Archive for the ‘Change Orders’ Category

Litigation Topics for Prime / Subcontractor Contracts

I had a speaking engagement today here in Kenner, Louisiana (a suburb of New Orleans) whereby I had the pleasure of speaking to a group of contractors and architects regarding construction contracts. The bulk of the discussion focused on the most contested provisions within construction contracts.

The information is very helpful to contractors and can be used a resource when a contractor begins the contracting phase of a construction project to help get a better understanding of what is going on within the contract documents.

Prime/Subcontractors Contracts

Contracts between prime/general contractors and their subcontractors make up a vital link in the construction project chain. Here both parties need to negotiate terms to better protect when a dispute arises. A well crafted contract can better protect a prime and/or a sub when default arises. Typically subcontractors are at the mercy of the prime. A good subcontractor will have his attorney review any agreement to make sure that the deal is an even one.

AIA – American Institute of Architects is the most common standard form contracts in the construction industry. AIA contracts are a good starting point and offer contracts for Prime/sub relationships, Architect/owner, Owner/Prime, and any other design professional/contractor relationship that may exist.

• Commonly litigated subcontract provisions

There are a number of provisions which could be contained in a prime/subcontractor contract that need to raise a red flag when present and should be negotiated by either party so as to keep the contract from becoming one-sided.

1. Incorporation by Reference Clauses: (flow-up & flow-down provisions)

  • a Flow-down provision in a prime/sub contract will incorporate by reference terms and provisions of the owner/prime contract;
  • conversely, a Flow-up provision incorporates the duties owed by the owner to the prime into the prime/sub contract;
  • Many times parties enter into these agreements with out ever seeing the referenced document making them susceptible to unknown provisions;
  • Enforcement depends on the reciprocality of the provisions and lack of ambiguity

2. Scope of Work Provisions

  • Prime contractors want a broad scope of work provision with subs so that they can pin other work to them later on if needed;
  • Subs should demand very specific scope of work provisions so as to know exactly what work is expected and what exactly they have bid on;
  • This provision can incorporate other documents such as plans and specifications;
  • Provision needed for extra work or change order if work called for is outside of the scope;

3. Change Order and Extra Work Provisions

  • Very popular area for dispute in construction contracts – changes are always happening
  • There should be a clear provision in the contract outlining the process whereby CO’s are made and approved;
  • Define change order – modification to work already contemplated by the agreement; (ie different materials)
  • Define extra – item of work beyond the original scope of work that is added during construction;
  • MAKE SURE change orders and/or extras are in writing;

4. Notice Provisions

  • Found in various places within a prime/sub contract
  • Very important risk-shifiting devices – can determine a win or loss regarding a claim

5. Indemnity Clauses

  • Typically these trickle down the line Owner -> Prime -> Sub
  • These are generally enforceable, Subs should be careful and not allow indemnity for negligence of another party
  • Insurance can be purchased by prime or sub to cover the indemnity obligation

6. No Damages for Delay Clauses

  • Owners and Primes try to insert “no damage for delay” provisions in contracts for protection against unforeseen delays
  • Parties want to check all referencing documents to see if this provision is in there

7. LD’s – Liquidated Damages Provisions

  • Very helpful provisions because the pre-determine delay damages, usually on a per day basis;
  • Enforceable unless determined to be a penalty or if they are a “one- size fits all” provision;
  • LD’s are a good way to measure delay damage but can enhance the need for Contractor/Sub to accelerate work to avoid further damage, leading to defects and workmanship issues;
  • For LD’s to apply the contractors work must be a substantial factor in the delay;

8. Lien Waivers

  • reduce the chance for encumbrances to be placed on the title of the property;
  • Usually not enforceable if lien waiver required before work performed;
  • A good tool for Prime and Owner to reduce exposure;
  • Can be used in an incremental fashion as payments are distributed

9. “Pay-when-paid” v. “Pay-if-paid”

  • Pay-if-paid is defined as a subcontractor gets paid by the general contractor only if the owner pays the general contractor for that subcontractor’s work.” Requires a condition precedent.
  • Pay-when-paid in contrast to the pay-if-paid; a pay-when-paid clause does not establish a condition precedent, but merely creates a timing mechanism for the general contractor’s payment to the subcontractor.

10. Retainage

  • Typically 5%-10% of each payment will be withheld by the Owner/Prime until a later date, such as substantial completion
  • Its purpose is to keep a pool of money to remedy any defects in workmanship by that sub

11. Termination provisions

  • Termination for Cause
  • Usually nonpayment, excessive delay, insolvency, or convenience are reasons to terminate the contract

12. ADR Clause (Arbitration/Mediation clauses)

  • Arbitration (most popular) – binding way to avoid litigation;
  • Mediation – non-binding way to avoid litigation;
  • Both can be effective, typically arbitration can be more intimidating due to its binding and no (very limited) ability to appeal

13. Attorney fee provisions

  • Very popular as no one likes to pay an attorney!
  • Many provisions will say that the unsuccessful party must pay attorney fees but others to be careful will put the burden on one party
  • Primes and subs should include an attorney fee provision in all contracts
  • Good to be specific on the provision and include for litigation and ADR

14. Forum selection & choice of law

  • If working out of state, make sure you know which venue a dispute will be held in;
  • This can be a very costly provision

(list partially obtained from the ABA’s Fundamentals of Construction Law)

 

Posted in:     Arbitration & ADR, Change Orders, Construction Contracts, Construction News, Damages, Delays, Dispute A Lien, Disputes, Insurance, Litigation, Louisiana, Mechanics Lien  /  Tags: , , , , ,   /   2 Comments

Can Contract Time Can Increased By Oral Agreement?

Construction contracts very frequently contain provisions that require all changes orders to be approved in writing. In Louisiana, however, oral modifications to written contracts are allowed despite such provisions. Rhodes Steel Buildings, Inc. v. Walker Const. Co., 813 So.2d 1171.

At the trial level in Lantech Construction Co. v. Speed, the court’s ruling reflected this jurisprudence, requiring a property owner to pay for work performed by the contractor in six unwritten change orders. However, the trial court also required the contract or to pay $31k in liquidated damages for failing to finish the project on time.

The contractor’s argument was simple: If the written contract’s sum can be modified orally, so too can the written contract’s time – and that the unsigned change orders requested a change in the contract time & sum.

Going through the line of Louisiana cases regarding oral changes to written construction contracts, the appeals court agreed with the contractor.

…[T]he law is clear that written contracts may be modified by oral contracts and the conduct of the parties, even when the written contract contains a provision that change orders must be in writing. Modification of a written agreement can be presumed by silence, inaction, or implication. The party who asserts that an obligation has been modified must prove by a preponderance of the evidence facts or acts giving rise to the modification. It is a question of fact, therefore, as to whether there were oral agreements that modified the written contract. Oral modifications alleged to be in excess of $500 must be proved by at least one “credible witness” and “other corroborating circumstances.” Only general corroboration is required. Parol evidence is admissible for this purpose.

The court reversed the award of liquidated damages against the contractor, ruling that after application of the contract time extensions the project was not delivered late.

This blog post was originally published on Wolfe Law Group’s topic-specific Louisiana Construction Law Blog.

Posted in:     Change Orders, Construction Contracts, Louisiana  /  Tags: , , ,   /   3 Comments

Contractors Beware – Louisiana Appeal Court Says Compliance with Building Codes is Not a Cause for Change Orders

This fall, the Louisiana 1st Circuit decided Bonvillain Builders LLC v. Gentile, finding that a property owner was not required to pay nearly $50,000 in requested change orders because the extra work was required under the original contract.

In Gentile, the construction contract required the contractor to meet all prevailing building codes. A situation arose with regard to the parish’s drainage requirements, as the original design did not accommodate the code. The drainage study and total completed price for the drainage work was eventually tallied to cost $47k more than estimated.

The contractor wanted the property owner to pay for this, because it was an “unknown condition.” The owner rejected the change orders arguing the contractor was responsible to meet prevailing building codes.

The Gentile court agreed with the property owner. According to the first circuit, the contract unambiguously required the contractor to comply with prevailing building codes. The fact that the designer and the contractor overlooked the drainage requirements and failed to properly provide for the the same in its plans and bid…did not pass the burden of paying for the drainage onto the owner. Instead, the contractor/designer was liable for the mistake.

The court found that the drainage requirements were not a “hidden condition” of the property, but merely, something the contractor and designer overlooked.

What Does It Mean For You?
Nearly every construction contract has a provision similar to the one in Gentile where the contractor (or sub) is required to meet prevailing building codes. When bidding on a project, its critical to bid responsibly. Failing to understand and accommodate the prevailing building codes applicable to the site can end up destroying the project’s bottom line.

The real key is understanding what is and what is not a “change order.” The term gets used so frequently by those working on a construction project, we sometimes forget its true meaning and warp the term to work to a party’s convenience.

A change order is not issued overtime the cost of work or scope of work is greater than anticipated. It’s only issued when the scope of work is changed.

If the owner adds a new complex to the plans, or requires a different quality of materials – this will likely result in a change order. However, if you simply didn’t correctly estimate the amount of work that would be required for a task or misunderstood the prevailing building codes…a change order will not be an available remedy.

Like the situation in Gentile, you will be legally responsible for your own mistake.

Of course, this Gentile case will not likely apply to a scenario where a change is required because of a hidden site condition. If a hidden site condition is found, a change order is appropriate. The court in Gentile just clarified something that may seem a bit obvious: failing to take into account the building codes in the parish was not a hidden condition, regardless of whether it was or was not scoped in the original plans.

This article was originally posted on Wolfe Law Group’s topic-specific Louisiana Construction Law Blog.

Posted in:     Building Codes, Change Orders, Louisiana  /  Tags: , , ,   /   1 Comment

Budgets, Changes Orders and A Green Building Project

If you were to survey green building critics, it’s safe to guess most will argue that the cost to build green do not outweigh the benefits.

Indeed, many have suggested that the cost of building green (especially gaining LEED certification) is significantly higher than building to ordinary standards.   Others argue that LEED certification can be achieved through an everyday budget.

Regardless of where you fall on this issue, everyone should agree that green building projects have certain specifications, and bidding contractors must project the construction costs responsibly.

And so, one of the most challenging components of a constructing a green building may be the process of bidding it.

Since green building work is just starting to take hold in the construction industry, many contractors and subcontractors are working on little-to-no experience on green projects.   And sometimes the data behind green building techniques and products are thin (see greenwashing).

On Wolfe Law Group’s Construction Law Monitor, we published a 2-part article on the Bidding Process and Change Orders:   Bidding Errors and Change Orders: Avoiding a Nightmare [Part One and Part Two].

How do we suggest you avoid Bidding Error nightmares?   Spend time with the Contract Documents pre-bid.

With green building projects, this is more true than usual.

When preparing your green bid, here are some example thoughts that should be considered:

  • If the project is being certified with LEED or another standard, who will be responsible for the submittal process?   Who will be responsible for monitoring the construction process?
  • Contact vendors who will be providing the project’s materials, and review the data they have to back-up their performance and environmental claims.   It would be a pity to plan on using one product, and being forced to later use a more expensive substitute.   See this article on how to shop for green building materials.
  • If the builder is anticipating a tax credit, do you understand the requirements to qualify for the credit?   Will this increase your construction costs?

A successful green building project starts where successful ordinary projects begin:  during the bidding and contracting period.

Whether your green building project will increase costs, or not, understand the green building expenses associated with your project, and avoid bidding errors and change order nightmares.

This article was originally posted on Wolfe Law Group’s topic-specific Louisiana Green Building Law Blog.

Posted in:     Bidding, Change Orders, Green Building  /  Tags: , , , , , ,   /   Leave a comment

7 Habits of Contractors Who Lose Money…and How to Break Them

The Construction Commando’s “Contractor’s Secret Weapon” published an article with this title that described seven instances when contractors lose money on a project.  While the article was drafted to an audience of California contractors, the habits apply nationwide.

It will be to any contractors’ benefit to review this article online, access which habits apply to you, and make an effort to avoid the costly mistakes.  Any progress will help increase your bottom line.

The seven habits highlighted are:

1)    The “Gentlemen’s Agreement” – A Handshake and Your Word.   Bottom line:  Get it in writing.
2)    Using Contracts that Fall Short of the Legal Requirements.
3)    Not Getting Every Change Order in Writing.
4)    Failing to invoice immediately.
5)    Failing to serve a preliminary 20-day notice (pre-lien construction notices)
6)    Don’t Worry – They Will “Take Care of You” on the Next Job
7)    It isn’t good “customer service” to record a Mechanic’s Lien

Posted in:     Change Orders, Construction Contracts, Construction News, Mechanics Lien  /  Tags: , , , , , , , , , , , , , , ,   /   Leave a comment