This is the second part of a two part article. The first part was in last month’s issue of this Report. Consider the following basic “killer” clauses, and how they might be managed.
You must know your contract. The first step in good contractual risk management is to understand the contract and its requirements. Particularly important is knowing the notice requirements contained in the contract. The easiest way to waive rights to compensation is to fail to provide timely notice as required by the contract for added work, delay, or differing site conditions. Notice requirements exist to allow the owner the opportunity to mitigate its damages resulting from an apparent problem. If notice requirements are not met, this opportunity has effectively been taken away from the owner.
Courts tend to support notice requirements with few exceptions (i.e., exceptions may be granted if the owner was constructively notified or aware of the problem, or if timely notice would have had no impact on the extend of the damages sustained). It is critical that field personnel know the notice requirement for changed conditions! How does your company make the field superintendent aware of notice requirements on his or her job?
Differing Site Conditions
Today’s contracts typically require the contractor to investigate and satisfy itself as to general and local conditions, including patent site conditions; labor and utility availability; normal weather conditions; and the character of equipment and facilities needed to perform the work. This is a much bigger task than looking for water or rock! If a differing site condition is encountered and the contractor has not done its homework, the contractor may be barred from the recovery of additional costs associated with the differing site condition.
If the contractor has completed an adequate site investigation (complete with a written report of findings), the reasonableness of its original estimate can more easily be shown. Reliance on information provided by the owner is often not a prudent approach. Exculpatory language in the contract documents may make recovery for differing site conditions even more difficult (i.e., “The soil report is not a warranty of subsurface conditions, nor is it a part of the contract documents,” or the owner ” … disclaims any responsibility for the accuracy … of soils investigations …”). Exculpatory language may or may not be enforceable, depending on the type of contract and locality; however, it is always better to avoid depending on a court decision when it comes to your bottom line. Failure to take the time to make a detailed site investigation can prove fatal to profits.
No Damage for Delay
If the contract contains a “no damage for delay” clause, then the request for compensation should focus on costs resulting from added time required to accomplish a change. The changes clause can be a contractor’s best friend. The delay clause should only be invoked for non-compensable delays, such as acts of God or strikes. Try not to use the world delay – use changes instead. Job costs segregated by account coding for the specific change causing extra time are indispensable to proving actual damage.
Pay if Paid
If the “pay if paid” clause is invoked, and you experience a delay in payment, you must know the law and your lien rights in the state in which the work is performed. Pay if paid clauses are not enforceable in all states (i.e., California) because they may be considered waivers of the contractor’s lien rights – do you really want to fight this battle? Regardless, never agree to a contractual waiver of lien rights (“no lien contract”) and be sure to file appropriate liens or stop notices in a timely manner. Remember, lien rights must be perfected by a lawsuit if the issue is not resolved early. (Contact your lawyer!) Also, notify the bonding company of non-payment if a payment bond exists for the project.
Early resolution of problems is ultimately the most cost-effective approach to contractual risk management. And, the best way to accomplish early resolution of issues is to maintain good site records (daily logs, time sheets, cost reports, schedules, etc.) and to keep the lines of communication open between the contracting parties and internal management. This is particularly important in change order management. There is no such thing as too much information.
A contractor does not have to spend new monies on more people and fancier accounting systems to achieve expert change order management practices. It is mostly an exercise involving training the personnel who observe and collect data to track changes. And, it involves improving the communication between field personnel, the company controller, and the project scheduler.
The controller is the forgotten link in expert change order administration. Why? Because he or she is rarely asked by the field superintendent or project manager for labor, equipment, material, profit, and overhead cost codes specifically to capture costs of changes while they are happening. Contemporaneous collection of cost and schedule variances is the most effective tool to change order negotiations – it prevents claims and lawsuits!
Practical Tools to Manage Around Onerous Contract Clauses
1) Again, read the contract. Find ambiguous words such as “may” and have them clarified at both the pre-bid and pre-construction conference. Consider this war story: a contractor lost 60 days of schedule because a steel fabricator walked off the job claiming breach of contract because it hadn’t been paid for steel stored off-site. The contract said “owner may pay for steel stored off-site.” The “may” word was never clarified, to the harm of the entire project.
2) Initiate a standard, company-wide, format for the superintendent’s daily log. In addition to a description of the work performed, the log should include identification of any added work and/or delay, with responsibility, start date, resources impacted, and resolution date documented. Train all superintendents in the proper completion of the log, and be sure the superintendents understand and appreciate the importance of the log to cost recovery. Be sure this log is circulated daily. Circulating and storing the logs in three-ring binders gives management a change to spot problems that are similar to ones they may have encountered on jobs in the past. It forces people to talk about problems. In construction, a company is better off running toward a problem than running away from it.
3) Check legal enforceability; this cannot be stressed enough! Amazingly, some owners will put tough contract clauses into a contract almost to bully and intimidate, knowing they are not enforceable. This violates the concept of partnering. Such clauses found not to be enforceable should be presented to the owner for deletion.
4) Utilize a Disputes Review Board (DRB) whenever possible. A DRB is an administrative response to change order disputes when the parties cannot agree among themselves. The DRB can meet every month or two, and consists of three construction experts, with costs shared among the parties. Their decision can be binding or advisory. They are a low cost, fast way to prevent claims. Their use is becoming common, and the use of a DRB can be negotiated into the contract even after the bid has been awarded. DRB’s work!
5) Turn pre-construction conferences into an advantage. At the pre-con, a contractor needs to show an owner its expertise in managing the contract. This can be accomplished without appearing arrogant. It is done, once again, by:
(a) Asking for clarification of ambiguous contract words.
(b) Identifying the owner representatives who have the authority to make changes in the field.
(c) Suggesting a DRB to settle change order conflicts.
At pre-con, request a procedure whereby cash flow can be maintained for direct costs when the full cost of a change is ongoing and undetermined. Finally, show the owner all the elements of cost that your company uses in its change order pricing formula to prevent any surprises.
In conclusion, contractors today are being called to perform to a higher standard of contract administration, and ignorance is no excuse. Many contractors that are no longer in business were mortally wounded by one bad job that overrode years of profitability. It does not have to be that way. Remember the days (in the recent past) when Safety and Loss Control was not viewed as a profit center? Because of high workers’ compensation, contractors started to manage the problem. The next generation of risk management is now upon us. It is too expensive not to practice good contractual risk management.
Reproduced with permission from CFMA Building Profits, the official publication of the Construction Financial Management Association, Princeton, NJ (http://www.cfma.org)
About the Author: Pamela Tittes is a Principal at Kellogg, LLC. During her 30 years of professional experience, Ms. Tittes has worn many hats, including engineer, owner, contractor, and consultant.
ConstructionRisk.com Report, Vol. 4, No. 6 (Jun 2002)