Category Archives: Contract Drafting

A LACK OF SOPHISTICATION WITH THE CONSTRUCTION CONTRACT CAN PLAY OUT IN AN UGLY DISPUTE

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There are times where a lack of sophistication can come back to haunt you.  This is not referring to a lack of sophistication of the parties.  The parties, themselves, could be quite sophisticated. This is referring to a lack of sophistication with the construction contract forming the basis of the relationship. While parties don’t always want to buy into the contract drafting and negotiation process, it is oftentimes the first document reviewed.  Because contract terms and conditions are important.  They govern the relationship, the risk, scope, amount, and certain outcomes with disputes.  However, a lack of sophistication can play out when that contract that should govern the relationship, the risk, the scope, the amount, and certain outcomes doesn’t actually do that, or if it does, it does it poorly.  An example of how bad a dispute can play out when it comes to the lack of sophistication on the front end is Avant Design Group, Inc. v. Aquastar Holdings, LLC, 2022 WL 6852227 (Fla. 3d DCA 2022), where a cost-plus contract was treated as a lump sum contract.

Here, an owner planned to perform an extensive interior build-out to a residential unit.  The owner had an out-of-country architect; because the architect was not licensed in Florida, the owner hired a local architect/designer to oversee construction and obtain goods and services for the residential interior build-out.  The contract was nothing but a proposal of items and costs.  The proposal stated the owner “would pay the cost of goods and services of the vendors, plus pay a ‘20% Interior Design & Administrative Fee’” to the local designer.  Avant Design Group, 2022 WL at *1.  The proposal further stated, “This preliminary budget of the Client’s construction costs include [sic] anticipated costs for construction materials, labor and sales tax.  Any other cost, including but not limited to freight, cartage, shipping, receiving, storage and delivery are not included in the preliminary budget and will be invoiced separately.” Id., n.2.

The owner and its local designer executed 92 proposals for purposes of the interior residential build-out.  Think about this: 92 proposals.   Collectively, all of these so-called proposals formed the basis of the contractual arrangement between the owner and local designer.  Terms and conditions, however, appeared to be skimpy at best.  The bigger issue, mentioned below, is the application of the 20% fee, as the language would suggest it is a cost-plus contract where the fee of 20% was on top of actual costs.

A dispute arose.  The owner thought it was being over-charged so it terminated the local designer. The local designer thought it was underpaid so it recorded a lien.  Then, the inevitable lawsuit. At trial, the owner had a forensic expert that testified that the owner was overcharged by over $500,000.  This was based on the owner’s position that the contract was actually a cost-plus contract.  The local designer claimed it was lump sum.  The type of contract—whether it was cost-plus OR lump sum—formed the basis of the dispute, and it mattered a lot.  A cost-plus arrangement meant that the local designer would be entitled to a cost of the goods and services plus its 20% fee markup.  A lump sum meant that actual costs did not matter–in other words, all of the proposals were simply mini-lump sum arrangements that could factor in the 20% fee markup.

“Generally, absent a finding of ambiguity, parol evidence is not admissible to assist the factfinder regarding the parties’ intent.”  Avant Design Group, supra, n.10.  Stated differently, expert testimony and the testimony of the parties is irrelevant when the contract is unambiguous.  While here, the trial court did not render any findings that the contract was ambiguous, “both parties, without objection, elicited expert testimony regarding the nature of the parties’ contract.”  Avant Design Group, supra, n.10.  Both parties viewed the type of contract to be a factual issue and the trial court ruled that the contract was a cost-plus agreement.  “As ample evidence supports the trial court’s finding that the parties entered into a cost-plus contract that limited [owner’s] payment obligation to the 20% Fee, we affirm the trial court’s principal conclusion regarding the contract’s payment terms.”  Avant Design Group, supra, *4.

The determination of whether the contract was cost-plus or lump sum was really the dispute and determined the outcome.  It was the dispute. This determination meant that the local designer was overpaid by over $500,000, its lien was fraudulent, and its lien should be discharged.  Had the determination been that the contract was lump sum, the entire outcome of the case should have been different.  Keep this in mind.  If your intent is lump sum, make that intent clear.  Conversely, if it is cost-plus, it is a completely different contract relationship and contract administration because you cannot add your markup to what you are already marking up as that is double dipping.  Notably, the case of Avant Design Group has a number of interesting issues to be discussed.  Those will be probably be discussed separately in shorter postings.  The key, though, is that the dispute centered on a cost-plus contract being treated as lump sum, when that was clearly not the case.

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.

 

IS THE EVENT YOU ARE CLAIMING AS UNFORESEEABLE DELAY REALLY UNFORESEEABLE?

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Is the item or event you are claiming as an unforeseeable, excusable delay really unforeseeable?  This is not a trick question.

Just because your construction contract identifies items or events that constitute unforeseeable, excusable delay does not mean those items can be used as a blanket excuse or crutch for the contractor.  That would be unfair.

For instance, it is not uncommon for a construction contract to list as unforeseeable, excusable delay the following events or items: “(i) acts of God or of the public enemy, (ii) act of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers.” See, e.g., F.A.R. 52.249-10(b)(1).  While the itemization of excusable delay may be worded differently, the point is there may be a listing as to what items or events constitute excusable delay.  An excusable delay would justify additional time and, potentially, compensation to the contractor.

The Civilian Board of Contract Appeals explained that a listing of items or events leading to unforeseeable, excusable delay is NOT intended to give the contractor free rein or a get-of-jail free card if the contractor encounters such delaying item or event:

Nevertheless, the mere fact that a delay is caused by a type of activity listed in the contract as generally excusable does not give the contractor carte blanche to rely upon such excuses. “The purpose of the proviso,” which is “to protect the contractor against the unexpected, and its grammatical sense both militate against holding that the listed events are always to be regarded as unforeseeable, no matter what the attendant circumstances are.” As the Supreme Court has explained, “[a] quarantine, or freight embargo, may have been in effect for many years as a permanent policy of the controlling government” and, if so, may not meet the definition of a cause “unforeseeable” at the time of contract award, even if quarantines and freight embargoes are listed in the contract as examples of possible excusable causes of delay.

Further, even if an unforeseeable cause of delay occurs, the contractor cannot sit back and fail to take reasonable steps in response to it — once such an unforeseeable event occurs, the contractor affected by it has an obligation to attempt to mitigate the resulting damage to the extent that it can. If the contractor fails to do so, it “may not recover those damages which could have been avoided by reasonable precautionary action on its part.”

Yates-Desbuild Joint Venture v. Department of State, CBCA 3350, 2017 WL 4296219 (CBCA 2017) (internal citations omitted).

Now, think about your construction contract.  It may list similar items or events constituting delay.  Perhaps it expands on this list and identifies COVID, the Russia-Ukraine war, or supply chain impacts.  Similar to the reasoning above, “the mere fact that a delay is caused by a type of activity listed in the contract as generally excusable does not give the contractor carte blanche to rely upon such excuses.”  Yates-Desbuild Joint Venture, supra.  We know of the existence of COVID, the Russia-Ukraine war, and current supply chain impacts such that they are not unforeseeable.  And, encountering such an item or event cannot be used to compensate for other delays as the contractor “cannot sit back and fail to take reasonable steps in response to it.”  Yates-Desbuild Joint Venture, supra. The contractor still must mitigate the item or event it claims is causing excusable delay.

This serves as an example as to why you want clarity in your construction contract.  If you are identifying an item or event as unforeseeable, make sure it truly is or specify the context in which the item or event constitutes excusable delay.

 

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.

 

DOES THE RUSSIA UKRAINE WAR LEAD TO A CONSIDERATION IN YOUR CONSTRUCTION CONTRACTS?

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Material costs are still affecting the construction industry.  Supply chain impacts too.  The volatility started with COVID-19 (and, in certain cases, before with the imposition of tariffs) and has continued through present date.

But what about the war between Russia and Ukraine and the impact this has had or may have on the supply chain?   I think the spillover from the war (with oil, gas, the energy sector, etc.), including the imposition of any sanctions, is not fully realized other than the concern exists in an economy that is already battling through material costs and supply chain disruptions.

How does this affect you?

It may not.

Or you may regularly enter into construction contracts in which you would be smart to address material costs and supply chain impacts.  The reason being is that everything from a risk standpoint should begin with your construction contract.  Not addressing an issue does not actually mitigate the risk.  Confronting the issue does mitigate the risk because you are contractually addressing a concern and know where the other party stands relating to that concern so that business decisions can be made.

This does not mean the Russia and Ukraine war provides you a get-out-of-jail free card for every material cost or supply chain issue you deal with.  It does not and should not.  That would not be fair, right?  What is currently affecting the construction industry should not be a basis to shield from accountability or causation.  You still need to connect dots by tying a material cost escalation or supply chain impact to an actual event.  The key is ALWAYS to understand how this will be dealt with in your construction contract and there are many ways to do so.  Sure, the volatility of the market makes it difficult to predict any material cost in the near future and whether certain products will be impacted by supply chain disruptions.  Recognizing the risk is the first step in trying to negotiate the allocation of that risk in your contract.

Remember, simply calling something a force majeure event post-contract does not actually make it so, particularly if you know about the event and the potential of the risk at the time of contract.  

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.

 

THERE IS NO SYMPATHY IF YOU FAIL TO READ CLOSELY THE FINAL NEGOTIATED CONSTRUCTION CONTRACT

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When an opinion in a case starts with, “Unlike some motions, not even the most ingenious lawyers could make this one complicated,” you know you are in for an interesting read.  This was how the opinion started in U.S. f/u/b/o Hambric Steel and Fabrication, Inc. v. Leebcor Services, LLC, 2022 WL 345636 (M.D. GA. 2022), which concerns a Miller Act payment bond dispute between a subcontractor and prime contractor on a federal construction project.

As demonstrated below, the moral of this case is in fact simple.  Read what you sign BEFORE you sign!  No ifs, ands, or buts.  Failure to do so will garner very little sympathy.

This case dealt with a prime contractor arguing that the subcontractor pulled the wool over its eyes by surreptitiously altering the final negotiated redlined contract between the parties.  In particular, the prime contractor claimed that the dispute resolution provision was supposed to include a Virginia venue provision.  However, the subcontractor “fraudulently” changed this provision to make it a Georgia venue provision after the final contract had been agreed to during the negotiation.  Yet, it is undisputed that the executed contract between the parties included a Georgia venue provision.

The Miller Act contains a statutory venue requirement; however, this requirement can be modified by a venue provision / forum selection clause in the subcontract.  Here the prime contractor wanted venue to be in Virginia even though the executed subcontract contained a Georgia venue provision.  The BIG problem for the prime contractor:

[The prime contractor] has not pointed to any evidence that it was prevented from reading the revisions to the contract draft related to the forum selection clause.  Through the exercise of reasonable diligence, [the prime contractor] certainly could have discovered the change.  It possessed the revised draft, had ample time to review it, and chose to sign it. While [the subcontractor] may have edited the forum selection clause in a manner different than other revisions made during the negotiation process, nothing prevented [the prime contractor] from reading the final revised draft in its entirety before signing it.  Choosing not to do so for the sake of convenience does not excuse it from being bound by the contract that it signed.  Moreover, [the subcontractor’s] failure to affirmatively and specifically highlight the changes for [the prime contractor] does not amount to fraud.  The revision was clearly set out in the final draft document and could have been noticed through reasonable diligence.  Signing a contract that is different than the one the party thought it had negotiated is not a sufficient basis, standing alone, to reform the fully executed written agreement.

Leebcor Services, supra, at *2

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.

 

APPLICATION OF TWO CONSTRUCTION CONTRACT PROVISIONS: NO-DAMAGES-FOR-DELAY AND LIQUIDATED DAMAGES

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A recent Florida opinion between a prime contractor and a Florida public body touches upon two important issues:  (1) the application of a no-damage-for-delay provision; and (2) the application of a liquidated damages provision.   Both provisions find there way into many construction contracts.  Unfortunately, the opinion is sparse on facts.  Nevertheless, the application of these provisions is worthy of consideration.

In this opinion, Sarasota County v. Southern Underground Industries, Inc., 2022 WL 162977 (Fla. 2d DCA 2022), a county hired a contractor to install sanitary and water piping underneath a waterway.  During construction, a nearby homeowner complained that vibration from the drilling caused damage to his home.  As a result, the county stopped the contractor’s work to address a potential safety issue, as it was contractually entitled to do.  The contractor hired a structural engineer to inspect the house and the engineer issued a report determining that any alleged damage was cosmetic and that there was sufficient monitoring of the vibrations to prevent future damage.  The contractor also had an insurance policy to cover any homeowner claim for damage.  However, upon receipt of the engineer’s report, the county did not lift its stop work order.  Rather, the stop work order remained in place for an additional 71 days.

NO-DAMAGES-FOR-DELAY

The contractor sued the county to recover its costs during the additional 71 days the project was stopped.  The county relied on its no-damages-for-delay provision in its contract.  The trial court, as affirmed by the appellate court, found that the county’s work stoppage for an additional 71 days amounted to active interference and bad faith.

“Although ‘no damages for delay’ clauses are recognized in law, they will not be enforced in the face of governmental ‘fraud, bad faith, or active interference’ with the performance under the contract.”  Sarasota County, 2022 WL at *2 (citation omitted).   There was no reason to keep the stop work order in place after it was found it was safe to resume the construction activities.

LIQUIDATED DAMAGES

However, the trial court did assess liquidated damages against the contractor because the matter with the complaining homeowner had not been resolved by the contractual date for final acceptance.

For a liquidated damages clause to be enforceable, “the damages consequent upon a breach must not be readily ascertainable,” and “the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach.” “[L]iquidated damages clauses can exist only when they provide for ’damages’ (something to be given by one party who breaches the contract to the other party to compensate the other party for his loss which is a consequence of that breach).”

Sarasota County, 2022 WL at *2 (citations omitted).

The appellate court reversed the trial court’s assessment of liquidated damages because the county did not sustain any loss due to any delay to final acceptance.  The contractor had completed all of its work by the contractual date except for resolving the complaining homeowner’s claim.  “Thus, because the County had the full use for the completed construction project for over two years before final acceptance, ‘the sum stipulated to be forfeited,” was “grossly disproportionate to any damages that might [have been] expected to follow from a breach.’”  Sarasota County, 2022 WL at *3 (citation omitted).

COMMENTS

The limited facts do not do this opinion any justice.  However, it’s important to appreciate that a no-damages-for-delay provision is not the be-all-and-end-all of a delay claim.  It just isn’t!  As this court found, the work stoppage beyond the point it should have been stopped was active interference and bad faith.

As for the liquidated damages argument, that’s a head scratcher unless the court’s point is that once the government got beneficial use of the project, any delay in its final acceptance of the contract constituted a penalty even though sophisticated parties agreed to this provision.  (Not how the court worded it though!). Also, this opinion could have the affect of opening up Pandora’s box by allowing a party to take discovery on financial information or otherwise relative to actual damages when, frankly, this defeats the purpose of the liquidated damages provision.

Liquidated damages provisions on private jobs are negotiated by sophisticated parties.  On public jobs, you know what the liquidated damages are and how the provision is generally worded and can factor that into your pricing, no different than any other risk included in the contract.

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.

 

 

DISPUTE RESOLUTION IN YOUR CONSTRUCTION CONTRACT

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There are important provisions in your construction contract that are geared towards dispute resolution.  These are provisions you want to understand – not when a dispute arises, but BEFORE the dispute ever occurs.

Many times, dispute resolution provisions are cast aside or not appreciated until a dispute rears its ugly head.  This can put you in a reactive stance versus a proactive stance, which you want to be in, because you want to proactively make sure all rights are preserved relative to the dispute.  You want to proactively make strategic decisions based on the dispute resolution provisions and process in your contract.

Before your contract even gets signed, you may want to negotiate aspects of the dispute resolution process for many reasons.  The process could be one-sided.  It could be onerous.  It could be complex.  It could be unfavorable or costly with respect to how you want to progress a dispute.   If you appreciate the dispute resolution process from the get-go, you will be in a more effective position to navigate the process while ensuring you are preserving your rights moving forward

Here are considerations when negotiating and entering a construction contract when it comes to dispute resolution that should not be overlooked:

(i) How does the contract address the submission and resolution of claims for additional money and/or time?

(ii) Is their an initial decision maker or dispute resolution board serving as the person/board that resolves claims, and who is this person/board?

(iii) Is there a time period to submit claims; if so, what is that time period and is it reasonable?

(iv) What happens if a claim is denied and/or the initial decision maker/board denies the claim?

(v) Does the contract require mediation as a condition precedent to litigation or arbitration?

(vi) Does the contract require anything prior to mediation as an initial step in the dispute resolution process, such as a meeting with principals to occur within a set time period?

(vii) Does the contract require litigation or binding arbitration (and if arbitration, is there a body to administer the arbitration such as the American Arbitration Association)?

(viii) If litigation, does the contract specify an exclusive venue to file the dispute?

(ix) If litigation, does the contract include a waiver of jury trial?

(x) If binding arbitration, does the contract specify the number of arbitrators and/or the expected qualifications of the arbitrator(s)?

(xi) If binding arbitration, does the contract specify whether the arbitrator(s) can decide the arbitrability of any dispute?

(xii) Does the contract include a prevailing party attorney’s fees provision?

(xiii) Does the contract include a provision that would promote a stay of a dispute pending the outcome of another dispute or claim with another party?

(xiv) Is there a choice of law provision in the contract to reflect the law that governs the contract (and the dispute)?

(xv) Does the contract include a joinder provision that would allow you to be joined in disputes with others, regardless of the venue or the forum for the dispute?

There is no one-size-fits-all model when it comes to dispute resolution and a dispute resolution process.  The goal is to understand the process and negotiate those aspects of the process that are not in your interests and/or, at a minimum, factor that process into your strategic decisions moving forward in case you encounter a dispute.

Please make sure to work with experienced construction counsel if you need assistance with your construction contract, whether it is understanding the dispute resolution process, negotiating the dispute resolution process, or simply working on an equitable contract for your project or business.

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.

 

DRAFTING OR NEGOTIATING A SUBCONTRACT–QUESTIONS TO CONSIDER

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When it comes to drafting and negotiating a subcontract, there are provisions that should be important to you from a risk assessment standpoint.   From the subcontractor’s standpoint, below are questions you should ask, or issues you should consider, as you go through the subcontract.  These are the same questions and issues that are also important to a contractor as the contractor will want to ensure these issues are included in the subcontract.  By asking yourself these questions, you can check to see how the subcontract addresses these issues, and how the risk should be negotiated.  Hopefully, you are working with counsel to make sure you understand what risk you are assuming and those provisions you want to try to push back on.  Asking yourself these questions, or considering these questions, will help you go through the subcontract with a purpose based on the risk profile of the project and certain risk you don’t want to assume.

 

 

  • Prime Contract –> Does the subcontract incorporate the prime contract?  Make sure to request the prime contract since the subcontract will identify the prime contract as part of the Subcontract Documents and will require you to assume towards the contractor the same obligations the contractor is required to assume towards the owner.

 

  • Scope of Work –> What is the scope of work? Is it clear.  Make sure the scope is clear and you understand the scope.

 

  • Drawings –> What are the drawings incorporated into the subcontract? Are these the most up-to-date drawings?  These are the drawings the subcontract amount will be predicated on so revisions to the drawings may result in change orders.

 

  • Schedule –> Is the contractor’s schedule attached? Regardless, what does the subcontract say regarding revisions and updates to the schedule? Does it require you to provide scheduling input?  Does it include a no-damage-for-delay provision that gives the contractor an argument to preclude paying any delay, acceleration, or lost productivity claim?

 

  • Claims Procedure –> What is the required claims procedure? How many days do you have to submit a claim after the occurrence of the event giving rise to the claim?

 

  • Change Order Procedure –> What is the change order procedure? What steps should be taken if a change order request is denied?

 

  • Construction Change Directives –> Can the contractor issue construction change directives if there is a dispute as to time or money with the construction change directive?

 

  • Insurance –> What are the insurance requirements?  Do you maintain this insurance or can you obtain the required coverages?

 

  • Design-Assist –> Are there any delegated-design or design-assist requirements? If so, do you have insurance to cover this risk (which goes with the insurance requirements)?

 

  • Indemnity –> What are the indemnity requirements? Do you have insurance to cover the indemnity obligation(s)?  Does it comply with the law if you are required to indemnify the contractor for the negligence of the contractor?

 

  • Substitutions –> What is the procedure for getting substitutions or deviations with the Subcontract Documents approved?

 

  • Dispute Resolution –> What is the dispute resolution procedure? Does it require arbitration or litigation?  Is mediation a condition precedent?  Are there other conditions precedent?

 

  • Conditions Precedent to Payment –> What are the conditions precedent to payment? Is there a release form attached to the subcontract?  Does it allow you to carve-out items for pending change orders or claims, i.e., items you are not prepared to release?

 

  • Delay Damages –> Does it include a liquidated damages provision or allow the contractor to flow-down liquidated damages? What about the contractor’s own delay damages?  How are delay damages handled?

 

  • Hazardous Substances –> Is there a provision dealing with hazardous substances?

 

  • Site/Unforeseeable Conditions –> Is there a provision discussing unforeseeable site conditions? Or, if it is an existing structure, is there a provision dealing with hidden conditions?

 

  • Attorney’s Fees –> Is there an attorney’s fees provision?

 

  • Consequential Damages –> Does it include a waiver of consequential damages and, if so, does it specify the type of waived damages?

 

  • Force Majeure –> Is there a force majeure clause and how is it worded? Does it address items like pandemics, hurricanes, etc., or is there another provision that addresses these items?

 

  • Escalations and Supply Chain Impacts –> How are material escalations and supply chain impacts addressed?

 

  • Fabricated or Modular Items –> How are prefabricated items addressed from a risk allocation standpoint including delivery, shipment, storage, and integration issues?

 

  • Building Information Modeling or Digital Drawings –> Is there a protocol regarding digital drawings or building information modeling?

 

  • Bonding Requirements –> What are the bonding requirements?  What does the bond form look like?  Make sure it is not an unfavorable form, particularly when it comes to the performance bond.

 

  • Default and Termination –> What is the default procedure?  Is there a reasonable cure period?  What forms the basis of a default and then a termination for default?  Is there a termination for convenience provision and, if so, is there a termination for convenience fee?

 

  • Warranty Period –> When does the warranty period begin? Is there a specific warranty procedure?

 

  • Retainage –> What is the percentage of withheld retainage and does the percentage reduce after 50% completion? When is retainage released?

 

  • Lien/Payment Bond Rights –> Do you have construction lien rights or rights against the contractor’s payment bond?  Do you need information, such as the notice of commencement, to make sure you timely preserve your rights?

 

  • Pay-When-Paid –> Does the subcontract include a pay-when-paid provision?  It probably does which reinforces why you need to know on the frontend whether you have construction lien or payment bond rights.

 

 

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.

 

 

HOW ARE YOU DEALING WITH MATERIAL DELAYS / SUPPLY CHAIN IMPACTS?

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In a prior article I discussed a material escalation provision in your construction contract to account for the volatility of the material price market.  While including such a provision may not have been much of a forethought before, it is now!

What about concerns with the actual supply chain that impacts the availability of and the lead time of materials?  How are you addressing this concern in your construction contract?

The pandemic has raised awareness to this issue as certain material availability has been impacted by the pandemic.  As a result, parties in construction have tried to forecast those materials where delivery issues may occur including those materials with longer than expected lead times.  But equally important is how this issue is being addressed in your construction contract including how you want to negotiate this risk in future construction contracts.

Start with the force majeure provision.  Does this force majeure provision address supply chain impacts?  It may touch upon it but you may want more clarification dealing with delivery delays that impact a project’s schedule and identifying that this includes a supply chain impact attributable to a specific occurrence, such as the pandemic.  Generally touching upon an issue is not the same as specifically addressing an issue for practical purposes to avoid any dispute down the road.

One way is to include or address certain supply chain impacts caused by the COVID-19 pandemic, any future pandemic, and other potential factors based on the current economic climate.  If one thing COVID-19 taught us is that we need to fully address the risk of pandemics moving forward, both from a time standpoint and a cost standpoint.  Another thing COVID-19 taught is to precisely word force majeure and other provisions so that parties are on the same page when it comes to a foreseeable risk.

The provision can be broad enough to include any supply chain impacts caused by the pandemic and any future pandemic and/or can include specificity based on certain materials that are known as of the date of the contract that have anticipated supply chain concerns and long lead times.  While a contractor does its best to account for materials with long lead times, there are factors that can come into play associated with when that material is procured including the construction documents, the approval of shop drawings, deposits for fabricated items, transportation including where the material is being shipped from, and storage and staging issues.  In other words, there are factors that can lead to delays in deliveries that simply occur regardless of the planning.

When preparing and negotiating your construction contract, consider the issues associated with material escalation and supply chain impacts.

 

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.

 

MATERIAL PRICES CLIMB…AND CLIMB…ARE YOU CONSIDERING A MATERIAL ESCALATION PROVISION?

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As you may know, material prices have been climbing.  And they continue to climb based on the volatility of the material market.  On top of that, there are lead times in getting material due to supply chain and other related concerns.   The question is, how are you addressing these risks?  These are risks that need to be addressed in your contract.

As it relates to climbing material prices, one consideration is a material escalation provision.  The objective of this provision is to address the volatility of the material market in economic climates, such as today’s climate, where the price of material continues to climb.  Locking down a material price today will be different than locking down the same price months from today.  This volatility and risk impacts pricing and budgets.  Naturally, an owner and contractor would like to be in a position to lock down supplier prices as soon as possible—both to secure pricing and to account for items with long lead times or that recent data forecasts a long lead time due to supply chain concerns.  However, this is not always possible or practical and can depend on numerous issues such as when the owner contracts with the contractor, when the owner issues the notice to proceed (and permits are issued), final construction documents and revisions to the construction documents, the type of material, whether there is staging or storage available for the materials, and the current status including climitazation of the project.

With a material escalation provision, you are negotiating the risk of material escalations based on how this risk is addressed in your construction contract.  This allows parties to be on the same page when a material escalation claim or price adjustment is submitted. Please make sure you work with construction counsel to draft, negotiate, and explain the material escalation provision to you.

If you entered into a fixed sum contract, the reality is that within that fixed sum the contractor should be factoring in this risk into the fixed sum.  Under a fix sum contract, the sentiment is an owner is paying “X” for its project and whether the contractor can deliver the project for well under “X” or well over “X” is of no moment because the owner agreed to pay the fixed sum of “X” for the project.  As a result, the contractor should bear the risk in a traditional fixed sum contract.  However, contractors are trying to address this risk with allowance items by identifying in the contract certain items that constitute an allowance.  If a contractor does this, they need to understand that they need to demonstrate the costs for the allowance items because if the cost is less than the allowance item, that amount is credited to the owner.  If the cost is greater than the allowance item, than that overage would increase the fixed sum.

A cost-plus contract, on the other hand, is different because there is more transparency in costs than a traditional fixed sum contract.  In a cost-plus arrangement, an owner is paying the cost of the work (inclusive of a contractor’s overhead-related items) plus a mark-up for profit.  If the cost-plus contract does not contain a cap, known as the guaranteed maximum price, than the owner is going to pay the actual costs so that if there are demonstrated material escalations, that will be a cost passed on to the owner.  A prudent owner however shall still require the contractor to demonstrate actual escalation costs (from time of contract to time of procurement) because the escalations should impact the contractor’s control estimate that forms the basis of the cost-plus without a guaranteed maximum price contract.

If there is guaranteed maximum price, then a material escalation provision is a must.  (In my opinion, it is good to address this risk even without a guaranteed maximum price.)

There are numerous ways a material escalation clause can be addressed because it involves a negotiation on the frontend as to how the parties will address this risk.   Here are some considerations:

  • Do you want to address the specific materials / items subject to material escalations (e.g., lumber, PVC, steel, aluminum, copper, etc.)? This way the parties understand those materials / items where the provision can apply. In other words, how specific do you want to be in the material escalation provision?
  • Do you want to consider certain pricing for materials? For instance, this contract is based on the specific pricing set forth in Exhibit “A,” and pricing that increases “Y”%  from this pricing shall support the basis of a change order.  The specified pricing is the budgeted pricing that forms that basis of the contract but any increase over that pricing over a certain percentage will result in a change order.
  • Similar to the above bullet point, do you want to include an exhibit for certain material pricing and identify that this pricing is secured through a set date. Any material price increase beyond this date (or above a certain percentage) shall result in a change order.
  • Similar to the above bullet points, if you are identifying certain pricing for materials for which the contract is based, what if the material prices decrease? Is the owner entitled to a credit?
  • Is there a contingency in the contract and are buy-out savings rolled into the contingency? If so, does the contractor have full discretion to use the contingency to fund material escalations up to the balance of the contingency?  Or, is there a separate contingency solely for purposes of material escalations that reverts 100% to the owner if there are no escalations?
  • Does the contractor include allowances for certain materials such that there will be a decrease or increase in the contract amount based on the allowance items?
  • Is the material escalations provision tied to delay?

A material escalation provision is grounded in fairness and allocating risk in an equitable manner. Do not neglect this discussion and including a material escalation provision in the construction contract.

 

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.

 

WORKING WITH CONSTRUCTION COUNSEL ON YOUR CONSTRUCTION CONTRACT IS VALUE-ADDED

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It is always good practice to have construction counsel assist you with your construction contract.  This may mean drafting your contract.  This may mean negotiating your contract.  This may mean advising you as to provisions in your contract that shift risk to you.  This may mean providing red-lined suggestions to the contract.   Or, this may mean all of the above, or a combination.   The point is having construction counsel work with you will allow you to appreciate risk you are assuming and risk you are allocating to the other party.    It will also allow you to consider provisions or language to provisions you should consider.  I cannot emphasize the importance of working with construction counsel when it comes to your construction contracts.  This is a value-added service.

One consideration is the forum selection provision.  This is the provision in the construction contract that may dictate the exclusive venue for disputes.  The forum selection provision is not a provision that should be cast aside because if there is a dispute it will be one of the first provisions your attorney will want to review.   Dismissing this provision could result in you being required to litigate your dispute or portions thereof in a non-preferred destination, as seen in this non-construction case, that may be more costly or disadvantageous to you for a variety of reasons.  A forum selection provision and the provisions in your contract dealing with dispute resolution are important provisions as these provisions advise you how to navigate disputes that may occur during the performance of the construction contract.

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.