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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 7, No. 3, June 05
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Inside
This Issue:
• Using
Negotiation, Mediation and Arbitration to Resolve Construction Disputes.
• Contractor Suit
Dismissed for Failure to Follow Claim Procedures of Contract
• Framing
professional negligence claim as breach of contract does not get around
shorter statute of limitations period for negligence claims
• Managing Contract Changes
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ARTICLE 1
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Using
Negotiation, Mediation and Arbitration to Resolve Construction Disputes.
By Allan
H. Goodman
If a
dispute arises during construction of your project, do not
proceed immediately to court! Your contract may require you to use
alternative dispute resolution (ADR) techniques such as negotiation,
mediation or arbitration to resolve your disputes. You should therefore
be familiar with these techniques.
Negotiation is the most informal method of dispute resolution.
The only participants
in the negotiation process are the parties to the contract and their
designated negotiators. The goal of a negotiator is to resolve the
dispute on the best terms for the party that he or she represents. When
parties attempt to resolve a dispute by negotiation, it is not certain
that the process will result in a resolution. The parties and their
negotiators must deal face to face with each other in a manner that
promotes the parties’ interests, yet preserves the parties’
relationship. In a successful negotiation, the parties and their
negotiators reach a resolution of the dispute based on the parties’
interests.
Mediation is often referred to as “assisted
negotiation.” In this process, the parties select a neutral person,
the mediator, to help them arrive at a settlement of the dispute. A
mediator is not a negotiator, as the mediator does not represent the
interest of either party. The mediator is a facilitator, who helps the
parties explore the strengths and weaknesses of their cases and assists
them to frame and transmit settlement offers. The mediator spends a
majority of the time meeting privately with each party. The mediator
does not have authority to bind the parties, but can only help the
parties resolve their dispute by agreement. In a successful mediation,
the parties will reach a settlement of their dispute with the aid of the
mediator.
As you can
see, negotiation and mediation are both non-binding processes
that will resolve the dispute only if the parties agree to a settlement.
A settlement may be based upon compromises, promises of performance, and
agreements to continue to do business in the future. By using these
processes, the parties retain control of the resolution.
In contrast to negotiation and mediation, arbitration is binding.
The parties select a neutral person, the arbitrator, who acts as a
private judge. The arbitrator conducts a hearing, similar to a trial in
court, and issues a decision, known as an “award,” that binds the
parties. Unlike a mediator, the arbitrator cannot meet privately with
the parties, but must come to a decision based upon his or her
understanding of the evidence submitted at the hearing and the law.
Though arbitration is similar to litigation in court, it is private, the
parties can choose an arbitrator that has particular expertise in the
subject matter of the dispute, and the scheduling of the arbitration
proceeding is not dependent on delays usually associated with a
court’s docket.
What if
your contract does not require you to use ADR techniques or specifies a
technique that the parties do not want to use?
The parties may still use any ADR technique to resolve their
dispute, as long as they agree. It is important that you know that
litigation in court is not your only option.
About
the Author: Allan H. Goodman
is an experienced mediator and arbitrator of construction disputes, a
Judge on the U.S. General Services Administration Board of Contract
Appeals, and the author of Basic Skill for the New Mediator
and Basic Skills for the New Arbitrator. He is also an
instructor for Redvector.com, where he offers online courses on
construction mediation and arbitration. For a detailed description of his books and courses,
visit www.solomonpublications.com and www.redvector.com.
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Article
# 2
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Contractor
Suit Dismissed for Failure to Follow Claim Procedures of Contract
By:
J. Kent Holland, Esq.
A homebuilder’s lawsuit against a city and its architectural
firm for refusing to grant change orders for additional costs was
rejected by a court because the contractor failed to comply with a
contractual requirement that it give written notice to the architect of
its breach of contract claims against the city before initiating
litigation.
In
the case of Cameo Homes v. Kraus-Andersen Construction Company and City of East
Grant Forks, (No. 04-1200, U.S. 8th Circuit), the Court
of Appeals affirmed a summary judgment granted in favor of the City and
architect by the federal district court.
Federal District Court
. Cameo Homes
(hereinafter, “Cameo” or “Contractor”) entered into four
contracts with the city to do concrete work on four projects being
managed by Kraus-Andersen, the city’s construction manager (CM).
The contracts incorporated the general conditions of the American
Institute of Architects (AIS) contract provisions, including a provision
stating that the contract could only be modified through written
agreements such as “change orders.”
In
the section addressing change orders, the contract provided that change
orders requested by the contractor were then to be prepared by the
construction manager stating the additional work to be performed, the
deadline and the additional compensation, if any.
No change order would be effective unless singed by the CM, the
architect, and the contractor. No
oral modification of contract terms was permissible.
In
addition to the change order process, the contract addressed a separate
category called “claims.” The
difference in a change order and a claim is that change orders modify
the terms of a contract while claims seek relief owed “as a matter of
right” under the existing terms of the contract.
Written notice of any claim was required to be submitted to the
architect by the contractor within 21 days of an event or the discovery
of an event giving rise to the demand.
As a condition precedent to any litigation, the contractor was
required to first obtain an architect’s decision of a claim.
In
this case, Cameo, the contractor, submitted several change orders which
were denied. Cameo performed
the work demanded without obtaining change orders and subsequently
submitted change orders for its extra costs.
These change orders too were denied.
Cameo then filed suit against both the city and the CM, alleging
breach of contract by the city, negligence by both the city and the CM
as well as defamation, fraud, RICO violations, intentional and negligent
interference with prospective business advantage, intentional
interference with contractual relations, extortion, civil conspiracy,
and violations of the Davis-Bacon Act.
After
the defendants had the case removed to the federal district court, they
succeeded in having the court grant their motions for summary judgment
and dismiss all the contractor’s claims.
On appeal, Cameo argued that the district court erred in
determining that it had failed to give notice of its claims to the
architect. In particular,
the contractor argued that the process for submitting a claim “is
referred to as the ‘change order process.’”
In practice, the contractor claims that the parties amended the
claims process by allowing change order requests to be submitted and
approved after contested work had been performed. Cameo therefore argued
that its submission of change order requests satisfied the requirement
that written notice of claims be given to the architect before
litigation.
The
appellate court concluded that although the contractor submitted some
evidence suggesting the parties developed an alternative practice for
the approval of change orders, it had not proved that the parties
understood change order requests to be equivalent to submitting formal
claims to the architect as required by the contract.
The claims process was never modified in writing.
Since the contractor failed to adhere to the contract’s strict
requirement to give written notice of claims to the architect, the court
held the contractor was barred from filing suit in court.
This applied not only to breach of contract claims but also to
the alleged negligence-based claims against the architect.
The court concluded that the contractor’s disagreement with the
architect over verification of concrete placements was subject to the
same contractual claims process rather than a negligence action because
the architect acted within the scope of the contracts and incurred no
corresponding obligation directly to the contractor.
For
these reasons, the appellate court affirmed the summary judgment against
the contractor.
Commentary: This case
once again demonstrates the importance of knowing and following the
contractual requirements concerning the change order process and claims
process. There a numerous
reported court decisions in courts throughout the country upholding the
contract terms to bar contractor claims that failed to meet the time
requirements or notice requirements specified.
As explained by this court, when a contract states on its face
that it can only be amended in writing, it means what it says. Even if
the parties appear to informally waive the contractual requirements to
permit consideration of changes or claims that do not adhere to the
literal black-letter requirements of the contract, many contracts state
that such an apparent waiver on one matter does not constitute a waiver
of the provision going forward.
Even
where no harm or apparent prejudice has been caused to the architect or
project owner by a contractor’s failure to adhere to the strict claims
process requirements, numerous court decisions have held that the
failure to comply with the contractual claims process acts as an
absolute bar to filing claims in court.
The basic idea is that where commercial entities have bargained
for and entered into a contract, it is not proper for courts to undo or
rewrite the bargain.
As
part of the risk management training that I present to owners, design
professionals and contracts, I emphasize the importance of knowing your
contract. Know what it says
with regard to time limitations for filing change order requests and
claims. Know what it says concerning where to file and with whom to
address the change order requests and claims.
Be sure that the responsible field personnel and project managers
know the requirements. And
be sure they all follow the requirements.
About the author: Kent
Holland is a construction lawyer in Tysons Corner, Virginia, and is a risk management consultant for
the environmental and design professional liability. He also publisher of ConstructionRisk.com Report.
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Article
# 3
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Framing
professional negligence claim as breach of contract does not get around
shorter statute of limitations period for negligence claims
By: J. Kent Holland, Esq.
A
three-year statute of limitations for negligence claims was applied by a
court to dismiss a claim against an architect in which the claimant
presented its claim as one for breach
of contract based upon alleged breach express warranty.
The plaintiff asserted that a six-year period for breach of
contract claims should be applied instead of the shorter period for
negligence actions. The
court held that despite the contractual language relied upon by the
claimant, the essence of the claim was that the architect had performed
its contractual services negligently, and the legislative intent was
that no matter how a claim is presented, if it arises out of
professional negligence, the shorter limitations period must be applied.
In
the case of Kliment & Frances Halsband. v. McKinsey & Company,
Inc., 3 N.Y.3d 538 (Dec. 2004), an architect, Kliment & Frances
Halsband (K&H) peformed design services for McKinsey and Company,
the lessee of office building space.
Four years after K&H completed its interior design services,
McKinsey submitted a demand for arbitration, claiming that the architect
failed to provide fire protection in compliance with the building code.
The architect filed suit in court to a permanent stay of
arbitration, arguing that the claim was barred by the three-year statute
of limitations applicable to professional negligence claims.
The state trial court ruled against the architect.
It concluded that the claim was a breach of contract claim rather
than a negligence claim because the architects failed to perform a
contractual obligation. The
trial court thus held that the claim was timely within the six-year
statute of limitations applicable to breach of contract claims.
This was reversed on appeal, and the appellate decision was
further affirmed upon ultimate appeal to the highest court of appeals of
the state.
At
issue was whether a contract provision concerning code compliance
constituted an express guarantee that elevated the architect’s
responsibility to higher than the normal standard of care.
The contract provided the following:
“All plans, drawings, specifications and other documents
prepared by Architect or its consultants or engineers in connection with
the Project … shall be in compliance with al laws, codes, ordinances
and other requirements applicable to the Project (including without
limitation the relevant building code….)”
The
appellate division held that whether the alleged failure to comply with
the code was a breach of contract or tortuous (negligent) in nature was
immaterial for statute of limitations purposes.
In affirming the appellate court decision, the Court of Appeals
quoted the legislative history of the statute of limitations which reads
as follows: “ Where the
underlying complaint is one which essentially claims that there was a
failure to utilize reasonable care or where acts of omission or
negligence are alleged or claimed, the statue of limitations shall be
three years if the case comes within the purview of [the statute]
regardless of whether the theory is based in tort or in a breach of
contract.”
Even
though the claimant had alleged breach of an express, rather than
implied, term of the agreement, the court held that “while compliance
with the relevant building code may have been a particular bargained-for
result, that result is not inconsistent with an architect’s ordinary
professional obligations. Making
such ordinary obligations express terms of an agreement does not remove
the issue from the realm of negligence as argued by McKinsey, nor can it
convert a malpractice action into a breach of contract action.”
Comment: This court
concluded that although the architect expressly committed by contract to
comply with various code requirements, this did not constitute an
express warranty that would turn this into breach of contract claim and
thereby avoid requirements applicable to professional malpractice
claims—such as the shorter statute of limitations period.
This would also mean that the claimant would be required to prove
that the architect’s alleged lack of code compliance was the result of
negligence. Thus, it appears
that the issue is whether the architect complied with the generally
accepted standard of care. In
an action based upon negligence, a claimant would have to prove not only
that the architect failed to comply with a code provision, but also that
it was negligent in doing so. Mere
failure to comply does not necessarily entitle the claimant to a
judgment against the architect.
The reasoning of the court is quite important because quite a few
contracts seem to be attempting to make the design professional
contractually liable for any and all errors regardless of whether there
was negligence or not. If
the reasoning of this opinion is applied, one might argue just as held
here that “Making such ordinary obligations express terms of an
agreement does not remove the issue from the realm of negligence … nor
can it convert a malpractice action into a breach of contract action.
Design
professionals and their attorneys are sometimes frustrated by some
project owners who attempt to convert all professional obligations into
strict contractual commitments with the expectation that they can win a
claim against the design professional without proving negligence and
that they can even prevail to obtain insurance proceeds from the
architect’s professional liability policy in the absence of
negligence. Insurance
professionals and risk managers routinely advise design professionals to
avoid “contractual liabilities” by which the design professional
would have liability for non-negligent performance since the liability
expressly excludes coverage for “contractual liability” and express
warranties. This decision
might be a useful one to share with such owners during contract
negotiation. Attempting
to hold design professionals responsible for anything other than their
negligence is not in the best interest of the project or project owner.
As seen in this case, it may be the cause unnecessary confusion
and litigation. And it may
also cause an insurance carrier to deny coverage for a claim if the
owner in fact recovers for breach of contract instead of for negligence.
About the Author: Kent
Holland, publisher of ConstructionRisk.com Report, is an attorney a risk management consultant.
He provides risk management services and contract negotiation services on
behalf of design professionals and contractors.
He is the author of several books and numerous articles on
construction law and risk management.
See www.ConstructionRisk.com
for more information and resources.
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Article
4
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Managing Contract Changes
by
J. Gerard Boyle
Claims
Analyst and Senior Project Manager
Revay and
Associates Limited –
Toronto
Shortly
after work commences on design-bid-build projects all over this country,
it can be predicted with reasonable certainty that the Owner and/or
Consultant will confidently announce to the General Contractor (GC) and
its subtrades: “There will be no
contract changes on this project”. This they may say after 10
addenda have been issued during a three-week tender period, and despite
the fact that they themselves have never been on a project without
contract changes (and often a great many). If they actually believe this
dictum can be observed, they suffer from the sort of wishful thinking
that had Francis Fukuyama announcing the end of history. And yet while a
GC may shake its head at such idle pronouncements, knowing full well
that changes (along with the delay, disruption and consequential effects
they frequently cause) are inevitable, the GC often conducts itself as
though totally unprepared to deal with them.
The
following discussion suggests that the GC can manage changes in such a
way that its exposure to claims is minimized and its profitability is
preserved, while at the same time avoiding, or a least minimizing, the
deterioration of relations with the Owner and Consultants prevalent
where change management is wanting. Effective change management is
conducive to the health of the project; an interest shared by all
project participants, each of whom has a part to play in ameliorating
the potentially consumptive effects of changes to the work.
Changing
the Climate: The Role of the General Contractor
The GC must
take the lead in getting the project participants to realize that all
parties have an interest in the early identification and resolution of
changes because: a) failure to do so will lead a project into a morass
of conflict and contentious claims; and b) nobody else is going to do
it. The GC’s project administrator must often do this in a climate of
mutual suspicion that the project participants carry as baggage from
past disasters. For their part, Owners are convinced that Contractors
have a vast apparatus dedicated during the bidding stage to change
discovery, so that they can exact their ransom on the job absent
competitive pressures. GCs, confronted too often by Consultants who
defend deficient documents against reasonable claims for extra, become
totally skeptical about the Consultant’s objectivity.
The truth
that Owners should know is that GCs barely have time to assemble a bid,
let alone to attempt the sort of predatory ‘change discovery’
strategy posited by the ‘Contractor conspiracy’ theory. GCs gain
perspective if they realize that the Consultant is often deprived of the
resources required to produce more complete documents, and may have an
Owner muttering ‘errors and omissions’, each time he presents a
change order for signing. Contending with, and overcoming, the
prevailing prejudices of the project participants is an extremely
important first step in creating an environment conducive to the
resolution of changes.
There is a
compelling need for leadership in this regard, and if the other project
participants are disinclined, it is in the interest of the GC to assume
the leadership role. Discussions about leadership often appear to float
up in a balloon filled with the heady air of idealized assumptions about
a utopian project where the players, once enlightened, are readily
disposed to rise above their narrow self-interest. The type of
leadership called for here is not of this sort: it is pragmatic, not
Pollyannaish; it is earned, not imparted.
The
leadership recommended here can mean dollars in a GC’s pocket and
avoidance of unnecessary exposure to Owner and subcontractor claims.
First the GC demonstrates that if he has the information he can build
according to schedule. Next he shows that he has control of his subs,
and that if they do not perform he will take swift action. He knows
where he has been and where he is going, by way of attention to
scheduling. He controls the project documentation, especially the flow
of changes. He has a thorough understanding of his contractual
rights, but conveys this without intimidation. He is so confident in his
leadership position that he can manage forcefully, but judiciously,
utilizing effective conflict-mitigating strategies such as
interest-based, rather than position-based, approaches.
Absent this
type of leadership, scenarios such as the following may be expected.
Mismanaging
Changes: A Typical Case
During the
third month of a scheduled nine-month project, the Owner directs the
Architect to prepare a Contemplated Change Order (CCO) that will involve
changes to the Architectural, Civil, Mechanical and Electrical scope of
work. Two weeks pass before the CCO is issued, and the work involves a
change to one area of the building from the currently required classroom
arrangement to an office space. The layout of the affected area,
including wall and ceiling layouts, will be completely revised. Light
fixture and diffuser locations and types will be changed; re-ordering
will be required.
Some
M&E rough-in and drywall stud installation has already been
completed. The GC instructs the trades to stop work in this area in
accordance with the Owner’s verbal instruction – the Owner told him
unofficially the change will definitely be implemented because it has
been directed from ‘higher-ups’.
This is a
renovation project and by this time there have been numerous other
(especially structural) changes: mostly Owner-directed (by a CCO), but
also a growing number of changes for which no CCO has been issued. Given
the upsurge in price requests, and his growing commitments on the other
two jobs he is running, the GC is falling behind in delivering the CCOs
to the affected subtrades, and in this case almost a week goes by before
the change is faxed out. It doesn’t help him that some trades,
especially the painting subtrade are consistently slow to price.
The GC is
actually not aware that the Mechanical scope definition for this change
is incomplete and that the Mechanical subtrade has been bypassing the
GC, pushing the Mechanical Consultant for information so that he can
quote the work. The structural scope of work is not accurately depicted
in the CCO: major alterations to the approach have been worked out on
site. The GC instructs his steel subcontractor to ignore the obsolete
CCO and quote the work as it will be constructed.
About four
weeks after receiving the change the GC has assembled about ten
quotations which he hands to the Architect at the next regular site
meeting. During the site meeting, the GC becomes aware by way of the
complaints of his own superintendent and some of the trades that this
change (and others) is now seriously affecting the progress of the work.
The architect looks over to the Owner and observes that he has not even
received pricing for the change. The GC quickly acknowledges and
apologizes for the delay in pricing, but explains that the quotation is
included in the package he has before him. “In the interest of
schedule”, the GC asks the architect, “can we have an immediate
opinion on the price.”
The
Architect objects, advising he will need more time to review the quote,
and then notices that the painting price does not include a break down
for the labour and material portion of the work. He chastises the GC:
“This is not the first time that changes are being submitted without
adequate detail.” The GC almost replies that the Architect has not yet
responded to a single quotation but, feeling himself on shaky ground in
this case, he decides that now is not the time to get into an argument.
The
Mechanical Consultant, who only visits the site every other week is not
available to comment on the Mechanical portion of the quote. Although
the GC has succeeded (at his own risk) in convincing the steel
subcontractor to proceed with the structural work in the interest of not
delaying the job, the Mechanical sub will not proceed without a
go-ahead. Another week passes by before the Mechanical Consultant
finally sends his approval recommendation to the architect. However, the
architect is convinced the Mechanical Contractor is ‘gouging’, and
recommends to the Owner that the quotation not be accepted.
Instead, a
Change Directive is issued, materials are ordered and the work is
performed. Two months later the GC submits a fully substantiated
quotation complete with time sheet signed by his superintendent,
delivery slips and invoices for all items. At the next site meeting the
Mechanical subtrade complains that he has not yet invoiced for any of
the work (note: the GC will not permit billing for a change without a
corresponding Change Order) that has been performed and insists on
immediate issuance of a Change Order. The architect complains that the
substantiated labour hours “seem very high”. The Mechanical
subcontractor furiously objects, pointing out that all of his time has
been duly signed by the GC’s site superintendent. The Architect cuts
off the discussion, concluding that since the amount of the quotation
has greatly exceeded the original quote he will simply recommend
acceptance of the original quote amount. The GC bangs the table and
announces that no more changes will be performed without prior approval,
and the meeting abruptly ends. “And forget about your schedule”, he
says, to which the Architect responds that he has not seen a single
schedule update.
Later, the
GC’s project administrator is brought before his own management who at
first assail him for an architect’s letter accusing the GC of not
pricing and managing the job changes efficiently. They soften their
position once he explains that he is being inundated with changes on the
job and reminds them that this after all is only one of three jobs he is
looking after. Just as they all agree on a “hard ball, letter
of-the-law approach” to deal with future changes, a fax is received
from the Mechanical Contractor wherein he asserts that he is being
delayed in the progress of the work and is being adversely affected by
late payment on extras.
Identifying
the problems and finding solutions
Variations
on the above scenario play out on construction projects with disturbing
regularity. It should first be understood that although there is plenty
of blame to go around in this deteriorating situation, it is clearly the
case that the GC is not playing the leading role in the resolution of
changes and this is to the great detriment of his firm and the overall
health of the project. It has been said that if the facts are on your
side, you should hammer the facts, if they aren’t, hammer the table.
This GC should chastise himself before berating the Consultants, he is
really banging the table because he has needlessly lost control of the
project.
To
begin with, if this GC actually knows his contract, he has decided to
ignore provisions that would otherwise have afforded protection to his
position and that of his subcontractors. The first thing that should
have occurred to the GC is to consider what type of change he was being
asked to perform. This change is not a straightforward addition, or
‘extra’, as for example when a diffuser is added to a room
sufficiently in advance of the planned schedule so as not to require
re-work or cause interruptions. In the case of this particular change,
re-work and re-ordering will be required, and delay and disruption will
result. Depending on the circumstances, such a change may fall into the
category of a ‘scope’ change and, if it does, the GC has a choice:
he may have the right to refuse to perform the work.
The
contract clearly allows the Owner to “make changes in the Work … by
Change Order or Change Directive”.
However, the Owner and
GC must “agree to the
adjustments in contract price and contract time”.
Where there is no agreement, and the Owner requires the GC to proceed,
the Change Directive is to be used.
But a Change Directive may only deal with work “within the general
scope” of the contract documents.
Therefore, in the case of a change outside of the scope of the contract,
if the GC decides that it does not want to perform the work, it could
arguably simply resort to its right under the contract to refuse such
work.
Having said
this, it must be stressed that in this context the CCDC 2 – 1994
contract does not provide a definition for a ‘scope’ change, nor
does there appear to be a consensus in the industry on what actually
constitutes a general scope change. Consequently a decision to refuse to
do the work should only be considered after legal advice. The
consequence of incorrectly determining work to be outside “the general
scope of work” could be severe and this is likely a rare occurrence.
The next
important point to be made is that the verbal instruction the Owner gave
to the GC is insufficient. A stop work order, being a change to the
work, should be issued as a Change Directive.
If the Owner had ultimately decided not to proceed with the change, the
GC would have experienced delay, but by having nothing in writing, he
may have no protection under the contract.
Having
apparently ignored any consideration of whether he is arguably
contractually obliged to perform this change, the GC then proceeded with
some elements of the work without either a Change Order or a Change
Directive. Of course the wording of the contract is very clear in this
regard: “The Contractor shall
not perform a change in the work without a Change Order or Change
Directive.” In fact, the GC did not
proceed out of ignorance of this very clear stipulation; he did so
knowingly, and was already performing other changed work without a
change order or a change directive.
There were
several factors at work in his ‘reasoning’: he had a level of
comfort and trust with this Owner and so felt reasonably sure that the
changes would eventually be approved; he did not want the schedule to
suffer by delaying work he was confident would be required; he thought
his willingness to proceed with changes prior to a Change Order or
Change Directive would foster good will and; finally, he was reluctant
to demand strict adherence to contractual procedures on changes because
he felt vulnerable – he was not pricing in a timely fashion and was
concerned this deficiency would become very apparent by this approach.
In fact, he has fallen, by his own neglect, into the trap of proceeding
with work prior to pricing, and without a Change Directive that would
define the method of evaluation.
Absent the
Change Directive, the Consultant, if he does not simply refuse to
acknowledge the change, will often take the position that the work the
GC is performing is to be evaluated as a lump sum quotation, in which
case actual job site conditions may be ignored in favour of an
‘objective’ estimate.
As the GC
sees it, he is taking a calculated risk, but such risk is really
unnecessary and ill advised. Assuming that the number of changes that
are issued do not become so overwhelming that it can be reasonably
asserted that existing resources can no longer be expected to deal with
them,
and furthermore that the price request document is adequately detailed,
then a failure of the GC to produce pricing in a timely fashion, is
really an inexcusable failure because it fatally weakens his ability to
demand accountability from the other project participants.
Once the GC
makes a management decision to devote as much time as it takes to keep
on top of pricing, it must enforce the same requirement on all of his
subtrades. The GC’s subcontract with the trades should include a
clause stipulating a strict time frame for subtrade pricing, after which
it reserves the right to conclude no adjustment to the subtrade’s
price. The GC’s log of contract changes which he creates to record
every extra cost item he identifies, should become the document of
reference for change status and should be reviewed at every site
meeting.
The CCOs
being issued on this project are often incomplete and incorrect, and
this is undoubtedly slowing pricing and affecting the quality of the
submissions. The Mechanical subtrade is chasing the Consultant for a
full scope, and not making an issue of it because he wants to preserve
his good relations with the Consultant. Furthermore, the CCOs are not
being issued quickly enough to keep up with the changes on the job. This
will not change until the Owner and Consultants are taken to task. The
Request for Information (RFI) document should be used to record
deficiencies in the price request documents.
As evidence
accumulates of consistent failure to produce adequate information to
price, the GC should request in writing that the change(s) in question
be issued as a Change Directive in order to mitigate potential or actual
delay to the project.
A GC has
recourse by the contract to deal with the inadequacies of resources on
the Owner’s side and vice versa. If, as in this case, a Mechanical
Consultant is not available to visit the site in order to fully evaluate
some aspect of the quote, and it is delaying the process, request a
Change Directive.
After all
the time wasted in this process, albeit some of it due to the
Contractor, the Consultant then attempts to ‘negotiate’ the amount
of the Change Directive. The contract makes clear that the
earlier-submitted lump sum price is superseded by the time and material
approach (unless both parties agree otherwise),
the Consultant must evaluate the substantiated quote for the work
performed on a time and material basis in accordance with GC 6.3.4 and
on its merits.
Labour
hours in particular should be signed on a daily basis, preferably by an
authorized agent of the Owner or Consultant. Once this is done, there is
still room for the Consultant’s reasonable questions with respect to
particulars of the quotes, but “seems high” does not constitute a
reasonable review of the Contractor’s detailed quotation. Accumulated
hours should be presented to the Owner/Consultant at least once a week
and the approved amount billed each month.
Changes
that the Owner/Consultants will not Acknowledge
The
foregoing example dealt with a change that was introduced by the Owner,
but another significant challenge for a GC is to defend the reasonable
claims for extra’s that the Owner/Consultant refuse to fairly
consider. The GC must be fair and reasonable, so that he will engender
trust, but firm and unrelenting in demanding equitable compensation for
extra work according to some fundamental principles supported by the
contract, the common law and, sometimes, common sense.
The most
important principle is that on a design-bid-build project, the GC may
expect that the bid documents including plans, specifications and
addenda convey the scope in a clear and comprehensible fashion. The GC
is not a designer unless the contract specifically states otherwise (as
is the case, for example, in GC 3.3 Temporary Supports where the GC must
hire a structural engineer to produce a design).
The GC can construct only to the extent that the design and Contract
Documents permit such performance.
Experienced
Contractors are familiar with lines of argument that Owners and
Consultants have developed to try to contend with their own
vulnerability in this regard. An attempt may be made, for example, to
use the pre-bid site visit as a substitute for a documented scope of
work, even though the contract documents, by themselves, should convey
the scope of the work, and should not require the elaboration of site
interpretations to produce a complete picture of the scope of work.
Information
that is necessary, but not sufficient, is sometimes offered as a
complete scope (as when for example fire extinguishers are mentioned in
a specification but no quantity is given and none are shown on the
drawings). Often what a Consultant calls ‘coordination of the work’
which is the responsibility of the GC is really ‘coordination of the
design’,
for which the Consultant is responsible.
It should
also be remembered that once these approaches are exposed for what they
are, the GC still has to construct, and that without his prodding and
contractibility input the information he requires to build will probably
not be provided quickly enough. Even when the Owner/Consultant are
clearly at fault, the GC can never be the indifferent bystander, he must
not only be a part of the solution, he must drive the solution because
if he does not, the potential damages to which all are exposed, may be
magnified.
Delay
and Impact
Changes are
so dangerous for GCs because the delay, disruption and/or impact effects
they often cause, while potentially claimable for the Contractor may
instead become, if not managed properly in accordance with the contract,
a situation of significant exposure to claims. The contract allows that
every change should be considered with respect to the potential delay it
may cause.
Consistent
with the contract, The Canadian Construction Association recommends that
GCs add a line to their quotations for “schedule
acceleration/extension” as well as “impact” in their model Change
Order Quotation form.
It goes on to suggest the inclusion of the period of days (addition or
deletion) of schedule effect and contains wording reserving the right of
the Contractor to assess impact of the change at a later date if such
impact cannot be assessed at the time.
Why then do
GCs so often fail to include for the time impact effects of a given
change? Some GCs will include the exculpatory language regarding impact,
but yield to the objections of the Consultant. Others will include the
suggested allocation of schedule days affected by the change, but more
often GCs do not directly address schedule at all. Why would a
knowledgeable Contractor not attempt to assign a time effect when the
contract clearly affords this right?
Sometimes
it is actually not possible, in other cases, Contractors are actually
concerned that in so doing, they wave their right to future claims for
the accumulated affect of all changes. But in most cases it is simply
because the GC has failed to update the CPM schedule, which is the
contractually mandated instrument of time effects, on a regular basis.
Most
contracts require the GC to update the critical path schedule on a
monthly basis.
Moreover, written notice of delay must be given by the Contractor to the
Consultant within 10 working days after the commencement of the delay.
The GC who fails to provide clear and timely notice may not only waive
his contractual right to compensation, but in failing to assert his own
rights he may leave himself exposed to claims by subs and the Owner.
The GC must
understand how changes are affecting the schedule. On changes where
there is a clear-cut effect on the original program, it is preferred to
perform a ‘snapshot’ analysis.
However, many GCs are either not trained in the techniques of such
analysis or, if they are, fail to allocate their time to this task. The
great value of such a demonstration is to introduce into the
contemporaneous job record a document that will record agreement at the
time with respect to relevant facts pertaining to the as-built status of
the job and schedule logic. If not so recorded, such disputes begin with
efforts to negotiate agreement on fundamental facts that might otherwise
have been established. Delay and disruption claims should be
governed by the contract.
It is in
the GC’s interest to devote sufficient resources to realize this
objective. It is entirely possible, but rarely accomplished, to settle
changes and delay and impact claims during the life of the project and
without acrimony or resort to legal remedies. To be sure this will
depend to a large degree on the reasonableness of the project
participants, but critically important is that the GC is in control of
documentation (especially changes), monitors schedule, knows his
contract, and exercises leadership in contending with changes and the
delay and consequential effects they so often bring to a project.
Early
Discovery of Changes
It was
suggested above that GCs, owing to time and resource constraints, do not
have time during the tender period to perform a ‘change discovery’
examination of the bid documents. After award however, it is of great
benefit to the Contractor to work with its subcontractors to identify
changes at an early stage (say within the first month), and to then have
the Consultants document the required design change so that the delay
effect can be minimized. It is even suggested that the Owner and
Consultant be asked by the GC to participate in this exercise, although
they may not be able to see that it is in their own interest to settle
the scope early. Such an early approach by the GC may, if nothing else,
succeed in moving the Owner/Consultant away from the ‘Ostrich’
mentality on changes, so that the reality can be dealt with.
It should
be understood that not all changes can be discovered at an early stage.
For example, the fact that the Architect’s layout for the Mechanical
room conflicts with Mechanical design, may not be discoverable even by
careful review of working documents, and so will only be discovered once
work is sufficiently advanced. Changes of this sort may be symptomatic
of a pervasive problem of incomplete, absent and/or conflicting design.
In such cases, the pro-active approaches advanced here are of limited
utility, and the best a GC can do is to adopt a ‘damage control’
posture.
There are,
however, changes that can and should be identified by the GC at an early
stage of the project. Included in this category are changes of the sort
found on renovations projects where, for example, the Consultants rely
upon the original project ‘as-built’ drawings, later found to be
incorrect, as a layout template. In this situation the GC may find that
rooms indicated in the bid documents do not even exist, wall locations
may be incorrectly drawn, ceilings identified in schedules as drywall
may be plaster; all involving changes to the original plan which may
prove significant. Other examples of ‘discoverable’ changes
resulting from an inadequate ‘survey’ of the building by the
designers are as follows: the existing masonry walls require extensive
repair not indicated in the documents; or the window opening is not
large enough for the new louvre it is to receive, requiring a new
structural steel header.
Critical to
the success of this early ‘change discovery’ approach is that the
GC’s supervisor and the subcontractors understand that among the
priorities during the first weeks of the project must be a wholesale
site investigation and a thoroughgoing document review. Moreover, shop
drawing submittals, which introduce an essential, additional level of
information that may reveal design problems, must be expedited. Of
course if, as is often the case, the GC is dilatory in the award of
subcontracts, an essential participant in the early change discovery
approach is not available, and the process cannot really get started in
earnest until awards are finalized.
Conclusion
Many GCs
today see themselves as ‘brokers’. This thinking is encouraged by
economic considerations. If project delivery for the GC only involves
limited oversight of the work that others (subcontractors) will perform,
overhead costs can be minimized. These days a GC ‘passes through’
most of the actual construction work as well as the provisions of the
‘prime’ contract to its subcontractors. What cannot be ‘passed
through’, and where the ‘brokerage’ model breaks down, is the
requirement for effective management of the project in the volatile
atmosphere of contract changes, and the leadership this entails. It is
hoped that this article will cause not only GCs, but Owners and
Consultants as well, to realize that the success of the project requires
a shared commitment to the early identification and timely resolution of
changes and, equally important, the allocation of sufficient resources
to accomplish the task.
About the Author: J.
Gerard Boyle is Claims Analyst and Sr. Project Manager with Revay and
Associated Limited, a Canadian firm with a national practice of
construction consultants and claims specialists, assisting owners and
contractors on projects. He
may be reached in the
Montreal
office at 4333 Ste. Catherine Sat., West,
Suite
500
,
Montreal
,
Quebec
H3Z 1P9
; (514) 932-2188; montreal@revay.com;
http://www.revay.com. This article
was originally published in The Revay Report, Vol. 23, No. 3 and is
re-published by ConstructionRisk.com Report with permission.
Editor’s Note: This
article, although addressing the question of contract changes in the
context of specific Canadian contract language has valuable insights
with general application to contracts in the
United States
and elsewhere. With
the number of subscribers to our Report that are based in Canada and
countries other than the United States I believe it appropriate to
include this article for our readers.
=====================================
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ABOUT
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This newsletter Report is published and edited by J. Kent Holland,
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