The Construction Contract Review

Absolutely Free Home Remodeling – A Tough Way to Make a Living

Offering absolutely free home remodeling to consumers is a tough way to make a living.  But many home remodeling contractors are often at risk for doing expensive home repairs and remodeling without getting paid a dime – legally.

 

Numerous states have strict statutes that, in the name of consumer protection,

offer draconian remedies against what legislatures perceive to be unscrupulous contractors.  Honest, good-faith contractors, however, can get caught in some of these legislative traps if they are not diligent in their paperwork. 

 

The Illinois Home Repair and Remodeling Act (HRRA) is a good example of requirements for consumer contracts. For any home repair or remodeling contract over $1,000, a person engaging in the business of home repair and remodeling is required in Illinois to provide the consumer with a copy of the "Home Repair: Know Your Consumer Rights" pamphlet.  A clear, concise, and complete written contract that spells out the who, what, where, when, and total cost of the project is required.  In addition, the contract is required to give the name and address of the person engaged in the business of home repair or remodeling. If the contractor uses a post office box, mail service, or agent to receive business correspondence, the contract must state the contractor's home address. 

 

 

Related enforcement statutes and court cases interpreting these statutes have had some painful outcomes for contractors.  Failure to abide by the HRRA may preclude a contractor from recovering unpaid contract balances or extra work, force a return of any money received, open up a contractor to further damages, attorney fees or possible sanctions from the Attorney General.  Homeowners in Illinois have received FREE home additions from contractors who failed to follow some of these statutes. 

The attorneys at Mayfield | Broderick can help contractors develop consumer contracts and practical checklists for dealing with residential homeowners.  It would be a lot cheaper to pay us a small flat fee for this preventative consultation than to perform free work for a consumer – can’t make that up in volume.

Photo Credit: http://www.flickr.com/photos/nickdawson/522097877/

Got Conflicting Information in Bidding Documents? How to Avoid a Differing Site Condition Dispute.

A contractor was hired to remove DDT from contaminated soil at a Navy facility in California.  One of its subcontractors claimed that the soil encountered onsite had a higher than expected clay content resulting in extra costs incurred. The contractor sued to recover these unexpected costs on behalf of the subcontractor claiming the sub relied on one of two bidding documents relating to soil content in preparing its bid.  There was no specific differing site conditions clause in the contract, so the contractor’s theory was one of misrepresentation of the site conditions by incorrectly representing the amount of clay in the contaminated soil. 

 

In order to prevail on such a site conditions claim, a contractor must establish four elements.

1. The contractor must prove that a reasonable contractor reading the contract documents as a whole would interpret them as making a representation as to the site conditions - that the contract contained some identification of the conditions to be encountered at the site;
2. The contractor must prove that the actual site conditions were not reasonably foreseeable to the contractor, i.e., that the contractor "reasonably relied" on the representations given all information available to the contractor when bidding;
3. The contractor must prove that it in fact relied on the contractual representation; and
4. The contractor must prove that the conditions differed materially from those represented and that the contractor suffered damages as a result. 

The Court rejected the claim because it did not find the contractor proved that the specific contract documents actually represented site conditions, failing to satisfy the first requirement above.  But moreover, the contractor failed to prove the second requirement because the Court determined that the contractor’s reliance on the soil information was not reasonable.  Two bidding documents containing information on soil content were in “direct contradiction,” and the contractor could not claim a reasonable reliance on one but not the other. 

 

With 20/20 Hindsight….

 

This claim was lost at the time the bid was submitted.  Testimony emerged at the trial that the contractor itself questioned some of the data.  The classic “should have been a warning” was used by the Court in describing what conflicting reports represented to a “reasonable contractor.” 

 

Obviously, the contractor made a determination based on the data that turned out to be wrong.  However, given the importance of the soil characteristics to the success of the treatment methodology employed, the contractor could have negotiated better contractual protections in its contract.  The importance of the soil condition and the technical assumptions made should have been incorporated into the construction contract.  At a minimum, the contractor should have identified the contradiction and explained its reliance on one document over the other in its bid.  20/20 hindsight is pretty easy. 

 

The Construction Contract Clock:

Work Order to Court decision: 10 years

 

The case is known as Int'l Tech. Corp. v. Winter, 523 F.3d 1341 (Fed. Cir. 2008)

4 Things You Must Show If Claiming a Constructive Change

A constructive change occurs where a contractor performs work beyond the contract requirements without a formal order, either by an informal order or due to the fault of the Government.   Equitable adjustments are corrective measures that make a contractor whole when the government modifies a contract.  A contractor is entitled to an equitable adjustment for a constructive change when it is required to perform more or different work not called for under the terms of its contract.

 

Several categories of constructive change have been identified in existing case law:

• disputes over contract interpretation during performance;
• government interference or failure to cooperate;
• defective specifications;
• misrepresentation and nondisclosure of superior knowledge; and
• acceleration.

 

The doctrine of constructive change serves to

(1) remediate contractor claims for extra work, and (2) permit contractors to perform disputed work without having to risk abandonment of their contracts to preserve their claims. The theory underlying the constructive change concept is that where the government "should have" issued a change order authorizing the extra work in the first place, the court or board [of contract appeals] may direct the government to do what "should have been done" by directing the government to issue a formal change order. The doctrine in its modern guise is the embodiment of the ancient principle that "what should have been done will be done."

Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner and O'Connor on Construction Law § 4.25 (2002) as quoted in Metric Constr. Co., Inc. v. United States, 80 Fed. Cl. 178 (2008). 

 

In order to recover for a constructive change, a contractor typically must show:

1. The work performed was not included in the original scope of work
2. All contractual or statutory notice requirements were satisfied
3. The owner required the change and was not volunteered by the Contractor
4. Contractor tracked its additional costs incurred due to the change

A constructive change situation can sneak up on a contractor or an owner.  All four of these elements are usually required to be shown in order for a contractor to recover.  Therefore, be sure to contact an attorney early in the project if you are working without a formal change order.

Or even better, send us your contract before you submit your bid and we can provide a comprehensive attorney review, highlighting the risks to you and suggest some negotiating strategies.  Click here for more details.

Green Updates: Construction Contract Review For November 2009

A few updates or interesting items I encountered this month:

Green Mall Expansion

In November, I wrote about a troubled mall expansion in Syracuse intended to showcase green construction technologies.  The Wall Street Journal reported that the New York State Supreme Court Appellate Division, affirming a lower court decision, ruled that Citigroup must continue to fund a $155 million construction loan to Destiny USA Holdings.  The developer must post a $15 million bond before the bank must fund the remainder of the project.  Look out for changes in determination of default criteria in construction loan agreements. 

Clean Diesel

The Associated General Contractors of America and the Clean Air Task Force lobbied Congress to let states mandate the use of clean-diesel equipment for federally funded highway construction.  The New York Times reported that the two groups want new legislation to authorize states to require diesel emissions reductions at construction sites and to cover the cost of retrofitting or repowering equipment manufactured to meet earlier emissions standards.  Under the plan, states would first require contractors who successfully bid for a project to identify the off-road diesel equipment they plan to use during the construction process. States would then consider a U.S. EPA-approved measure for cutting emissions from the equipment and issue orders to the contractors requiring that they pursue the best of the emissions-reducing options.  Federal funds would be used to reimburse the contractors, according to the Times.  Anti-idling and alternative fuel policies are easy to implement and cost effective.  Are you ready now for these guidelines?  Why not?

Emission Footprint Tool

The Rocky Mountain Institute has developed an assessment tool for reducing carbon emissions from building construction projects called Green Footstep.  According to the website, the Green Footstep tool can be used on residential and commercial new and retrofit building construction projects, from pre-design through occupancy. The tool assesses design's total carbon footprint due to site development, construction, and operation; helps designers and other project stakeholders set carbon emissions goals and design targets; identifies ways to meet the Architecture 2030 Challenge, earn credits in green building rating systems, and achieve other goals; and compliments a financial model (based on life cycle cost analysis) to provide the most comprehensive support for building design decisions.  The tool is online and FREE.

2 Great Books If You Enjoy Construction

I’m starting to get asked what I would like to receive for the holidays.  As a construction attorney, I cannot say that a lot of my work reading is done for pleasure.  However, these two books made it on to my reading list and were thoroughly enjoyable.  If you enjoy construction issues like I do (and if you don’t, you probably should not be reading a blog called “The Construction Contract Review” - really, what are you doing here?), you will probably enjoy these books.  Drop a hint at the Thanksgiving Day dinner and see if one of these ends up in your stocking. 

 

I am not a professional book reviewer, and I’ve never played one on TV.  Accordingly, I will simply refer to the blurbs from Amazon.com, and no, I will not get any referral or commission from the sale of these books. 

The Path Between the Seas: The Creation of the Panama Canal, 1870-1914 by David McCullough. 

I just saw this news story, and was reminded how much I enjoyed this related book:  Construction of a new set of locks for the Panama Canal will begin in January.  According to the Amazon.com review: “The story of the Panama Canal is complex, full of heroes, villains, and victims. McCullough's long, richly detailed, and eminently literate book pays homage to an immense undertaking.” 

 

I found this book absolutely fascinating.  In a history class, one learns about the events, whereas in this book, McCullough tells about the personalities around the events.  He tells a great story.  If you’ve read any of his other books, you’ll probably enjoy this one. 

The Pentagon: A History, by Steve Vogel

When the Washington Post reviewed this book, they stated: “The Pentagon was built upon a foundation of lies, secrecy and cost overruns.”  Publishers’ Weekly stated: “Vogel traces the politics and design considerations involved in planning a new home for the previously scattered War Department … in the early 1940s. Wartime conservation subsequently forced builders to use the least amount of steel possible, and much concrete. The Stripped Classical building - erected in 16 months at a cost of $85 million - was made with five sides chiefly because it lay on remnant acres between five appropriately angled roads. At the time, it was a massive undertaking: five concentric rings of offices, 17.5 miles of corridors and a five-acre central courtyard.”

 

Like McCullough’s book above, Vogel does an excellent job of telling the story of the characters in this event.  Booklist recounted: “Vivid portraits are drawn of other key figures in the drama, among them Franklin D. Roosevelt, the president who fancied himself an architect; Secretary of War Henry L. Stimson and Army Chief of Staff General George C. Marshall, both desperate for a home for the War Department as the country prepared for battle; Colonel Leslie R. Groves, the ruthless force of nature who oversaw the Pentagon’s construction (as well as the Manhattan Project to create an atomic bomb); and John McShain, the charming and dapper builder who used his relationship with FDR to help land himself the contract for the biggest office building in the world.”  Anyone ever involved in a change order should read this book!

 

I wasn’t alone in enjoying both of these books, apparently.  The Kirkus Reviews wrote about The Pentagon: A History: "Among books dealing with seemingly impossible engineering feats, this easily ranks with David McCullough’s The Great Bridge and The Path Between the Seas, as well as Ross King’s Brunelleschi’s Dome." 

I have not yet read The Great Bridge or the Ross King book.  Hint, Hint.

Review of the Green Building Addendum from ConsensusDOCS

ConsensusDOCS is an organization that has developed construction contracts endorsed by 23 leading industry associations representing owners, contractors, subcontractors, designers and sureties. ConsensusDOCS states that its contracts protect the best interests of the project rather than a singular party, yielding better project results and fewer disputes.  ConsensusDOCS seeks a broad range of industry viewpoints when drafting its standard contracts, “ensuring an equitable balance of risks and responsibilities and an appropriate baseline for the parties’ legal relationship.”  It publishes a comprehensive catalog of standard contract documents that now includes a Green Building Addendum.   

 

The Green Building Addendum attempts to provide “a contractual mechanism to identify clear objectives, and assign roles and responsibilities to achieve green goals” for use on “projects with green building elements, particularly those seeking a third-party green building rating certification such as LEED.”

Sections of The Green Building Addendum

1. General Principles – lays out broad goals for the Addendum
2. Definitions – defines specific terms that are used elsewhere in the Addendum as capitalized terms
3. Green Requirements and Procedures – identifies the specific regime to be used on the project
4. Green Building Facilitator – introduces and defines a point person/entity for green issues and coordination
5. Green Status – process for selecting a specific green certification regime
6. Green Measures – process for identifying responsibilities for implementation of green certification
7. Plans and Specifications – how the green steps are to be incorporated into the plans and specifications
8. Risk Allocation – confirms the allocation of risk laid out in the underlying contractual documents between parties

Pros of Green Building Addendum

• Regime Agnostic

  The Green Building Addendum does not incorporate any particular “Green Status” from any specific organizations, such as the USGBC’s LEED standard or Green Globes from the Green Building Initiative.  This gives the Addendum staying power for new standards where none currently exist, flexibility for future revisions, and is not beholden to one set of certification regime or processes. 

• Seamless Integration 

   As would be expected, the Green Building Addendum is designed to integrate seamlessly with existing ConsensusDOCS contract documents and procedures.  If one is familiar with ConsesnusDOCS, one will be comfortable with this Green Building Addendum. 

• Clarity

  The Green Building Addendum provides clear processes and who is responsible for identifying green certifications, communicating steps towards green goal achievements and how/if any green issues affect the underlying relationship between the parties in the construction project. 

Cons of Green Building Addendum

Many of the weaknesses below are inherent in attempting to be an industry standard form in an industry that is by definition constantly being redesigned. 

• Vaguenes

  As a noted strength, the Green Building Addendum is “regime agnostic,” therefore the processes defined are generic.  Something along the lines of “A goes to B who has 30 days to respond to [generic process]” as opposed to “A submits [LEED process] to B”

• Length

  It is a contract so the definitions are very lengthy and could be confusing to non-attorney users.  The Addendum itself is 10, single spaced pages.  There is room for condensing sections and tightening of the language, in my opinion.  This, in and of itself, may limit its use to larger projects that warrant large documentation packages. 

• Requires More

  The Green Building Addendum is not a stand alone document, nor is it intended to be.  Underlying contracts are required between all the various parties, including the new Green Building Facilitator, if an additional party. 

As with any industry form or other construction contract, parties are encouraged to consult competent legal, insurance and surety advisors before using, modifying or completing the Green Building Addendum.  Everything needs a first step.  The availability of the Green Building Addendum will help speed up the incorporation of green and sustainable construction practices in the industry.

Construction Costs Per Square Foot

Reed Construction Data published some interesting numbers earlier this summer regarding construction costs per square foot.  For obvious competitive reasons, contractors don’t publish these numbers often.  The data speaks for itself I think, so for once, I will keep my opinions to myself. 

Accompanying this report are tables and charts based on RSMeans’ measures of dollar-per-square-foot construction costs. The results for 25 major cities are shown for four hotel, motel and mid-rise residential types of structure. Means has updated specifications with regard to its building cost models. For this reason, it is not valid to directly compare this year’s figures with last year’s. That is why the percentage change columns read “not applicable”.

Ranking of Accommodation and Residential Buildings by Expense

Among the four categories of buildings shown in the table and graphs, it is most expensive to build an eight- to 24-story hotel. The second-most expensive is a four- to seven-story apartment building. In third and fourth spots respectively, with not much difference between them, are a four- to seven-story hotel and a two- to three-story motel. On a square footage basis, it is only 8% cheaper to build a motel (i.e., the cheapest of the four structure types) than an eight- to 24-story hotel (i.e., the “dearest”).

New York is the Most Expensive; Cities in the South are Least Expensive

New York has the highest dollar-per-square-foot construction costs in the country. San Francisco, Boston, Chicago and Philadelphia round out the top five. Relatively low-cost cities are mainly in the southeast and southwest, including Miami, Atlanta, Phoenix, Houston and Dallas.

The nation’s capital, Washington, is in the low mid-range for construction costs among the 25 cities considered in the table and graphs. The same holds true for Pittsburgh and Denver. Seattle, Detroit and St. Louis are in the upper mid-range. In California, dollar-per-square foot construction costs in Los Angeles and San Diego are between 12% and 15% lower than in San Francisco.

Some City Comparisons

It is interesting to make some regional comparisons. It now costs about 28% more to build in Chicago than in Atlanta. The relationship is about the same (26%) between higher-cost Philadelphia and lower-cost Miami. The mark-up in New York, the most expensive city among the 25 shown, and Winston Salem, the least expensive, is slightly more than two-thirds or 70%.

Additional tables can be found here. 

Would you like to have your construction contract reviewed for free? Send us your contract here.

 

Photo Credit: http://www.flickr.com/photos/dannotti/3267969801/

Just Get the Construction Bond

I’ve done a lot of legal work for environmental remediation companies and others doing underground construction so I am always interested in court decisions that arise from those sorts of disputes.  A recent case in Massachusetts (but applying Louisiana law) provided a painful lesson for a subcontractor. 

 

Project Dispute

A Property Owner hired a General to perform environmental remediation, including the excavation and removal of contaminated soil, on real property in Massachusetts. General entered a written subcontract with Sub, wherein Sub agreed to supply a bond, labor, equipment, and materials to General for the environmental remediation over the course of about 90 days.  In return, General agreed to pay Sub $2,136,194.

 

About nine months after the originally scheduled completion date, General issued a cure notice and subsequently terminated Sub. 

 

Cross Claims

In letters written back and forth around the time of termination and, ultimately, in the ensuing litigation, General asserted that Sub breached “its subcontract in that it has failed to prosecute the work with diligence so as to ensure completion of the project in accordance with the Schedule." Additional alleged breaches included Sub's failures to: comply with the performance requirements of the Subcontract, meet the Subcontract deadline, submit a revised schedule that included a new completion date, and provide the bonds.

 

As with most cases like this, Sub presented an alternative point of view.  Sub disagreed with the termination and claimed that “site conditions, defective specifications, and schedule impacts/business interruptions, not [Sub], have delayed the project schedule."

 

Each party filed Summary Judgment motions against the other (in other words, “even assuming the other side’s version of events is correct, or based on facts that we agree on, I should still win because…”). 

 

What the Court Did

There were numerous parties involved in this litigation – in addition to the General and Sub, parties included the property owners, replacement contractors, sub-subcontractors, and equipment suppliers.  The main dispute, however, is simply between the General and the Sub. 

 

There were lots of intricate details as to why the project was unsuccessful.  There were sufficient disputes between Sub and General about what occurred (defective plans or ineffective implementation of plans?) such that the court said it couldn’t rule without more information.  The Court simply skipped the messy “he said/she said.” 

 

However, what was not in dispute was that the Sub never provided the contractually required performance bond.  The Court held that in construction contracts, the "failure to furnish and maintain payment and performance bonds or insurance specified by the contract documents is deemed invariably to constitute a material breach of the contract."  A material breach is one that "goes to the heart of the contract" and this breach was material because "[b]onds and insurance constitute significant instruments of risk allocation that, if not procured or maintained in force, materially shift to the owner the risk of nonperformance."  Due to this material breach by the Sub, General was justified in terminating the contract. 

 

Essentially, Sub never got the chance to prove it’s version of events because Sub never got the bond it was supposed to.  Ouch for Sub. 

 

The Construction Contract Court Clock

Contract to Decision: 3 years 2 months

Follow the Change Order Path

An unpublished opinion from a federal court in Virginia this spring provides a nice lesson in the importance of contractual change order procedures in construction agreements.

 

It stated: The Virginia Supreme Court has held that "when one furnishes labor to another under a contract which, for reasons not prejudicial to the former, is void and of no effect, he may recover the value of his services on a quantum meruit." Marine Dev't Corp. v. Rodak, 225 Va. 137, 300 S.E.2d 763, 765 (Va. 1983) (quoting Hendrickson v. Meredith, 161 Va. 193, 170 S.E. 602, 604 (1933)). "It is a general rule of law that he who gains the labor of another must make reasonable compensation for the same." Id. (punctuation and citation omitted). However, the Virginia Supreme Court has also held that "where there is an express and enforceable contract in existence which governs the rights of the parties, the law will not imply a contract in contravention thereof." Royer v. Bd. of County Supervisors of Albemarle County, 176 Va. 268, 10 S.E.2d 876, 881 (Va. 1940).

 

There you go, thanks for stopping by today. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ok.  I’ll try to provide a little insight.  An electrical contractor was doing a project for a public entity.  The contractor wanted some change orders for some extra work.  The construction agreement had specific procedures to follow for requesting and receiving change orders.  The contractor followed those procedures….for awhile.  At some point, the contractor stopped following those procedures for additional extra work it did and tried to get paid.  The owner refused to pay for the extra work and then the contractor sued to recover the value of that work as being outside of the construction contract.  But the court found that the contractor failed to follow the prescribed method outlined in the parties' contract to obtain approval and payment for extra work -- a method with which it was not only familiar, but which it had in fact utilized.

 

Do you always know and understand the terms and conditions and the procedures of your construction contract for getting change orders approved? If your construction agreement has a path to follow for change orders, follow it, particularly if you’ve already started down that path once before. 

 

Click here for a nice summary and copy of the decision.

 

The Construction Contract Court Clock

Contract to Decision: 5 years 9 months

 

Construction Site Safety: A Duty Unhinged

A premises owner and a contractor enter into a construction contract, and a third party is injured on the premises of the owner. The fundamental question at issue here is under what circumstances does a duty of care arise between the contractor and the third party?

 

A federal case was decided in Michigan this summer that probably made a lot of lawyers recall those halcyon days of law school, with references to Palsgraf and other classic Cardozo opinions.

 

A gas/service station was remodeling and moving its Subway location.  An employee of the service station sued a contractor for “injuries sustained when, during a remodeling of her employer's premises, a door, temporarily removed and stored outside of the construction zone, fell on her because it was stored upright and where, if placed there at all, it should have been laid on its side at an angle.”

 

The decision walks the reader through an interesting history of duty, contractual obligations, misfeasance and torts.  Good stuff, believe you me.

 

But the best way to explain the court’s thinking in this case was the story it told of an older case.  A contract for snow removal services made explicit that the snow removal contractor would "not be responsible for any damage or injury caused by slipping or falling on any pavement surface." But in the course of actually performing the contract the snow plow contractor placed snow "on a portion of the premises when it knew, or should have known or anticipated, that the snow would melt and freeze into ice on the abutting sidewalk, steps, and walkway, thus posing a dangerous and hazardous condition to individuals who traverse those areas."  While the snow removal contractor lacked a pre-existing duty to the person who slipped, in contract or otherwise, a duty arose anyway out of the contractor’s acts because it placed plowed snow from the parking lot on an otherwise clean sidewalk.  The snow removal contractor was responsible for creating an unsafe condition where one previously did not exist.   

 

In this Subway case, the contractor removed the door and placed it in an area that it knew was used by the store’s employees.  The contractor created the hazard when persons working for it leaned and left the door unsecured in an area outside the construction zone.  If one having assumed to act, does so negligently, then liability exists as to a third party for failure of the contractor to exercise care and skill in the performance itself.

 

Today’s shocking and profound legal insight: if you, as a construction contractor, do something, you have a duty to do it in a safe way.

 

The Construction Contract Court Clock

Contract to Decision: 4 years 11 months