1. Legal Aspects of Construction Management ADSC West Coast Chapter 31st Annual Meeting
B. Scott Douglass
DOUGLASS LAW GROUP
(415)

2. Presentation Overview
Risk Identification and Management
Managing the Project
Changes

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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
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.

10. 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

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

12. 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

13. 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

14. 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.

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

16. 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

17. 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.

18. 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

19. 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

20. 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.

21. 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.

22. 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.

23. 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?

24. 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.

25. 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

26. 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

27. 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

28. 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/ s
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?

29. 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
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

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

31. 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

32. 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

33. 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?

34. 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

35. Changes

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

37. Q & A B. Scott Douglass DOUGLASS LAW GROUP (415) 297-0796