Construction Contract Formation Requirements to Mitigate Deficiency

The responsibility for errors and omissions in construction contract documents traditionally belongs to the party that drafted the documents.

Usually, owners or their architects or engineers prepare these documents, including construction contract requirements, terms, and conditions, technical specifications, and drawings. Owners may also provide administrative and project cost and schedule control procedures, or the contractor may be required to submit these for the owner’s approval. The owner is generally held to have impliedly warranted to the contractor that the contract documents that it or its architect or engineer prepared are accurate and suitable for use. An experienced contractor cannot, however, consciously overlook patent defects or rely on this implied warranty when it knows or should know that such documents cannot produce the desired end result.

In the case of a design/build contract, the contractor performs the role of the architect or engineer and the constructor. The owner’s contract documents in this situation usually include the contract language, specifications, and preliminary design criteria and drawings. The contractor’s scope is to interpret the owner’s construction contract requirements, finalize the design documents, procure materials and equipment, subcontract where necessary, and then construct or manage construction. Depending on the contract language, the owner’s approval of the final design and completed facility may occur at various project milestones with considerable owner participation in design reviews. The owner’s contract may also have provisions stating that the owner’s review of the designs and sign off on the specifications and issued-for-construction drawings do not relieve the contractor from providing the required facility and products that result from operating the facility. In the case of a turnkey project, the owner’s approval may not occur until the entire facility is completed and all systems have been inspected, started, and determined to be functional and consistent with the owner’s specifications.

Perfect contract documents and flawless designs are rare. Given the complexity of the construction process and technological advances, it should not be surprising that contract documents often fail to adequately define the work to be performed. There is, however, a critical and costly difference between a normal incidence of errors and serious design flaws that cause substantial delays and cost increases.

Both owners and contractors have opportunities to mitigate the problems resulting from deficient and defective contract formation. Awareness of these options for mitigation not only reduces the likelihood of disputes but also increases the chances for a financially successful project. The following discussion can serve as a set of guidelines for both parties to follow during the design development, contract formation, and contract performance phases of a project.

OWNER’S OPTIONS FOR MITIGATION

Design Development
The following guidelines illustrate the care that the owner and its architect or engineer should take in the preparation of design documents before preparing and awarding the construction contract.

• Provide adequate lead time for the design process;
• Award design contracts only to firms with adequate staff and proven track records for similar work;
• Provide sufficient compensation for critically important elements of the design effort, such as top-level management attention, periodic design reviews, value engineering studies, and constructability reviews;
• Consider a peer review of the drawings, specifications, and other documents. Plans should be checked at the earliest possible stage, prior to construction, for compliance with applicable building and industry codes;
• Require the designer to provide a certificate of insurance covering errors and omissions;
• Require the designer to demonstrate an effective internal Quality Assurance (QA) system;
• Carefully determine whether the end result (performance) or the design detail is more important. If the end result is the controlling criteria, use performance specifications and permit the contractor to choose its own methods of achieving the end results;
• Provide clear, unambiguous requirements for design specifications set forth in great detail, allowing complete certainty as to the end product that any capable and experienced contractor can achieve;
• Provide a sufficient budget for the architect or engineer to provide a cost-effective design that includes constructability reviews. To reduce the cost of construction, some owners introduce value engineering after receiving the contractor’s bid or after entering a construction contract at a stipulated sum, and the contractor and owner share the cost savings resulting from the redesign. This practice has undermined the role of the architect or engineering firm as the prime professional acting on behalf of the owner to supervise the contractor and should be avoided;
• Recognize the owner’s exposure, based on the Spearin Doctrine, to the extent that it retains liability and responsibility for design omissions, errors, and deficiencies in the drawings and specifications; and
• Thoroughly review and approve the design documents¹ and any scale or 3D models before construction begins to avoid expensive field changes after installation.

Construction Contract Formation
The owner’s preparation of the actual construction contract language should convey the requirements and risks retained by the owner or transferred to the contractor. Examine the following guidelines during the drafting of the contract to mitigate design-related problems.

• Avoid lump sum construction contracts if the design is relatively incomplete;
• Draft contracts with equitable language and allocate risks to the party that is best able to control them;
• Avoid using off-the-shelf specifications, general contract conditions, and other contract provisions that have not been carefully reviewed and modified for specific project risks and requirements;
• Recognize that general contract clauses requiring the contractor to inspect the site, study the drawings and specifications, and assume complete responsibility for the work until completion and acceptance may not obviate the implied warranty of the adequacy of drawings and specifications;
• Determine if the contractor is best able to assume responsibility for site conditions that may affect its performance. If so, require and provide an adequate amount of time for the contractor to perform a site investigation. Reveal all existing site conditions data and clearly state uncertainties in the data and the contractor’s responsibilities for verification using clear, non-boilerplate language. Consider requesting the contractor to put a contingency or conditional sum in its bid to cover the uncertainty of site conditions if the intent is to shift this risk to the contractor. The owner should also carry contingency in the owner’s budget for potential site conditions changes and claims;
• Clearly state in the design/build contract using unambiguous, non-boilerplate language the intent of a performance specification to shift the project design responsibility to the contractor. Highlight performance specifications in the contract documents and showcase them at pre-bid and preconstruction meetings. Do not provide excessive design details that would take away the contractor’s ability to utilize its own judgment, experience, and expertise to achieve the desired end results;
• Use specific rather than broad verification clauses that require the contractor to verify the project specifications for accuracy and completeness;
• Disclose all relevant information to the contractor and inform the contractor of inaccurate or misleading data so that the contractor relies on complete, accurate information in preparing its bid;
• Inform the contractor during bid preparation of any special methods of which the contractor may not be aware that will be required to achieve satisfactory end results;
• Use the common and normal meaning of words appropriate for the trade;
• Clarify the order of precedence of contract documents to identify the controlling document should conflicts or ambiguities exist, i.e., do specifications take precedence over detailed drawings? Avoid assigning documents a low level of precedence and then referencing them in higher-level documents, thus causing a precedence roll-up problem;
• Include adequate cross-referencing for all specification requirements contained in various sections of the design documents;
• Require the contractor to state all its reservations and qualifications to the requirements in its bid;
• Clearly state all mandatory minimum requirements in the construction contract. Avoid optional or preferential items or requiring alternate pricing for options;
• Require the contractor to clearly identify all deviations from the specifications and “or equal” substitutions in its bid;
• Clearly identify any required variations from standard industry practice;
• Have a change management procedure in place for handling change orders, which can be used to modify the scope of work or make other adjustments that are required because of problems with the design specifications and drawings;
• Avoid the use of addenda as much as possible because excessive use greatly increases the likelihood of confusion;
• Consider requiring performance and payment bonds from all contractors and subcontractors; and
• Have a dispute resolution process in place, such as mediation or arbitration, to resolve any issues that may arise during the construction process.

Contract Performance
The owner has opportunities to mitigate problems associated with contract documents during contract performance.

• Provide timely responses to the contractor’s requests for information and clarification;
• Consider retaining independent inspectors to monitor construction to make sure the work performed complies with the plans and specifications;
• Establish a process and have sufficient experienced technical and administrative personnel for reviewing and approving submittals and change order requests;
• Ensure that adequate and equitable adjustments are made to the contractor’s compensation if design defects or deficiencies occur that impact construction;
• Avoid directing the contractor to proceed with work in the face of defective construction drawings and specifications unless later corrective measures will be less costly than the costs due to delays caused by correcting the defects;
• Carefully evaluate “equal” materials or equipment and consider paying extra if more costly preference items are required; and
• Include a reasonable allowance in the owner’s overall project budget for normal design imperfections.

CONTRACTOR’S OPTIONS FOR MITIGATION

Construction Contract Formation

The contractor should carefully examine the construction contract requirements and provisions, drawings, and specifications with the intent of mitigating the risks associated with possible defects and deficiencies.

• Before signing any construction contract, thoroughly review all documents to ensure that they are complete, accurate, and legally binding;
• Seek clarification in a timely manner if a drawing or specification is obviously defective or deficient or if an ambiguity creates a doubt about the work. Failure to seek clarification may make the contractor liable for its erroneous interpretations and may prevent the contractor from recovery of its damages for a subsequent change;
• Record notes of any discussions with the owner regarding any requests for information, clarification, or interpretation of the specifications and drawings and the owner’s response;
• Be careful regarding accepting value engineering after submitting a bid or after entering a construction contract at a stipulated sum, where the contractor and the owner share the saved costs resulting from the redesign. The full effect of the design changes on the construction schedule and cost may not be fully apparent, and the sharing of savings can become difficult to negotiate fairly;
• Do not volunteer to replace defective specifications except on the condition that the owner approves in writing any revised specifications and accepts the responsibility for the substitutions;
• Read the entire contract and specifications as a whole and in detail. Include a review by the project manager, technical specialists, and the cost/schedule control manager who will perform the work. Identify and evaluate all referenced specifications and drawings even if not attached or appended;
• Avoid accepting complete discretion in the selection of the method of performance for a hybrid design/performance specification unless the owner expressly agrees to assume the risk of failure to attain performance goals;
• Attempt to place the design/build contractor’s bid design in the highest order of precedence in the contract documents and require the owner to thoroughly review and approve the design documents. The contractor should recognize that it may be held to the performance suggested by its proposal;
• Request from the owner all important information that may have been omitted from the specifications. This imposes an affirmative obligation to disclose all such information that the owner possesses;
• Make certain that any caveat language or disclaimers insisted on by the owner are general. If unsuccessful, provide sufficient contingency for specific disclaimers in the bid. Elect not to bid the project if the risks are unreasonably high;
• Conduct independent site investigations of conditions if the owner provides them as information but disclaims the warranty of the accuracy of the information. Document all findings of the site investigation and rely on these findings in preparing the bid;
• Document the basis for bid including all assumptions, bid clarifications, reservations, and pre-award meetings with the owner. Preserve a copy of all bid documents and estimates, including a copy of the drawings that existed at the time of contract award;
• Make a written record of efforts in discovering obvious defects in the plans and specifications, and in dealing with the owner once defects are discovered. Document any problems associated with efforts to examine site conditions, such as insufficient time, poor weather conditions, or materials that conceal the site;
• Set up separate accounting cost codes to track any extra work or change order work that is performed as a result of problems with the specifications and drawings;
• Make inquiries into whether any specific problems might result from using the owner’s specifications;
• Be circumspect about using specifications that appear economically impractical to use;
• Evaluate cost impacts of sole source vendor requirements; and
• Ask for postponements of bids for follow-on contracts containing defective specifications until the problems are remedied.

Contract Performance
Problems most likely will develop during contract performance. The following guidelines should be followed to assure equitable recovery of the contractor’s damages.

• Seek clarification as soon as a need becomes apparent;
• Notify the owner of defects in the plans or specifications that are reasonably discoverable or patent;
• Provide letters of timely notice for all cost increases and schedule delays resulting from problems with the drawings and specifications;
• Do not deviate from the drawings and specifications without a written change order;
• Obtain design approvals from the owner before materials are purchased and installed;
• Clearly identify the subcontractor’s scope of work where trade responsibilities may overlap. Do not award subcontracts too early while the design is being finalized because the costs for design changes may be negotiated at a disadvantage;
• Clearly establish specific cost accounts to capture impacts resulting from design-related problems; and
• Clearly identify schedule impacts that result from design-related problems that occur on the then-current critical path and request time extensions.

CONCLUSION

Following these guidelines does not ensure a dispute-free project. Latent errors and ambiguities may still exist, and unanticipated problems may occur. A clearer understanding of the construction contract requirements and risks of both the owner and the contractor, however, will result from careful consideration of these options for mitigation and may prevent the project from being completed in the courtroom. The owner and the contractor should each use legal counselors as advisors to mitigate conflicts before they happen rather than to wield conflicts as weapons against the other party.

¹     Usually, the owner’s approval of design documents may not relieve the engineer of the responsibility for a functional and workable design.

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