Management Techniques to Limit Risks and Avoid Disputes
Management Techniques to Limit Risks and Avoid Disputes
I. Construction: A Risk-Prone Business
Every business enterprise involves risk identification and management. Construction is especially risky, for nearly every project is unique. Unlike a manufacturing operation in which standard products are assembled in a controlled environment by a relatively stable workforce, construction projects are typically unique structures built on unique sites by a team that has been assembled for that specific purpose. To that extent, each construction project can be viewed as involving the development of a prototype. Even if the actual structure or building is essentially repetitive, the possible variation in the site conditions and locale, the historical low-profit margins, the vagaries of weather, and the changing team of trade contractors and vendors create the potential for significant risks and losses. The allocation of risk and the economic consequences of risk are significant contributors to the fact that construction is a dispute-prone industry. Therefore, prudent participants in the construction process strive to identify, reduce, and manage risks and seek to avoid disputes by implementing proven management techniques.
Even successful projects can have claims. Claims are a natural outgrowth of a complex and highly competitive process during which the unexpected often happens. Careful organization and coordination of numerous parties are required, and outside parties may control many of the circumstances and events that generate claims. The possibility that a claim might develop should not be ignored. The responsible owner, contractor, trade contractor, or design professional must recognize the need to anticipate the circumstances that foster claims and develop effective strategies for dealing with them.
The best way to handle claims is to anticipate them and avoid them to the extent possible. Despite the uniqueness of each project and its participants, certain recurring problems generate disputes. History repeats itself. Some of those recurring problems can be avoided, or their impact mitigated. At a minimum, some preparation can be made to more effectively address a dispute if one should occur. Of course, too intense a focus on eliminating all risks and anticipating claims and disputes can also create problems or paralysis, which impairs one’s ability to conduct business effectively. A certain element of risk must be recognized and accepted. Risk can only be mitigated, not eliminated.
This chapter focuses on those measures that can be taken at the outset of a project to identify risks, avoid them, or effectively prepare for and successfully deal with disputes when they cannot be avoided. Common sense, planning, skill, and experience can help identify those strategies for avoiding and effectively dealing with disputes.
II. Qualifying the Project and the Participants
Construction is a cooperative enterprise involving numerous entities and disciplines. These include the owner or developer, the design professional, the lender, the prime contractor, subcontractors and suppliers, sureties, and others. Each has an essential function. A failure by any participant to perform its obligations properly can mean disaster for the entire project and the rest of the participants. Equally important to a successful project is the nature of the work, its location, and any other special requirements or conditions affecting the proposed work. Consequently, it is essential to risk management and dispute avoidance to qualify the project and the key players well before making any commitment to participate in the project.
A. Qualifying the Project
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.
Table 15.1 Qualifying the Project
|Does your firm have sufficient relevant experience with this type of work?|
|Does your firm have sufficient relevant experience with projects of this size and complexity?|
|Does your firm have sufficient relevant experience with the performance of similar work in terms of weather conditions, location, and does it have a reliable source of trained workers?|
|Has your prior experience with this type of work included meeting or exceeding the anticipated project margin?|
|Do you have sufficient, relevant experience with the proposed project delivery method?|
|Do you have available a project team and job-site staff with successful experience in managing a project of this type, size, and complexity?|
|Do you have the home office support required for this project?|
|Does the realistic profit potential offset the project risks?|
|Can your company bond the project?|
|Does the bonding requirement substantially impact the company’s overall bonding capacity?|
|Does the project involve possibly bonded, post completion obligations, such as long-term warranty, water or energy consumption, or commissioning etc.?|
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.
Table 15.2 Qualifying the Participants
|Have you previously constructed a project for this owner?|
|If yes, are the key personnel different?|
|Has the owner provided adequate assurance of sufficient financing?|
|Does the owner have experience with the project delivery system selected for the project?|
|Has the owner previously built a project of similar size and complexity to this project?|
|Does the owner have an experienced staff to facilitate the resolution of problems?|
|Does the owner have a history of disputes and litigation?|
|Does the proposed contract allocate risks consistent with customary practices in the industry?|
|If not, is the owner willing to modify the proposed contract documents?|
|Does the proposed contract contain a requirement to exchange documents electronically? Is there a protocol established for that purpose?|
|Will the project use a project Web site or a third party provider to exchange information electronically?|
|Have the owner and design professional clearly defined those portions of the design that will be delegated to the contractor?|
|Have you previously worked with this concern?|
|If yes, are the key personnel different?|
|Has your prior experience with this firm been satisfactory?|
|Do you have information on the contractor’s/subcontractor’s current backlog?|
|Do you have adequate information on the contractor’s/subcontractor’s finances?|
|Does the contractor/subcontractor have a reputation for promptly paying its subcontractors/vendors?|
|Can the contractor/subcontractor provide bonds?|
|If yes, have you investigated the financial capacity of the proposed surety?|
|Has the contractor/subcontractor identified key project personnel?|
|If so, do they have experience with projects of this type, size, and complexity?|
|Does the contractor/subcontractor have a history of disputes and litigation?|
|Has the contractor/subcontractor been assessed liquidated damages in the past five years?|
|Has the contractor/subcontractor ever failed to complete a project for any reason?|
|Has the contractor/subcontractor ever been terminated for default?|
|Design Team (Design Professional)|
|Have you previously built a project with this design professional?|
|If so, are the same people assigned to this project?|
|If so, was the prior experience satisfactory?|
|Is this project similar to projects in size, type, and complexity to prior projects designed by this design professional?|
|Is there any indication that the design professional was not provided adequate fee or time to complete the design?|
|Does the design professional have a good reputation for fairness?|
|Does the design professional have a good reputation for prompt decision making?|
|Do the design documents appear to be complete and coordinated?|
|Are there missing details, incorrect cross references, dimensions that do not add up, discrepancies between large-scale drawings and details?|
|Do the contract documents contain language purporting to shift the responsibility for the design or the adequacy of the design to the contractor?|
|Do the documents contain unusual requirements for coordination of the various disciplines?|
|Does the design appear to have sufficient space for MEP system installation?|
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.
Table 15.3 Qualifying the Project Site/Locale
|Does your company have sufficient prior experience in the project jurisdiction?|
|Was the prior experience in this jurisdiction profitable?|
|Does your company possess the required licenses to work in this jurisdiction?|
|Are local licenses/permits required?|
|Are the insurance policies/coverages adequate for work in this locale?|
|Does your company understand bond/lien claim rights and requirements in this jurisdiction?|
|Do the laws in this jurisdiction create special risks or require changes to subcontract forms or documentation systems?|
|Is the available local labor force adequate and sufficiently skilled?|
|Is the labor market in site’s locale predominantly union or nonunion?|
|Is there a required project/union agreement for this work?|
|Are there state/local taxes to be considered?|
|Are materials and equipment available locally?|
|Has your company identified any local or required labor rates and fringes?|
|Are there project/local Disadvantaged Business Enterprise/Women Owned Business Enterprise (DBE/WBE) requirements?|
|Are there unusual business or political circumstances that may affect the project?|
|Are there federal/state/local immigration laws or regulations to consider?|
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.)
III. Defining Rights, Responsibilities, and Risks: Parties and Their Contracts
A written contract generally provides the foundation for each of the numerous relationships and binds the disparate project participants into a cohesive team to get the job built. Keeping those participants together requires anticipating issues and events that might generate disputes and detract from the goal of prompt and cost-effective project completion. This is done both by allocating risks among the parties, so it is clear who will have to bear the burden if the risk becomes reality, and providing mechanisms for resolving disputes when the risk allocation is not clear or there is disagreement. A well-drafted contract is one of the most important elements in effectively managing a construction project and avoiding or efficiently dealing with claims.
Clarity, common sense, and precision are essential when drafting contract language. Such efforts will, it is hoped, limit later uncertainty and misunderstanding among the parties and the need to refer to some third-party decision maker, court, or arbitration, to determine how the contract will be interpreted. Unreasonable and overly burdensome terms should be avoided, as they can unnecessarily drive up the cost of the work through inflated contingencies and may be difficult to enforce. However, a contractor or subcontractor should not ignore such terms in an unrealistically optimistic belief that they will not be enforced. The parties must grapple with the tough issues raised by their conflicting interests in the contract-preparation stage or face the prospect of much more serious disagreements and disputes during contract performance.
IV. Contract Framework
Establishing the contract framework for the project is a threshold decision that must be made by the owner. The selection depends on a variety of factors, including the owner’s needs and its expertise and capabilities. Construction projects traditionally have been designed, bid, built, and paid for within a framework of strictly defined roles, relationships, and procedures. This has proven satisfactory for many construction projects, but perceived weaknesses in the traditional method have led to consideration and use of new, alternative methods, such as the various forms of construction management, multiprime contracting, and design-build.6 These new project delivery methods can provide many advantages, but their divergence from clearly defined practices and roles requires careful attention in the contract drafting phase to be certain that the advantages are not lost through unanticipated problems and disputes.
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.
1. AIA Documents
The AIA revised many of its key contract documents in 2007, including its A201 General Conditions of the Contract for Construction. The AIA documents are also fairly well integrated, with the terms of the various contract forms coordinated with and complementing each other.8 Consistency potentially enhances usefulness of these documents.
Historically, AIA documents have enjoyed acceptance by owners, particularly in the traditional design-bid-build delivery system, where the owner first engages a design professional. The AIA documents may not, however, meet the needs of each and every project, and some modification may be required for each specific situation. To the extent that documents such as the AIA documents may protect the interests of the design professional, at the expense of the owner and contractor, alternate clauses can be introduced into standard AIA contracts to address any perceived bias.9 Similarly, documents in the other families of construction contract forms may warrant review and modification to fit particular needs or requirements. The AIA library of contract documents series contains 7 series of documents:
- A-Series: Owner/Contractor Agreements
- B-Series: Owner/Architect Agreements
- C-Series: Other Agreements
- D-Series: Miscellaneous
- E-Series: Exhibits
- F-Series: (Reserved)
- G-Series: Contract Administration and Project Management Forms
Starting in the fall of 2007, a broad coalition of construction industry associations initiated the publication of a new family of standard construction contracts: ConsensusDocs. This family of documents has continued to grow and receive acceptance during the subsequent years. The ConsensusDocs library10 of forms and documents contains six series of documents:
- 200 Series: General Contracting Documents
- 300 Series: Collaborative Documents
- 400 Series: Design-Build Documents
- 500 Series: Construction Management Documents
- 700 Series: Subcontracting Documents
- 800 Series: Program Management Documents
3. EJCDC Documents
EJCDC Documents, which first became available in the 1970s, are sponsored by the National Society for Professional Engineers (NSPE) Private Practice Group.11 The National Society of Professional Engineers, the American Council of Engineering Companies, and the American Society of Civil Engineers are the primary members of this group.
EJCDC’s Construction Series documents include:
- C Series: Construction Related Documents
- E Series: Owner-Engineer Documents & Engineer-Subconsultant Documents
- R Series: Environmental Documents
- P Series: Procurement Documents
- D Series Design-Build Documents
EJCDC makes its documents available electronically through licensing arrangements. Once a license is obtained, the documents can be tailored to meet the specific project requirements. As with the other form documents, use of EJCDC documents will likely warrant modifications to meet specific project needs.
4. DBIA Documents
The Design-Build Institute of America (DBIA) is an organization of construction industry representatives with a stated goal to define, teach, and promote best practices in the use of the design-build project delivery system. Currently, DBIA has released thirteen contract forms and eight administrative forms including agreements between the owner and the design-builder as well as agreements between the design-builder and other project participants.12
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.
V. Avoiding and Preparing for Disputes through Proper Management and Documentation
The prudent and realistic contractor and subcontractor designs and uses systems and procedures to manage, monitor, and document the performance of the work and progress on the project. This serves two important functions. First, these systems and procedures ensure an adequate flow of information to facilitate proper project control and coordination, including adjustments needed to respond to unexpected circumstances. Second, they aid in the compilation of an accurate and complete record of job conditions and problems and their impact on the project. The general contractor or construction manager certainly bears a very significant portion of project documentation responsibility during construction as it installs the work and generally controls the means and methods employed.
The design professional and owner should not, however, abdicate all responsibility and oversight and in an effort to totally remove themselves from the construction process to insulate themselves from liability. Moreover, some interaction and monitoring of the construction is always required of the owner and design professional, and is in their interests. If owners or design professionals become too removed from the construction, they can neither anticipate nor promptly address problems requiring their attention. The level of activity and monitoring will vary depending on the type and terms of the contract involved, but should not be so active or intrusive as to constitute interference and disruption of the contractor’s work. Although it may be somewhat unpleasant to begin a project with an eye to possible future claims, a failure to adopt such prudent management procedures almost ensures that disputes will develop.
VI. Prudent and Responsible Estimating
Efforts to effectively manage work on the project and avoid claims should begin for the general contractor or trade contractor before it even mobilizes or reaches the site. Many risks and claims arise not in the field but in the estimating department. Prudent estimating and bidding can avoid a host of performance problems and claims. A project that starts out in the hole because of a poor estimate generally cannot climb out. Instead, the hole gets bigger and deeper, expanding the problem and drawing more parties into it.
Failure at any level to accurately perceive and then price the scope of the work or the associated risks results in unnecessary losses and difficulties that can ripple throughout the project. Estimates and bids should be supported by worksheets and backup documentation of sufficient detail under the circumstances. Such backup, and the entire estimating process, should be subject to standard forms and procedures and management review to ensure their accuracy.
Overly optimistic estimates based on vague or incomplete designs should be avoided or at least clearly identified and qualified as such. Performance specifications often entail more responsibility and cost more than may be initially apparent and are often another soft spot in the estimating effort. The zeal applied to selling the project or submitting an early guaranteed maximum price to satisfy the owner must be balanced with caution against establishing an unrealistic budget or inflated expectations that, regardless of any contractual significance, are bound to cause disappointment, distrust, and disagreement when they are not met.