GENERAL TIPS WHEN IT COMES TO CONSTRUCTION CONTRACT DRAFTING AND NEGOTIATION

When it comes to construction contracts, there are many good industry form templates that can be used.   All are templates and all are designed to be modified to conform to the jurisdiction’s law and, of course, the parameters of the project.  There are industry form templates from the American Institute of Architects, ConsensusDocs, Engineers Joint Contract Documents Committee, and Design-Build Institute of America.  All include good provisions.  Regardless of the industry form template utilized, or whether your own template is utilized, contract drafting and negotiation is all about assessing risk and allocating risk to the party best equipped to manage that risk.  Oftentimes, management of the risk is considered in conjunction with insurance coverage to cover that associated risk.  Construction contract drafting and negotiation should not be taken lightly because “you want to know what you are getting into” so that you can best manage and address issues that arise, and you know issues always arise in construction.

Here are some general tips when it comes to construction contract drafting and negotiation:

  • Work with a construction attorney. Yes, I had to go there, because too frequently parties want to draft the contract without legal assistance, or negotiate without legal assistance, and this is not always fruitful.  Working with a construction attorney can at least help you assess the risk and ensure that a contract is sufficiently drafted or negotiated based on your understanding and appreciation of risk. I am routinely involved in some capacity when it comes to construction contract drafting and negotiation.

 

  • Obtain documents that are incorporated or flowed-down into the contract. Most contracts will either incorporate other documents or, in the case of a subcontract, contain flow-down provisions that flow-down obligations from the prime contract into the subcontract.  To best understand and appreciate the risk you are accepting, including risk associated with your scope of work, obtain these documents incorporated or flowed-down into the contract.   Not doing so is a mistake when these documents will impose obligations or requirements on you.

 

  • Review the insurance coverage language and consult with your insurance broker to make sure you have the required insurance. Insurance coverage is key.  Many times, contracts require heightened insurance coverage requirements that, realistically, are not available to a certain contractor.  Consider the insurance coverage requirements and consult with your insurance broker (and your construction attorney, if possible) regarding the insurance coverage, additional premium associated with the coverage, whether the coverage is available to you, and whether there is additional insurance coverage you should consider based on your scope of work.

 

  • Have an appreciation of the following driving provisions that will be important no matter the project:
    • Indemnification
    • Insurance coverage
    • Dispute resolution including forum selection, prevailing party attorney’s fees, joinder, and abatement or staying of certain disputes or claims
    • Termination for default and for convenience
    • Default and notification of default and any cure period
    • Suspension of work
    • Payment timing and requirements including any pay-if-paid language and conditions precedent to payment
    • Claims procedures including timing requirements when to submit claims and the waiver of claims
    • Change orders and directives
    • Scope of work to make sure you understand the scope of work in the contract as it will likely include work and risk not included in your proposal
    • No-damage-for-delay and all schedule-based language (since time is money)

The construction contract serves as the backbone governing your relationship with the project.  Do not neglect the importance of the construction contract or deprioritize its importance.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

ENFORCEMENT OF CONTRACTUAL TERMS (E.G., FLOW-DOWN, FIELD VERIFICATION, SHOP DRAWING APPROVAL, AND NO-DAMAGE-FOR-DELAY PROVISIONS)

What you contractually agree to matters, particularly when you are deemed a sophisticated entity.  This means you can figuratively live or die by the terms and conditions agreed to.   Don’t take it from me, but it take it from the Fourth Circuit’s decision in U.S. f/u/b/o Modern Mosaic, Ltd. v. Turner Construction Co., 2019 WL 7174550 (4th Cir. 2019), where the Court started off by stressing, “One of our country’s bedrock principles is the freedom of individuals and entities to enter into contracts and rely that their terms will be enforced.”  Id. at *1.

This case involved a dispute between a prime contractor and its precast concrete subcontractor on a federal project.  The subcontractor filed a Miller Act payment bond lawsuit.   The trial court ruled against the subcontractor based on…the subcontract’s terms!  So, yes, what you contractually agree to matters.

Example #1 – The subcontractor fabricated and installed precast concrete panels per engineering drawings. However, the parking garage was not built per dimensions meaning the panels it fabricated would not fit. The subcontractor had to perform remedial work on the panels to get them to fit.  The subcontractor pursued the prime contractor for these costs arguing the prime contractor should have field verified the dimensions. The problem for the subcontractor, however, was that the subcontract required the subcontractor, not the prime contractor, to field verify the dimensions.  Based on this language that required the subcontractor to field verify existing conditions and take field measurements, the subcontractor was not entitled to its remedial costs (and they were close to $1 Million).  Furthermore, and of importance, the Court noted that the subcontract contained a flow down provision requiring the subcontractor to be bound by all of the terms and conditions of the prime contract and assume those duties and obligations that the prime contractor was to assume towards the owner.  While this flow-down provision may often be overlooked, here it was not, as it meant the subcontractor was assuming the field verification duties that the prime contractor was responsible to perform for the owner.

Example #2 – The subcontractor also argued that the prime contractor should bear its remedial costs to the precast panels because it accepted its shop drawings for the panels.  However, the subcontract and prime contract (that was flowed down) required the subcontractor to obtain the approval of the prime contractor for the shop drawings before it started fabricating the panels.  The subcontractor did not have the contractual right to begin fabrication prior to approval.  The subcontractor, not uncommonly, started fabrication before the shop drawings were approved by the prime contractor.  But even if the subcontractor obtained the approval, the subcontract provided that such approval does not relieve the subcontractor of performing the work per the plans and specifications and the proper matching and fitting of its work.

Example #3 – The subcontractor claimed it incurred additional costs due to soil remediation from another subcontractor. This required the subcontractor to wait many months for the soil to be properly prepared before it could finish its work.  The subcontractor also incurred storage costs during this time.  The prime contractor argued that the subcontract contained a no-damage-for-delay provision that barred the subcontractor’s damages.  The trial court, affirmed by the appellate court, agreed that the subcontractor’s damages due to the delay were barred by the no-damage-for-delay provision it agreed to in the subcontract.

And, as the Court strongly concluded: “When parties, particularly sophisticated commercial entities like [prime contractor] and [subcontractor], negotiate and enter into written agreements, they have a right to expect the provisions of those agreements will not be cast aside when a dispute arises.”  Id at 6.    The Court started off and concluded its decision with the same principle

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

GENERAL CONTRACTOR SUPPORTING A SUBCONTRACTOR’S CHANGE ORDER ONLY FOR OWNER TO REJECT THE CHANGE

The opinion in Westchester Fire Ins. Co, LLC v. Kesoki Painting, LLC, 260 So.3d 546 (Fla. 3d DCA 2018) leads to a worthy discussion because it involves a common scope of work occurrence on construction projects involving a general contractor and subcontractor.  The contractor submits a subcontractor’s change order request to the owner and the owner rejects the change order.   What happens next is a scope of work payment dispute between the general contractor and subcontractor.   Yep, a common occurrence.

In this case, a general contractor hired a subcontractor to perform waterproofing and painting.  A scope of work issue arose because the specifications did not address how the window gaskets should be cut and then sealed. The owner wanted the window gaskets cut at a 45-degree angle and the subcontractor claimed this resulted in increased extra work.    The general contractor agreed and submitted a change order to the owner to cover these costs.  The owner rejected the change order claiming it was part of the general contractor’s scope of work even though the cutting of window gaskets at a 45-degree angle was not detailed in the specifications.

After the subcontractor filed a suit against the general contractor’s payment bond surety, the project architect further rejected the change order because gasket cutting was part of the specification requirements.  (Duh! What else was the architect going to say?  It was not going to concede there was an omission that resulted in a change order to the owner, right?)

Importantly, the subcontract agreement stated that, “If a dispute arises between the Contractor and the Subcontractor regarding the Scope of Work, or in the interpretation of the Contract Documents, and the parties hereto do not resolve that dispute, the decision of the [Architect] shall be final.”   As it pertains to this provision, while the appellate court noted the enforceability of the provision, it found that it did not apply because there was not a scope of work dispute between the general contractor and its subcontractor.  The general contractor agreed that this resulted in a change order condition, i.e., that there was a change to the subcontractor’s scope of work, and submitted a change order to the owner for the scope of work change.  Ouch!  The payment bond surety was on the hook to pay for this change order.

A few things that I find noteworthy.

First, the opinion does not include a lot of discussion on language in the subcontract. This tells me that there may not have been great language in the subcontract dealing with the subcontractor’s scope of work.  It is not uncommon to hear that a specification does not include every single detail so if the subcontractor was always required to cut gaskets in performing its scope of waterproofing work then there may be an argument there is not a scope of work change.  Either way, detailing the scope of work in the subcontract is important to account for the inevitable scope of work dispute.

Second, I understand the logic from the general contractor’s perspective of having the architect decide scope of work disputes between a general contractor and subcontractor because the architect is going to naturally disfavor scope of work changes or changes of work associated with its plans and specifications.  This will benefit the general contractor as a rejection of a scope of work change will support the denial of a change order.  With that said, I am generally not in favor of the finality of such a decision from an architect, particularly when addressing the scope of work dispute may warrant a detailed analysis of the governing subcontract. Also, the court in this case seemed to dismiss such language because the general contractor supported the subcontractor’s change.

Third, just because a general contractor supports a subcontractor’s change order request does not mean that it and its surety should automatically be bound by the change and finance the change.  Again, there was little discussion as to language in the subcontract and it does not appear the surety tried to make an argument under the pay-when-paid clause. While such defense is generally not applicable to payment bond sureties, the (creative) argument could be different when dealing with a change order to preclude the effect of a surety and general contractor being on the hook for every change order submitted to the owner that the owner rejects.

And, fourth, this opinion does not address how the general contractor handled or pursued this with the owner.  That is important because if the general contractor agreed and supported the change, there should have been an effort to collect this amount from the owner.  This leads to another important consideration.  In this scenario, the subcontract could include language that any claim the subcontractor initiates stemming from a dispute involving the owner should be stayed pending the resolution of the dispute with the owner.  On the other hand, if the general contractor elects not to pursue the dispute with the owner but recognized the change, then it having to pay for the change makes sense based on the business decision it made.

What are your thoughts?

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

LUMP SUM SUBCONTRACT? PERHAPS NOT.

Lump sum subcontract?   Perhaps not due to a recent ruling where the trial court said No!” based on the language in the subcontract and contract documents generally incorporated into the subcontract.

 

This is a ruling on an interpretation of a subcontract and contract documents incorporated into the subcontract that I do not agree with and struggle to fully comprehend.  The issue was whether the subcontract amount was a lump sum or subject to an audit, adjustment, and definitization based on actual costs incurred.  Of course, the subcontractor (or any person in any business) is not just interested in recouping actual costs, but there needs to be a margin to cover profit and home office overhead that does not get factored into field general conditions.  

 

In United States v. Travelers Casualty and Surety Company, 2018 WL 6571234 (M.D.Fla. 2018), a prime contractor was hired to perform work on a federal project.  During the work, the Government issued the prime contractor a Modification that had a not-to-exceed value and required the prime contractor to track its costs for this Modification separate from other contract costs.  In other words, based on this Modification, the prime contractor was paid its costs up to a maximum amount and the prime contractor would separately cost-code and track the costs for this work differently than other work it was performing under the prime contract.   

 

The prime contractor hired a subcontractor to perform a scope of fireproofing work relative to the Modification.  The subcontract amount was $646,886 and the subcontractor claimed it was due and owing $376,609 upon completing the work and filed a lawsuit against the prime contractor’s Miller Act payment bond.  

 

The prime contractor argued that the subcontract amount was not lump sum and was subject to definitization, auditing, adjustment, and change, although it certainly is not uncommon by any means that a prime contractor working under a cost-plus scenario to enter lump sum subcontracts.   The subcontract contained the following language:

 

  • The Contractor agreed to pay the Subcontractor for the complete performance of the Subcontract the sum of $646,886, subject to additions and deductions for changes agreed upon in writing…and Contractor further agreed to make all partial and final payments in accordance with the terms and provisions of the Subcontract Documents.
  • The Subcontractor had to submit a complete and accurate schedule of various parts of the Subcontractor’s work aggregating the total sum of the Subcontract, itemized and detailed as required by the Contractor and supported by such evidence as to its correctness as the Contractor may direct.
  • Each partial payment and final payment would be subject to final audit and adjustment and Subcontractor agreed to reimburse the Contractor for overpayment.
  • The Contractor was entitled to make changes in the work that could cause an increase or decrease in the work.
  • The Contract Documents including certain Federal Acquisition Regulation (FAR) clauses were incorporated into the Subcontract.

 

The subcontractor argued that this was not a unit cost contract, but a lump sum contract, and it did not agree to any such changes (such as those that would have removed a scope of its work).  Thus, the subcontractor completed its work and should be entitled to the subcontract amount.

 

The trial court did not agree with the subcontractor: “The Court finds that the Subcontract contains unambiguous language which shows the Subcontract amount was subject to definitization, adjustment, and audit, rather than being a fixed-price amount.”  United States, supra, at *6. 

 

Huh!!??!!

 

The language in the subcontract was relatively standard subcontract language included in most subcontracts.   The changes clause is standard that allows the contractor to increase or decrease the work and the subcontractor is required to proceed with any changes.  The schedule of values language is standard, which is nothing more than an administrative vehicle for purposes of allocating payment based on percentages of work performed.   The overpayment clause is relatively standard.  As the subcontractor argued, the subcontract amount was not based on specific unit costs measured against a specific unit of measurement.  The subcontract did not unequivocally state that the subcontractor would be paid a cost of the work plus a specific markup for profit and overhead.   Nothing of the sort and nothing identifying what should be construed a permissible cost of work versus an impermissible cost of work so that the subcontractor could specifically track its costs of work.  There was nothing that identified the subcontract amount would be reconciled based on the subcontractor’s actual costs of the fireproofing work.  If it did, then the argument that it was not a lump sum amount makes sense.  But, what is there to audit?  The subcontractor’s actual costs should be less than the fixed amount in light of a profit and overhead margin.  The subcontract did not identify what this margin should even be.  If it were a unit cost contract, that margin would be built into the unit costs.  If it were a cost of the work subcontract, as mentioned, it would clearly specify what the agreed markup was and the permissible costs of work to be tracked.  Also, nothing in the subcontract mentioned the subcontractor would only be paid its time and materials based on a specific labor rate where the profit and overhead would be built into the labor rate.

 

As it pertains to the FAR clauses, the trial court held that, “Incorporation by general reference only incorporates the quality and manner of the subcontractor’s work from the prime contract, not the rights and remedies he may have against the prime contractor.”  United States, supra, at *8.   This makes sense and, for this reason, the trial court held that the general incorporation by reference language only incorporated the FAR clause or the Modification at-issue only if they refer to the quality and manner of the subcontractors’ work.  Based on this, the trial court explained that language in the Modification requiring the prime contractor to track its costs was incorporated  into the subcontract because it related to the manner in which the work was to be completed.  This does not make sense as the prime contractor is tracking the fireproofing costs by buying out that scope at a fixed amount.  

 

The trial court’s interpretation based on rather common and standard subcontract language could ultimately turn every fixed price subcontract that requires an audit as a requirement of the subcontractor to track actual costs without any true understanding as to how actual costs are determined, reconciled, or what the appropriate markup should even be.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

GENERAL CONTRACTOR’S ABILITY TO SUPPLEMENT SUBCONTRACTOR PER SUBCONTRACT

shutterstock_142349770As a subcontractor, you need to appreciate that the subcontract you (more than likely) sign is going to have you bear risk associated with furnishing manpower to maintain the prime contractor’s schedule and progress.   A subcontractor can factor some of this risk into the lump sum amount it agrees to in the subcontract.  But, from the general/prime contractor’s perspective, it is very important that this risk is borne by the subcontractor because there is no such thing as a schedule written in stone.  The baseline schedule, whether attached to the subcontract or not, will change.  Activities will be re-sequenced.  Activities will be added.  Activities will overlap.  Activity start dates and finish dates will change.  It is the nature of construction.  As a subcontractor, you know all of this because it is the same no matter the project. Schedules are never written in stone — they change on a regular basis.

 

The subcontract will include a number of provisions that address the schedule, the prime contractor’s discretion to adjust the schedule and supplement the work, and the subcontractor’s requirement to maintain progress.  These are provisions that shift risk to the subcontractor including:

 

  • The subcontractor will furnish all manpower to complete its scope of work;
  • Time is of the essence with respect to the subcontractor’s performance of its work;
  • The prime contractor has the right to decide the time and order of various portions of the subcontractor’s work;
  • The subcontractor must prosecute its work in a prompt and diligent manner and at such times as the prime contractor directs;
  • The subcontractor must keep itself thoroughly informed as to the overall progress of the project;
  • The subcontractor must not delay, hinder, or interfere with the progress of the project;
  • The subcontractor must notify the prime contractor within “X” days after the occurrence of the circumstances giving rise to a change (or delay) or else waive such claim for additional time or compensation;
  • If the subcontractor fails to furnish sufficient manpower or prosecute the work with promptness and diligence, which is not corrected after “X” days after receiving notice, the prime contractor can declare the subcontractor in default, supplement the subcontractor, terminate the subcontract in whole or in part, and/or complete the subcontract work at the expense of the subcontractor;
  • The prime contractor can withhold payments if the subcontractor is unable to comply with subcontractual obligations, perform its work, or is delaying or is in reasonable danger of delaying the work; and
  • The subcontractor is required to indemnify the prime contractor for damages resulting from its breaches of the subcontract (which may be an indemnification provision separate from an indemnification for personal injury or property damage claims).

 

These types of provisions are crafted a number of different ways, are perhaps more onerously drafted, but the intent is the same relating to the subcontractor assuming risk and ensuring the prime contractor has recourse against the subcontractor associated with that risk.   (An example of such risk-shifting provisions in a subcontract can be found here.)  Again, these are important provisions for prime contractors to include in subcontracts.  They are also important provisions for subcontractors to factor in the risk associated with the subcontract amount.

 

In a recent bench trial, MWH Constructors, Inc. v. Brown and Brown Electric, Inc., 2018 WL 2087687 (S.D.Fla. 2018), a prime contractor sued its electrical subcontractor for breach of subcontract and contractual indemnification associated with the subcontractor’s inability to maintain progress during the construction of a water treatment project.  The subcontractor counter-sued for its contract balance.  The subcontract at-issue contained all of the provisions discussed above.

 

During the subcontractor’s scope of work, its president and qualifier died.  Thereafter, it began to fall behind schedule and was not furnishing sufficient manpower. There were numerous discussions between the prime contractor and subcontractor regarding the subcontractor’s inability to timely complete its work.  It was discussed that the subcontractor needed additional manpower and needed to work on Saturdays to recover lost time.   The subcontractor, however, was unable to abide by its commitments.  Further meetings were held and notifications were sent to the subcontractor. The public owner notified the prime contractor the job was delayed, the electrical subcontractor was behind schedule, and was threatening to assess liquidated damages.  Finally, after the subcontractor was unable to improve its progress, the prime contractor declared the subcontractor in default and supplemented its work with another electrical subcontractor and back-charged the subcontractor for such costs.

 

Due to the supplementation, the prime contractor paid the supplemental electrical subcontractor in excess of the defaulted subcontractor’s contract balance.  The prime contractor also had to pay the defaulted subcontractor’s lower tiered subcontractors and suppliers because the defaulted subcontractor did not pay them (likely because it did not have the cash flow due to the prime contractor withholding contract balance). 

 

The trial court entered judgment in favor of the prime contractor against the subcontractor finding that the prime contractor was justified supplementing the subcontractor in accordance with the numerous contractual provisions.  The prime contractor put on evidence at trial supporting the justification in conjunction with its rights under the prime contract. 

 

Of importance, the trial court was not going to rewrite the subcontract or the risks the subcontractor assumed in the subcontract:

 

Contracts are voluntary undertakings, and contracting parties are free to bargain for-and specify-the terms and conditions of their agreement.  That freedom is a constitutionally protected right.

***

Thus, [i]t is not the function of the courts to rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain.

***

Rather, the court’s task is to apply the parties’ contract as-written, not rewrite it under the guise of judicial construction.

 

MWH Constructors, Inc., 2018 WL at *6 (internal citations and quotations omitted).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

EXCULPATORY PROVISIONS IN BUSINESS CONTRACTS

shutterstock_734837968-644x316An exculpatory provision in a contract is a provision that relieves one party from liability for damages.  It shifts the risk of an issue entirely to the other party.   Such a provision is generally drafted by the party preparing the contract that is looking to eliminate or disclaim liability associated with a particular risk, oftentimes a risk within their control.  These provisions are also known as limitation of liability provisions because they do exactly that — limit liability as to a risk.   For this reason, they can be useful provisions based on the context of certain risks, and are provisions that are included in business contracts (such as construction contracts).

 

While such clauses are disfavored, they are enforceable if they are drafted clearly, unambiguously, and unequivocally.  If they are unclear, ambiguous, or equivocal, they will construed against enforcement.  See Obsessions In Time, Inc. v. Jewelry Exchange Venture, LLP, 43 Fla.L.Weekly D1033a (Fla. 3d DCA 2018) (finding exculpatory clause in lease ambiguous and, therefore, unenforceable as to lessor looking to benefit from the exculpatory clause).   

 

Exculpatory clauses are enforceable only where and to the extent that the intention to be relieved from liability is made clear and unequivocal. The wording must be so clear and understandable that an ordinary and knowledgeable person will know what he is contracting away. A phrase in a contract is ambiguous when it is of uncertain meaning, and thus may be fairly understood in more ways than one.

Peterson v. Flare Fittings, Inc., 177 So.3d 651, 654 (Fla. 5th DCA 2015) quoting Tatman v. Space Coast Kennel Club, Inc., 27 So.3d 108, 110 (Fla. 5th DCA 2009). 

 

 

Because such clauses are disfavored and will be narrowly construed against the party who benefits from the clause, there are certainly public policy considerations that may come into play. See, e.g., Loewe v. Seagate Homes, Inc., 987 So.2d 758 (Fla. 5th DCA 2008) (exculpatory provision in agreement for purchase and construction of new home unenforceable to the extent it relieved homebuilder for an intentional tort and homebuilder could not contract around complying with building code). 

 

When negotiating a contract with an exculpatory provision in a contract, make sure you appreciate the risk associated with the clause.  The risk could be significant and outside of your control.  Make sure the provision is drafted in a clear, unequivocal. and unambiguous manner.  If you are dealing with such a provision after-the-fact, consult with counsel to best analyze arguments pertaining to the enforceability of that provision.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

ACCOUNT FOR THE IMPOSITION OF MATERIAL TARIFFS IN YOUR CONSTRUCTION CONTRACT

shutterstock_138974732After Hurricane Irma, I wrote an article that contractors should revisit the force majeure provisions in their construction contracts.  Not later.  But Now. The force majeure provision is an important provision in a construction contract to account for certain uncertainties that you have NO control over. 

 

Recently, another reason has given rise to contractors needing to revisit their force majeure provisions, as well as any provisions dealing with material escalations. Not later.  But now.  The imposition of raw steel and aluminum tariffs (tax on imported goods) and the back-and-forth regarding a potential trade war leads to the kind of uncertainty that should be assessed as a risk.  A risk in both time and cost from material escalations.

 

Contractors want to revisit their force majeure provisions, as well as any material escalation language, for these two reasons. 

 

First, you want to ensure any delay, to the extent there is any, associated with the tariffs or potential trade war provides for a time extension.    Any impact a contractor has with the delivery or fabrication of raw steel due to the imposition of tariffs should result in an extension of time.

 

 

Second, and probably the bigger concern, is associated with price.  Higher raw steel and aluminum costs could mean you based your price on inaccurate supplier and/or subcontractor pricing (pricing that did not factor in tariffs), particularly if the raw steel has not been pre-ordered or pre-delivered. Escalating material pricing is a concern.

 

 

Moving forward, I suggest including language in the force majeure provision that accounts for the imposition of tariffs and the concern of a trade war just to be safe.  Clarity in a contract is always better.  But, adding this language will account for time, but not the escalation of steel and aluminum pricing due to the tariffs.

 

If you are entering a lump sum contract, consider factoring this issue into your pricing.  Or, alternatively, identify an allowance associated with these materials so that you are not penalized based on actual pricing that accounts for the tariff   Another thing you can do is include a contingency in your lump sum contract with language that allows you to use the contingency for this purpose.  The difference between the allowance and contingency is there is still contractor-risk with the contingency if the costs exceed the contingency agreed upon in the contract.  Finally, you can include a carefully crafted material escalations provision that does not require you to bear the risk of certain material escalations.  

 

If you are entering into a Guaranteed Maximum Price (GMP) contract, you want to factor this escalating material pricing into the GMP cap.  Most GMP contracts have (and, if not, they should have) a line item for contingency.  The contingency amount should be increased (or there should be a separate contingency) to account for this issue with language that allows the contractor to use the contingency for escalating material pricing.  Alternatively, you can identify that due to the uncertainty associated with steel or aluminum pricing (or perhaps any other pricing) the GMP includes certain allowance items which will increase the contract through change order if the cost of the item exceeds the allowance. Finally, you can include a carefully crafted material escalations provision so that you are not bearing the risk of this uncertainty, i.e., material escalations entitle you to a change order. 

 

The politics behind the tariffs are irrelevant.  What is relevant, however, is the uncertainty behind the impact and pricing associated with the imposition of tariffs and the risk assessment that needs to be factored in to deal with this uncertainty.   This uncertainty affects the costs and potential time associated with obtaining raw materials to fabricate and incorporate into an owner’s construction project.

 

If this issue is currently impacting an on-going project, be proactive and consult an attorney that can review the language in your existing contract(s) and help, as need be, craft a change order request or claim based upon what has already been agreed to.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONTRACTORS: REVISIT YOUR FORCE MAJEURE PROVISIONS TO ACCOUNT FOR HURRICANES

 

shutterstock_43059370We now know and can appreciate the threat of hurricanes.  Not that we did not appreciate the reality of hurricanes–of course we did–but Hurricane Harvey and Hurricane Irma created the type of actual devastation we fear because they hit close to home.  The fear came to life, creating panic, anxiety, and uncertainty.  It is hard to plan for a force majeure event such as a hurricane because of the capriciousness of Mother Nature.   But, we need to do so from this point forward.  No exception!  And, I mean no exception!!

 

A force majeure event is an uncontrollable event that cannot be anticipated with any degree of definitiveness.   The force majeure event will excusably delay or hinder performance obligations under a contract.  One type of force majeure event is a hurricane—an uncontrollable and unforeseen act of Mother Nature.   

 

Standard construction contracts will contain some type of force majeure language.  The language will entitle the contractor to an extension of time to perform since the force majeure event will have excusably delayed the contractor’s performance.  I am not going to rehash that standard language because this language needs to be modified and tailored to address the major risk of a hurricane.  Not only is time impacted, but money is impacted too.  We need to consider the total impact of a hurricane versus considering the impact in isolation or in a vacuum. 

 

Take a look at your present construction contracts.  Revisit the force majeure language.  Does this language adequately address the time and monetary impacts associated with a hurricane?  If it does, great!  If it does not, or can be written much better, now is the time to make this language a MUST-INCLUDED provision in your construction contracts because this risk is real.  It is not illusory and it will be a real risk during hurricane season.   If you do not know or are unsure as to the language, please engage a construction attorney to review your contracts or propose standard language for you catered to your business needs.  Even if you feel comfortable with the language, I would still encourage you to have a construction attorney review the language and provide constructive feedback on the language.  At this point, there is no excuse to neglect this risk or minimize the potential of a devastating time and cost impact.  Regardless of the type of construction work you perform, this risk needs to be addressed. Any owner should appreciate this risk because it is a reasonable risk that needs to be accounted for with certainty in your construction contract. Is this a risk you completely want to assume from a cost standpoint?

 

I have drafted numerous force majeure provisions tailored to the risks of a project and business objectives of a client.  I have drafted specific provisions or negotiated provisions dealing with the risk of a hurricane.   Based on this experience, here are my suggestions when considering the risk of a hurricane and the potential time and monetary impacts associated with the risk:

 

1)   Make sure there is builder’s risk insurance covering property damage during construction.  Builder’s risk insurance policies are specialized property insurance policies for construction projects.  Make sure the policy does not exclude hurricanes.  In other words, you do not want hurricanes to be an excluded peril, particularly if there is the chance your work will take place during the hurricane season and/or you are performing work where storm surge or flooding caused by a hurricane can be an issue.   If there is a sub-limit for hurricane-caused damage, know what that sub-limit is.   You want to know a) what property and materials will be covered for hurricane-caused damage, b) whether costs to protect the property and materials from the hurricane are covered, c) whether the policy covers repair costs, and 3) whether the policy covers delay-type damage caused by the hurricane.   Get a copy of the builder’s risk policy in advance.  This way you know whether or not you need to supplement the policy accordingly or, alternatively, you want specific perils covered before that policy is bound.  In fact, you will likely want to supplement this with a construction equipment / inland marine insurance policy.  Work with an insurance broker that has experience with construction projects to ensure you have the right insurance in place for the project and your business.

2)   Make sure your contract specifically identifies a named storm such as a hurricane as a force majeure event.  Make sure your contract specifically identifies a hurricane as a force majeure event.  Be specific.  A hurricane should be an event that entitles you to additional time to perform since time will be spent protecting the work and tying down equipment and materials, time will be spent dealing with the actual hurricane, and time will be spent assessing the damage, remediating the damage, and ramping back up. 

3)   Make sure your contact entitles you to delay-related compensation associated with a hurricane such as a force majeure event.  A time extension for a hurricane is a given.  But, what about compensation for the impact?  Your project schedule is not going to include the risk of a hurricane, as there is no reasonable way to include that time in a project schedule.  Hence, the time extension.   As we know though, time is money.  You want to include a provision that entitles you to compensation for the time impact.  The provision should entitle you to utilize contingency money for any delay or, perhaps more appropriately, entitle you to a change order for the time-related costs.  (I have even drafted provisions that include a specific force majeure contingency to address associated costs for a force majeure event.)  You can even stipulate to a daily rate for such time-impact costs (which I have also done) caused by a hurricane or force majeure event.  A hurricane will not only prevent you from performing, but it will shift your performance to essential activities (that will not be included in your schedule).  It is reasonable for impact-related costs to be recoverable for such a force majeure issue.  It is unreasonable for the risk to be entirely shifted to the contractor because Mother Nature is certainly a risk that a contractor cannot control.

4)   Make sure your contract entitles you to recover costs associated with preserving and protecting work in-place, materials, and equipment.  As mentioned, a hurricane will divert your performance to progressing the work to preserving and protecting work in-place, materials, and equipment.  All of this needs to be protected from prolonged, heavy wind activity, torrential rain, and potential surge and flooding.  There are costs associated with this and you want to make sure this is performed to minimize the likelihood of any loss.  You also want to make sure you have time to perform this work.  Be safe, rather than sorry, and do not wait to the last minute to see what direction the hurricane ultimately pursues.   Hurricanes, as we know, are unpredictable and take unpredictable paths.  We need to make sure we have time to not only preserve and protect the work, materials, and equipment, but that our employees and subcontractors (and their families) safely make the right decisions to protect their homes and families.  Similar to the above, make sure your contract specifies how you get paid for this type of work – whether through contingency funds or, perhaps more appropriately, a change order.  Notifying the owner in writing in advance of the protective measures being performed is always a good idea.  If the owner elects not to implement such measures because it does not want to bear the cost, then the owner is evidently bearing risk.

5)   Know your contractual notification requirements.  Your contract probably includes notification provisions to address time impacts and costs associated with protecting the work.  Make sure these provisions are reasonable in light of a hurricane or force majeure event.  Your priorities when dealing with a hurricane, in particular, will be shifted.  For this reason, you want to make sure the notification provisions are not unreasonably onerous and are more than reasonable to account for the issues you will be dealing with.  Think these issues through.  Remember, not only will you be dealing with the issues associated with the construction project, but there will be internal issues dealing with the safety of your employees, their families, and any subcontractors you hire.

 

 

Do not panic if your contract currently does not, in your opinion, sufficiently address all of these items.  You can address this moving forward.  You should address this moving forward.  Again, no excuses.  And, again, do not be reluctant to hire a construction attorney that can best protect your rights moving forward to account for this risk that we know is REAL.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

COMPLY AND UNDERSTAND CONTRACTUAL CONDITIONS PRECEDENT

shutterstock_463024297Contracts oftentimes contain conditions precedent to payment or another affirmative obligation.  The condition precedent needs to occur to trigger a party’s obligation to perform.  If the condition precedent does not occur, then the obligation to perform is never  triggered. 

 

Contracting parties need to understand and appreciate conditions precedent to perform in their contract.  This ensures that they perform a condition precedent to trigger another party’s obligation to perform or they know that their obligation to perform is not triggered until the opposing party performs a condition precedent.

 

The recent ruling in University Housing by Dayco Corp. v. Foch, 42 Fla. L. Weekly D1122a (Fla. 3d DCA 2017) exemplifies the importance of understanding conditions precedent to an affirmative contractual obligation.   In this case, parties entered into an agreement where party “A” was required to form a new development company and obtain financing to build a student housing complex.  Party “B”, when the financing (loan) was in place, was to transfer certain property to the newly formed development company.  Party A forming the new development company  and obtaining financing was a condition precedent to Party B transferring certain real property to the new development company.

 

Party A did not obtain the financing.  And, naturally, Party B did not transfer property to the new development company contending that the procurement of financing was a condition precedent to its obligation to transfer property.  The Third District, affirming the trial court, agreed with Party B that Party B’s obligation to transfer property to the development company was never triggered because Party A did not comply with a contractual condition precedent.  As the court summed up a condition precedent:

 

Under well established contract law, a condition precedent is a condition which calls for the performance of an act after a contract is entered into, upon the performance or happening of which its obligation to perform is made to depend…. Conditions precedent to an obligation to perform are those acts or events, which occur subsequently to the making of a contract, that must occur before there is a right to immediate performance and before there is a breach of contractual duty

University of Housing by Dayco Corp., supra (internal quotations and citations omitted).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

WHICH CONSTRUCTION CONTRACT SHOULD I USE?

In the previous article I posted a chart that includes a side-by-side comparison of common risk allocation and risk assumption provisions in industry form construction contracts (the general conditions between the owner and contractor in the AIA, EJCDC, and ConsensusDocs industry form contracts).   This chart was used to illustrate various contractual provisions in industry form contracts in a presentation I recently did on construction contracts. The point of the presentation was to summarize many of the common risk allocation and risk assumption provisions in construction contracts that need to be considered when selecting and finalizing an industry form construction contract.  A portion of that presentation is below.  

 

Download (PPTX, 239KB)

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.