Creating a Legal Roadmap for Dispute Resolution
By Wayne Ringeisen, Esq. and Laura Miller, CPA, CFE
In the course of a construction project things often go well and smoothly. We don’t hear much about those instances, though. More often we hear about the projects that go south and result in delays and claims for damages. There seem to be certain issues that we as attorneys and experts see pop up as problematic more often than any others. These issues deserve a closer look at the time the contracts are formed. Clarifying the contract requirements may well save future headaches, legal and expert fees, and damages. Some contracts do a great job of specifying the treatment of these items and provide a legal roadmap for the contractors, owners and their legal teams to follow. Failure to do so, however, leads to confusion, misunderstanding of the terms, inconsistent treatment of requests, and inefficient time spent by contractors trying to figure out the “right” presentation and by owners trying to figure out the “right” responses. Here are a few items we have seen cause problems:
1. Audit Authority
Does your contract include provisions for the owner to inspect the records of the contractor and its subcontractors to verify requested change order amounts and/or claims? It should. Contractors may balk at giving the owner access to its records as they relate to its base contract, but in the instance of a claim that is calculated using the total cost method, this provision will allow the owner insight into the bid estimate and the actual costs. The owner’s right to do this may help all parties avoid making or responding to claims that may not be justified by the project records. If you are the contractor and your contract contains this provision, you will be more likely to keep more specific records, more accurately track and quantify costs for changes, and you may be more likely to request the same from your subcontractors. Better records lead to better project management, more justifiable change orders/claim requests, and quicker resolution of disputes.
2. Calculation of Change Order Amounts
When the calculation methodology of change orders is clear and formulaic, confusion is avoided and mistakes can be corrected quickly and without unnecessary conflict. Specific and agreed-upon formulas also make for streamlined processes. A few items to consider:
- Who determines whether a change order will be time and material or lump sum? Is it clear how the change order approval process will work in cases of work that needs to move forward quickly?
- Does your contract lay out specific rates allowed for change orders for labor (by trade), project management, equipment, and materials? If not, do you require actual cost amounts? Is “actual cost” defined? Make sure you have the ability to audit labor rates back to the union(s) (see above).
- If you are including agreed-upon labor rates in your contract, be aware of whether the contractor’s requested change order rates already include overhead and profit.
- Is your contract clear as to what rates are allowed to be charged by subcontractors and passed through in a change order request?
- What markups are allowed (consider both the contractor’s and subcontractors’ markup)? Is the contractor permitted to markup subcontractor work using the same percentages it would use to markup its own work? Is additional overhead allowed on every change or only those that add schedule extension?
3. Requests for Information (“RFI”) Provisions
RFI Provisions should be used as a tool for communication between the designer and the contractor, but often this tool is misused and the sheer volume of RFIs becomes a burden to the completion of the work. The RFI procedure should be clearly and succinctly described in the parties’ contract and address and/or include:
- To whom the RFIs are to be submitted.
- What the allowable response time is for RFIs.
- In addition, consider a volume-related scale: If a contractor submits 50 RFIs in a day, or within a week, should a longer response time be allowable?
- Is there an agreed-upon RFI form and format and is there a clear way for the contractor to identify an RFI that requires immediate response to avoid project delay?
- Whom should the contractor contact first if RFI responses are lagging?
- Is the RFI process tied into the change-order process? Is that clearly defined?
4. Baseline Schedule
Is there a clearly defined baseline schedule that all parties have agreed to? This is a problem that comes up more often than one might think and can lead to conflicting schedules, differing project milestones and potential delay claims. The resolution of these issues years after the signing of a contract can consume huge amounts of time for project personnel as well as attorneys, experts, and even the Court.
5. Exculpatory Clauses
Generally, these clauses are provisions where one party seeks to absolve itself of liability or pass that liability on to another party to the contract. In Pennsylvania, for example, such provisions are closely scrutinized by the courts. They can generally be deemed valid, however, if three conditions are met: First, the clause cannot violate public policy; second, the contract containing the exculpatory clause must be between persons relating to their own private relationship and affairs; and third, the contract cannot be one of adhesion such that each party must be free to bargain the terms. Topp Copy Prods., Inc. v. Singletary, 533 Pa. 468, 471, 626 A.2d 98, 99 (1993). Even if deemed to be valid, the clause can still be unenforceable if the clause’s language does not clearly reflect that one of the persons is being relieved of liability for his/her own negligence. Generally, in interpreting such clauses, the following principles apply:
- The contract language must be construed strictly, since exculpatory language is not favored under the law;
- The contract must specifically state the intention of the parties with the greatest particularity;
- If ambiguous, the language of the contract will be construed against the party seeking immunity from liability; and
- The party seeking immunity has the burden of establishing their immunity. Top Copy Prods., Inc., 533 Pa. at 471, 626 A.2d at 99.
One such example of an exculpatory clause is a no damage for delay clause, which most contracts tend to include to address how delays will be handled if they are encountered on the project. Typically these clauses provide that the contractor is not entitled to damages for delay on the project. Although usually valid and enforceable, because they seek to limit liability, they are closely scrutinized and bad faith, delays not within the parties’ contemplation, delays of unreasonable duration and delays caused by the owner are generally exceptions. In Pennsylvania, a no damage for delay clause will not exclude an owner from liability where “(1) there is an affirmative or positive interference by the owner with the contractor’s work, or (2) there is a failure on the part of the owner to act in some essential matter necessary to the prosecution of the work.” Coatesville Contractors & Eng’rs, Inc. v. Borough of Ridley Park, 509 Pa. 553, 560, 506 A.2d 862, 865 (1985); Guy M. Cooper, Inc. v. East Penn Sch. Dist., 903 A.2d 608, 613 (Pa. Cmwlth. 2006) (“[A]ffirmative or positive interference sufficient to overcome the ‘no damages for delay clause’ may involve availability, access or design problems that pre-existed the bidding process and were known by the owner but not by the contractor.”). In a similar manner, when project delays are not the responsibility of the contractor, but are caused by the owner, contractual provisions seeking to reduce the contractor’s fees under the contract will generally not be enforced. Commonwealth v. W. P. Dickerson & Son, Inc., 42 Pa. Commw. 359, 356, 400 A.2d 930, 933 (1979) (refusing to enforce liquidated damages provision for reduction in fees due to delay).
Of course every state, jurisdiction, and situation is different and each one requires specific focus on the particular state’s statutes and caselaw, the specific contract language, and the conduct/actions of the parties.
Lack of clarity in situations like those described above often leads to confusion, misunderstanding, and dispute. Giving them careful consideration and precision of language in the contract formation phase provides all parties with a clear road to travel when issues arise on projects, as they often do. When everyone knows how a problem is going to be addressed before it even comes up, a cooperative and open environment may be a welcome byproduct.
About the Authors
Wayne W. Ringeisen is a Partner at Reed Smith LLP.
Laura Miller is a Director and Testifying Expert at The Rhodes Group.