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Inside This Issue:

 

  • Professional Liability Risks in BIM Applications:  If BIM is Here to Stay, How Can we Insure Errors and Omissions?
  • Contractor not Entitled to Recover from Subcontractor who Met Specifications Even though Project Failed to Function as Intended;
  • U.S. Needs Immigrant labor and Immigration Reform;
  • Pitfalls of Using Collateral to Obtain Bonds

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Article 1

Professional Liability Risks in BIM Applications:  If BIM is Here to Stay, How Can we Insure Errors and Omissions?

By:  Rodney J. Taylor, J.D., P.E., CPCU, CLU, ARM (December 14, 2007);
Managing Director; Aon Environmental Services Group; Rodney_Taylor@aon.com

Introduction

The architectural profession is under considerable pressure to adopt and utilize Building Information Modeling (BIM) technology to make the design, construction operation and maintenance of buildings more efficient.  BIM consists of a system or systems that utilize information generated and maintained throughout the lifecycle of a building, including its design, to coordinate the work of design professionals, contractors, subcontractors and others to provide a more comprehensive model of the building and its functions than is possible under current design and construction delivery systems.  Owners believe that the use of BIM will reduce the overall costs of design, construction and operation by eliminating loss of information among parties that have traditionally worked with incomplete knowledge of the data developed by others parties that contribute to the design-build process.[1] If the promise of BIM is fully realized, it should result in fewer errors in design and construction since material flaws should be detected earlier in the process and corrected before they are incorporated into structures.

While the technology has existed for some time to create, store and provide access to more comprehensive information regarding the design and construction of buildings, owners are just starting to become aware of the potential of BIM to streamline the process by which building construction is carried out.  The movement toward adopting BIM received a substantial boost when the General Services Administration announced its intent to require all design submittals to be in BIM format before the end of 2006.[2] With this bandwagon already rolling, what should a design firm do to become more knowledgeable about BIM before getting onboard?  More importantly, what problems does the use of BIM present for architects, engineers, contractors, subcontractors and owners looking to utilize the technology to get new facilities completed on time and on budget, and to operate them more efficiently?

Comparison of BIM Programs Available

The power of BIM was conceived as a single building information model for the entire construction industry.  The International Alliance for Interoperability pioneered an international technology effort to define a single building model as one authoritative semantic definition of building elements, their properties and interrelationships.  This work was largely successful with the Industry Foundation Class (IFC) Model being endorsed as an International Standards Organization standard.[3] However, in the absence of a single model, software vendors aspiring to gain market share forged ahead with competing BIM systems that differed from each other in material details.

Today, the most popular BIM systems each have support from segments of the market and are being used on real life projects.  The following is a brief summary of the systems offered by the leading suppliers of BIM technology:

1.      Autodesk Architectural Desktop (ADT) – provides a transitional approach to BIM.  As an intermediate step from CAD, ADT creates its building model as a loosely-coupled collection of drawings, each representing a portion of the complete building model.

2.      Autodesk REVIT – a comprehensive central project database with the ability to coordinate every building element in one database.  REVIT is a proprietary data model, which does not currently support IFC import/export.  For software developers, REVIT provides limited access to the building model information making coordination with other BIM systems difficult.

3.      Bentley Systems – provides an integrated project model by assembling a family of application modules.  Bentley utilizes an evolutionary approach that allows its users to migrate work practices that have their origins in CAD systems.  Access to project data is provided with IFC file format being supported, however, the highest degree of interoperability can only be achieved when the entire family of Bentley products are deployed on a given project, making Bentley’s BIM technology relatively expensive.

4.      Graphisoft ArchiCAD – creates a database representation of a building by using its software as one of many satellite applications orbiting a virtual model rather than being viewed as the central repository of all model information.  Graphisoft works with a number of application partners to develop IFC files that can be stored in a single database that makes up the virtual building model.

5. Nemetschek AllPlan – the AllPlan database is wrapped by the Nentschek Object Interface layer to allow third-party design and analysis applications to interface with building objects in the model.  This system can utilize a number of existing purpose-built models for the assembly of a total building model that incorporates data from each of the contributing models.[4]

 

Current Status of BIM and the Reaction of the Architectural Profession

BIM is currently employed by professionals on all types of building projects from the simplest warehouse to the most complex new structures, but the technology is relatively young and still evolving.  BIM provides the potential for a virtual information model that will be passed from the design professionals to the contractor and subcontractors and then to the owner and operators, each adding additional discipline-specific information and tracking changes to a single comprehensive model that defines the structure.

As computers and software become more capable of handling building information, this process will have a more dramatic impact than in current projects.  With all information being derived from a single database, it is believed that there will be a significant reduction in errors that are currently blamed on incomplete information or inaccurate transmission of data from one part of the project (i.e., architects, surveyors, geologists, engineers, etc.) to another (i.e., prime contractor, subcontractors, etc.).

Not all architectural firms are capable of working with BIM and, as described above, there is a lack of uniformity among systems currently available that marginalizes some of the benefits that are possible through the use of this technology.  Many architects will not be able to afford the investment that is required in technology and in specialized personnel capable of converting design concepts into three-dimensional models.

A cultural change will also be required within architectural firms that will allow the acceptance of new roles for designers that have been accustomed to directed work under the leadership of a tenured professional.  This is not just an evolution of computer-assisted design (CAD) technology, which took architects from hand drawing and t-squares to computer generated two-dimensional drawings, but a quantum change in the fundamental process of building design and the development of information that will be used by contractors to execute the architects’ designs and then by owners in operating completed facilities.  It will require that architects have a better understanding of the building processes and of materials and products that are incorporated into their designs.

BIM organizes the information surrounding a building project in one or more databases.  Using this technology, the architect does not directly make drawings, but enters information in these databases using a variety of means, including a graphic environment.  As the architect “draws” components of the design, objects with an extensive array of properties are created in a database.  This information is then used to generate drawings, but may also be used in a variety of other ways in other stages of the construction and operation of the building.[5]

The technological advances of BIM have the potential to enhance the role of the architect in the construction process, but if not properly implemented it may become an additional cost that does not translate to higher fees for the broader range of services that will be required.

Barriers to the use of BIM include: (1) project teams that are already optimizing their work processes using current technologies that do not integrate BIM principles; (2) long-standing delineation of professional responsibility and liability among project team members that leads to resistance when changes are required; (3) reliance on best-in-class applications and purpose-driven models from different vendors based on specific requirements of individual projects; (4) an iterative design process impacted by fast-track project schedules that do not allow time to integrate new processes such as BIM; (5) lack of uniformity among BIM technologies and the information they are capable of incorporating; and (6) varying project delivery methodologies employing a variety of contractual relationships among designers, contractors and owners.[6]

Comparing BIM to Traditional Design/Construction Approaches

The design and construction of buildings have traditionally been segregated into specific tasks with responsibilities clearly defined among the design team that develops concepts and plans to meet the owner’s needs, the contractors who execute the plans of the architect and engineers, vendors that supply standard and custom products to complete construction activities and owners that take control after completion.  The process begins with conceptual drawings that are then translated into working drawings and written specifications.  These hard copy two-dimensional documents are delivered with a request for proposals to contractors that are typically awarded the work based on the lowest conforming bid for completing the construction substantially in accordance with the architect’s plans and specifications.

From a standpoint of risks, the lines that divide these parties are relatively clear.  The design team has a professional liability risk for failing to perform their services in accordance with recognized standards for their various specialties.  This risk is typically addressed by the purchase of professional errors and omissions insurance.

Contractors, on the other hand, assume the risks of conducting construction activities in a safe manner and also have a risk of claims arising out of completed operations (i.e., construction defects).    These risks are customarily addressed by the purchase of general and excess liability policies.  The risk that the contractor will not complete the required work is shifted, in part, to sureties that write performance bonds guaranteeing delivery of the projects on time and on budget.

Vendors warrant the performance of their products for specified time periods following delivery or installation and insure the risks with product liability coverage provisions of general liability policies.  The owner is then responsible for risks arising out of operations and maintenance of the completed structures.  A Builder’s Risk Insurance Policy provides property loss protection during construction and is converted to a permanent form of insurance for the completed structure.  During construction, the risk of property loss may be transferred to the prime contractors or be retained by the owner.

With the division of assignments and relatively clear delineation of risks, this system of building design and construction has lasted for decades with relatively few changes.  More complex projects and higher construction values gave rise to a number of variations in insuring construction risks such as the introduction of owner-controlled and contractor-controlled coordinated (wrap-up) programs combining coverages to reduce the costs and the difficulty of administering risk management programs on large construction projects.  Design/build projects resulted in a combination of the functions of architects and contractors and resulted in the need for new risk management tools to address situations where the lines among parties participating on projects became blurred.

Proponents of BIM suggest that it will ultimately result in less risk for design professionals by alerting them to potential constructability problems at an earlier point in the design/construction process.[7] By providing more information and incorporating that information into three-dimensional models, it is theorized that the architect will be able to detect design issues and resolve them before they get to the contractor in the form of working drawings or specifications.  For example, if a window system that might be appropriate for use in Phoenix is incorrectly specified for a building to be constructed in Cincinnati , the BIM database would identify this when comparing the window manufacturer’s specifications with the geographical and meteorological data for the subject property.  The error could then be corrected before the data set was transmitted to the contractors along with the balance of the package provided for bidding purposes.

Early experience with BIM has resulted in a realization that there are limitations in the use of this technology that will take months or even years to overcome.  Some of the limitations noted to date include:

§         The size and complexity of files that BIM systems create cannot be managed by currently available hardware and software systems.  This typically results in portions of the project data being handled through conventional technologies even where BIM is being utilized.

§         Sharing of data requires full compatibility of hardware and software and a coordination of the persons entering data into the systems.  Many architects have defaulted to conventional drawings and specifications when they were unable to pass data effectively to the contractors working on their designs or to subcontractors that do not have BIM capabilities.

§         Data management may not yet be capable of addressing unusual design features of complex structures.  For example, where walls are not vertical, the systems may not be capable of the managing the complex data required to modify architectural elements when changes are made in other aspects of the structure.

§         The inability to represent different fundamental design concepts in the early stages of the project make it difficult for architects to present alternative design options.  The amount of detail involved may require the development of separate BIM databases for each of the design alternatives, increasing the cost and time required for an owner to review and compare alternatives.

§         Inability of construction firms to accept and utilize data developed during the design phase may limit the use of BIM to phases of the project rather than allowing its benefits to be shared by all participants.  If BIM has been challenging for architects, it has been even more difficult for construction companies to integrate into their bidding and construction processes.  Even large contractors must select from among competing BIM systems, hire personnel to operate the systems and input data.  The contractors then must, determine how they will utilize the information being developed by architects, some of whom are using different hardware and software systems to prepare bids, break down work to be performed by subcontractors and implement the architects’ designs.

§         The ability of BIM to continuously refine a design as the project progresses is contrary to normal construction processes, especially where bids and budgets are involved.  While changes in the design may be made instantaneously, the impact on implementation and costs may be profound.  Controlling costs where designs continue to evolve will be a problem for contractors and for sureties providing performance bonds on construction projects.[8]

Liability Issues Associated with the Use of BIM

Reliance on the information developed and maintained in a BIM system raises questions concerning the role of the architect in performing professional services associated with the construction process.  With systems that are capable of generating beam sizes and concrete thickness from three-dimensional models, who is responsible for the specification of the final elements incorporated into a structure designed and built with BIM technology?  Is the answer the same if the architect’s data is supplemented by data from the contractors, vendors and the owner that result in the selection of different elements from those originally specified by the architect and/or the BIM system?

Over-reliance on BIM technology presents a chance for heightened liability on the part of design professionals if the information being input into a BIM system is incorrect or the software processes it incorrectly.[9] Some architects and structural experts fear that this will result in catastrophic failures where no human judgment is applied after the fundamental construction components have been selected by computer programs based on the architect’s design parameters.  There is also a fear that the new breed of architects that interface with the BIM systems may lack field experience and “street-sense”.  This could lead to construction using materials and systems that experienced personnel would intuitively understand to be unworkable.

Legal issues will also arise in determining responsibility for design errors where greater collaboration among the construction team spreads decision-making for design elements beyond the traditional set of design professionals.  Liability may depend on what information is included in the database, who has the ability to add or change data and how much reliance contractors place on the output from the BIM system.  With the lines of responsibility blurred, professional liability risks may spread from the traditional design professionals to include contractors, subcontractors and even building owners that alter the data in the BIM databases.

There are also questions with regard to who has the responsibility of maintaining the databases and providing warnings of possible problems that should be apparent from cumulated information.  For example, if a roof structure that has been implemented on a number of projects proves to be more likely to fail than similar systems, who is responsible for tracking its performance and providing warnings to owners that may be unaware of the potential for early failure?   If the owner is in possession of the data showing the possibility of early failure by virtue of having access to the database, is the architect absolved from liability for future damage caused by a roof failure or the failure to warn of possible risks?

Another question that has been asked with respect to the use of BIM systems is whether they alter the standard of care applied to design professionals for their work in developing building concepts and specifications.  It is important to understand that BIM does not promise “perfect” drawings.  The work of the architects and engineers is still subject to errors that can result in change orders during construction or future structural problems.  The owner still needs to set aside a contingency fund for construction coordination issues that arise during construction.  What may change is the standard by which an architectural firm’s competence is judged, with the “reasonable” architect being the one that uses BIM, while the one that does not is automatically considered to have acted in a manner that is not prudent given the availability of the technology.[10] Additional questions will be asked concerning the basis for selecting BIM systems from among competing technologies and the quality and training of persons entering data into the systems.

Professional liability insurers will also have to determine what standards are applicable to architects, engineers, contractors and owners using BIM systems.  Two national standards are emerging for work performed in the United States – the National Building Information Modeling Standard and the General Services Administration 3D/4D Standards.  These may ultimately be merged, but the state of the industry today has not settled upon a single standard that is utilized by all software companies active in providing BIM systems.  There is also no clear understanding of who owns data entered into the BIM databases or who has the right to use it.  This may result in questions when the data is used to select materials and components for construction, especially where decisions are made by contractors and subcontractors who may have limited ability to evaluate the data by which decisions are being made.

All of these issues result in a state of affairs where liability for design errors and omissions may be heightened where BIM systems are used than where the traditional separation of functions common to the construction industry has been maintained.  Professional liability policies are written to address errors and omissions or breach of professional standards in the delivery of services provided by an insured firm or individual design professionals.

While the services that are insured have been broadly defined in errors and omissions insurance policies, underwriters have not been asked to consider whether they will expand their coverage to include situations where other parties have access to and the ability to modify data provided by the architects or engineers through the use of BIM technology.

There is also a risk that the software contains flaws that will result in design defects that are beyond the control of the architect.  Will the professional liability policy cover a claim arising out of an improperly selected building component that is derived from data manipulation by the software and not reviewed by the designer prior to its incorporation into a structure?  Do we ultimately risk over-reliance on systems that leave no human judgment and perhaps no one on the scene capable of recognizing an obvious structural problem?

Data theft is an additional risk that may need to be considered in the use of BIM systems.  This problem will be most acute where the system is utilized to design, construct and operate a facility that handles or processes sensitive information.  If a computer that contains information on the design, construction and operation of a data center (including the hardware and software that is utilized by that facility) is stolen, who is responsible for the loss of that data or its subsequent illicit use?  Who is responsible for making changes to protect the data in the event that the loss of the computer is discovered but no illegal use has been made of the information?  Will professional liability policies of the architect or the general liability policies of the contractors pay the costs of such claims?

It is clear that proper protection for architects and engineers will require additional attention to the scope of protection afforded by professional liability insurance policies.  The starting point will be a discussion with underwriters regarding the use of BIM and how this might affect the liability of the insured professional.  Architectural firms should be able to discuss their knowledge of BIM systems, their application to current projects, the personnel that are authorized to use the systems employed by the firm and the other parties that are provided the information developed and entered into databases that define building models.  If current policy language does not provide affirmative coverage for claims arising out of the use of BIM, it should, at a minimum, not exclude such claims.

Design professionals should pay careful attention to the contracts that are employed when there is a requirement for their work to be done using BIM technology.  Contracts with owners should include allocation of risk clauses that acknowledge that the project will be designed using BIM technology and that this is not intended to alter the standard of care applicable to the architect’s work.  It should also discuss who can input additional data that defines the building model and how that information will be used.

If the architect’s work can be altered by future decisions made by contractors or the owner, the architect should be absolved from liability where it no longer has control over the decision-making process.  The contract with an owner should also contain a third-party beneficiary clause that makes it clear that the architect is not intending to create a contractual relationship with anyone other than the owner and is not conferring a benefit to other parties including contractors, subcontractors or vendors as a result of its involvement in the work or its use of the BIM system.[11]

The design professional’s contract should also contain a waiver of direct or consequential damages due to a failure of a BIM system (other than the system they own and control) or errors in the BIM data over which they have incomplete control.  This waiver should extend to loss of revenue, loss of profits, loss of business and loss of business opportunity as a result of the reliance of any parties on information derived from the BIM system once the data has been transferred from the architect to any third party.  There should also be a waiver of damages for theft of data that is beyond the control of the architect or other design professional for information that is stolen by persons illegally accessing the databases of the BIM system.

The contract should also address how the databases will be maintained and who is responsible to warn contractors and owners if future problems are identified by database updates.  Design professionals should be absolved from liability for claims arising out of elements of their work that were not known to be defective at the time the architect or engineer performed their services related to the property where a loss occurs.

Conclusion

While BIM systems are currently being used to provide drawings, specifications and other information utilized in the construction of complex structures, current hardware, software and programming are not capable of providing full interoperability among design professionals, contractors and building owners that is envisioned as the end goal of BIM technology.

Not everyone in the construction industry is convinced that BIM will be broadly adopted to the exclusion of other design and construction systems and more conventional services currently performed by architects, engineers and other design professionals.  Even where BIM is utilized for the creation, storage, processing and access to portions of the information required during the design/build process, liability issues will need to be addressed to avoid increasing the risk of errors and omissions claims being filed against design professionals.

Architects and engineers should take advantage of the time available as BIM systems evolve to improve both their liability insurance programs and their contracts to address emerging BIM risks.  If design professionals decide to employ BIM technology, they should investigate the available systems, select appropriate hardware and software for their professional activities and make certain that they have personnel that can interface with the BIM system to assure maximum performance, compatibility with other commonly used systems and comprehensive support from their BIM supplier.

By being ahead of the curve, design professionals can assure they are in control of their own destiny as the technology evolves, maximize their input into the construction process, and minimize additional exposures to professional liability claims.

About the Author: Rod Taylor is Managing Director of Aon’s Environmental Group.  Aon Environmental is responsible for working with the Aon offices around the world to assist their clients in managing their environmental exposures.  Mr. Taylor is a professional registered engineer and an attorney.  He also holds the Charter Property and Casualty Underwriter (CPCU) and Associate in Risk Management (ARM) professional insurance designations.  Before joining Aon, Mr. Taylor was the managing director of Breitstone & Co., Ltd., a specialized consulting firm providing assistance to parties engaged in complex transactions involving construction, environmental and energy related risks.  Prior to that, he was managing director of the Willis environmental practice, and in 1981 he was one of the first insurance professionals to focus on environmental risks when he founded the environmental risk management practice for Sedgwick, Inc.  He has written numerous articles on environmental insurance and risk management topics, and he is a frequent speaker at conferences and educational programs on environmental topics.


[1] Building Information Modeling in Practice, www.autodesk.com/buildinginformation, 2003, also notes the following benefits from the use of  BIM technology:  (1) speeds the time for delivery of project information; (2) better coordination of the efforts of all parties involved in the construction process;  (3) increased productivity; and (4) improved quality if work.

[2] Building Information Modeling: What About Architecture?, David R. Scheer, AIA, July 18, 2005.

[3] Building Information Modeling Two Years Later – Huge Potential, Some Success and Several limitations, Ian Howell and Bob Batcheler.

[4] Ibid at Page 2.

[5] Building Information Modeling: What About Architecture?, David R. Scheer, AIA, July 18, 2005.

[6] BIM – What is it, why do I care, and how do I do it?, Breaking Down the Walls, Autodesk Building Solutions, January 11, 2005.

[7] BIM’s Return on Investment, REVIT Building Information Modeling, Autodesk, Inc, 2007.

[8] Building Information Modeling Two Years Later – Huge Potential, Some Success and Several limitations, Ian Howell and Bob Batcheler.

[9] INSIGHT: Building Information Modeling: The Wave of the Future?, Gary Prather, September 18, 2007.

[10] Benefits and Risks of Building Information Modeling, Greg Bundschuh, IRMI Construction Risk Conference, October 31, 2007.

[11] Ibid.

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Article 2

Contractor not Entitled to Recover from Subcontractor who Met Specs Even though Project Failed to Function as Intended

By:  J. Kent Holland, Jr.; Construction Risk, LLC

Where a subcontractor performed certain work (including HVAC, electrical and mechanical work for a new ice rink), in accordance with the plans and specifications provided by the Owner and the Prime Contractor, it was not responsible for the heating system’s failure to heat the rink to the satisfaction of the Owner.   Detailed design specifications and drawings were provided to the subcontractor by the Owner/Prime Contractor as part of the bid package.  The Subcontractor provided a lump sum bid for the work and included shop drawings demonstrating how it intended to install the heaters.  This was accepted by the Owner and the work proceeded accordingly.  After the rink was opened, the electric heating elements that were installed over the bleachers caused the ice on the rink to melt.  Despite numerous efforts by the subcontractor to adjust the heaters so they wouldn’t melt the ice, it was ultimately determined that the heaters had to be replaced with a different configuration of heaters.

When the Owner/Prime Contractor refused to pay the subcontractor the balance due under the contract, the subcontractor sued for payment.  A countersuit was filed for the cost of replacing the heaters.  In a rather surprising decision, the trial court awarded the subcontractor the retainage payment that was due but also awarded the Owner judgment on its counterclaim for the replacement costs.  (Editor’s Note:  This is such an illogical result that a successful appeal must have been almost assured).  On appeal, the appellate court concluded that the subcontractor was entitled to full payment and that the Owner was not entitled to any recovery for its costs in replacing the heaters.  The court reasoned that the subcontractor was entitled to rely upon the heater specifications and since it performed its work consistent with those specifications it had no responsibility for the failure of the heaters to work as well as the Owner, the designer and prime contractor had expected.  This is a classic Spearin doctrine case, although the court did no expressly rely upon that important decision.

Other important issues discussed in this decision include: (1) there was no formal written contract but the court found that the written specifications, along with the written proposal that was accepted by the Owner constituted the “contract.”  There had been a “meeting of the minds” as to the contract intent and terms even though there was no document officially called the “contract” or agreement; and  (2) The trial court committed reversible error when it relied on testimony of single witness over written documentation and testimony of several other individuals.    Ruthrauff, Inc. v. Ravin, Inc. 914 AQ.2ds 880 (2006 PA. Super 352). For more analysis of this decision as well as risk management pointers, click here on this link.

The court noted that “despite the magnitude of this construction project, [the parties] did not enter into a separate written construction contract.  But the court was nevertheless satisfied that the parties had a contractual relationship.  This was based on a written proposal by the subcontractor that identified the “scope of work” to encompass furnishing an installation of a complete HVAC system “as per plans and specifications.  The other documents that the court described as “contractual” included the engineer’s drawings.  None of the contractual documents, said the court, indicated that the subcontractor had any contractual duty to provide design, engineering, or layout services with regard to the heaters.   There was testimony by the Owner’s engineer and the Owner’s employees that the subcontractor was not hired to provided design services.

The court also considered meeting minutes that showed the subcontractor had inquired as to the exact location the engineer intended for the heaters over the bleachers.   All reliable testimony in the case showed that the subcontractor was responsible for installing the heaters per the manufacturer’s recommendation with regard to such things as clearance from combustibles and recommended mounting height elevations.  Testimony also stated that the subcontractor met all such specifications.

Risk Management Comment:

Spearin Doctrine.  This decision confirms the long-standing precedent of the Spearin doctrine – holding that where a contractor follows design requirements – it is excused for the failure of a project to performance as expected.  The greater level of detail the Owner specifies, the greater the responsibility the contractor has to meet those design specifications – but also the greater the responsibility the owner assumes for the adequate performance of the project.  The contractor is legally entitled to assume that the project can be built satisfactorily if the design specifications are followed.

Get the Contract in Writing – or at least the scope of services and payment provisions. The lack of a formal written contract could have been a significant problem for the subcontractor in this case.  Fortunately, the trial judge and appellate judges recognized that despite the absence of a document entitled “contract,” there was a meeting of the minds concerning the scope of services and the amount to be paid.   As a general matter, it is wise to obtain a signed contract before performing services.  But, as this decision demonstrates, a written proposal (with compensation terms) along with a  written description of the scope of services and a written set of specifications may be considered together to create the terms of the agreement between parties.

It’s Riskier when Working for Prime Contractor that is Part Owned by Project Owner. The prime contractor with whom the subcontractor had its dispute in this case was owned by an individual who was also a partner in the Limited Liability Company that was the project owner.  It is for this reason that I refer to the subcontractor’s adversary here as the Owner/Prime Contractor.  As far as this subcontractor was concerned, the project owner and the prime contractor were one and the same.  Although there is no discussion in the decision of the interaction between the Owner and the Prime Contractor, it is likely that the Owner looked to the Prime contractor for recovery first, before the prime contractor sought recovery from the subcontractor.  This can create serious insurance issues for underwriters and insureds – who should look at their policies to determine the extent of “insured vs. insured” exclusions that could bar coverage.

Don’t Accept Contract Terms Giving Owner too much discretion to reject work.  The Owner in this case tried to reject the heaters because they didn’t perform the way they wanted despite the fact that they met the design specifications.  If you are a design professional, beware of professional service agreements that contain terms and conditions permitting Owners unfettered discretion to reject professional services just because the owner is not satisfied with results instead of because those services were negligently performed.   Likewise, contractors need to be careful of contract clauses that would give an owner complete discretion to reject all work regardless of whether it was actually “defective” in its workmanship or materials.

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects – including assistance with contract drafting, review and negotiation; change order and claims analysis (preparation or defense); risk management advice concerning insurance coverage – including assistance with negotiating and drafting the terms and conditions of policies and endorsements; advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation.  Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 10, No. 1 (Jan. 2008).

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RED VECTOR.COM — ON-LINE COURSES by KENT HOLLAND
Currently available risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following:; Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Management for the Design Professional; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.  This is an efficient, easy and cost-effective to get your continuing education credits.

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Article 3

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U.S. Needs Immigrant Labor & Immigration Reform

By:  Stephen E. Sandherr, CEO, The Associated General Contractors of America (AGC)

(Presented as Keynote address at Construction SuperConference – San Francisco – Dec. 2007)

A necessary source for the construction workforce has been immigrant labor.  It is estimated that over a quarter of the industry’s craft workers are Hispanic.  We are told that in 2004, 40% of new entrants into our industry were foreign born Latinos.  Anyone living in a metropolitan area of this country who is stopped by a red light near a commercial construction site will undoubtedly notice disproportionate representation of Hispanics on that jobsite compared with their representation in the general population.  Why is that?

I would submit that they are merely descendants of a long line of races and nationalities that have emigrated to the United States to build America .  It started with the Chinese who came to build the railroad and continued with the Irish, Italians and other European Immigrants who came here and took any opportunity to provide for their families.

The difference is that many of the Hispanics came here “illegally.”  Let’s think about that.  Our southern neighbor has a per capita income of $7,000 while the per capita income in the U.S. is six times greater at $42,000.  American jobs are a magnet for these people and the pull of that magnet is difficult to resist.  The vast majority of these people, like most of our grandparents or great grandparents, came here to work; not to deal drugs; not join gangs; and not to seek government services.  Yes, they crossed our borders illegally.  Of course, we need to secure our borders because of the numerous threats we face in an age of terrorism.  But we need to do more than that.

The Associated General Contractors of America was hopeful that the comprehensive immigration reform bill that the senate debated earlier this year would provide a balanced solution to increasing border security while providing a practical way to deal with the 12 million people who are classified as “Illegals.”  Unfortunately, a 700 page document came to be defined by one word: “Amnesty.”  Unfortunately, too, senators who drafted a compromise bill, and smiled for the cameras when a breakthrough was announced, voted against their own product after the heat was turned up by the anti-“amnesty” crowd.  And unfortunately, many of our leaders lacked the leadership necessary to calm fears and educate the public about what was really in the bill.

Allow me to persuade you that what was termed “amnesty” by critics of the bill was far from it.  The proposed legislation sought to create what were known as “Z” visas in an attempt to convey some type of legal status on workers without documentation.  A “Z” visa was meant to be temporary, conditional, and probationary.  It would have required an undocumented worker to do each of the following: (1)  Register with the government; (2) Plead guilty to entering the country illegally; (3) Pay a civil penalty of about $3,000; (4) Demonstrate employment; and (5) Submit to a criminal background check.

If, during the three (3) year probationary period, the visa holder maintained employment, and a clean criminal record, and demonstrated proficiency in English, he or she would be eligible to reapply for another three (3) year term.  The “Z” visa holders would not be eligible for social security benefits or be able to sponsor relatives for entry into the United States .  That hardly looks like amnesty to me.  The late Senator, Daniel Patrick Moynihan, was fond of saying, “You are entitled to your own opinion but not your own set of facts.”  In this debate, the facts are often ignored or condensed to the size of a bumper sticker.

It is ironic that opponents of so-called “amnesty” have, for the present, guaranteed de facto amnesty for the 12 million undocumented among us.  We don’t know who they are, we don’t know where they live, and we don’t know what they’re doing.  The truth of the matter is that something needs to be done.

One of the reasons that something needs to be done at the federal level is that in the absence of Congressional action, other ambitious politicians are attempting to fill the void.  There are over 1200 pending state and local laws and regulations that have passed or are under consideration.  The potential is great for a patchwork quilt of conflicting rules and regulations that employers would face depending upon the location of their job site.  We need federal preemption to provide uniformity and guidance for employers who seek to comply with the law.

About this Speech: While attending the Construction SuperConference held in San Francisco on December 12-14, I (Kent Holland) was fortunate enough to be able to attend the excellent luncheon keynote speech by Mr. Steve Massie, President of AGC.  He discussed several hot topics affecting the construction industry, including Economic Data, Managing People – including Immigrant Labor, and Managing Risks. His remarks concerning the need for immigrant labor and immigration reform, as well as his explanation of the actual facts concerning the proposed legislation, were so compelling that I asked if I could include part of his speech in this ConstructionRisk.com Report.  Not only did he graciously agree, but he even handed me the text of his speech.  I deem it a privilege to be able to share his remarks with you concerning immigration in this issue of ConstructionRisk.com Report, Vol. 10, No. 1, January 2008).  I also encourage you to pass along this speech/article via e-mail or website link.

Additional Comments by Mr. Massie:  Construction Industry Economic Data

$1.2 trillion of construction value was put in place in 2006;

7.6 million people are employed in the construction industry;

We need additional 180,000 craft workers every year.  We have a difficult challenge finding young people to enter the industry despite the fact that the average wage is over $21/hour.

Non-residential construction spending was up 15% in the first 10 months of 2007 as compared to the same period in 2006;

Non-residential construction employment increased almost 1% in 2007 – even as residential construction employment fell.

Spending on income-producing properties such as retail, office, hotel and mixed-use projects is likely to be flat or down in 2008.

Growth in construction of power plants, transmission lines, energy projects, hospitals and higher education is likely to remain strong in 2008 or even accelerate.

$1.6 trillion is needed in spending for roads, bridges, water systems, ports, dams, and schools.  Unfortunately, the United States is spending less than 1% of gross domestic product (GDP) on infrastructure improvements.  “We live in an era when the public makes great demands but does not expect it to cost them anything.  For example, we have not raised the federal gas tax since 1993.  Since that time, inflation has robbed its purchasing power by 30%.”


NOTE: This speech/article is used with permission.  It is re-published here in ConstructionRisk.com Report, Vol. 10, No. 1.

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Article 4

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Pitfalls of using Collateral to Obtain Bonds

By:  Rich & Cartmill Insurance/Bonds

When contractors have bonding difficulties they are often told collateral is a solution.  Giving collateral to a bonding company to obtain bonds is usually not the best solution as other options are usually available.  Further, giving collateral to a bonding company can create a number of problems for the contractor.

The first problem begins with the type of collateral generally required by bonding companies, which is cash or bank irrevocable letter of credit.  Collateral is often required because the contractor does not have sufficient working capital and/or net worth.  Our position is this – if a contractor has a means of getting cash or an irrevocable letter of credit for collateral, then he probably has the means to improve its financial statement enough to qualify for bonding without collateral.

Here are the other problems caused by using collateral for bonding: (1) It is nearly always a slow process getting the collateral back from the bonding companies as they usually hold the collateral months after the job is completed for late claims;  (2)  Bonding companies have the authority to automatically extend irrevocable letters of credit, which usually expire after one year;  (3)  Bonding companies have broad powers to draw on collateral (take the collateral into their account) if they believe they are at risk of a bond loss; and (4) It is often difficult to change bonding companies when your present bonding company is holding collateral, an asset not available to the contractor or the new bonding company.  In short, collateral could be tied up much longer than the contractor expected, which could cause him financial problems and make it difficult to move to another bonding company.

So, collateral is an asset (cash, irrevocable letter of credit, real estate, etc.) that often can better be used by the contractor to enhance his financial statement enough to qualify for bonding credit without collateral.  Therefore, we prefer that contractors keep their collateral for their own use and control rather than give up control of an asset for use as collateral to a bonding company.

Also, contractors often pay higher rates when putting up collateral for bonds.  It is usually the so called non standard bonding companies that require collateral.  Non standard bonding companies are markets for marginal or higher risk contractors – and they usually charge a higher bond rate.  Of course, there are times when collateral is the only option for getting bonds—but this should be last resort when no alternative solutions are available.

About the Author: This article is reprinted with permission from “Contractors Bonding & Insurance Bulleting,” published by Rich & Cartmill Insurance/Bonds (2007), whose agents include Steve Poleman, Vaughn Graham, J. Kelly Deer, Travis Brown and Bob Richardson.  Phone: (918)743-8811.  Website: http://www.rcins.com.  This article is published in ConstructionRisk.com Report, Vol. 10, No. 1 (Jan. 2008).

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

Copyright 2008, ConstructionRisk, LLC

Publisher & Editor:
J. Kent Holland, Jr., Esq.

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