Cost-Plus Contract and the Disorganized Contractor

I’Ashea Myles-Dihigo | The Dispute Resolver | September 6, 2017

Some contractors are better at record keeping than others.  I always seem to run into this issue when I working with a client and I’ve asked them to provide me with all of their records regarding the project.  The usual answer that I get is, “I don’t keep those kinds of records,” or “All I have are text messages.”  Depending on the type of contract dispute, the lack of accurate record keeping may not be such a big deal, however, when there is a dispute regarding a cost-plus contract, recording keeping can become a central issue.  This concept is explained by the Tennessee Court of Appeals in the case of Forrest Construction Company, LLC v. Laughlin.
Generally speaking in Tennessee, when a contractor seeks to recover unpaid fees relative to a cost-plus contract, and the owner denies owing fees, the contractor must show the court an itemization of each expenditure made on the project.  In Forrest Construction Company, LLC v. Laughlin, homeowner entered into a cost plus contract with Forrest Construction Company to build a home. Forrest Construction Company, LLC v. Laughlin, 337 S.W. 3d 211 (Tenn. Ct. App. 2009).  Prior to completion, of the house, Forrest Construction and the homeowner began to have disputes about payment.  Id. at 216.  Forrest Construction stopped work on the home, filed a lien, and thereafter filed a breach of contract action against the homeowner and an action to recover damages based on the doctrine of quantum meruitId. at 218.  Forrest Construction claimed that homeowner breached the contract by failing to timely pay pursuant to the terms of the parties’ agreement. Id. Defendant homeowners filed a counter-claim against Forrest Construction for negligent construction, gross negligence, negligence per se, breach of contract, and violations of the Tennessee Consumer Protection Act.  Id. at 218-219.
The contract at issue in Forrest Construction required that the contractor retained a detailed accounting and back-up documents for all expenditures and draw requests on the project.  When the homeowner asked Forrest Construction for the accounting records on the project, the contractor could only provide a “two foot thick pile” of unorganized receipts.  Id. at 224.  The Court found this type of record keeping to be unacceptable when it said,  “In any cost-plus contract there is an implicit understanding between the parties that the cost must be reasonable and proper.” Id. at 223-224; Kerner v. Gilt, 296 So. 2d 428, 431 (La. App. 4 Cir., 1974). “The contractor is under a duty of itemizing each and every expenditure made by him on the job and where the owner denies being indebted to the contractor the latter has the burden of proving each and every item of expense in connection with the job.” Id. (citing Wendel v. Maybury, 75 So.2d 379 (Orl. La. App. 1954); Lee v. National Cylinder Gas Co., 58 So. 2d 568 (Orl. La. App. 1952)); see also 17A Am Jur. 2d Contracts, Sec. 495 (2008). Forrest Construction never itemized the expenditures it sought to recover from the homeowner. Id. Instead, it submitted essentially unsubstantiated requests for draws. Id. Moreover, when called upon to provide proper documentation and itemization of the costs, it provided a wholly disorganized, un-itemized box of documents, many of which were unrelated to the actual project.  Id. As a result of this finding, the Court reversed the trial court’s decision in favor of the contractor and instead held that the contractor materially breached the contract first.
The take away from this case is when a contractor chooses to work under a cost-plus contract agreement, the contractor should be sure that they are able to maintain the heightened accounting requirement that goes along with that type of agreement. This means fully documenting each expenditure in an organized manner. If your client is like many of my clients, the fixed-fee agreement may work better because it does not require the heightened accounting in order to recover on a dispute of non-payment.

Have You Been ‘Delayed’ or ‘Disrupted’? – Why the Distinction Matters

Ann B. Graff | Pepper Hamilton LLP | August 2017

No-damages-for-delay clauses are commonly found in construction contracts and, with certain exceptions, are generally recognized as valid and enforceable. The exact language can vary, but the typical clause provides that the contractor shall have no claim for compensation for delay and that an extension of time shall be the contractor’s sole remedy. While the case law is fairly uniform and well-developed regarding the effect no-damages-for-delay clauses have on claims for delay damages, whether these clauses also bar disruption damages is less clear.

“Delay and disruption” damages are often lumped together, but they have distinct definitions. “Delay damages” refer to damages “arising out of delayed completion, suspension, acceleration or disrupted performance.” 5 Philip J. Bruner & Patrick O’Connor, Construction Law § 15:29 (6th ed. 2002). These damages compensate a contractor that is injured when a project takes longer to complete than the construction contract specified. Conversely, “disruption damages” occur when a project may be timely completed, but at a greater expense to the contractor because of disruptive events caused by another party. Id. at § 15:102. Disruption damages compensate the contractor for the resulting reduction in its expected productivity in labor or equipment. Id.

Often, a no-damages-for-delay clause will also expressly bar disruption damages. And, even when the word “hindrance” or “disruption” is not expressly used, many courts have held that disruption damages caused by the breaching party’s delay are also barred by a no-damages-for-delay clause. See, e.g., Cleveland Constr., Inc. v. Ohio Pub. Emps. Ret. Sys., 10th Dist. No. 07AP-574, 2008-Ohio-1630, 2008 Ohio App. LEXIS 1403 (Ohio App. 10th Dist. April 3, 2008); The Law Co. v. Mohawk Constr. & Supply Co., 523 F. Supp. 2d 1276, 1285-86 (D. Kan. 2007) (contractor’s sole remedy of “schedule extension” for contractor’s delays barred subcontractor’s claim for disruption damages), rev’d on other grounds, 577 F.3d 1164 (10th Cir. 2009); U.S. ex rel. Tenn. Valley Marble Holding Co. v. Grunley Constr., 433 F. Supp. 2d 104, 109-11 (D.D.C. 2006) (holding that contractual provision allowing damages for delays “recovered on [Supplier’s] behalf by the Contractor from the Owner” barred disruption damages because “the ordinary meaning of the word ‘delay’” encompasses disruption damages that are caused by another party’s late performance.).

Recently, however, in Central Ceilings, Inc. v. Suffolk Construction Co., 75 N.E.3d 40 (Mass. App. Ct. 2017), the Massachusetts Court of Appeals refused to bar a subcontractor’s claim for disruption damages, holding that the no-damages-for-delay clause only precluded claims for “delay.” Central Ceilings involved the construction of three dormitories at Westfield State University. The dormitories were to be ready for occupancy by students arriving for the 2005 fall semester, with a substantial completion date of July 1, 2005. As an incentive for the general contractor, Suffolk Construction Company, to finish on time, its contract provided that it could earn a bonus for completing the project early or face liquidated damages for finishing late.

Central Ceilings, Inc. served as a subcontractor for installation of the exterior heavy metal gauge framing, drywall and hollow metal door frames. Critical to Central’s estimate and ability to timely complete its work was the “flow” of the project, with each aspect of work following in sequence, floor by floor, exterior to interior, building by building.

From the outset, the project was plagued by problems, as Suffolk failed to coordinate the work of other trades; failed to establish proper elevation, column and control lines from which Central worked to construct the building; failed to provide for and timely coordinate delivery of the hollow metal door frames; and failed to ensure that the buildings were weather-tight, all of which were essential to Central’s ability to complete its work.

As a result, Central’s workers were repeatedly forced to break down and remobilize to different areas to carry out different tasks, then go back and remobilize to complete the original task. Central’s supervisory personnel were also forced to spend an inordinate amount of time coordinating all of the changes and filling out related paperwork. The problems also resulted in significant trade stacking.

Given the substantial completion date and the related financial incentives and disincentives, Suffolk advised Central that no time extensions would be granted. As a result, while the start dates for various aspects of Central’s subcontract work were consistently pushed back due to Suffolk’s various breaches, the completion dates remained the same and the time within which Central had to perform was constantly compressed. Central was forced to assign additional manpower to keep the project on track. Ultimately, while the project was substantially completed on time, Central’s productivity was significantly impacted.

The trial judge found that Suffolk breached the contract and awarded Central damages for its lost productivity. The judge determined that the contract’s no-damages-for-delay clause did not apply because Central was not, in fact, seeking damages “for delay.” The appeals court upheld the judge’s ruling, rejecting Suffolk’s suggestion that the finding was in error because Central was seeking damages “caused by delays.” The appeals court noted that no-damages-for-delay clauses are strictly construed due to their harsh effects. In strictly construing the contract language, the appeals court found that Central was not seeking damages because it had been delayed but, rather, because it had been forced to increase its workforce due to the compression of the schedule caused by Suffolk’s breaches. Quoting the trial judge, the appeals court noted that “Suffolk’s breaches did not affect Central’s ability to complete its work on time . . . but, rather . . . its ability to complete its work on budget.”

Central Ceilings is not the only case to hold that disruption damages may be recoverable despite a no-damages-for-delay clause. In John E. Green Plumbing & Heating Co. v. Turner Construction Co., 742 F.2d 965 (6th Cir. 1984), the court agreed that the no-damages-for-delay clause, strictly construed, only barred delay damages and not damages due to hindering the contractor’s work. See also Mecca Constr. Corp. v. All Interiors, Inc., No. 06-3823, 2009 Mass. Super. LEXIS 253 (Mass. Super. Middlesex Oct. 16, 2009) (allowing contractor to recover increased labor and other costs required to timely complete the job in light of hindrances despite no-damages-for-delay clause).

Given the lack of consistency in case law regarding applicability of a no-damages-for-delay clause to claims for disruption damages, consider the following:

  1. Be familiar with the state’s law applicable to your project. Do not simply assume that disruption claims are barred by a no-damages-for-delay clause.
  2. When drafting a no-damages-for-delay clause, expressly include language to also bar disruption damages (i.e., “no claim . . . for hindrances or delays”; “delayed . . . or obstructed or hindered”).
  3. As a party seeking to recover disruption damages, be mindful of the distinction between delay and disruption damages and be sure to carefully characterize your claim in correspondence and claim filings.

What You Need to Know About Additional Insured Endorsements

Gary Barrera | California Construction Law Blog | August 28, 2017

A well-drafted insurance clause is an integral part of a construction contract because it sets forth a subcontractor’s obligations to add the general contractor to its policies of insurance as an additional insured and identifies the manner by which the general contractor will qualify as an additional insured. In a typical construction contract, the general contractor will be an additional insured via a scheduled endorsement or a blanket endorsement.

Scheduled Endorsements

A scheduled endorsement contains a “schedule” in which the person or organization that is named in the schedule is added to the policy as an additional insured. The following scheduled endorsements are commonly used in construction contracts.

The CG 20 10 11 85 endorsement, entitled “Additional Insured-Owners, Lessees or Contractors (Form B),” provides coverage to the person or organization named in the endorsement for liability arising out of “your [the named insured’s] work.” The phrase “your work” includes the named insured’s ongoing and completed operations.

The CG 20 10 11 85 is generally no longer available, even though most construction contracts continue to require subcontractors to name the general contractor as an additional insured under this endorsement. After 1985, the Insurance Service Office (“ISO”) modified the CG 20 10 form to limit coverage to liability arising out of the named insured’s ongoing operations. The CG 20 10 10 01 endorsement, entitled “Additional Insured- Owners, Lessees or Contractors-Scheduled Person or Organization,” provides coverage to the person or organization named in the endorsement for liability arising out of the named insured’s ongoing operations.

Alternatively, the general contractor can be named as an additional insured for completed operations via a CG 20 37 07 04 endorsement. The CG 20 37 04, entitled “Additional Insured-Owners, Lessees or Contractors-Completed Operations,” provides additional insured coverage to the person or organization named in the endorsement for liability arising out of the named insured’s “work” that is included in the “products-completed operations hazard.” In other words, the endorsement provides coverage for bodily injury or property damage that occurs after the named insured’s work is completed.  However, the CG 20 37 07 04 is difficult to obtain, as most insurers have opted not to provide such coverage.

In response to the absence of completed operations coverage in the CG 20 10, the ISO created the CG 20 37 10 01 endorsement, entitled “Additional Insured-Owners, Lessees or Contractors-Completed Operations.” The CG 20 37 10 01 endorsement provides coverage to the person or organization named in the endorsement for liability arising out of the named insured’s completed operations, but does not provide coverage for ongoing operations. Therefore, requiring the subcontractor to name the general contractor as an additional insured using a combination of the CG 20 10 10 01 and CG 20 37 10 01 endorsements , in lieu of a CG 20 10 11 85 endorsement, is proper in order to ensure that the general contractor is an additional insured for both ongoing and completed operations.

Blanket Endorsements

As illustrated above, in order for the general contractor to qualify as an additional insured via a scheduled endorsement, the general contractor must be named as an additional insured on the endorsement. Due to administrative errors, it is not uncommon for a general contractor not to be named as an additional insured on a scheduled endorsement. However, despite this omission, the general contractor may still qualify as an additional insured via a blanket endorsement.

A typical blanket endorsement states that additional insured status is automatically provided when the named insured has agreed in a written contract to add a person or organization to its policies of insurance as an additional insured. Thus, a blanket endorsement does not require the intended additional insured to be named on the endorsement in order for coverage to apply.

There are two blanket endorsements that are commonly used in the construction industry. The CG 20 33 07 04 endorsement, entitled “Additional Insured-Owners, Lessees or Contractors-Automatic Status When Required in Construction Agreement With You,” provides coverage to “any person or organization for whom you [the named insured] are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy” for liability arising out of the named insured’s ongoing operations. The endorsement also states that a person’s or organization’s status as an additional insured ends when the named insured’s operations for the additional insured are completed.

The CG 20 38 04 13 endorsement, entitled “Additional Insured-Owners, Lessees or Contractors-Automatic Status For Other Parties When Required In Written Construction Agreement” is similar to the CG 20 33 07 04 in that it provides coverage for liability arising out of the named insured’s ongoing operations. However, the primary distinction between the endorsements is that the CG 20 38 04 13 provides coverage for upstream parties (i.e. persons or organizations above the level where an entity is contracting) if the contract requires the subcontractor to procure additional insured coverage for such entities.  The CG 20 38 04 13 provides coverage to “any person or organization for whom you [the named insured] are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy” and “any other person or organization you are required to add as an additional insured under the contract or agreement.”

There are two drawbacks to blanket endorsements. Blanket endorsements providing coverage for completed operations are rare, as evidenced by the above endorsements. In response, the subcontractor could attempt to procure a manuscript blanket endorsement (i.e., a non-ISO form endorsement) that provides coverage for completed operations, though industry trends suggest that insurers are reluctant to issue such endorsements. Therefore, if the general contractor wants to have coverage for completed operations, it should confirm that it has been named as an additional insured on a scheduled endorsement providing completed operations coverage.

Blanket endorsement are also problematic because if the named insured’s policy is cancelled, a person or organization that is an additional insured via a blanket endorsement may not receive a notice of cancellation from the insurer. California Insurance Code section 677.2 requires an insurer to provide a notice of cancellation to a named insured. In Kotlar v. Hartford Fire Ins Co., 83 Cal.App.4th 1116 (2000), the California Court of Appeal held that Section 677.2 applies to both named insureds and any persons or entities named as additional insureds on an endorsement.  Since blanket endorsements do not require the person or organization to be named as an additional insured, Section 677.2 does not apply to blanket endorsements. In order to remedy this deficiency, the contract could require the subcontractor to provide the general contractor with written notification that the policy is cancelled within a specific time frame following cancellation of the policy. Ultimately, if the general contractor wants to ensure that it receives the statutory notice of cancellation, it should require the subcontractor to name it as an additional insured on a scheduled endorsement.

California Limits Indemnification Obligations of Design Professionals

William L. Doerler | The Subrogation Stategist | August 18, 2017

The California legislature recently enacted legislation – SB 496 – limiting a design professional’s indemnification obligations in private contracts related to design services. The term “design professional” refers to licensed architects, landscape architects and professional land surveyors, and registered professional engineers. As revised, Cal. Civ. Code § 2782.8 states that, for all contracts entered into on or after January 1, 2018 for design professional services, all provisions that purport to have the design professional indemnify the indemnitee for claims against the indemnitee – or require the design professional to provide a defense to the indemnitee – are unenforceable except to the extent that the claims against the indemnitee arise out of, or relate to, the negligence, recklessness or willful misconduct of the design professional. In addition, as revised, § 2782.8 limits a design professional’s liability for the cost of defense to the design professional’s percentage of fault.

The revised statute provides two exceptions. Pursuant to these exceptions, the limitations related to the duty and cost to defend do not apply to: 1) design service contracts where a project-specific general liability policy insures all project participants, including the design professional, and 2) a design professional who is a party to a written design-build, joint venture agreement.

Although this change in the law does not go into effect until January 1, 2018, the change serves as a reminder to subrogation professionals that, when faced with indemnification provisions in design or construction-related contracts, they should check local laws to determine the extent to which subrogating insurers can enforce such provisions.

Claim Barred by Florida’s Construction Defect Statute of Repose? Maybe Not. Florida Court Says You Should Read the Construction Contract More Closely

Troy Vuurens | Butler Weihmuller Katz Craig | August 21, 2017

Claim professionals are often reminded that even the most meritorious claim is worthless if not filed within the applicable statute of limitations or statute of repose. In the world of construction defect claims, Florida law provides for a 10-year statute of repose. Under § 95.11(3)(c), the action must commence within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

Not surprisingly, the parties do not always agree on the specific date that the countdown clock on the statute of repose commenced running. In a recent appellate decision, Florida’s 5th DCA reversed a trial court’s dismissal of a homeowner’s construction defect claim that was filed just beyond 10 years after the closing date on the property. See Busch v. Lennar Homes, LLC, 219 So.3d 93 (Fla. 5th DCA 2017).

In Busch, the defendant had taken the common position that the plaintiff’s claim was barred by the statute of repose because the Purchase and Sale Agreement, i.e. “the contract,” was completed on the date of the closing on the property, which was the latest date applicable under §95.11(3)(c). Therefore, argued the defendant, the claim expired exactly 10 years later and before the complaint was filed. The trial court agreed with the defendant and dismissed the claim upon determination that the contract was completed on the date of the closing, which commenced the running of the statute of repose.

The 5th DCA reversed on appeal and held that the trial court erred in finding that the contract was completed on the date of closing. The court held that a contract is not completed until both sides of a contract have been performed. The court pointed to the “inspection and punch-list clause” of the contract which stated: “Any remaining items that Seller has agreed to correct will be corrected by Seller at Seller’s sole cost and expense prior to closing or at Seller’s option within a reasonable time after closing.” In other words, the court found that the contract was not completed at the time of closing because there were remaining punch-list items that the Seller was obligated to correct. As such, the clock on the 10-year statute of repose did not start ticking until the contract was completed (i.e. when the Seller completed the punch-list items, post-closing).

In the context of residential construction, the closing date is generally the date when the statute of repose commences. It is typically the date on which the homeowner takes possession, final payment is made, and the contract is completed. However, the 5th DCA’s decision in Busch is a reminder that there are other factors to consider as well, including if there is a contractual obligation to complete any remaining work after the closing, such as punch-list items.

It is also worth noting that the defendant in Busch is a large production home builder who likely built thousands of homes with the same contract language. Other builders may have similar clauses incorporated into their contracts, too. The Busch case is an important new decision because of the sheer volume of homes that were likely built with this language. As such, it stands to reason that Florida practitioners engaged in residential construction defect litigation may begin to see these same issues arise in their cases, too. And in all cases where the statute of repose may become a critical issue, a careful analysis of the contract should be undertaken in order to identify similar language.