Legal Aspects of Construction Management ADSC West Coast Chapter 31st Annual Meeting B. Scott Douglass DOUGLASS LAW GROUP (415) 297-0796 scott@dlglaw.co

Presentation Overview Risk Identification and Management Managing the Project Changes

Risk Identification And Management Overview Sources of Claims General Risk Management Considerations Contractual Risk Management Tools

Risk Identification And Management Sources of Claims Delayed Issuance of Notice to Proceed Restricted Access Differing Site Conditions Adverse Weather Defective Plans/Specs Design Changes Change in Code/Law Cardinal Change Delay of Approvals/RFI Responses Destruction or Damage to Work

Risk Identification And Management Sources of Claims (Cont’d) Improper Inspection/Testing Labor Issues Suspension of Work Termination of Contract Cost Escalation Constructive Acceleration Early Completion Prevented Faulty Owner-Supplied Equipment

Risk Identification And Management General Risk Management Considerations Understand the risks – the contract identifies them Understand who controls a given risk – the contract identifies responsible party Retain critical risks – risks critical to own performance Protect against such risks Insurance Bonds/Subguard Reasonably shift risks Increased risk equals increased price – risk premium E.g., subsurface conditions

Risk Identification And Management Contractual Risk Management Tools Contractual Liability Limitations Limit type of damages – e.g., specific type of damages – direct or indirect Limit amount of damages Contractual Waivers - e.g. consequential Indemnity Provisions – what is indemnity? “Type I” clauses shift risk of all liability, except the indemnitee’s sole negligence or willful misconduct Void and unenforceable as of 1/1/13 to extent claim arises from indemnitee’s active negligence “Type II” clauses shift the risk of only active negligence by indemnitor

Risk Identification And Management Contractual Risk Management Tools (Cont’d) Liquidated damages Cannot be a penalty – milestones tied to costs/use? Reasonable estimate of actual damages Recoverable even if no damages actually incurred LDs as a backdoor for Owner’s indirect costs? Consequential/Indirect Damages (Waiver Clause?) Owner’s lost profit/revenues - rents, casino revenue, etc. Owner’s financing costs Owner’s internal staff costs Contractor’s home office overhead Direct Damages Owner’s rent for alternate facility Owner’s additional contract administration by A/E or CM Contractor’s job site overhead

Risk Identification And Management Contractual Risk Management Tools (Cont’d) Pay-if-paid vs. pay-when-paid clauses Pay-if-paid unenforceable in CA No-damages-for-delay clauses Generally unenforceable in CA Price Escalation – labor and materials generally cost more with the passage of time – e.g., steel, cement, etc. AGC Document No. 200.1 Identify “Potentially Time and Price-Impacted Material(s)” Create a baseline and adjustments method Equitable adjustments for increase and decrease Adjust both time and cost.

Risk Identification And Management Contractual Risk Management Tools (Cont’d) Lease/Rental Agreements and Purchase Orders Used for jobsite trailers, materials, equipment, etc. Same contractual tools and concepts apply Issues to focus on: Overtime fees and other fees Indemnity Transportation Anything impacting price, time or quality

Managing The Project Overview Risk Identification and Management Managing the Project Bidding Phase Construction Phase Changes Statutory Remedies

Managing The Project Bidding Phase GCs “Locking In” Subs’ Bids Binding contract usually requires an offer, acceptance and consideration (i.e., something of value that is not a pre-existing obligation) Prime contractor’s dilemma – binding sub without accepting sub’s bid prior to award of contract Must rely on sub’s bid in preparing bid to owner Must await award before accepting subcontractor’s bid Promissory Estoppel Equitable doctrine - enforces promise in the absence a contract based on offer & acceptance

Managing The Project Bidding Phase (Cont’d) Bidding Principles - Promissory Estoppel The elements of promissory estoppel A promise Reasonable and detrimental reliance (e.g., reasons to suspect inaccuracies) Injustice if the promise is not enforced Damages - cost differential May also protect offerror (Sub) Protect expectation of award to low bidder Must be implied promise to award to the lowest bidder Recovery may be bid preparation expenses and/or non-speculative lost profits

Managing The Project Bidding Phase (Cont’d) Subcontracts - Is the Sub’s Bid part of the Subcontract? Yes - bid/proposal is incorporated into the Subcontract by reference – exclusions and assumption apply. No – bid not incorporated by reference and the Subcontract includes an integration clause – exclusions/assumptions do not apply, unless specified in the Subcontract. But – if there’s an ambiguity in the Subcontract, the bid/proposal may be considered to resolve the ambiguity. Other factors to resolve ambiguities – parties’ behavior before dispute arises and custom and practice.

Managing The Project Construction Phase Overview Contract Administration General principles Cost Schedule Quality Record Keeping

Managing The Project Construction Phase (Cont’d) Contract Administration - General principles: Read The Final Contract – requirements and timing Contractor generally controls means and methods Design-bid-build projects - Owner responsible for adequacy and completeness of plans/specs Spearin Doctrine Creates liability gap for owner Problem of the mixed design spec and performance spec Broad application – specified equipment, designers, etc. Betterment Rule – limitation on designer’s liability for omissions on design-bid-build projects. Design-build projects - DBer responsible for adequacy of design and fitness for purpose. Betterment rule does not usually apply

Managing The Project Construction Phase (Cont’d) Contract Administration - Cost Control Schedule of Values Front-end loading – violates False Claims Act on public projects Weekly job cost reports – variance between budget and costs Monthly Payment Applications Inspections to determine percent complete – FCA liability? Certification - (1) amount now due, and (2) amounts previously received have been paid to subs/suppliers FCA Horror Stories – Subguard, bond mark-up, etc.

Managing The Project Construction Phase (Cont’d) Contract Administration - Schedule Control Baseline Schedule (CPM) Rules of thumb: Activity durations < 20 days 10-15% of activities on CP 100 activities/$1.0 million Monthly Schedule Updates Time Impact Evaluations (TIEs or frag nets) COs and other events causing delay Recovery Schedules Ordered Acceleration/Contractor-Required Acceleration

Managing The Project Construction Phase (Cont’d) Contract Administration - Schedule Control Delay Claim Classification - Excusable and Compensable Contractor entitled to a time extension and compensation for extra costs. Delayed Issuance of Notice to Proceed Delayed Site Access – e.g., Lack of Right-of-Way Delayed Permits Defective Plans/Specs (D-B-B) Delayed Reviews/Approvals/Decisions/RFI Responses

Managing The Project Construction Phase (Cont’d) Contract Administration - Schedule Control Delay Claim Classification - Excusable and Non-Compensable Contractor entitled to a time extension, but is not compensated for extra costs resulting from the delay. Unanticipated force majeure-type events, such as: Labor strikes Severe weather Acts of God Contracts usually identify such events Concurrent delay Owner and Contractor are separately responsible for delays that occur at the same time. Contractors assert their inexcusable and non-compensable delay was really a pacing delay.

Managing The Project Construction Phase (Cont’d) Contract Administration - Schedule Control Delay Claim Classification - Inexcusable Contractor is entitled to neither a time extension nor compensation. Contractor is responsible for extra costs resulting from the delay and for Owner’s delay damages if Contractor does not make up time through acceleration. Owner’s delay damages are L/Ds or actual damages if no L/Ds clause exists.

Managing The Project Construction Phase (Cont’d) Contract Administration - Quality Inspections Coordination before work covered Weekly Owner-Architect-Contractor Meetings Proactive Involvement and Communication Document issues as they arise – identify the issue, how it was resolved and why it was resolved in the way it was. Such as: Change in design; or Directed change to means and methods.

Managing The Project Construction Phase (Cont’d.) Record Keeping Written Notice Contractors must provide timely notice of changes per Contract requirements. Greg Opinski Constr., Inc. v. City of Oakdale (2011). Form and content of notice: Describe Event or occurrence giving rise to the change Explain Effect on the contractor’s work Cost resulting from the change Delay resulting from the change Meeting minutes?

Managing The Project Construction Phase (Cont’d.) Record Keeping – Written Notice – Typical Clause AIA - “21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.” Other contracts require “prompt” notice or “reasonable” notice Review the specific timing requirements in each contract and follow it.

Managing The Project Construction Phase (Cont’d.) Record Keeping – Written Notice - Purpose Allows the recipient of the notice to: Assess the implications/options and potential liability that may be created under various options Investigate whether the claimed item truly is an “extra” to the original contract – e.g., DSC Allows for costs incurred in performing the extra work to be documented Allows for fair adjustment to the contract price while the issues are still fresh Provides informed consent for the extra work

Managing The Project Construction Phase (Cont’d.) Record Keeping – Written Notice – Waiver/Estoppel If oral notice is provided, and Owner recognizes that a change has been requested, and Owner subsequently considers the change, Owner has arguably waived any claim that notice was insufficient If Owner lulls Contractor into foregoing the required notice until after the notice period has passed, Owner is arguably estopped from relying on failure to comply Best Practice – fully comply with the contract’s notice requirements

Managing The Project Construction Phase (Cont’d) Record Keeping – Documenting the Project “Official” Meeting Minutes – volunteer to do this Deemed approved unless objected to within 7 days Submittals/Approvals Value engineering – who assumes the risk of failure? Generally, party proposing a VE change assumes the risk that of the VE proposal’s success. Important to disclaim any warranties re the VE proposal, unless its success is certain. Requests for Information Turnaround time can be critical Change Orders Timely pricing and processing Timely seeking schedule extensions

Managing The Project Construction Phase (Cont’d) Record Keeping Payment Application Conditional/Unconditional Waiver and Release Upon Progress/Final Payment (Preliminary Notices) Daily Logs & Diaries Photos/Video Correspondence/Emails Body of letter Reason for letter Relay circumstances One topic per letter Third-party/two-year test Two years later, will a third party understand the letter?

Managing The Project Construction Phase (Cont’d.) Record Keeping Email Beware! Beware! Beware! Beware! Typically very informal and not carefully considered Widely circulated Cannot be permanently erased Source of very damaging evidence E-mail is so easy, people don’t hesitate in relaying their thoughts – Twitter, blogs, etc. GC vs. Sub – sometimes better to just pick up the phone

Changes Overview Risk Identification and Management Managing the Project Changes Sources of Changes Classification of Changes Affect on Contract Statutory Remedies

Changes Sources of Changes Owner-initiated changes materially affecting Design Construction performance Completion Circumstances beyond the control of the parties Unforeseeable site conditions Extreme weather Change in laws/code Changes to material quantities Value engineering Commonly proposed by contractor

Changes Classification of Changes Typically classified by Source: owner or contractor initiated Formality Express written order or directive “Constructive change” arising from Owner’s conduct Affected activities Design: changes to plans and specifications Time: modify time for completion Construction: alter method, manner, or sequence Risk / Responsibility changes: alters the obligations of the parties

Changes Affect on the Contract Written Change Orders - modifies contract terms Typical procedure Proposed by contractor or requested by owner Negotiated with owner Documented Content Description of changed work Adjustment to contract price, if any Adjustment to contract time, if any Release of all direct and indirect costs Reservation of rights?

Changes Affect on the Contract (Cont’d) Waiver of CO Requirement Waiver Doctrine: “Where the terms of a written contract require that extra work be approved in writing, such provision may be altered or waived by an executed oral modification of the contract.” Healy v. Brewster, 251 Cal.App.2d 541, 552 (1967). More compelling when Contractor confirms oral change in writing Owner previously paid on oral changes There is repeated disregard for the writing requirement Courts will permit contractor to recover reasonable value of work Prevents owner’s unjust enrichment

Changes

Statutory Remedies Risk Identification and Management Managing the Project Changes Statutory Remedies Stop Work Order Mechanic’s Liens Stop Payment Notices Prompt Payment Laws

Q & A B. Scott Douglass DOUGLASS LAW GROUP (415) 297-0796 scott@dlglaw.co