the particular project. Companies can be too successful, causing them to be stretched too thin, with all their capable and experienced personnel assigned to and consumed by other projects. The company is certainly important, but the individuals representing those companies, executing responsibilities, and working in the field are no less important.

C. Qualifying the Site and Locale

Similar to qualifying the type of project and the project participants, experience demonstrates that the site for the project also requires qualification. Chapter 12 reviews the issues related to differing site conditions and Appendix 12-1 provides a review of the questions related to a site investigation and a review of the information or data on subsurface site conditions. However, this inquiry extends beyond the physical characteristics at the location of the project and includes questions about state and local license requirements, lien laws, taxes, availability of labor, and so on. Table 15.3 contains examples of topics that should be addressed when contemplating the locale of any project and, particularly, a project location that is unfamiliar.

Answering these questions is critical to qualifying the project and evaluating the risks (potential or actual) in the performance of the work. Many of the questions on each of the foregoing tables flag a risk depending on whether the answer is Yes or No. Possibly a greater potential risk is signaled if the answer to any question is “do not know.” If the answer is unknown, it is very likely that the evaluation of the potential risk and reward is a guess. That only compounds the inherent risks of working in the construction industry.

Environmental risks and potential issues associated with performance in a different state from a firm’s traditional or home base of operations require careful review to avoid unforeseen risks or obligations. Appendix 12.1 reviews questions related to environmental conditions and potential hazards at the project site. (See Chapter 19 for a detailed discussion on environmental risks typically found on construction projects.)

A. Standard Contract Forms

There are a number of available standard contract forms that establish the various relationships on a construction project. Many of these forms are sponsored and drafted by one trade association or group of associations reflecting similar interests. Reflecting an effort to develop consensus-based contract forms is the family of documents published with comments and guidebooks which have been developed and issued by ConsensusDocs, These contracts and forms are a result of the collaboration of 41 leading construction associations representing owners, contractors, subcontractors, and sureties.⁷ The group’s goal was to draft a series of contract documents that would represent the best interests of the construction project, rather than a single trade association. The ConsensusDocs seek to fairly allocate project risks to the party in the best position to control the risk. In addition, other families of documents published by the American Institute of Architects, the Design-Build Institute of America (DBIA), and the Engineers Joint Contract Documents Committee (EJCDC) have been used in the construction industry. These common forms permit all parties to focus on critical variables when negotiating construction transactions and obviate the need to start from scratch with each new construction transaction.

Use of a family of documents can be advantageous, as those documents have been drafted by industry participants in an effort to provide a more integrated approach to the contracting process. To view these families of documents, see www.wiley.com/go/constructionlaw5e.

B. Critical Contract Provisions

Whether reliance is placed on a standard-form contract, a custom-drafted contract, or some combination of the two, certain contract provisions are of critical importance in anticipating, avoiding, and resolving claims and disputes. These include provisions addressing:

• Terms of payment
  
• Partial/final payment
  
• Pay-if-paid or pay-when-paid clauses
  
• Retainage rights
  
• Lien rights
  
• Differing site (changed) conditions
  
• Change order procedures
  
• Design collaboration
  
• Design review and coordination
  
• Time for completion
  
• Excusable delays (force majeure)
  
• Definitions of substantial and final completion
  
• Damages for delay
  
• Definitions of allowable costs
  
• Notice requirements
  
• Termination for default and for convenience
  
• Dispute resolution procedures

Careful attention should also be paid to the use of liquidated damages or no-damage-for-delay clauses as well as other exculpatory clauses and attorneys’ fees provisions, which can weigh heavily in the resolution of claims. It is also worthwhile to consider whether the parties intend for Article 2 of the Uniform Commercial Code (U.C.C.), which governs the sale of goods, to apply to the transaction. See Chapter 8 for a discussion of the U.C.C. and its application to the construction process. Dispute resolution procedures for construction claims are discussed in Chapter 23.

C. Modifying Standard Contract Forms

While standardized construction contract forms are extremely valuable resources for the construction industry as a whole, careful attention should be paid to ensure that these documents are modified, as necessary, to meet the particular construction project at hand. The modification of a standard form contract often requires more than just “filling in the blanks.” In addressing the critical contract provisions listed in Section B above, as well as any other relevant provision, the process of modification may require significant back-and-forth negotiations between the parties. This process can often require a significant time investment, but the time invested in tailoring a standard form contract to a particular project may pay dividends throughout the course of the project.

Often, when looking at a standard form contract, the parties may find that contract sections of particular importance might not be sufficiently developed. By way of example only, some of these provisions might include the change order process, the definitions of substantial completion and final completion, the parties’ waiver of a jury trial, insurance provisions, liquidated damages provisions, indemnification, or prevailing-party attorneys’ fees clauses. The provisions that need modifications may be determined by the nature of the specific construction project which is the subject of the contract. For example, in a multi-phased project with separate completion dates for each phase, it might be necessary to significantly alter the contractual definition of substantial completion and the application of liquidated damages, as well as the commencement dates for warranties. Another example is when the parties participating in the construction project are coming together from differing states or even differing countries. In such a situation, it would be advantageous for the contracts to uniformly provide the venue for litigation and the applicable law. Such uniformity eliminates expending time and money in the future resolving disputes over these issues.

It is impossible to list all of the issues that should to be considered when using standardized forms of construction contracts. The contracting parties are in the best position to know the significant issues that need to be addressed in their contract. The process of reducing these concerns into a formal writing can be an intensive and time consuming process, but that effort is often critical to the success of a project.