1. COST OF THE WORK: Tricks and Traps to Avoid in Contract Drafting
American Bar Association
Forum on the Construction Industry
Fall Meeting – 2010
COST OF THE WORK: Tricks and Traps to Avoid in Contract Drafting
Ronald W. Messerly, Esq. Anna Oshiro, Esq.
Snell & Wilmer LLP Damon Key Leong Kupchak Hastert
Phoenix, Arizona Honolulu, HI
Theodore L. Senet, Esq.
Gibbs, Giden, Locher, Turner & Senet  LLP
Los Angeles, California

2. LET’S NOT GET FOOLED AGAIN
Negotiate
Protect Your Client
Protect the Project

3. WHY “COST-PLUS”
Necessity and Time Require Proceeding (Where the Design is Incomplete)
More Information Means Better Control of Cost and Pricing
Allows for Potential Cost Savings

4. WHY NOT “COST-PLUS”
Huge Administrative Burden to Review and Audit Costs
Risk of Cost Savings Clause
Fosters Disputes Over “Grey Areas” of Cost

5. GMP OR NO GMP Price Ceiling … “Guaranteed”
Line Item GMPs (Lump Sum Line Items)
When can it be altered?
Does contractor have a duty to minimize costs where there is no GMP?

6. DRAFTING TIPS Clarifications, Assumptions, and Exclusions
Schedule of Values – For Information Only?
Include Contract Provisions to Avoid Disputes Over Conflicting Language

7. COSTS NOT COUNTED TOWARD GMP
Unanticipated Costs
Legal Costs for Owner-related Litigation for Patent Infringement (AIA A102 § 7.6.5)
Negotiated Exceptions
The Rock Clause
Allowances

8. COST OF THE WORK DEFINED
AIA A102 § 7.1.1: “The term Cost of the Work shall mean costs necessarily incurred by the Contractor in the proper performance of the Work. Such costs shall be at rates not higher than the standard paid at the place of the Project except with prior consent of the Owner. The Cost of the Work shall include only the items set forth in this Article 7.”
Necessary and Proper Performance
Express Listing Requirement 8

9. LABOR Basic Principles Onsite / Offsite Supervisory Wage Burden
Rate Sheets
Relocated Labor

10. MATERIALS Related Parties (AIA A102 § 7.8) Left Over Materials
Provisions for Waste
AIA vs ConsensusDOCS
Owner / Contractor Perspective

11. EQUIPMENT Equipment: Blue Book As Measure
Purchased for this Project?
Used after this Project?
Blue Book As Measure
Owner / Contractor Perspective

12. SUBCONTRACTORS
“… in accordance with the requirements of the subcontracts.” AIA A102 § 7.3
Relationship to Requirement of Mandatory Self-Performance Percentage
Self-Performed Work
Owner / Contractor Perspective

13. INSURANCE AND BONDS Deductibles and Self Insured Retentions
Subbonds / Subcontractor Default Insurance (Subguard)
Corporate Practice Policies / Insurance Charges Between Corporate Divisions
Wraps
Builders Risk

14. GENERAL CONDITIONS AND THE CATCH ALL
Taxes
Utilities
Legal Fees
Emergency
Catch All
Fee or No Fee on Certain Costs

15. NEGLIGENTLY PERFORMED WORK
AIA A102 § 7.7.3: Costs of repairing or correcting damaged or nonconforming Work executed by the Contractor, Subcontractors or suppliers, provided that such damaged or nonconforming Work was not caused by negligence or failure to fulfill a specific responsibility of the Contractor and only to the extent that the cost of repair or correction is not recovered by the Contractor from insurance, sureties, Subcontractors, suppliers, or others.

16. COSTS INCURRED AFTER FINAL PAYMENT
AIA A102 § : If, subsequent to final payment and at the Owner’s request, the Contractor incurs costs described in Article 7 and not excluded by Article 8 to correct defective or nonconforming Work, the Owner shall reimburse the Contractor such costs and the Contractor’s Fee applicable thereto on the same basis as if such costs had been incurred prior to final payment, but not in excess of the Guaranteed Maximum Price. If the Contractor has participated in savings as provided in Section 5.2, the amount of such savings shall be recalculated and appropriate credit given to the Owner in determining the net amount to be paid by the Owner to the Contractor.
Is warranty work covered? 16

17. AUDIT CLAUSE Allows Owner to Confirm Actual Costs
Owner’s Interests vs. Contractor’s Administrative Burden
AIA vs. ConsensusDocs
Types: Spot and True Up
Get Detail
Proof of Costs
Mediation – AIA A102 §

18. PRACTICE TIPS Agree Upon Cost Savings Methodology Delineate Costs
Agree Upon Fee
Plan Scope and Method of Audits
Identify Methods to Modify GMP
Monitoring Strategy