Hidden Risk Topics in Construction Contracts – What You Don’t Know Can Hurt You

by | Jan 27, 2018

As discussed in the previous blog, the underlying principle of allocating and managing risk in projects using CMAR or design-build delivery methods is to embark upon a collaborative process between the owner and construction professionals with initial discussions on how to allocate specific risks to the party best positioned to manage and assume the risk. These decisions ultimately end up in the contract between the owner and construction professional.

As part of the initial discussions when formulating a contract, the following additional areas are highlighted for your attention. In addition, WDBC’s 2018 education program now includes a specific module on contracts which also addresses the elements of risk.

Site Conditions

The nature of unknown subsurface conditions is why every industry-standard contract contains provisions for differing site conditions (DSC), which can have a significant impact on the project cost and/or time if the risk elements are not allocated properly. This is one area in which the owner can make a difference in the allocation. For example, it is cost-prohibitive for a construction professional to do extensive subsurface investigation before a contract award, and in most cases the necessary easements to allow subsurface investigations are not in place prior to contract award.

Unreasonable Liquidated Damages

Liquidated damage provisions are critical components of construction contracts. Time is of the essence on construction projects and delays can negatively impact the owner. But actual damages for the delay can be difficult to quantify after the fact and may require costly analysis and legal expenses to determine. A best practice is that all parties agree to liquidated damages to compensate the owner for their reasonable costs should the construction professionals fail to complete the project on time. In establishing the liquidated damages amount, the owner should also make good faith efforts to ensure the amount is reasonable. Excessive liquidated damages appear punitive, and are likely unenforceable in the courts. Disproportionate liquidated damages, often combined with an unrealistically short schedule, drives construction professionals away. As a note, on progressive design-build projects, the Design-Build Institute of America (DBIA) recommends not establishing the liquidated damages amount until GMP development.

Dispute Resolution Provisions

Construction contracts are often found with no dispute resolution provisions, or where the owner deleted the industry-standard dispute resolution provisions. Without this provision, the process of collaboration is missing—resulting in all disputes between the owner and the construction professional being resolved by litigation.

Land Acquisition and Easements

The permitting process in a project can be time-consuming and often results in unintended delay. Because the owner owns the land, the best practice is for the owner to initially obtain all land and easements. What is particularly onerous in this scenario is when the owner transfers this risk to the construction professional and includes no damages for delay provisions.

Unrealistic Weather Baselines

Some contracts will establish a monthly baseline for normal weather conditions. This topic can be a useful component when attempting to negotiate time extensions due to abnormal weather. However, caution in addressing this topic is needed so as to avoid skewing the baseline and defining how the construction professional should obtain a legitimate contract time extension.

Consequential Damages

The DBIA and WDBC best practice is that all construction contracts contain a mutual waiver of consequential damages between the owner and construction professional. Contracts with discussion of no waiver of consequential damages, or where the waiver is only extended from the construction professional to the owner, is not a collaborative partnership. Subsequently, without this waiver, the construction professional may be unable to obtain the necessary bonds for the project; or if so, they will be at an increased premium to the owner.

Warranty Requirements.

In the allocation of risk for this topic, the construction warranty and guarantee requirements defined for the contract should be clear and unambiguous. However, extended warranty requirements, particularly for major process equipment, are not uncommon, but the owner should know they may result in an increased cost. Construction professionals will gladly warrant their work, but must understand the warranty requirements.

The solution to these contract scenarios is easy. Use industry-standard documents, and follow the industry-standard recommendations on risk allocation and management. CMAR and design-build projects are built upon collaboration, mutual trust, appropriate risk-sharing, and openness. Owners benefit from this collaborative process of risk allocation in developing their contracts – and ultimately achieve a successful project and relationship

Mark E. Alpert, PE, DBIA, WDBC Executive Director

WDBC Executive Director Mark Alpert is a former CH2M senior vice president for design-build (Denver, CO), WDBC founding member, and past president. For more than 35 years, Mark has been a pioneer in the development of integrated project delivery for water and wastewater projects. Even before the term “design-build” was commonly recognized, Mark was focusing on cost-effective design and construction, which led to the formalization of design-build and other collaborative project delivery methods.