Sears, Construction Law, Fall 2012
I. OVERVIEW
a. Construction Ripe for Legal Disputes
i. Construction contracts performed over time – maybe years
ii. Parties experience unexpected conditions and changes
iii. These circumstances create numerous disputes
b. Primary construction players
i. Owner (sometimes a developer)
1. Initiates project
2. Original risk taker
a. Structures (office building, courthouse, condo)
b. Plants (power plant, recycling plant, manufacturing)
3. Private v. public
a. Source of funds – tax dollars or loans
b. Rules that apply are different
4. Possible owners
a. Someone who intends to use the building
b. Developer looking to sell or market to others
ii. Designer
1. Translates owner’s concept into plans and specs
2. Usually an architect or engineer (A/E)
3. Usually contracts with owner
4. Prepares plans, specifications, and bid package
iii. General contractor
1. Builds the projects based on the plans and specs
2. Terms
a. General contractor
b. Prime contractor
3. May not actually do the work
a. Most general contractors use subcontractors to perform the physical work
b. If so, contractor’s job is to organize and coordinate the subs
iv. Subcontractors and suppliers
1. Perform specific portions of the physical construction work
2. Also known as trades
3. Examples
a. Site work
b. Foundation
c. Framing
d. HVAC
e. Plumbing
f. Electrical
g. Painter
v. Other players
1. Lenders
2. Insurance companies
3. Bonding companies
4. Unions
c. Practical advice
i. Risks of disputes is high
ii. Disputes are bad
1. Delay completion
2. Cost money
3. Interfere with the final product
iii. Strategies for avoiding dispute
1. Reputable participants
2. Use contracts to shift risks intelligently
3. Monitor the project carefully
d. Construction lawyer’s mindset
i. This is a profession
ii. Need to know the law and our clients goals
iii. Need to give advice that helps clients meet their goals within what the laws allows
iv. When you read cases, think about how a lawyer could have helped avoid the problem that led to the dispute.
e. Three key factors for every project
i. Cost – budget
ii. Time – schedule
iii. Quality – scope
iv. Changing one usually changes the others
f. Quick overview of a construction project
i. Background
1. Idea: new dorm
2. Design: prepared by architect
3. Financing: how much money is needed to build the new dorm
4. Permits: needed before construction can begin
ii. Construction
1. Demo old building
2. Re-grade site
3. Prepare foundation
4. Build the new dorm
iii. Sequence is everything – you can’t paint until the walls are up
1. Usual sequence
a. Sitework
b. Foundation
c. Slabs/floors (rough in)
d. Frame
e. Roof
f. Exterior skin
g. Plumbing, electrical, and mechanical (HVAC, fire alarms, fire protection systems)
h. Sheetrock, paint, carpet, doors
g. Project delivery systems
i. Design-bid-build (our K)
1. Traditional system
2. Advantages
a. Design protects inexperienced owner
b. Completed design = accurate firm price
c. Easier to get loan
3. Weaknesses
a. Contractor may be able to improve design
b. Slower process – can’t start until design is done
c. Lots of adversarial relationships
i. A/E vs. contractor
ii. Contractor vs. subs
ii. Construction management
1. Became prominent in the 1980s
2. C/M is usually a G/C firm
3. C/M serves as Owner’s consultant
4. Owner often contracts directly with trade contractors
5. Helps owner achieve best project for the money
6. Variations
a. C/M at risk – C/M liable for schedule and cost
b. C/M not at risk – pure consultant
iii. Design/build
1. Single point of contact for both design and construction
a. Owner obtains design and construction from a single entity
b. Owner avoids the blame game b/t GC and A/E
2. Performance guarantees protect owner
3. Fast – construction starts before design is completed
4. Disadvantages
a. Undermines competitive bidding
b. Licensing issues (In AL, for example, you have to be licensed to be an architect and you have to be an employee of a firm that is an architectural firm, not a GC)
c. No watchdog to protect owner
5. Sometimes called Engineer/Procure/Construct (EPC)
h. Pricing Options
i. Lump sum/Fixed price (better with design-bid-build)
1. I will build dorm for $1m based on the plans provided
2. What is the best delivery system
3. Risks, and who has them
a. Work is more difficult than expected – contractor, unless said in K in advance
b. Bid bust – contractor
c. Unexpected difficult site conditions – contractor, unless said in K in advance
d. Labor strike – contractor, unless said in K in advance
e. Bad weather – contractor, unless said in K in advance
f. Fire – contractor, unless said in K in advance
g. Sub files bankruptcy – contractor, unless said in K in advance
4. Why would contractor agree to do this?
a. Good estimator
b. Good at managing subs
c. Keeps costs below contract price = profit
5. How can contractor protect himself
a. Contingency in bid
b. Shift some risks back to owner by K
i. Force majeure
ii. Differing site conditions clause
c. Shift some risks to subs by K
i. Flow down
6. Advantages for owner
a. Firm budget – one loan
b. Owner freed from worrying about contractor’s costs
c. Major risks on contractor
7. Disadvantages for owner
a. Adversarial – contractor incentivized to build cheaply
b. Owner may pay too much – contingency high where project is risky
ii. Cost Plus
1. I’ll build your dorm for my actual costs, plus 10% for overhead and 10% for profit
2. Why do this?
a. Project risks are too uncertain to get a fixed price
b. Scope of work is unknown
3. Problems
a. Owner has to rely on contractor to control costs
b. Contractor not incentivized to spend efficiently
4. Solution
a. CPFF
b. GMP – guaranteed maximum price
c. Cost sharing/bonus clause
iii. Unit pricing
1. I’ll remove unsuitable soil from site for $1 per cubic yard
2. Requires repetitive work
3. Key issues
a. Define the unit carefully (is the cubic yard of dirt packed?)
b. Costs included in unit price must be clear (can the contractor seek extra money if it rains?)
c. Must be able to measure number of units correctly (how do you count the number of cubic yards removed?)
I. CONTRACT FORMATION, REQUIREMENTS FOR A VALID CONTRACT, CONTRACT INTERPRETATION, AND IMPLIED OBLIGATIONS
ner sue
a. Contractor
b. Designer
c. Window manufacturer
6. Assume spec also said “all windows shall be watertight up to a certain specified water pressure.”
a. This is performance spec. If doesn’t perform up to specs, we can then sue the person responsible for this.
7. Assume specs gave two acceptable types of windows and contractor used one of the specified, but it doesn’t meet the requirement. Need more facts.
viii. Implied obligations
1. Try to be faithful to the apparent intent of the parties that may not have been expressed in words
a. Examples
i. Implied duty to cooperate
ii. Implied warranty of adequacy of plans and specifications – Spearin doctrine. In that case, contractor followed the specs given him by the govt, but they wouldn’t work. SC said if you provide plans and specs to contractor then you are impliedly warranting that the result will be achieved
1. But you can contract around this. And say that you make no warranty about the adequacy of plans and specs.
2. Implied obligation hypo
a. Contractor hired to build an archives building for the US government in DC
b. Contractor required to install ornamentation based on models to be provided by the govt
c. Contract did not specify a date when the govt models are due
d. Contractor’s work delayed because govt failed to timely provide the models
e. Does contractor have a claim
i. Yes, can claim that implied obligation to supply the models at a reasonable time
e. Contract Interpretation
i. Try to discern what the parties intended to agree
ii. Plain meaning rule
iii. Canons of contract construction
1. Contra-preferentum
2. Handwritten over typed, typed over printed
3. Expressio unio est exclusio alterius
a. Expression of one thing excludes others
b. “Owner to provide A, B, and C” means not D
4. Ejusdem generis
a. Specific terms trump general terms
b. “Contractor shall construct entire house” v. “owner to supply ceiling fans”
5. Make sense of entire contract
6. Contractual order or preference: can set up own rules…if there are any inconsistencies b/t the general and specific conditions, then the specific conditions shall control
f. Resolving ambiguities
i. Parol evidence
1. Testimony about intent based on what the parties said during negotiations
ii. Course of dealing between the parties
1. On this contract
2. On other contracts
iii. Custom in the industry
1. What is the commonly understood meaning in the industry
iv. Interpretation hypo (Alabama Society for Crippled Children)
1. Specs call for 6 “projected” windows
2. Drawings place a “jag” mark on operable windows. One of the projected windows on the drawings has a “jag” mark.
3. Contractor installs 5 fixed and 1 operable projected window
4. Owner claims all 6 should be operable
