Archive for the ‘Change Orders’ Category

Litigation Topics for Prime / Subcontractor Contracts

On November 2, 2011 Author By Seth Smiley

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: , , , , ,   /   1 Comment

Can Contract Time Can Increased By Oral Agreement?

On April 29, 2010 Author By Scott Wolfe Jr

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

On December 17, 2009 Author By Scott Wolfe Jr

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

On July 31, 2009 Author By Scott Wolfe Jr

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

Bidding Errors and Change Orders – Avoiding a Nightmare: Part One

On October 23, 2007 Author By Scott Wolfe Jr
The goal in the design of any structure must be excellence, not perfection. Inevitably, there will be issues that reveal themselves during construction which are impossible to predict in the conception phase of any new project. Among the most common design alterations involve site conditions that differ from design expectations; an owner’s desire to alter the design in some way (“change in scope”); and the plans or specifications containing an inadvertent omission.

Owners, architects, and contractors approach this inevitability very differently. Owners prefer to have as little change as possible, unless they are requesting a design change, while architects have the overriding concern that the integrity of their design be protected. Meanwhile, experienced contractors know that refinements or minor adjustments will need to be made during the construction process to the design documents — even the highest quality drawings and specifications will need some tweaking as building progresses.

The inevitably of change during the course of construction does not mandate that major alterations to the initial schedule and design concepts should be expected. If all the participants do their parts well, the project should be completed with a minimum of change. Unfortunately, this is not always the case.

Bidding Errors

With any construction project, the owner and architect begin with a goal in mind. Once the design has evolved, and the initial drawings have been finalized, the general contractor enters the picture with the goal of turning the drawings into a three-dimensional reality. The owner may well have chosen both the architect and the contractor through a bidding process: here, several competitors compete for the work, and the owner chooses what appears to be the best bid for the job.

The general contractor will usually select the sub-contractors through a bidding process, as well. Additionally, the architect may use a bidding process to select engineers and other supporting professionals in the design phase.

Therefore, the owner choosing bids for both the architect and the general contractor may be deciding between bids that are built upon a prior bidding process. Bids upon bids are the underpinnings of the initial construction agreements.

It is here that bidding errors occur. In an attempt to land the contract, bids can be compiled too quickly, giving estimates without sufficient detail and cost support. Sometimes, bids are intentionally low-balled. The lowest bid may not be the best bid, and the owner that does not carefully study all the bids before him is inviting the aftermath of a sloppy bid: expensive and time-consuming bidding errors.

Bidding errors will require costly and preventable changes to be made during construction. The issue of which parties are to be held responsible for the cost in both time and money can also create expense: many lawsuits have resulted from disputes between owners, architects, and contractors over who pays what percentage of the costs caused by bidding errors.

Owner Abuse of Opportunity to Make Changes

Owners have the right to make changes to the project: it’s their property, after all, that’s being built. However, changes requested by an owner can skyrocket the costs of construction. What appears to be a simple request to change the size of a window or door may mean tremendous expense if framing has already occurred, for example.

Architect Administration, Design Error, and Changes to the Project

Architects usually administer the construction project. They oversee the building as it progresses, they answer any questions that the contractor may have regarding the plans and specifications, and they approve any changes made to the project. Architects can also make alterations to the design drawings as they view the site progression.

This may be a predictable addition: for example, not all the shop drawings and materials specifications are known when the work is bid. Sometimes, this is aesthetic. Occasionally, this is due to small or large errors in the design.

If the architect is not prompt in approving changes, or becomes excessive in the number of design changes he makes, then construction can be halted or delayed. Construction involves an inter-dependent relationship between many craftsmen, suppliers, tradesmen, and the like: an architect can effectively stop the job with excessive design changes, or tardy approvals to a requested change.

Contractor Changes to the Project

Contractors are usually responsible for most of the requested changes on a project. As building progresses, there will be discoveries on site of needed changes to the design documents. However, contractors who make changes without approval can cost time and money if their changes are faulty and need to be redone. Contractors who request excessive changes can also create tremendous expense: they may do so because of design error, but they may also be doing so to cover their own bidding errors or substandard performance.

The Change Order Process

In order to combat and control changes during the construction process, the construction industry has standardized the use of “change orders.” Change orders alter or modify the final documents upon which the construction contracts are based. They direct a change to the work plan which will impact the time and money needed to finish the project.

Usually, the change orders are written; however, some states – including Louisiana and Washington – allow for oral change orders. See, Cajun Contractors, Inc. v. Fleming Const. Co., Inc., 951 So.2d 208 (La.App 1 Cir. 2006), citing Pelican Electrical Contractors v. Neumeyer, 419 So.2d 1, 5 (La.App. 4 Cir.), writ denied, 423 So.2d 1150 (La.1982); CKP, Inc. v. GRS Const. Co., 63 Wash.App. 601 (1991); Bjerkeseth v. Lysnes 173 Wash 229 (Wash 1933).

In fact, change orders are so commonplace that they have become standardized. The form used most often has been provided by the American Institute of Architects, see “AIA Document G701™-2001, Change Order.”

RFIs

Requests for Information (“RFIs”) are not necessarily change orders. They are written communications between the contractor and the architect, where the contractor asks for information regarding the design documents. RFIs become change orders if they are properly approved as such by the architect, and sometimes, by the owner as well.

Since the owner usually has one contract with the architect, and a separate one with the contractor, the architect and the contractor need a method to communicate efficiently and fast, without the owner as a go-between, and the RFI has evolved to meet that need. The architect will provide a written form to the contractor to be used for all RFIs.

The American Institute of Architects describes this process in its section 3.2 of A201 the General Conditions for Construction (1997):

Before starting each portion of the Work, the Contractor shall carefully study and compare the various Drawings and other Contract Documents relative to that portion of the Work, as well as the information furnished by the Owner… These obligations are for the purpose of facilitating construction by the Contractor and are not for the purpose of discovering error, omissions, or inconsistencies in the Contract Documents; however, any errors, inconsistencies or omissions discovered by the Contractor shall be reported promptly to the Architect as a Request for Information in such form as the Architect may require.

RFIs are used by contractors when they find an omission in the documents, something unexpected is discovered on the site, or they meet with a discrepancy between various plans and specifications. RFIs also confirm information, gather notes from site visits and delineate meeting minutes.

Change Order Conflicts

Owners, particularly those building their new residential home, are suspicious of change orders as costing them money in the form of cost overruns and possibly even price gouging by the contractor, as well as causing delays in finishing the job. Owners want to avoid change orders.

Contractors, meanwhile, would prefer to maximize change orders on a project because they lose money with discounted change orders, as well as ones which are ignored, outright. Too often, they argue, the time and expense costs associated with a change are eaten by the general contractor or his subs.

Change Orders do solve issues. If everyone is cooperative, problems can be easily solved. However, when a change will impact either money or time, especially in significant amounts, controversies can result. This is particularly true when the change request contains ambiguities or unclear terms.

To avoid deadlocks, most construction contracts give detailed instructions on how change orders are to be written, including what steps must be undertaken before any change in work (more or less) is allowed. Change orders usually have to give the amount of dollars as well as the amount of time involved in the request. They usually have to be submitted within a certain number of days before the scheduled work, and signed by several designated individuals authorized in advance to approve or deny each change request.

Nevertheless, once construction begins and the number of RFIs escalates as well as the number of change orders, tempers may flare. Work stoppages may be threatened, termination of contracts may be considered, and heated arguments may arise if oral change orders are denied compensation because they weren’t put on paper. Delay damages can mount.

The construction project can become a nightmare as the necessity of requested changes is debated. The dispute can involve not only the need for the change, but who will bear the cost of the change.

Under the law, change orders are characterized as modifications to a written contract. Until a change order is valid, the old contract documents control. However, the legal determination of whether the change order is valid may necessitate the filing of lawsuits or the entering of dispute resolution forums that all the parties would be better off avoiding.

For example, contractors faced with time deadlines may proceed in good faith under oral change orders, only to have them later disputed because they were not put in writing. In some states, including Louisiana and Washington, oral change orders can exist under the contractual defenses of waiver, estoppel, and unjust enrichment. Unfortunately, that contractor may have to go to court to prove his point.

How to avoid this nightmare?

Over time, several methods for avoiding litigation and encouraging a smooth change process during construction have been advanced. For a discussion of these methods, see next month’s Bidding Errors and Change Orders – Avoiding a Nightmare: Part 2.

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