OVERVIEW OF CONSTRUCTION INDUSTRY AND LEGAL ISSUES
A Construction Contract is nothing but an effort to allocate risks therefore it all depends on what the K says
Look for language in the practice K that addresses the problem in the case we’re reading. If not, figure out what should have been in there.
Construction Lawyers:
· Negotiate Ks
· Help client work their way through a complicated K; administer a K
· Litigate problems that arise – mediation, arbitration, court
Major Players on a Construction Project:
· Owner
o Initiates project
o Original risk taker
§ Structures (office building, courthouse, condo)
§ Plants (power plant, recycling plant, manufacturing plant)
o Private v. Public
§ Source of funds – tax dollars or loans
§ Rules that apply are different
o Possible owners
§ Someone who intends to use the building
§ Developer looking to sell or market to others
· Designer
o Translates owner’s concept into plans and specs
o Usually an architect or engineer (“A/E”)
o Usually contracts with Owner
o Prepares plans, specs, and bid package
· General contractor
o Builds project based on plans and specs
o Terms
§ General contractor
§ Prime contractor
o May not actually do all the work
· Subcontractor and suppliers
o Perform specific portions of the physical construction work
o Also known as “trades”
o Examples:
§ Site work
§ Foundation
§ Framing
§ HVAC
§ Plumbing
§ Electrical
§ Painter
Other Players:
· Lenders
· Insurance companies
· Bonding companies
· Unions
Practical Advice
· Risk of disputes is high
· Disputes are bad – a good lawyer helps clients avoid disputes
o Delay completion
o Cost money
o Interfere with the final product
· Strategies for avoiding disputes
o Reputable participants
o Use contracts to shift risks intelligently
o Monitor the project carefully
**When reading the cases, think about how a lawyer could have helped avoid the problem that led to the dispute
Three key factors for every project
Cost – budget
Time – schedule
Quality – scope (of work) – what is the contractor signing on to do? A 1-story house? A chemical processing plant? Hotel?
Defined in K by plans and specs
Changing one usually changes the others…
Quick overview of Construction Project
· Background
o Idea – new dorm
o Design – prepared by architect
o Financing – how many $ is needed to build the new dorm?
o Permits – needed before construction can begin
· Construction
o Demo
o Re-grade
o Prepare
o Build
· Sequence is everything – you cant paint until the walls are up
· Usual sequence
o Site work
o Foundation
o Slabs/floors (rough-in)
o Frame
o Roof
o Exterior skin
o Plumbing, electrical, mechanical
o Sheetrock, paint, carpet, doors
o This area usually leads to disputes about time and money
o Scheduling can be used forensically to determine what went wrong
Types of Project Delivery Systems
· Design-Bid-Build – most construction is done this way
o Traditional system
o Advantages
§ Design protects inexperienced owner
§ Completed design = Accurate firm price
§ Easier to get loan
o Weaknesses
§ Contractor may be able to improve design
§ Slower process (linear) – can’t start until design is done
§ Lots of adversarial relationships
· A/E v. Contractor
· Contractor v. Subs
· Construction Management
o Became prominent in the 1980s
o C/M is usually a G/C Firm
o C/M serves as Owner’s consultant
o Owner often contracts directly with trade contractors
o Helps owner achieve best projects for the money
o Variations
§ C/M at risk – C/M liable for schedule and cost
§ C/M not at risk – pure consultant
· Design/Build (or EPC – Engineer, Procure, Construct)
o Single point of contact for both design and construction
§ Owner obtains design and construction from a single entity
§ Owner avoids “blame game” between GC and A/E
o Performance guarantees protect Owner
o Fast – construction starts before design is complete
o Disadvantages
§ Undermines competitive bidding
§ Licensing issues – architects
§ No “watchdog” to protect owners
Pricing Variations and Risk Allocation
· Fixed Price/Lump Sum
o “I will build your dorm for $1 million, based on the plans you provide.”
o What is the best delivery system?
§ Can the design builder adequately price then project before he is done?
· Probably not
§ Design-Bid-Build – probably best because scope of work is defined
o Risks, and who has them?
§ Work is more difficult than expected – contractor
§ Bid bust – contractor
§ Unexpected difficult site conditions – depends on what the K says
§ Labor strike – contractor can try to allocate risks in K, otherwise, contractor is on the hook
· AL is tough about holding to promise – no impossibility of performance in AL common law
§ Bad weather – same as above
§ Fire – same as above
§ Sub files bankruptcy – same
**All are risks the contractor has unless the K has someway of dealing with the risks and allocating them differently
o Why would the contractor agree to do this?
§ Good estimator
§ Good at managing subs
§ Keeps costs below K price = profit
o How can contractor protect himself?
§ Contingency in bid
§ Shift some risks back to owner by K
· Force majeure
· Differing site conditions
least manage the legal or practical risk
· Capitalized word in a K usually means it is defined somewhere
Section 10-2B-15.02
Alabama’s Door closing Statute
Foreign corporations transacting business in AL “may not maintain a proceeding in this state” w/o a certificate of authority.
All Ks made by foreign corps “prior to obtaining a certificate of authority” shall be “held void at the action of the foreign corporation.”
Door Closing Statute Hypo #1:
Client is a GA contractor who built an office building in Alabama or $2 million
He was not qualified in AL at the time and did not pay any franchise tax
Client completes the office building, but O reuses to pay the last $200,000 owed under the K
C wants to file suit. What do you tell him?
Will he win if he sues in AL?
No
Does it make sense for him to qualify before he sues?
No
Can he sue in GA?
If the court can get jx over the D
What about tort claims? Quantum meruit?
Some other theory that arises out of the contractual relationship will not work
Precedence says no
Door Closing Statute Hypo #2:
Assume client is a CA based turbine supplier
Not qualified in AL: no franchise tax payments
Client supplies a gas turbine for a power plant in AL
The turbine is manufactured in CA and delivered by rail to AL, where it is installed in the power plant by another contractor.
The contractor claims hat the turbine was late, and withholds $1 million in liquidated damages from your client.
Can your client file suit? If so, where?
Yes. It is interstate commerce
Would it matter if your client sent 2 consultants to AL to help?
Not if it was a necessary and incidental part of the project
Typically has to be complicated project
AL courts have said that construction activities are intrastate activities
Door Closing Statutes – Why?
Tax collection device
Favoritism for local companies
BUT, may lead egregiously unfair results
Is this a good idea?
Contractor’s License
Purpose – gov’t certifies that contractor has minimum skills, honesty, and financial capability to be a contractor
Does it work? Cf. driver’s license tests.
Sanctions for failure to comply
No payment for work
Can’t sue to get paid
Criminal sanctions
