In a previous article, we addressed the nuts and bolts every contractor should focus on as we work our way out of the COVID-19 lockdown. Since then, Phase I of the Stay Home, Stay Healthy Order kicked in. Technically some construction is back online again as the “reopening” process continues.
No doubt, we’re all eager to ramp up again. But it’s been a slow and bumpy process so far. There are reports that, on larger projects, it’s taking an extra hour per day per employee (primarily due to check in, check out and restrictions on exterior lifts, etc.). For those who bid on a fixed-price basis, this means significant profit margin erosion.
Trades in Washington are presently facing a wide range of headwinds. From keeping employees healthy (and motivated), to signing (new) contracts, to figuring out how to handle existing contracts, one thing is clear: there is no real clarity yet. There have been numerous “webinars” for lawyers recently, who are trying to figure out how to advise clients. Each webinar ends with: “well, we really don’t know what to expect.”
That’s not helpful for anyone.
Therefore, in this article, we’re addressing contractual issues surrounding contracts. This article is intended to be more specific than my previous article , which was an overview of key areas (getting paid and preserving you rights).
What happens if the contractor believes the drawings, prepared by the architect and other design professionals, are deficient? We’re all eager to get ramped up, so pointing this out may seem like a bad decision in the uncertain environment we are all trying to navigate. But losing money on a project will do only one thing—dig the hole deeper.
Therefore, when a contractor determines that the drawings are not 100 percent complete or sufficient, the contractor should specifically reference deficiencies, emphasizing that the contractor is not responsible for the drawings. And, to the extent the project schedule is extended to allow the parties to address issues with the drawings, the contractor must be entitled to additional compensation.
Your contract should absolutely include a waiver of claims for consequential damages. AIA Document A201TM – 2017 includes such a waiver: “The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract … This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14.”
The idea is to insulate the contractor from open-ended liability. If a contractor were liable for consequential damages, an owner could seek to recover extended interest on its construction loan at the rate of tens of thousands of dollars a day on large construction projects. And, since many projects are starting to go “underwater” already, there is no doubt we’ll see an increase in such claims, whether justified or not.
It is important to note that the contractor is not the owner’s partner although the contractor does share in some of the owner’s profits. So why should the contractor assume the owner’s risk? It shouldn’t. Open-ended liability has no “upside” for the contractor. If an owner seeks to impose liability on a contractor for delay damages, and the contractor agrees, the parties can negotiate a liquidated damages provision.
Typically, a liquidated-damages provision demands that the contractor pay a fixed amount for each day of delay caused by the contractor. In exchange for agreeing to accept liquidated damages, the contractor should attempt to do each of the following:
- Have the right to pass any liquidated damages onto its subcontractors (which requires a solid Master Subcontract Agreement) under the right circumstances;
- Increase the contract sum to cover not only its additional risk, but to also cover increased subcontract costs (since subcontractors will similarly insist on increasing their respective contract sums);
- Negotiate a grace period (an agreed number of days of delay before liquidated damages kick in);
- Negotiate a cap on liquidated damages (for example, an agreed percentage of its fee); and
- During the course of the project, carefully note all delays for which you are not responsible. Then, be sure to promptly submit applicable documentation to the owner and architect. As noted in previous articles, courts in Washington often enforce harsh “notice” provision requirements. Unfortunately, the key case in this area, Mike M. Johnson, Inc. v. County of Spokane, 150 Wash.2d 375 (2003), is still good law in Washington. With that in mind, pay particular care to comply with all notice requirements on public works cases. Follow the contract to the letter. Do not cut corners when providing notice. It might feel like overkill, but it’s worth it when there is a delay.
Owners often attempt to include a “no damages for delay” clause in its construction contract with the prime contractor, which then flows down to subcontractors and trades. Fortunately, in Washington, this is generally not permitted. See RCW 4.24.360. The interesting thing in Washington is this: if you see a clause like this, since it’s generally invalid under RCW 4.24.360, I typically advise contractors not to mark it up. It’s invalid. It’s much better to have the entire clause thrown out than to tinker with parts of it. The problem? Most owners are brighter than that (unless they are out-of-state or using a bad form contract). So, typically, the owner tries to draft around the prohibitions in RCW 4.24.360. That’s when it gets tricky, and it varies from contract to contract, so seek individual advice on the specifics. But, as a general rule, obviously try to avoid limitations on damages you will pursue when a project delay arises.
The AIA Document A201TM – 2017 permits an owner to issue a Construction Change Directive, in the absence of agreement on the terms of a Change Order, directing a change in the work prior to nailing down the cost of the change or extension of time. Construction Change Directives are troublesome for contractors. For example, the owner may peg the cost for such change in the work at a much lower price than the contractor and its subcontractors would ordinarily recover. If so, the only solution is to protest and follow the dispute procedure in the contract. Typically, these procedures are designed to tire out the contractor. There are multiple tiers and layers, before a fact finder (judge, arbitrator or jury) is able to rule.
Therefore, the best practice for the contractor is simple: always insist that a change in the work will proceed only after mutual agreement to a Change Order. Otherwise, the contractor should insist on an agreed limit (scope or dollar), above which the contractor need not proceed with disputed work.
The old phrase is right: the devil is in the details. Precision counts. the problem is that we’re all swimming in uncharted waters as Phase I (hopefully) leads into Phase II. It’s great to be “precise,” but it’s another thing not to drown in the process. The best practical advice is to start back slowly. Taking on contracts, without really negotiating them, promises to make things worse.
There are some simple “blanket” terms that you can attach – as an addendum – to each of your subcontracts that serve as modifications. The general contractor will accept some and reject others. But at least you get a “feel” for whether the general is thinking about issues from your perspective too. Because that’s the key --perspective. And with a good set of “blanket” modifications, you don’t have to spend a fortune on attorney’s fees in the process. And the irony would be that you’d spend thousands on an attorney, modifying every clause, only to lose the job to a competitor who is willing to take on extra risk. That would be the worst of all worlds.
We all need to look at an “opening” of Washington’s economy as an opportunity. According to dictionary.com there are two definitions for “opening.” The first is “starting” or beginning. The second is “a gap, especially one allowing access.” Hopefully, we all use this “gap” to access better and more profitable jobs in 2020 and beyond.
Seth Millstein founded Pillar Law PLLC in 2010 to focus specifically on industry professionals and owners dealing with construction disputes. In 2015, Kerry Lawrence joined Pillar Law of-counsel. Pillar Law has been a member of the NWWCB since 2010, providing counsel directly to the Bureau and its members. More information can be found at pillar-law.com.