Contracts Can Provide Protection From Escalating Prices

If you work in the construction industry and you aren’t familiar with the impact of price escalation, chances are you are about to learn.

It’s hard to make sense of the so-called “trade war” between the United States and China, and the economic forces in play are complex. But in essence, reports are that the events of past months are continuing to impact building costs in the United States.

President Trump and his administration have imposed tariff increases on certain Chinese goods in a claimed effort to boost the United States’ economy. As several news outlets have reported, Trump started with a 10 percent increase on certain Chinese products; then on May 10, he announced an increase from 10 percent to 25 percent on products like electronics, clothing, and seafood. A May 14 Los Angeles Times story reported that the tariffs had already added $1 billion – a number that could increase to $2.5 billion – to the annual cost of housing construction due to price increases in Chinese granite, cement, vinyl floor coverings, waferboard, tile, and stainless steel. Some roofing materials, like aluminum, are projected to cost more in the near future, too. (See, for example, BBC News’ May 10 article “Trade wars, Trump tariffs, and protectionism explained.”)

The Los Angeles Times’ prediction was that cost increases would be borne by American consumers investing in housing and construction. But the only thing that truly allocates risk of price increases will be contract terms.

And this gets us back to why we care about material price escalation and how players in the construction industry can assert some control over what are, at their core, factors beyond their control.

None of us can control what President Trump says, does, or tweets, or what China does in response. But if parties think about these issues before entering into construction contracts, they can at least know who will bear the risk of these types of increases and try to prepare accordingly. Although factors like federal economic policy and market forces can impact material prices, who bears the cost of these increases in a commercial setting is solely dependent on the parties’ contract terms. 

Assessing Risk in Pre-Existing Contracts for a Fixed Price

If standard-form construction agreements, like AIA or ConsensusDocs contracts, are a guide, then contractors and subcontractors will probably bear the risk of material price increases in contracts to which they are already a party, assuming they are contracts for a fixed sum or guaranteed maximum price. (Of course, cost-plus agreements will give contractors much more potential to recover for price increases.) Although price escalation can be addressed in provisions on contingencies — percentages of the contract value set aside for unpredictable changes in the work — unless the agreement specifically mentions price increases or escalation, contractors probably are not entitled to an increase in a fixed contract sum due to price escalation.

To understand the legal significance of a price escalation claim, it is important to understand the distinction between changes in scope of work and changes in price. Nearly all standard-form construction agreements provide for how “changes in the work” will be handled. For example, AIA A201 (General Conditions of the Contract for Construction) provides in §7.3.1 that “the Owner may … without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions, or other revisions, the Contract Sum and Contract Time being adjusted accordingly.” However, because per §1.1.3 the term “Work” includes “all … labor, materials, equipment, and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations,” contractors will not be entitled to an increase in the contract sum unless there is a change in the scope of the work or materials themselves.

Addressing Price Escalation in Future Contracts

Because price escalation claims don’t fit neatly into most standard provisions on change orders or equitable adjustments, parties who want to reduce their risk with respect to material price increases should explicitly address the issue when negotiating contracts. Contractors can do this by considering cost-plus contracts, inserting a price escalation clause into fixed-price agreements, or simply increasing the contract sum in an attempt to protect themselves in the event of price increases.

Cost-plus contracts could be a useful tool for contractors hoping to shift away, or more evenly distribute, the risk of higher material costs. While most cost-plus agreements will still contain a guaranteed maximum price that potentially won’t cover builders for all price increases, these arrangements still probably give contractors greater ability to pass cost increases to owners than fixed-price agreements. Because these contracts charge owners for the cost of labor and materials plus a fee, owners can also benefit from any decreases in material costs. Negotiating a guaranteed maximum price may also allay owners’ concerns about rising costs.

In fixed-price agreements, parties who want to address material cost issues should likely insert clauses that either condition the contract sum on material costs existing at the time of the contract, or clauses explicitly entitling them to make a claim for additional payment in the event of price increases. Such provisions might be more appealing to owners if they similarly entitle owners to the right to reduce the contract amount in the event of material price decreases.

If price escalation clauses are based upon time, they should specifically state the date through which the contract sum can be guaranteed. They should then specify how a contract increase, if any, should be imposed so that the parties will have a clear understanding of how a new price will be calculated. If provisions are contingent not on time but on the amount of the price increase, they should address how much of a cost increase is actionable — for example, a clause could apply to material cost increases of 3 percent and above — and should explicitly state what documentation is required in order for the contractor to make a claim for increases. In anticipation of making such a claim, contractors should consider preserving documentation of prices as they exist at the time of bid so that they can prove that price increases in fact occurred later when they are asserting a claim for price escalation. With both types of clauses, providing cost savings for the owner in the event of a price decrease, or placing some limit on the ability to claim an increase, could be crucial to making a deal with owners.

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at caroline@oakcitylaw.com.

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.

The Future of Construction Projects: Geofencing, BIM and Smart Contracts

The modern-day construction project is quickly moving into the future. Within the next few years, an automated materials delivery truck will deliver an order of lumber to a project site without the need for physical labor, and as the material is incorporated into the project a 3D model will be automatically generated and stored on blockchain. Three technologies that roofing contractors and those involved in the construction industry need to be aware of are geofencing, Building Information Modeling (BIM) and smart contracts. Together, these three technologies will forever alter the modern construction project landscape.

What Is Geofencing?

Geofencing is a virtual perimeter around a single point with predefined boundaries created for a real-world area such as a construction site.1Geofencing uses either Global Positioning System (GPS) or Radio Frequency Identification (RFID) to map the boundaries and track objects traveling in and out of the virtual perimeter. 

GPS is a satellite-based global navigation system that provides geolocation anywhere on Earth where there is an unobstructed line of sight to four or more GPS satellites. Geofencing with GPS works well when applied to construction projects due to its ability to be used anywhere in the world. GPS technology works with geofencing software to track equipment and people, as well as sending real-time alerts and notifications to project managers and contractors. 

RFID uses electromagnetic fields to automatically identify and track tags attached to objects. The most common use of RFID is tracking large retail store product movement and inventory. In fact, RFID technology has replaced the old barcode system because it is more efficient. RFID tags may be attached to heavy equipment and/or on employee’s personal protective equipment (PPE) to track their movements in order to give contractors a deeper understanding of the project workflow and needs. 

Tags or other electronic communication tools (i.e., GPS, iPhone, etc.) placed on/in physical objects communicate instantly with administrators using geofencing software. Geofencing software installed on computers, iPads, and other electronic devices allows the user to receive real-time information on who and what has entered or left the geo-fenced area, as well as other information such as object height and time spent in the area. The devices with geofencing software can receive text messages, email notifications, phone calls, and other forms of communication indicating when an object has left or entered a geo-fenced area. 

Programs that incorporate the geofencing software may be programmed to set up “triggers” that notify the administrators when an object has left the geo-fenced area. For example, heavy equipment can be retrofitted with a RFID tag that is set to trigger when it leaves a geo-fenced area and instantaneously send a notification to a project manager’s phone or tablet, allowing the manager to immediately act upon the information.

How Can Geofencing Technology be Used by Contractors?

Contractors can apply geofencing technology to a number of different aspects related to most construction projects. Fortunately, most contractors already supply project managers and other supervisors with mobile devices capable of using geofence software, making implementation of geofence programs an easy next step. Purchasing RFID tags and GPS equipment is one of the only primary costs associated with this new technology. 

· Security: An obvious and practical application geofencing provides contractors and equipment owners with is security. Heavy equipment, expensive machinery, and other tools can be equipped with RFID tags that, when moved outside the geo-fenced area, will immediately send a notification to a project manager or owner, via text message or other, informing them that the equipment has moved. This gives the party receiving the alert an opportunity to immediately call emergency services and report a theft-in-progress, rather than discovering the theft at a later date and reporting it at that time. Further, with stolen vehicle technology, a contractor, project manager, or equipment owner may also disable the equipment to fully prevent the theft. 

Installing RFID tags on expensive construction equipment provides those with vested interests in construction projects with the ability to lower costs related to theft and theft recovery. Further, preventing construction project theft will lower the high costs associated with project delays caused by replacing equipment. 

· Material Supply: Geofencing software will allow contractors and project managers to have ample electronic data to monitor the progress of construction projects. For one, geofencing software will specify when supplies have been delivered to the project, how long they have been on site before incorporation into the project, and where the materials have been incorporated. This allows contractors and project managers to better allocate materials to reduce the amount of overstock and loss or damage of materials due to non-use. As will be discussed in much greater detail later in the article, combining geofencing technology with smart contracts will heavily reduce costs associated with material delivery and payment problems. 

· Fleet Management: Geofencing can also be used to monitor the arrival and departure of trucks on a project. Placing RFID tags or installing geofencing software on the trucks navigation system will allow for easy monitoring of the truck’s movement. Project managers can receive immediate notification when a fleet truck arrives or departs from the project. This will allow the contractor to save on administrative expenses related to tracking fleet movement. Geofencing will also allow fleet owners to monitor the amount of time trucks take to move from point A to point B in order to better coordinate the fleet in the future. 

· Labor Savings and Monitoring: The data collected from geofencing software can be used to supplement claims for overtime and the amount of labor used during a construction project. Often contractors are forced to litigate issues relating to the number of employees working on a jobsite, the number of hours worked, and when the workers were on site. Geofence technology will allow contractors to store and compile labor information in an easy-to-use format to save on expensive litigation costs. 

Further, project managers will be able to monitor whether employees remain within the authorized project perimeter. This allows contractors to ensure employees remain diligent and focused on their work and reduce labor costs due to inefficient labor. In addition, if/when disputes arise as to whether employees worked a number of hours of overtime, both parties will have the geofencing data to quickly resolve the dispute and return to business as usual. All that is necessary to achieve the aforementioned benefits is placement of RFID tags on PPE or installation of geofencing applications on employees’ smart phones.

· Site Grading: Geofencing software installed on heavy equipment can help track with greater accuracy and increase progress towards proper grade, as opposed to using traditional methods such as survey stakes. A GPS device may also be installed within the heavy equipment’s cabin, allowing the operator to accurately monitor his or her progress. All of this information can be relayed to the project manager to better assist in deciding when to order supplies and labor to move on to the next phase of the construction project. 

· Increased SafetyGeofencing perimeters can be created around hazardous work areas to prevent unauthorized employees from entering the area and risking injury. This can be accomplished by creating the perimeter and setting RFID tags to send an alert to a project manager when unauthorized personnel enters the dangerous area. The project manager can then contact the foreman to ensure that the employee moves to a safer location or trigger an onsite siren. Contractors who utilize geofencing software for all employees, via their smart phones, can even have an alert sent to the specific employee who has entered the unsafe area, warning them to leave immediately. 

Geofencing tags located on mobile equipment can also monitor the speed that the equipment is traveling. If the equipment exceeds the safe speed limit, a foreperson can be notified. 

As it should be clear, geofencing technology offers contractors an abundance of benefits that will drive down costs and time associated with project completion. While geofencing will have a positive impact on projects, there still will be costs associated with implementing and using the new technology.

The Costs of Geofencing Technology

As previously stated, most contractors already supply project managers and other supervisors with the equipment necessary to implement geofencing (i.e., tablets, smart phones, and laptops). Therefore, one of the largest drawbacks, that being the initial cost of implementation, is already at least partially covered. 

The next step contractors wishing to implement geofencing technology must take is purchasing software compatible with the hardware already in the hands of project managers. The software will need to be implemented by a third party specializing in geofencing. The price of this software will likely pay for itself with the savings associated with geofencing. Further, resources previously allocated towards expensive and time-consuming data analysis will be no longer necessary as geofencing software will automatically compile the data on its own. 

One initial drawback will be training project managers and other employees to use the geofencing software. Contractors and project managers will need to initially educate themselves through third-party geofencing professionals on the ins-and-outs of using the technology. The next step will be educating employees on the intricacies of geofencing technology. If contractors opt to use geofencing software on smart phones, tablets, and other electronic devices, the employees will need to know how to respond and comprehend alerts and notifications sent to their devices. This requires a review and update of the employee manual. 

Any change to the workflow of a construction project will have its obvious costs and adaptation period; however, the future is fast approaching and contractors should prepare to embrace this new technology.

Building Information Modeling (BIM)

In addition to creating a better understanding of material movement and location, RFID and other geofencing tech can be combined with BIM to supplement 3D models of a construction project. According to the U.S. National Building Information Model Standard Project Committee, BIM is “a digital representation of physical and functional characteristics of a facility” that can be used as a “reliable basis for decisions … from earliest conception to demolition.”2For example, RFID tags may be placed on decking material, and as the decking material is placed on the structural components of a building, a real-time 3D model is augmented to reflect the addition.

Before BIM, building design was reliant on computer-aided design (CAD). CAD creates a model of a building using three dimensions (width, height and depth), which are in turn used by roofing contractors to complete roofing projects. BIM uses CAD concepts and adds more dimensions, such as time and cost, to give project managers a more complete understanding of project workflow. 

The entire project can be modeled prior to construction beginning by using BIM, allowing for better preconstruction coordination among roofing contractors and other parties on the project. A roofing contractor can have a better understanding of materials and labor needed, as opposed to using older and simpler CAD technology. Further, project managers can use BIM software in concert with smart contracts to automate most of the project. A more detailed discussion of smart contracts and BIM is included later in the article; however, a better understanding of smart contracts and blockchain is necessary before delving into that discussion. 

Blockchain and Smart Contracts

The advantages offered by geofencing technology are abundantly clear. As previously mentioned this article, two of the technologies that will forever reshape the construction project landscape are geofencing and smart contracts. To better understand what smart contracts are and how they will also help drive the construction industry into the modern era, a basic understanding of blockchain is necessary. 

If you’ve ever used Google Drive or Microsoft OneDrive, then you already have a basic understanding of blockchain. Certain cloud-based programs allow a number of users to access a document at the same time, and as each user edits or adds to the document, all of the other users are able to view these changes and additions in real time. Blockchains work in an analogous manner. They are a database that tracks transactions, in the order they occur, and creates a record of each transaction. 

By combining blockchains with smart contracts, as well as BIM, a new form of project management can be, and already has been, created. In its simplest form, a smart contract is “a computer program that works on the if/thenprinciple.”3For example, ifa roofing contractor has installed decking on a building, then an inspection is requested to ensure the decking has been properly installed. If the roof deck passes inspection, then the roofing contractor is paid for his work and can be given authorization to continue to the next phase of the roofing installation. All of the different smart contract sections, as well as changes made to them, will be permanently recorded on the blockchain, eliminating a number of different issues inherent with typical project management.

Smart contracts work together on what is known as a Decentralized Autonomous Organization (DAO). The DAO is an organization that is run through rules encoded as the smart contracts. The DAO provides the ability of blockchain to deliver a secure record of the different transactions that occur. This enables roofing contractors and other individuals involved on a construction project to view the current status of the project on a fixed record that encompasses all of the transactions that have taken place.

Smart Contracts and Geofencing

Geofencing data, RFID triggers, and notifications can be used as a supplement to smart contracts that govern a construction project. Working together, these two dynamic technologies can increase project efficiency and lower project costs. 

· Materials: One of the biggest geofencing and smart contract applications is through material purchase, delivery, use, and payment. All contractors are familiar with the problems inherent in construction projects regarding payment. Subcontractors who finish their work want to be promptly paid, they want to have regular disbursements of payment if the payment isn’t to be made in full at project end, and they want the retainage held by the general contractor/owner. General contractors want to ensure that the work performed by their subcontractors passes inspection before releasing funds and will hold on to the retainage until such inspection is passed. When disputes arise as to the quality or progress of work performed, late payment issues will inevitably rear their ugly heads. With blockchain, many of these issues can be avoided, or at the very least mitigated, through the use of smart contracts which automatically provide payment when different aspects of a project are completed.

Just as with subcontractors and general contractors, the same issues arise between subs, general contractors, and their material suppliers. Issues arise over the delivery timing, prompt payment, payment amount, and a host of related problems. Combining smart contracts and geofencing, many of these problems can be alleviated. 

Using the if/then principle and site grading example mentioned previously, if the site grading equipment communicates to the project manager that proper grade has been achieved, then materials, such as concrete and steel, can automatically be ordered for delivery to begin the fill process. Once materials arrive on the site, and a project manager verifies that they are as contracted for, a trigger will be sent to the blockchain automatically sending payment to the material supplier. Further, if the materials arrive on time, labor may be directed to complete the site grading and filling process of the construction project. This simple example demonstrates the amount of resources saved and increased project efficiency from use of this new technology. 

· Labor: Another symbiotic effect from combining geofencing technology with smart contracts has to do with paying employees for their labor. As previously stated, geofencing allows contractors to monitor when and for what amount of time employees are on-site. Smart contracts allow employees to be paid automatically for labor performed. 

Employees who wear geofencing RFID tags or have geofencing software applications installed on their smart phones will be able to have their clock-in and clock-out times automatically recorded based on their entering the geofence perimeter. The geofencing software can communicate this information to the smart contract, and release payment according to the specific terms programmed in the contract. This removes the clerical and human error often found in standard time-keeping tools used today.

· Reduced “Paper Trail” Litigation: Owners and suppliers have become well aware of the legalities involved in most construction projects and are often ready to take advantage of the unprepared roofing contractor. When a construction project ends up in litigation, the party with most detailed and descriptive paper trail will typically be the most successful in the courtroom. 

Most contractors know to keep accurate written records of all communications involving disagreements over workmanship, material arrival or other potential information that is involved in claims on a project. These written records can include change orders, emails, text messages, and other correspondence. 

Geofencing and smart contracts will work to remove a number of the costs associated with litigating disputes between contractors and their employees when it comes to overtime and other employment related issues, as the data will be stored on the blockchain. A blockchain is “essentially a distributed database of records, or public ledger of all transactions or digital events that have been executed and shared among participating parties.”4Once a record has been created on the blockchain, it can never be deleted. This allows for instant verification that a transaction has occurred and allows for participants to view the transaction. Blockchain removes uncertainty from the playing field and allows for consensus between parties. All those involved with a construction project will be able to view transactions as they happen, eliminating uncertainty that usually comes with whether an employee was on-site and for what amount of time. 

Smart Contracts, Geofencing and BIM

Smart contracts and geofencing information can be used even further by being embedded within a BIM model that is secured by blockchain. BIM software allows data inputs from multiple sources. These sources can include smart contracts and geofencing data. 

As stated earlier, BIM can incorporate more than just the three standard dimensions of width, height, and depth. BIM can incorporate time and cost. The dimensions of time and cost can be further supplemented with smart contracts within the BIM software so that the entire project is centered on one convenient application. Building on the prior example of placing RFID tags on roof deck materials, once the roof deck has been installed, BIM software can work with the smart contract if/then principle to automatically send payment for completion of a portion of the scope of work, and request the next phase of the project to begin.

Through the use of blockchain technology, smart contracts, BIM and geofencing, construction projects could enter into a new, technology-driven, risk adverse system that reduces disputes and increases the likelihood of prompt payment and project efficiency. Roofing contractors and the rest of the construction industry will need to work together over the coming years to adapt to this new phase of construction projects. Soon all aspects of a construction project will be included in a singular platform that allows all those involved, including contractors, government officials, lawyers, and so on to work dynamically to reach project completion. 

About the author: Trent Cotney, CEO of Cotney Construction Law, is an advocate for the roofing industry and serves as General Counsel for FRSA, RT3, TARC, WSRCA and several other roofing associations. For more information, contact the author at 866-303-5868 or www.cotneycl.com.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. 

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Proper Documentation Can Be the Key to Dispute Resolution

Ever been told to dance like nobody’s watching? 

That advice is great for weddings and end-zone celebrations. But after wrapping up a week-long trial, your exhausted, cynical lawyer probably thinks “write every email like it will one day be a courtroom exhibit” is far better advice than the dancing thing.

This might sound needlessly frightening, but for construction professionals working on challenging projects, documentation can make or break the ability to successfully negotiate — or, if it comes to it, prove the merits of — a dispute with another party. 

Below are some items that, if handled properly, can help companies establish their side of case and that, if handled poorly, can constitute problem areas. 

Contract Documents and Statutory Notices 

Many legal rights on a project come from the parties’ written contract agreement. Basic measures like ensuring the both parties have signed — and not just received — the contract can be crucial to preserving these rights. It is also a good practice to keep a copy of the signed contract and all attachments in a location where it is accessible to project managers and others who have authority to deal directly with the other party. As always, reading the contract in advance, and perhaps consulting with an attorney before signing the contract, is an important practice. 

Having a checklist for every project can also help ensure that good practices are routine, and not just employed for especially difficult projects. If practices are done on every project, no matter the size or complexity, it is easier to ensure that companies will comply with them. 

Potential project checklist items include: 

  • Has a written contract been signed by both parties and saved in the project file? 
  • Are certificates of insurance on file for all subcontractors? 

Checklist items for privately owned projects: 

  • Have any statutorily required project statements, notices of contract, or notices of subcontract been properly filed and served? 
  • Have any statutory prerequisites to filing lien claims been met — such as North Carolina’s requirement to serve a Notice to Lien Agent? 

Checklist items for publicly owned projects:

  • Has the payment bond been obtained?
  • If required by state or federal statute, has the payment bond surety information been sent to all parties?
  • Have statutorily required notices of contract or notices of subcontract been properly served or filed? 

Notices 

Most written prime contracts and subcontracts require parties to give written notice to the other party to communicate various things, like change orders, claims for extra payment, or the other party’s breach or default. Failure to provide notice using the proper means and by the required deadline can prevent contractors from asserting their contractual rights. To ensure compliance with contract provisions, ensure that a copy of the contract is accessible to the project manager and that notices are dated, signed (if applicable), and that copies of the notice are preserved. If notices are sent by email, a good practice is trying to obtain a delivery or read receipt. Notices to cure should state specifically what is expected of the other party in order to cure a default and what will occur if the other party does not cure the default. 

Where Notices are concerned, do the following:

  • Keep a copy of the signed, written contract in a place where project managers can easily access it.
  • Send requests for change orders and additional time or money in writing.
  • Send notices to the right person. The written contract usually dictates to whom notices should be sent, and sending notices to a person with managerial authority is generally recommended. 
  • Consult with an attorney and send a written notice before invoking contractual remedies like self-correcting defective work, supplementing a subcontractor’s workforce, or terminating a subcontractor. 
  • Maintain copies of any letters, correspondence, or notices sent to another party, including copies of proofs of service like Certified Mail cards, email read receipts, or fax confirmation sheets. 

Confirming Emails 

Emails and text messages constitute the bulk of the written communication on most construction projects today. Both emails and text messages — whether they are sent from work or personal devices — are discoverable in legal cases, meaning that companies will be required to provide them to other parties in the case during the litigation process. This may be true whether or not the company or sender believes they are relevant. The implication is twofold: contractors should send emails and text messages with care and should assume that they could one day be seen by an opponent, judge or jury. On the other hand, when used effectively, emails and text messages can be used to accurately document parties’ agreements and understandings about what will occur on the project. 

With all communications, but particularly email, attorney-client privilege is an additional concern. The attorney-client privilege protects communications between an attorney and his or her client. The client has the right to keep these communications confidential in nearly all situations. However, the attorney-client privilege can be waived if communications are shared with third parties. The ease with which people can forward and share emails makes waiving the privilege dangerously easy. In some situations, waiving the privilege once can mean waiving it in future situations. 

Below are some do’s and don’ts that can result in helpful, not harmful, emails.

DO

  • Send emails to document conditions on a project. 
  • Send emails to confirm important conversations, especially ones about dates of mobilization or that contain notices. 
  • Respond to any emails that accuse you or your company of failing to fulfill any contractual obligation. 
  • Ensure you have access to the emails of any employees who leave the company. 

DON’T

  • Don’t forward your correspondence with your attorney to others. This could waive the attorney-client privilege. 
  • Don’t copy people outside of your company on emails to your attorney. This could waive the attorney-client privilege. 
  • In a dispute over fulfilling contractual obligations, don’tlet the other party have the last word. If you are sent an email accusing you of wrongdoing, not responding to an email can make it appear that you agree with it. 
  • Don’t send emails from your personal account. If you ever need to pull and produce all of the emails related to a project, it will be much easier to do if you are only pulling from one account per employee. 
  • Don’t use profanity or offensive language or phrases. If there is anything you would be ashamed of a judge or jury seeing you say, think twice before typing it. 

Daily Reports and Photographs

Daily job reports, if done well, can serve as a diary of what occurred on a project. While emails can be helpful, too, photographs do not lie, and daily reports with objective information like number of workers, hours worked, and weather conditions can effectively corroborate a company’s narrative of a story or dispute another side’s version. 

These types of documents typically have to be authenticated in court in order for them to be admissible as evidence, so if possible, it is best for the person who wrote a report or took a photograph to be able to testify about the origin of the document itself. 

Recommended procedures include: 

  • Have competent, trusted employees, such as project managers, take photographs and complete daily reports. 
  • Have a system in place for uploading photographs and saving them in the construction file so that they are centrally located, not just stored on employees’ individual phones or tablets. 
  • Ensure all photographs are dated or otherwise stored so that dates and identities of the people who took the photographs can be accessed. 
  • Complete daily reports documenting conditions like date, weather, number of workers, and anything pertinent occurring on the project site.  

About the author: Caroline Trautman is an attorney with Raleigh, N.C.-based Anderson Jones PLLC. Questions about this article can be directed to her at ctrautman@andersonandjones.com.

Author’s note: The above article is not, and should not be construed as, legal advice. For specific advice, consult with an attorney licensed in your state.

How Can Roofing Contractors Protect Themselves if a Project Gets Delayed?

Project delays can have serious financial consequences for both contractors and subcontractors. When such issues arise, one option for affected contractors is asserting delay claims to recover losses. Delay claims, however, must meet several criteria to survive in court, and claimants can pursue them in many different ways. This article will discuss different types of delay claims and the methods for asserting them, as well as what subcontractors can do to protect themselves the next time they encounter a project that is behind schedule.

In simple terms, a delay claim arises when a project is delayed and a contractor or subcontractor needs more time (and possibly more equipment and labor) than originally budgeted to fulfill its contractual obligation.

A delay claim can help a contractor extend an original deadline for completing a job or compensate it for the additional costs associated with the delay, which may include the overtime and additional manpower necessary to keep a job on schedule, as well as consequential damages like lost profits, lost opportunities, and home office and administrative costs.

Some delays, of course, cannot be avoided and do not qualify the impacted contractors for compensation. Examples include weather-related delays and delays arising from foreseeable circumstances. Although, when an owner or general contractor causes or is responsible for a preventable delay—also known as an inexcusable delay—the lower-tier contractor may recover the additional costs to complete the project. Some examples of inexcusable delays include the customer not having the job site ready on time, supplying defective materials to its contractor, giving its contractor insufficient access to the job site, or wrongly interfering with the project schedule.

Before committing to the complicated and risky delay claim process, most subcontractors should seriously consider resolving delay disputes either through informal means or, if applicable, through the “equitable adjustment” clauses within their contracts. Pursuing equitable adjustments can be less confrontational than pursuing delay claims. What equitable adjustment clauses allow varies from contract to contract, and parties are entitled negotiate contract terms to define what constitutes such an adjustment. Generally, however, an equitable adjustment is an adjustment in the contract price to reflect an increase in cost arising from a change in the completion date or duration of time for the contracted scope of work. These price adjustments typically encompass overhead and profit as well as actual costs. (In contrast, a change in the actual scope of work is typically addressed via an additive or deductive change order.)

Some jurisdictions that lack a legal definition of “equitable adjustment” will enforce the parties’ contract terms and, in the absence of evidence to the contrary, an equitable adjustment can simply mean cost, plus reasonable overhead and profit. For example, a recent North Carolina Court of Appeals decision (Southern Seeding Service Inc. v. W.C. English Inc., et al) involved a contract provision stating that unit prices were based upon the project being completed on schedule and that should the contractor’s work be delayed without its fault, “unit prices herein quoted shall be equitably adjusted to compensate us for increased cost… .”

Although neither the contract nor North Carolina law defined the term “equitable adjustment,” the court considered the parties’ intended definitions of the term. Both parties testified that essentially, “equitable adjustment” meant the difference in cost. The court allowed the claimant, Southern Seeding Service, to recover the difference in its actual per-unit costs and the per-unit costs in its bid, plus overhead and profit.

This decision indicates that even in the absence of a contract specifically stating otherwise, contractors can sometimes use equitable adjustment clauses to recover their cost increases resulting from delays. In the case of Southern Seeding, where a “no damage for delay” clause barred Southern Seeding from making a formal delay claim, this proved valuable. One downside to the approach, however, is that it does not necessarily compel upper-tier contractors or owners to speedily compensate contractors for delays. And, unlike some delay clauses, equitable adjustment clauses do not provide for interest accruing on properly noticed claims that go unpaid. Informal methods and equitable adjustments may prove more effective for contractors who have stronger and more positive relationships.

If equitable adjustment claims will not resolve delay issues, delay claims can help—given the right circumstances. One of the biggest hurdles to establishing delay claims is first giving proper notice to the upper-tier contractor or owner. Often, contracts contain notice provisions that restrict the time window in which contractors may present delay claims. For example, some contracts require contractors to submit their claims within a certain number of days—often, as few as two days—of the date that a delaying event occurs or is known to the contractor. Courts generally enforce notice provisions strictly, though there are exceptions.

Additionally, many contracts contain “no damage for delay” clauses that can eliminate delay claims entirely. Under such terms, courts have ruled contractors may only acquire extra time “in the owner’s discretion” and cannot receive damages unless the defending party has clearly breached the contract.

Courts in most jurisdictions recognize some exceptions to “no damage for delay” clauses, particularly when owners or upper-tier contractors deal in bad faith, unreasonably refuse to provide additional time, or unreasonably interfere with the claimants’ work.

Calculating Damages

Even if a delay claim is allowed by contract, selecting the proper method of measuring and reporting damages from a delay is essential to success. The two primary methods for calculating delay claims are the critical path method and the total cost method.

The critical path method is an analysis of a project’s schedule, which shows the length of a delay and how that delay disrupted the sequence of dependent tasks required to complete a project as scheduled. Ideally, actual records of project hours, materials, and other expenses, as well as agreed-upon schedules, can enable contractors to piece together the contemporary cost of a delay. Although most courts strongly prefer these actual records to calculate damages, contractors without schedule information may also attempt the critical path method by relying on scheduling experts who can retroactively reconstruct the project’s as-built schedule and testify on critical path items to estimate how much the delay impacted them.

If there is no way to collect the information sufficient for the critical path method, the total cost method might be an option for potential claimants. This approach calculates delay damages by subtracting the total anticipated costs of a project from its total actual costs. To use this method, contractors must show (1) the customer is completely at fault for the increased costs from a delay; (2) there are no other ways to measure the damages; and (3) both the bid and actual costs are reasonably calculated.

All three of these points can be difficult to prove, and most courts, regardless of jurisdiction, treat them with a great deal of scrutiny. The New Hampshire Superior Court for Merrimack County, for instance, in the case Axenics Inc. v. Turner Construction Co., wrote “the total cost method is a ‘theory of last resort.’”

One reason why some contractors gravitate towards the total cost method is that it does not require a full account of actual costs, and many contractors can easily calculate the losses themselves. The method also allows them to potentially recover lost profits. An additional approach to the total cost method is the modified total cost method, where contractors use the same formula as the total cost method but adjust it for bidding inaccuracies and/or performance inefficiencies to make their delay claims appear more accurate. The methods using actual costs, though, generally provide stronger evidence for damages, and most courts will only accept the total cost method if a contractor is able to prove there is no other way to account for the actual costs.

Many contractors who hope to recover home office expenses in delay claims use what is known as the Eichleay formula to determine such damages. Like other aspects of delay claims, however, the effectiveness of this method depends on the circumstances of the claim, a contractor’s documentation, and the jurisdiction. Furthermore, more conservative estimates may have greater chances of success. At its core, the Eichleay formula determines the amount of home office damages by multiplying the number of delay days by the average daily rate of home office overhead attributable the delayed contract. This daily overhead rate is calculated by dividing the delayed project’s share of a contractor’s total billings and dividing it by the number of days in the delayed contract (both the on-schedule and delay days). For cases involving government contracts, federal courts have deemed Eichleay claims as “the only proper method” for calculating home office damages provided they meet certain requirements. These requirements are: (1) the government caused the delay; (2) the period of delay was uncertain and the government required the contractor to be ready to resume its work on short notice; and (3) the contractor was unable to seek other work to cover its office expenses during that period.

Outside of matters involving federal contracts, courts treat Eichleay claims with a higher level of scrutiny than critical path claims. In an effort to discredit delay claims, defending parties often claim (correctly) that the Eichleay formula is only an estimate and not necessarily an accurate indicator of damages. To ensure the numbers within the calculation are true, contractors will likely have to provide audited financial statements—information smaller contractors may not be able to provide. Also, Eichleay damages may decrease if many of the office overhead costs were from bidding for the contract or if a contractor already paid most of its office expense before a delay late in a project. Although the federal government prefers the Eichleay formula, some state courts do not accept it and instead use the terms of a contract to determine the costs of overhead. Still, many contractors try to use the Eichleay formula whenever possible because it can potentially yield hundreds of thousands more in recovered expenses than other methods. Ultimately, the jurisdiction of a delay claim is a strong factor for deciding whether or not to use the Eichleay formula.

When project delays are inevitable, contractors have options to recover at least some of their losses. For many contractors, pursuing equitable adjustments will prove to be the most cost-effective and least adversarial solution. Companies that maintain detailed schedule records and give adequate, timely written notice of their delay concerns may successfully assert delay claims to avoid serious harm when a customer refuses to accommodate them (if contract provisions allow). Ultimately, consulting with a lawyer or delay consultant early in the delay process is the best protection from losing a legitimate claim.

Author’s Note

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

Three Types of Contracts Offer Different Benefits and Risks

For the first time in years, construction material costs are rising. In March, the Bureau of Labor Statistics reported numbers showing a 4.8 percent rise in material prices between February 2016 and February 2017.

For contractors who have been working on long-term projects, the price increases could mean lower profit margins, or even losses, as they complete their work. Contractors who are in the estimating, bidding, and contract negotiation stages for new projects will want to ensure profitability and manage risk where possible. In particular, selecting the best pricing system for a project and properly drafting the contract to reflect it is essential, especially during periods of material cost increases.

Three prevalent pricing mechanisms are fixed-price contracts, cost-plus contracts, and guaranteed maximum price contracts. Here’s the lowdown on each type and the benefits and risks with respect to cost changes.

FIXED-PRICE CONTRACTS

Fixed-price or lump-sum contracts are contracts where the parties, sometimes through extensive negotiation, agree upon a fixed sum for the labor and materials to be furnished. Typically, the contractor will prepare a schedule of values where portions of the work correspond with a certain percentage of completion, and pay applications are submitted for the appropriate percentages (often, minus an agreed-upon amount of retention). If the parties want to change the scope of work, a signed change order will be required, and the parties must negotiate and agree upon the change order pricing before signed.

Fixed-price contracts offer contractors limited protection—and in some cases, no protection—in the event of material price increases. Indeed, “the normal risk of a fixed-price contract is that the market price for subject goods or services will change.” (See Seaboard Lumber Co. v. U.S., a 2002 Federal Circuit Court opinion.) Many contracts contain force majeure provisions that excuse or absolve parties from performing their contractual duties in the event of unforeseeable circumstances that are beyond their control and that make performance impossible or commercially impracticable. Examples of such events include “acts of God” like floods, tornadoes, and earthquakes, as well as events such as riots, terrorist attacks, and labor strikes. However, force majeure clauses can be difficult to enforce, and most courts, like the Federal Circuit in Seaboard, view cost changes as a normal, foreseeable risk and not an event that will excuse contractors from further performance. Therefore, when negotiating a fixed price, contractors generally should plan to be held to that price.

However, properly drafted fixed-price contracts can give contractors options to mitigate potential losses arising from cost increases. One strategy is drafting the contract to read that the fixed price is based upon material prices as of the date of signing and that significant increases in material prices will or shall (not “may”) entitle the contractor to an equitable adjustment of the contract price through a signed change order.

Contractors should also be entitled to adjust the contract price or time of completion to account for other problems—like delays, material shortages, or other difficulties acquiring materials—that can occur when costs increase. Such provisions will have better chances of being enforced if the contract specifically defines what constitutes a “significant” percentage increase in price. Additionally, contracts should include provisions protecting contractors from liability associated with delays and shortages. Some fixed-price contracts also provide that in the event the parties cannot agree on a price for change orders, the change order work shall be paid for on a time-and-materials basis including overhead and profit. If contractors are unable to negotiate an equitable adjustment provision, a time-and-material measure for change orders can provide some protection.

COST-PLUS CONTRACTS

For contractors, while the above revisions to fixed-price contracts may be helpful, cost-plus contracts will provide the maximum protection against material cost increases. Cost-plus contracts—also known as time-and-material agreements—are agreements whereby contractors bill for the cost of the labor and materials, plus a fee that is either a percentage of the project costs or an agreed-upon flat fee. When invoicing, contractors include documentation of their payment to subcontractors, vendors, and material suppliers to provide proof of the cost. They then invoice for the cost plus the agreed-upon percentage of the cost.

Unlike fixed-price agreements, cost-plus agreements place the risk of cost overages and increases on the owner. If the contractor’s fee is a percentage of the labor and material costs, these arrangements also create potential for contractors to benefit from cost increases. However, they eliminate the need to negotiate a fixed price, they make change orders much simpler to implement, and in periods of cost decreases, they can benefit owners.

GUARANTEED MAXIMUM PRICE CONTRACTS

While some owners will be wary of cost-plus agreements—especially when material prices are on the rise—guaranteed maximum price (GMP) contracts may serve as a compromise that could help both contractors and owners mitigate risk. GMP contracts are a modified cost-plus option in that they function like cost-plus agreements—contractors invoice for the labor and material costs, plus their fee—but the contracts establish a maximum price for the entire project. Contractors invoice in the same manner they would for a cost-plus agreement, but once the owner has paid the maximum agreed-upon amount, the remaining costs are the contractor’s to bear.

Often, parties to GMP contracts also agree that if the sum of the cost of work and the contractor’s fee total less than the guaranteed maximum price, the difference in the cost and the agreed-upon maximum fee reverts to the owner or is split between the two parties. This makes some owners more amenable to these agreements than they would be to traditional cost-plus agreements, which can make project costs very unpredictable.

Whether parties decide that a fixed-price or cost-plus agreement is best for their needs, they should take care to draft the price terms clearly in order to avoid ambiguity and confusion. Generally, courts enforce contracts as written if they are clear and unambiguous, but if an ambiguity exists, courts will must look to extrinsic evidence to determine what the parties intended, leaving the fate of the dispute to a jury or fact finder. For example, in Rosa v. Long (a 2004 N.C. Court of Appeals opinion), a homeowner and contractor entered into a contract stating that the contractor would build a turnkey dwelling for the “sum of $193,662.60” but later stating that contractor would receive a commission in the amount of 10 percent of all materials, subcontracts, and labor obtained and expended by the contractor. Because these terms suggested that the contract was both fixed-price and cost-plus, a jury decided what the parties intended instead of a judge enforcing the terms as drafted. Clear, proper drafting is essential to increasing the parties’ chances of a predictable outcome in the event of a dispute.

NIBS States Proposed ABA Resolution to Make Codes and Standards Free Could Reduce Safety

The National Institute of Building Sciences issued an open letter to delegates attending the American Bar Association (ABA) Annual Meeting in August informing of the potential impacts if they vote to support a proposed resolution. The resolution—which advocates that copyrighted codes and standards incorporated by reference in legislation and regulation be made available for free—would alter the way codes and standards are developed in the United States.

In the U.S. construction industry alone, there are hundreds of copyrighted codes and standards that impact everything from seismic requirements and wind loads to water use and life safety. The standards developing organizations (SDOs) that develop these codes and standards have thousands of members, employees and volunteers that participate in the process to incorporate best practices and lessons learned to improve the standards. Each industry, from aeronautics and agricultural to electronics and telecommunications, has a similar structure and industry participation to address their specific needs. Such standards improve safety, drive innovation and improve commerce, both domestically and around the world.

The U.S. Government recognizes the benefit of private industry standards development, as directed by the National Technology Transfer and Advancement Act (NTTAA, P.L. 104-113) and Office of Management and Budget (OMB) Circular A-119.

If the ABA’s suggested resolution and related advocacy campaign is successful, private-sector-developed standards would be subject to new requirements due to their incorporation by reference in legislation and regulation, and the ability for SDOs to recoup development costs would change considerably.

The development of codes and standards is expensive. Today, the cost is born by those who are ultimately impacted by the standards (whether by participating in the process or purchasing the resulting document). By making such information free online, the ABA resolution would hamper cost recovery through such mechanisms. The result would be that private-sector organizations may no longer be able to invest in the development process, leaving existing standards to remain stagnant (and thus inhibiting innovation) and shifting the responsibility (and expense) of developing future standards to the government.

ABA’s proposed resolution attempts to mitigate any copyright concerns by encouraging government agencies to negotiate licenses with SDOs. However, this change would require agencies to hire staff and implement contracting mechanisms, making it necessary for tax payers to cover the cost of standards development.

The National Institute of Building Sciences—which was established by the U.S. Congress to work with both the public and private sectors to advance building science and the design, construction and operations of buildings to meet national goals of health, safety and welfare—is extremely concerned that the ABA is advocating a one-size-fits-all legislative vehicle that will alter the long-standing tradition of private-sector-developed standards in the United States. The result could reduce safety, increase costs and add a burden to the government and tax-paying citizens.

In lieu of moving forward with the resolution, the Institute suggests the ABA focus on engaging in a meaningful dialogue with the SDO community to help address the changing nature of access to copyrighted materials through the internet and other electronic sources, and, after taking the long-term goals and impacts into consideration, identify a mutually acceptable path forward.

Read the letter.

Fewer Contracts and More Coordination Point to Design-Build Becoming Even More Popular

When contractors and owners elect a certain project delivery method for their project, it can affect all aspects of the construction, including costs, time to complete the project and amount of exposure to liabilities for each involved party. Owners and designers have long viewed the “Project Delivery Method” as the comprehensive process including planning, design and construction required to execute and complete a building facility or other type of project. Choosing the right project delivery method is integral to a successful project. Currently, there are at least four types of common project delivery methods: construction management at risk (CMR), design-bid-build (DBB), design-build and multi-prime (MP). There is a growing trend showing the more traditional design-bid-build product delivery method is losing its appeal and other options, like the design-build delivery method, are taking its place.

To understand why the design-build process is growing in popularity, it is helpful to discuss three areas where the four processes are different: number of phases and essential parties, number of essential contracts and the liability exposure under the contracts within each method.

NUMBER OF PHASES AND ESSENTIAL ‘PRIME’ PARTIES

Traditional design-bid-build is the familiar, drawn-out process where the owner of the property contacts a designer to create plans and specifications. Once complete, the owner takes the plans and specifications and begins the bidding process. After a bid is accepted, only then can construction begin. The CMR and MP methods use similar processes, though the owners may contract to different parties instead of contracting with the general contractor (we’ll discuss this more later). Under design-bid-build, CMR and MP methods, a minimum of three players is necessary in every project: the owner, designer and the contractors in their various forms.

The design-build method uses an “integrated” process, whereby the designers and contractors are one-and-the-same entity. The process of designing and constructing occurs simultaneously and thus eliminates the lag time between an owner’s receipt of a design and the acceptance of a bid. Also, because there is only one entity performing the design and construction, the only two necessary “prime” parties are the owner of the project and the design-build entity.

NUMBER OF ESSENTIAL CONTRACTS

Another closely related factor to the number of phases and essential parties is the number of contracts created during the project. The traditional design-bid-build project first requires the owner to form a contract with a designer that will design the building or project in isolation and without any input from the construction team. CMR operates similarly again; however, it allows for input from the construction team as to what materials would be the most cost-effective and merchantable for the desired purpose. In these two processes, two contracts exist: one between the owner and designer and one between the owner and construction-management constructor.

MP requires the owner to contract directly with each contractor and subcontractor instead of with one general contractor. Under this process, a minimum of two contracts exists between the owner and the designers and contractors, likely increasing as the size of the project increases.

Conversely, the design-build process merges the designer and builder into one entity. Because the one entity handles both jobs, the contracting process is streamlined and results in only one contract between the owner and design-build entity.

LIABILITY EXPOSURE UNDER THE CONTRACTS

As the volume of contracts involved in the project increases, the more fragmented the liability exposure becomes. In the design bid-build, MP and CMR methods, the owner first secures the designs from the designing entity. When the owner hires the constructing entity, he or she warrants to the constructing entity that the designs and specifications are sufficient for its hired purpose. The designer and the contractors are independently responsible for their work product, but the owner is still held responsible for any representations made to either entity. Although the CMR method attempts to foster the communication between the designer and contractors, no contract exists between the two and, therefore, liability remains on the owner for all
representations made. Further, any change orders, which frequently arise, and any other “gaps” are solely the responsibility of the owner.

Design-build removes the wall that is frequently erected when construction projects go wrong. Frequently during litigation involving the design-bid-build process, designers will attempt to avoid liability by pointing the finger at the contractors and vice-versa. Design-build, by creating a merged entity including the designer and the contractor, places the responsibility of designing and constructing with that one entity, which facilitates problem resolution instead of gearing up for an adversarial proceeding. Therefore, the design-builder is responsible not only for designing the project so that it will satisfy the desired standards, but it must also complete the project required by the owner in the contract.

As for “gaps” with the design-build process, they are essentially eliminated. The entity is performing both roles. Should the owner provide the design-builder with prescriptive designs and specifications, however, the design-build contractor is the party
responsible for discovering any inconsistencies with the performance standards by which they are bound. Any consistencies found will be the financial responsibility of the owner.

FEWER BUMPS

It is easy to see why the design-build process is growing in popularity. Costs are decreased by streamlining the process in many ways: an overlapping process of concurrent designing and constructing, fewer required contracts, and the ability of the contracting entity to adapt to the changes in design and construction. Although liability exposure is more concentrated in the design-build entity than in the other methods, the benefits of coordination between the designer and contractor will surely outweigh its detriments.

In addition to making the project delivery process easier, fewer bumps along the way will surely decrease the time and costs associated with the completion of a project. As we follow the trend toward a more design-build-focused construction industry, we will likely experience a positive effect on the litigation process, where claims will arise only between two parties as opposed to the requisite three parties in a traditional design-bid-build-based action.

Expertly Negotiate Contracts

The National Roofing Legal Resource Center (NRLRC) has released its Roofing Contractors Introductory Guide to Reviewing Construction Contracts

The National Roofing Legal Resource Center has released its Roofing Contractors Introductory Guide to Reviewing Construction Contracts.

The National Roofing Legal Resource Center (NRLRC) has released its Roofing Contractors Introductory Guide to Reviewing Construction Contracts, which is designed to educate and assist roofing professionals in negotiating contracts. The rights and obligations of roofing contractors are governed by the terms of the contracts they sign. The guide discusses terms that frequently appear in contracts they are asked to sign and offers suggestions about how to revise provisions that may be disadvantageous if a problem were to develop. It is available electronically on NRLRC’s website.

Forum-selection Clauses and Their Impact on the Construction Industry

With the national housing market poised for slow but steady growth in 2014, U.S. contractors expect a good year for business, and the number of contracts and subcontracts for construction work is expected to increase. Many of these contracts will contain forum-selection clauses, and a recent U.S. Supreme Court ruling brings to light the importance of these clauses and coming changes in their enforceability.

WHAT IS A FORUM-SELECTION CLAUSE?

A forum-selection clause is a contractual provision in which the parties establish the place for specified litigation between them. These clauses have become increasingly common in construction contracts, particularly with general contractors who do business in two or more states. Often, general contractors have a form subcontract agreement they require or ask all subcontractors on a particular project to sign. If general contractors work in multiple states, forum-selection clauses can help them make potential litigation less costly and easier to manage by guaranteeing the litigation will take place in the company’s home state, where its executives and attorneys likely work.

An example is a general contractor based in New York but working on a North Carolina project and entering into a roofing subcontract with a North Carolina roofer. The general contractor can present the subcontractor with a forum-selection clause mandating any legal claims arising from the subcontract may only be brought in a New York court. For a North Carolina contractor, finding counsel and filing suit in New York will likely be more difficult and costly than doing so in North Carolina, especially when evidence and witnesses are located in North Carolina. In this example, the forum-selection clause makes litigation more predictable and cost-effective for the general contractor and also decreases the likelihood the subcontractor will actually be able to sue, so it most likely favors the general contractor.

To protect local contractors, many state laws have declared out-of-state forum-selection clauses unenforceable in construction contracts. These states include Arizona, California, Connecticut, Florida, Illinois, Louisiana, Minnesota, Montana, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Utah, Virginia and Wisconsin. Additionally, state laws in Nebraska, Rhode Island, South Carolina and Texas make forum-selection clauses unenforceable in certain circumstances that sometimes, but do not necessarily, encompass construction contracts. In the first category of states, local contractors have been able to file suit locally despite forum-selection clauses because courts in these states can apply the state laws and disregard the clauses. However, the U.S. Supreme Court’s recent decision on these clauses will severely limit the reach of these laws and will ensure that forum-selection clauses are enforced in many more cases.

CASE BACKGROUND

In December 2013, the U.S. Supreme Court issued a unanimous decision in the case of Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas. The court held that defendants in federal court can use forum-selection clauses to transfer their cases to the state specified in the clause, even if the suit is brought in a state with a law deeming these clauses unenforceable. Essentially, forum-selection clauses may be enforced by a venue transfer motion.

The case involved Atlantic Marine Construction (AMC) Co., a general contractor based in Virginia. AMC won a federal contract from the U.S. Army Corps of Engineers to construct a building at Fort Hood, Texas. AMC subcontracted with J-Crew Management, a local Texas company, to perform some of the work. AMC’s contract, which J-Crew Management signed, included a forum- selection clause dictating that any legal disputes between AMC and J-Crew Management arising from the contract had to be brought in state or federal court in Norfolk, Va.

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Five Ways Construction Professionals Can Protect Their Contractual Rights and Avoid Misunderstandings

If your company has recently been awarded a contract for construction work, congratulations! In finding the work and having your bid accepted, you’ve demonstrated your capability to efficiently furnish high-quality labor and materials. At this point, many contractors have no choice but to immediately proceed with reviewing the schedule, scope of work and specifications, as well as preparing to mobilize labor to meet time-related demands. With this flurry of activity, many contractors forget to reduce the agreements to writing, fail to sign written agreements, or—worse—sign contracts without reading all the terms and conditions. The following tips and information can help busy contractors prevent common pitfalls from occurring and offer guidance for those mired in contractual disputes.

1. Put everything in writing.

Most construction professionals would agree written contracts are essential for projects with new or relatively unknown clients, but many feel that long relationships with clients and mutual trust and respect eliminate the need for written contracts. In fact, some fear written agreements have the potential to offend other professionals with whom they have a positive past working relationship. However, written contracts are essential in today’s economic and legal climate and can be seen as a way to honor the mutual respect many feel toward past and repeat clients. The primary purpose of a contract is not necessarily to give one party an advantage over the other. Instead, the goal is for both parties to clearly delineate each party’s expectations from the other to avoid unwanted surprises. If both parties are aware of the duties, responsibilities, risks and rewards before the project commences, there will be less potential for disputes and misunderstandings than there will be without a written agreement.

2. Know that complying with licensing statutes is essential to preserving contract rights.

North Carolina and South Carolina, like most states, prohibit unlicensed contractors from enforcing the provisions of their contracts if a license was required for the contract in question. Additionally, North Carolina case law requires contractors to strictly comply with N.C. General Statutes Chapter 87, which contains specific provisions about the name in which contractors can lawfully hold a license. Failure to comply with the statutes will prevent contractors from enforcing the provisions of their construction contracts.

South Carolina has taken an even stricter approach. Pursuant to S.C. Code Ann. §40-11-370, it is unlawful to engage in construction under a name other than the exact name on the license issued to the contractor (if a license is required for the work), and an entity that does so may not bring an action in law or in equity to enforce the provisions of a contract. This means even a duly licensed contractor can be barred from any recovery for breach of contract, including lien and bond lawsuits, if the contractor’s name on a written contract is even slightly different from the contractor’s name on the contractor’s license. Although some states have case law adopting this principle, South Carolina appears to be the only state that has codified the rule. Therefore, it is imperative a contractor’s name on the contract is the exact same name as the name on any contracting license required for the work in question.

3. Assume no damage for delay clauses are enforceable.

Both North and South Carolina courts generally enforce “no damage for delay” clauses, which specify owners will not be liable for a general contractor’s damages arising from delay, disruption or interference—even if the owner is responsible. General contractors can enforce these provisions against subcontractors or suppliers, too. Often, the contract will provide that additional time—contingent on written approval by the owner, architect or general contractor—is the sole remedy for delay.

South Carolina courts have recognized some exceptions to these clauses’ enforceability, however. The South Carolina Supreme Court held in Williams Electric Co. v. Metric Constructors Inc. (1997) delay caused by fraud, misrepresentation or bad faith; delay caused by active interference; unreasonable delay giving rise to abandonment of the contract; or delay caused by gross negligence can give rise to recoverable damages.

Similarly, North Carolina courts have overlooked “no damage for delay” clauses and allowed parties to recover damages arising from delays that constitute abandonment of a contract; active interference with the contract; and delays resulting from fraud, bad faith or arbitrary action. Additionally, damages from delays not reasonably contemplated by the parties are recoverable.

Many delay provisions are accompanied by notice requirements, too. Most contracts that do allow parties to recover for delay related damages require the party claiming damages to give notice of the delay, or the source of the delay, as soon as they are aware of it. What constitutes notice and reasonable knowledge of the delay can be open to interpretation. Ambiguity is best avoided through specific provisions in the contract.

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