1 Extended Duration Warranties, Performance Warranties, and Liquidated Damages in Construction Contracts – What are the Risks? Presented by: Gene Rash & Rolly Chambers Smith, Currie & Hancock, LLP May 7, 2013

22 Presenter Biographies Gene Rash and Rolly Chambers – –Partners in Charlotte, NC office of Smith Currie & Hancock, LLP Smith Currie & Hancock, LLP ( – –60 attorneys devoted exclusively to construction and government contracts – –Focus on construction business legal matters – –Offices in Atlanta, Charlotte, Ft. Lauderdale, San Francisco & Washington, D.C.

33 Extended Duration and Performance Construction Warranties What will we cover? – –General legal principles for construction warranties – –Extended duration construction warranties – –Construction performance warranties – –Performance liquidated damages and construction warranties

44 Extended Duration and Performance Construction Warranties Why be concerned about construction warranties? – –Construction warranties shift significant risks to clients – –Financial risk of repairing nonconforming items – –Clients may misunderstand the risks involved – –You can help by recognizing construction warranty risks and exploring risk mitigation strategies

55 General Principles for Construction Warranties What is a warranty? – –Promise that particular statement of fact is true and may be relied upon by other contracting party “Standard” construction warranty – –Materials and equipment new and of good quality – –Work free from defects in workmanship – –Work conforms to requirements of contract – –No express time limit

66 General Principles for Construction Warranties Contractor will repair defects for 1 year after substantial completion – –AIA, ConsensusDocs, EJCDC Supplementary conditions may have additional warranty language – –Contractor warrants Work “will be free from defects in materials and workmanship for a period of one year from substantial completion”

77 General Principles for Construction Warranties Performance bonds and warranties – –Incorporate principal’s construction contract, including warranty obligations – –Surety’s warranty obligations derive from principal’s warranty obligations – –Warranty obligations extend beyond completion – –Warranty obligations extend beyond final payment

88 Extended Duration Construction Warranties Construction warranties > 1 year Owner shifts repair risk to contractor for longer term period – –Public owners increasingly looking for extended duration warranties – –Extended duration warranties stretch owner’s construction dollars

99 Extended Duration Construction Warranties Highway construction contracts – –State DOT’s face reduced funding – –Reduced funding impacts DOT q.c. testing and inspections – –DOT’s require longer duration warranties to cover risk of correcting quality problems – –Pavement warranties can be 3, 5, 7 years

1010 Extended Duration Construction Warranties Building construction contracts – –Extended warranties for building components (e.g. roofs, HVAC equipment, etc.) – –Warranty durations may be 5,10, 20 years – –If contractor goes out of business during extended warranty period, then performance bond surety will be liable

1111 Extended Duration Construction Warranties Extended duration warranties impact contractor bonding – –Difficult to estimate future financial obligations to cover extended warranty repair work – –Long term warranty obligations extend long after contract funds are paid – surety concern – –Sureties raise underwriting standards for longer term coverage

1212 Extended Duration Construction Warranties Are there ways to mitigate risks of extended duration warranties? – –Assign manufacturer’s long term warranty to owner – –Obtain warranty bond separate from performance bond to cover extended warranty obligations – –Limitations through terms of performance bond Limit duration of performance bond Exclude long term warranty language

1313 Construction Performance Warranties Contract warranties that concern performance of completed project Sustainable (“green”) building – –Project will perform at certain level of energy consumption Clean energy projects (solar, wind turbine) – –Project will perform at certain level of output

1414 Construction Performance Warranties “Green” Building Sustainable buildings are certified to meet standards for energy and environmental performance – –LEED, Energy Star, green building codes Federal, state, and local governments – –Increasingly incorporate sustainable building standards in construction contracts – –Want construction warranties that completed project will perform to “green” building standards

1515 Construction Performance Warranties “Green” Building AIA Guide for Sustainable Projects (2011) – –Disclaims warranty that project design and construction will perform to “green” building standards – –Owner maintenance and operations after completion affect project’s performance But … – –>20% of U.S. cities over 50,000 in population had green building programs in 2009

1616 Construction Performance Warranties “Green” Building Federal design-build project - warehouse – –Required design to achieve energy consumption at least 40% below a given baseline (performance) – –Required warranty of project design “through the statute of limitations and statute of repose” (extended duration) – –Required design-builder to furnish performance bond

1717 Construction Performance Warranties “Green” Building Federal design-build project - warehouse – –Government’s remedies for breach Equitable adjustment (deductive change) Contractor repair or replacement of defective item at contractor expense (re-design) Risk mitigation techniques – –Performance bond covering construction work but excluding design – –Design-build performance bond limiting liability for design (e.g. ConsensusDocs 470 (rev. 2011)

1818 Construction Performance Warranties Clean Energy Projects Solar cell and wind turbine power projects Developer financing depends on selling a given level of output – –Investors and lenders want assurance from developer – –Developer shifts performance risk to project designer and contractor with performance warranties

1919 Construction Performance Warranties EPC Projects EPC Contracts – –Engineering, Procurement, and Construction – –Type of design-build contract – –Commonly used for constructing clean energy or industrial projects EPC Contracts include performance warranties and construction warranties – –If project fails to perform to warranted level, then EPC contractor is obligated to bring performance to the warranted level

2020 Construction Performance Warranties EPC Projects Are there ways to mitigate risks of performance warranties in EPC contracts? – –Errors and omissions insurance from designer for design defects – –Performance warranty insurance from manufacturer of project components (solar cells, turbines, etc.) – –Manufacturers warrant output performance of solar cells or turbines for long term – 12, 15, 25 years – –Manufacturer partners with insurance company – –Developer can obtain coverage directly

2121 Construction Performance Warranties Performance Liquidated Damages EPC contracts may provide for both construction delay and performance liquidated damages – –Performance LD’s do not involve delays in construction – –Performance LD’s involve delays in achieving a warranted level of output – –Developer assesses performance LD’s while output is below warranted level

2222 Construction Performance Warranties Performance Liquidated Damages Are there ways to mitigate risk of performance LD’s? – –Limitation of damages clause can cap an EPC contractor’s or performance bond surety’s liability for performance LD’s

2323 Extended Duration and Performance Construction Warranties Extended duration and performance construction warranties shift significant risks to contractors and their sureties Trend to include such warranties is likely to increase Recognizing financial and legal risks and attempting to mitigation them is crucial

2424 Contractual Risk Allocation Provisions QUESTIONS? If you do not have the opportunity to have your question addressed during the session, you may contact the presenters directly: Gene Rash & Rolly Chambers Company: Smith, Currie & Hancock, LLP Phone: Address: 1023 W. Morehead St., Suite 301 Charlotte, NC 28208