When Do Defects Prevent Practical Completion?

Julian Bailey, Emma Knight and Helena Payne | White & Case | April 4, 2019

Practical completion represents the physical completion of works on construction projects. Despite its importance, it is not a legal term of art, and whether or not practical completion has been achieved requires determination on a case-by-case basis.

The recent judgment in Mears Ltd v Costplan Services (S.E.) Ltd [2019] EWCA Civ 502 provides an important analysis of the interplay between patent defects and practical completion. In this case, the Court of Appeal confirmed that a material defect does not necessarily prevent practical completion from being achieved.

Key facts

In Mears v Costplan, the Court of Appeal considered the meaning of ‘practical completion’ in the context of the construction of student accommodation and a related agreement for lease.

PNSL, the employer, contracted with Pickstock, the contractor, for the design and build of student accommodation. Separately, Mears, the tenant, entered into an agreement for lease (“AFL“) with PNSL and Pickstock to take a long lease of the property following completion.

The AFL contained a longstop provision that permitted the tenant to terminate the AFL if the practical completion certificate had not been issued by the longstop date.

Further, the AFL prohibited variations to the works that materially affected the size of the accommodation rooms. It considered a reduction in size by more than 3% from the relevant drawings as material. In the event, of the intended 348 bedrooms plus kitchens and certain other rooms, 56 rooms were built more than 3% smaller than the relevant drawings. These breaches were irremediable: there was no prospect of the building being torn down and re-built.

The tenant alleged that any breach of the 3% tolerance was a material and substantial breach of the AFL, meaning that (i) it was entitled to terminate the AFL and (ii) practical completion could not be certified. At first instance, the judge ruled in favour of the employer / landlord, noting that it would be ‘commercially absurd’ if the breach of the 3% tolerance made practical completion impossible and allowed the tenant to terminate the AFL and walk away.

The tenant’s appeal was dismissed by the Court of Appeal, which held that:

  • The failure to meet the 3% tolerance was a breach of contract, but not automatically a material breach of contract allowing the tenant to terminate. The question of materiality related to room size and not to the resulting breach of contract. If the parties were to be taken to have agreed that any failure (no matter how trivial) to meet the 3% tolerance amounted to a material breach of contract, it would lead to a very uncommercial result.
  • Practical completion is a question for the certifier. Whether a derogation / breach is so material as to preclude practical completion is a matter of fact and degree in each case. Patent defects regarded as ‘trifling’ cannot prevent the certification of practical completion, whether the defect is capable of economic remedy or not. Whether the 3% tolerance breach was trifling was not a matter for the court here. The issue of economic remedy goes to the proper measure of loss, and not to the issue of practical completion.

The meaning of ‘practical completion’

The Court of Appeal reviewed the current state of the law on practical completion, making the following observations:

  • Practical completion is easier to recognise than define, and there are no hard and fast rules as to when practical completion is (or is not) achieved;
  • The existence of latent (i.e. unknown) defects cannot prevent practical completion (as they are unknown to the certifier);
  • In relation to patent (i.e. known) defects, there is no difference between uncompleted items of work and an item of defective work that requires to be remedied;
  • Some authorities suggest the existence of patent defects prevents practical completion, however the preferred view (which has been adopted in almost all cases) is that the existence of ‘trifling’ patent defects does not preclude practical completion;
  • Whether an item is ‘trifling’ is a matter of fact and degree to be measured against the intended purpose of the works; and
  • The mere fact that a defect is irremediable does not mean that works are not practically complete.


The achievement of practical completion is primarily a question of fact and judgment, which is to be determined having regard to what the contractor promised to supply, the definition (if any) of “practical completion” in the relevant contract, and whether what the contractor has supplied substantially corresponds with what the contract required so as to constitute “practical completion”. The intents and purposes of the project will be important to consider when addressing the question of whether practical completion has been achieved.

However, the Court of Appeal made clear that, in this particular case, the mere fact that the accommodation was habitable did not mean the works were practically complete. It is a question of whether any patent defects could accurately be described as trifling. If parties intend for practical completion to be dependent on certain aspects of the work being completed in accordance with the letter of the contract, they should draft carefully for this.

In contrast, a more precise approach to completion is often taken in contracts for mechanical plant or similar facilities, such as power stations. On these projects, ‘completion’ is only taken to occur if, amongst other things, certain testing and commissioning is completed satisfactorily, based on defined benchmarks. Liquidated damages may also be payable if the plant does not function according to a performance specification. Furthermore, completion may also be dependent upon the provision of “as built” documents, operation and maintenance manuals and other documents.

Exactly when practical completion will have occurred is dependent on the nature of the asset, its intended purpose and any relevant contractual provisions. Certainty on exactly when completion is achieved is important given its consequences: the commencement of the defects liability period, the potential end of liquidated damages, the possible impact on retention monies, and the movement of risk to the Employer, to name a few.

Mears v Costplan helpfully clarifies the approach that the English courts will take to determining controversies over the achievement of practical completion. But ultimately, if the contractual criteria for ‘practical completion’ are defined in only general terms, what this will mean is that disputes over the achievement of practicalcompletion will continue to arise in practice.

Timely Legal Trends and Developments for Construction

Matt Viator | Construction Executive | January 17, 2019

The construction industry is broad and the legal concerns of industry members can be far-reaching. What seems like tomorrow’s problem often jumps to the forefront and becomes a high priority today. 2018 was full of moments like these – and it’s important to keep track of legal developments for a glimpse at what may be waiting around the corner. With that in mind, here are some of the most important legal developments for the construction industry from the second half of 2018.


Sureties play a vital role on construction projects. On federal jobs and state, county or municipal jobs, surety bonds are typically required. That means it’s important to stay on top of how the courts are treating surety agreements. 


A recent decision in the Federal Circuit of the United States Court of Appeals went a long way to show how important payment and performance bonds are on federal jobs. In K-Con, Inc. v. Secretary of the Army, the court found that despite the fact that the Army had not mentioned payment and performance bonds in the contract, K-Pon was still required to produce them, as set out under the Miller Act. That shouldn’t come as a huge surprise – when federal projects are in play, abiding by the Miller Act should be expected. Still, this case shows that the obligations created under the Miller Act are serious and contractual terms won’t do much to affect those obligations.

Another recent opinion swings quite the other way when discussing obligations under contract vs. the Alabama Little Miller Act. In Keller Construction Company of Northwest Florida, Inc. v. Hartford Fire Insurance Co., the Alabama Court of Civil Appeals found that a pay-if-paid clause between the contractor and subcontractor prevented the subcontractor from making certain bond claims. Specifically, the subcontractor made a claim for the payment of retainage from the contractor where the contractor’s retainage payment was withheld by the city for whom work was being performed. Ultimately, it came down to the fact that the contingent payment clause had been clearly expressed in the contract. The court found that the contractor was not liable for payment due to the pay-if-paid clause, and as a result, the surety was not liable either.

Finally, and back to federal projects, a case in the United States District Court for the District of Columbia has indicated that sureties might run into previously unforeseen liability under the False Claims Act. In United States ex rel. Scollick v. Narula, a contractor allegedly created an LLC and assigned a disabled veteran as the leadership of the LLC strictly in order to become eligible for benefits in the bidding process for acquiring federal jobs. Of course, when a federal job is in play, bonding is required under the Miller Act – and where fraud has taken place, that fraud could also implicate the surety. In this suit, the court contemplated whether the surety who provided that bonding could be held responsible under the False Claims Act rather than just the contractor alleged to have committed the fraud. While the surety avoided liability here, it did not shut the door to potential future liability for similarly situated sureties – and that could be something to keep an eye on.


Speaking of sureties and public projects, there are a number of current events that may affect contractors, subcontractors and suppliers. Specifically, the border wall, government shutdown and procurement methods for public jobs have all been the subject of discussion of late.

Regarding the border wall, several large contracts have been awarded in anticipation of construction. In Rio Grande Valley, a Texas contractor was awarded $145M to construct six miles of the wall. Another contract was secured for at least $172M in Arizona for 14 miles of wall – and the total contract value could reach as much as $324M if all options are granted under the contract. These are huge numbers and the question remains – where is all this money going to come from?


That question leads to another development-the government shutdown. The shutdown, of course, is centrally focused on funding for the border wall. At the time this is being written, the government has been shut down for about two weeks, and there’s no immediate end in sight. But what exactly does that mean for industry members? 

Unfortunately, a government shutdown will probably mean the receipt of a stop work order and result in a project in limbo. When a shutdown is in place, payments stop flowing and projects are delayed – and those (necessary) project delays will result in even more costs. But remember, the payment chain sprawls. Shutdowns impact contractors, but subcontractors, sub-subs and suppliers feel the hit that much more. With a shutdown in play, the money will stop flowing down the payment chain to these parties, and things can get uncomfortable in a hurry. With notoriously thin margins, many links in the construction payment chain will be put in jeopardy. For those performing work on federal jobs, the only option might be to sit tight or to focus resources on those jobs that are still progressing and resulting in payment. By the time this is posted, in all likelihood, the government shutdown will have reached a conclusion. However, with shutdowns more frequent these days, it’s important for those performing work on federal jobs to anticipate the potential for a shutdown at some point during the life of the project. 


According to the Washington Post, natural disasters caused $155 billion in damages in 2018. The construction industry is in a unique position when these disasters strike. The aftermath of a disaster provides construction participants the rare opportunity to increase business while also providing an opportunity to rebuild communities – beyond just the buildings that house them. Of course, with the current rate at which disasters strike, it’s important that structures aren’t simply rebuilt in order to only suffer when the next disaster strikes. Rather, building to withstand the next disaster should be paramount. The contractors, subcontractors and suppliers best suited to build disaster-resistant improvements will be primed for success in the aftermath of the California fires and while rebuilding communities affected by the active 2018 hurricane season.

Finally, Opportunity Zones have been a new topic of discussion in late 2018, construction projects specifically tailored for these zones may take off going forward. With the passage of 2017’s Tax Cuts and Jobs Act, these zones were created to give preferential tax treatment to those making investments in distressed communities. It should be no surprise that, following natural disasters, the areas most affected have been designated as Opportunity Zones. Because of the tax benefits associated, these zones are fertile ground for construction and development projects – and substantial investment and development is expected. Naturally, greater investment and land development is music to the ears of contractors, subs and suppliers. So be on the lookout for opportunities to perform work in one of these zones. A map of designated Opportunity Zones is available at the Department of Treasury’s website.

Top 7 Sources Of Uncertainty In Building Design And Construction

George M. Nicholos | Vandeventer Black | December 7, 2018

Recently the American Institute of Architects (AIA) and Dodge Data & Analytics and other allied construction industry parties conducted research to identify the top sources of uncertainty in design and construction along with best practices for managing associated risk.

And the top (7) are:

  1. Owner-driven changes: Instances where the owner’s requirements were not clearly initially defined, or subsequently modified resulting in added costs, design/construction effort, and schedule impact.
  2. Design omissions and communication gaps: As a rule, design documents do not contain information regarding each component in a building. Absent being a savant mind-reader, open and ongoing communication between parties is key to a successful project especially where fee crunch results in less and less information being provided or fully resolved by designers.
  3. Construction coordination: Buildings are a collection of thousands of components and ideas where opportunities for omissions and mis-communications are around almost every decision. Once again, open and on-going communication is key to a successfully managing construction coordination among the parties
  4. Unknown site or building conditions: These types of unknown conditions typically related to geotechnical issues and renovation projects. Related risks are usually allocated as part of the parties’ contract negotiations, requiring careful consideration since such unknown conditions can drastically affect project costs and construction schedules.
  5. Design or documentation mistakes: Few things are perfect, and perfection rarely exists with construction plans or specifications. However, unless accepted as a contracted risk, designers are not held by the law to the standard of perfection. The identification of and response to discovered mistakes is assisted greatly by good communication, and all parties to a project should remain vigilant reviewing, questioning, and coordinating between themselves to address errors and omissions when they appear.
  6. Accelerated design and construction schedules: There are a variety of reasons to expedite design and construction activities; however, a hurried project is increasingly susceptible to costly mistakes. Elevated alertness and coordination is important to help avoid such mistakes, or if they develop, to resolve them. Contractual risk allocation for expedited design and construction activities should be evaluated beforehand.
  7. Delays in procurement, fabrication or assembly: Delays can be born from labor uncertainties or material shortages/uncertainties. These can arise from a broad range of uncertainties including changing political tariff policies or market shortages resulting from the impact of severe weather events like hurricanes that can drain labor and materials and result in unanticipated cost increases. By their nature, these occurrences often cannot be known, but their risk allocation should be evaluated and negotiated because they may occur.

Key strategies for managing these and other project uncertainties include such things as: clear and direct leadership by each party, early assembly of the entire project team, and open communication. Parties should always be proactive and attempt to resolve uncertainties at the lowest level of management and as quickly as possible. Kicking the can down the street almost always results with magnified risk and damages, and often further detrimentally impacts party relationships. Formal documentation of these types of project events, and of the decisions regarding them, helps avoid later disagreements about when and what happened and is typically contractually required. Being proactive can avoid dispute escalation, which can adversely affect projects in so many ways. Finally, read carefully and follow your contract respecting such issues.

Construction in the USA

Craig Ledet, Martha Buttry Daniels, Scott A. Greer, Mike Stenglein | King & Spalding LLP | January 8, 2019


Sector overview

Trends, developments and prospects

What is the general state of the construction sector in your jurisdiction, including current trends, notable recent transactions/developments and future prospects?

The United States continues to be one of the largest construction markets worldwide, with $1.23 trillion worth of construction in 2017. As recently as April 2018, construction industry employment surged by 17,000 jobs. Notable developments in the energy industry include many large petrochemical projects across the Gulf Coast. Commercial construction is booming in most urban areas, exemplified by the recent completion in San Francisco of the 61-story Salesforce Tower. Major construction is anticipated as a result of the Trump administration’s $1 trillion infrastructure plan. 

Legal framework


What primary and secondary legislation governs the construction sector in your jurisdiction?

U.S. construction projects are subject to state-specific legislation such as anti-indemnity statutes, prompt payment acts, lien statutes, ‘home court’ governing law and venue rules, and retainage statutes. State legislation may pertain to specific types of project as well. For example, the majority of states legislate public-private partnerships. Federal legislation interfaces with the construction sector only in specific circumstances, such as construction of a federal infrastructure project.


Which authorities regulate the construction sector and enforce construction law, and what is the extent of their powers?

The state courts and private arbitral tribunals play the largest roles enforcing rights between contracting parties. They also enforce state-specific legislation touching on the construction industry, such as anti-indemnity statutes, prompt payment acts, lien statutes, ‘home court’ governing law and venue rules, and retainage statutes. Federal regulatory authorities, and their state counterparts, may also oversee construction when the project interfaces with a regulated issue. For example, the Environmental Protection Agency oversees a project’s environmental components, the Occupational Safety and Health Administration regulates worker safety, the Department of Labor has authority over issues such as minimum wage and overtime, and the Federal Energy Regulatory Commission governs transmission and wholesale sale of electricity and natural gas, while also regulating the transportation of oil by pipeline.      


Project licensing

What licensing requirements and procedures apply to construction projects in your jurisdiction (eg, planning consents)?

The applicable licensing requirements and procedures for construction projects vary depending on the type of construction (e.g., residential, commercial, or industrial) and the particular state. Licensing requirements are generally not stringent. Certain construction projects may also need to satisfy governmental inspection and permitting requirements, which again vary by state and municipality. 

Professional licensing and qualification

What licensing requirements and procedures apply to construction professionals, including any required qualifications?

Most construction professionals are not required to have specific qualifications, as the primary gauge in the industry is years of experience and past projects successfully completed. Construction project owners and contractors may establish their own qualification requirements.

Certain types of professional may need licenses or certifications, such as electricians, installers of heating, ventilation, and air conditioning, and non-destructive testing professionals.

Design professionals wishing to become licensed may do so by becoming professional engineers. The requirements for such licensure are state-specific, but often include a four-year college degree, years of work experience, and passing one or more exams. In some circumstances, again regulated on a state-by-state basis, a professional engineer may be required to sign, seal, or stamp technical documents.

Do any special rules and restrictions apply to foreign construction professionals?

Foreign construction professionals are not subject to any special rules and restrictions, apart from needing work authorization under U.S. immigration law. Several different visas are available to foreign workers, such as the H-2B Visa (for temporary non-agricultural labor) or the E-B3 Visa (for skilled workers, professionals, or non-temporary unskilled workers). From a practical standpoint, foreign construction professionals must be able to communicate fluently with the workforce, although some even rely on interpreters to assist in communications.

Project structures and relationships

Project structures

What corporate/formal structures are available for construction projects in your jurisdiction? What are the advantages and disadvantages of each? Are any structures explicitly prohibited?

No corporate or formal structure is prohibited for construction projects, so long as it does not run afoul of business associations’ requirements (e.g., it cannot be a ‘sham’ company). Owners and contractors can structure a project however they see fit, often relying on joint ventures (JVs), corporations, or limited liability companies. The benefits of different corporate formations depend on the circumstances.

For large-scale projects, JVs are prevalent because one company rarely retains all of the requisite expertise or resources to succeed by itself. Further, due to the size of these projects, many owners and contractors desire to spread the completion risk across several balance sheets. Whether the JV is long term or short term depends on the different business needs of the JV partners, and the anticipated requirements of the project itself.

Owners commonly use subsidiaries and special purpose project entities to help shield parent and affiliated companies from project-specific liabilities. Contractors may establish special purpose entities, but if they do, owners will generally require guarantees from the contractor’s parent company.

Relationship management

Are there any special considerations for managing relationships with:

(a) Joint venture partners (where applicable)?

The JV agreement should clearly lay out each partner’s roles and responsibilities, how the JV ends, how important operational decisions will be made without reaching impasse among the JV partners, and how disputes between the JV members—and with third-parties—are to be resolved. Failure to do so can have serious implications on the project.

A project’s success often relies on the alignment of the JV partners, which should maintain constant contact with one another. Communications between the partners may not be protected by the attorney-client privilege (depending on the state); consequently, inter-JV communications on legally sensitive topics should be approached with caution.      

(b) Contracting government entities in public-private partnerships (or other construction projects with a public element)?

In a public-private partnership, the government entity seeks to meet its development needs with a reduced capital expenditure and to capitalize on private sector expertise to deliver assets cost-effectively and efficiently. One should define the division of services and allocation of risk between the private and public sector. Risks must be allocated with the entity best able to manage them, including construction risks (e.g., increased construction or delay costs) and operating risks (e.g., certainty of revenue stream, costs of servicing the project, and costs associated with performance issues). There are two key considerations in risk allocation: which entity can better control the occurrence of the risk, and which entity is better able to manage the impact of the risk. If too much risk is allocated to the private sector, it can result in increased bid costs and/or the private sector failing to meet its contractual obligations.

(c) Subcontractors?

The successful management of subcontractors requires transparency, constant communication, and a clearly defined scope of work. Subcontract terms and conditions must align with the degree of definition of the scope of work to be performed.

There are often multiple subcontractors working on one construction project, so each must be treated fairly and equally (a ‘sweetheart’ deal with one subcontractor will almost certainly lead to unrest and dissention between the other subcontractors and the contractor). It is important for both the owner and prime contractor to understand the rights and responsibilities of each subcontractor. Ideally, each subcontractor will have similar contracts, as failure to maintain consistent subcontracts can prove problematic. For example, all subcontracts should have identical dispute resolution provisions (e.g., requiring arbitration in the same forum and under the same rules). If a dispute should arise, inconsistent dispute resolution provisions could result in disputes across multiple forums.       

(d) Architects, designers, engineers and any other related professionals?

Managing relationships with design professionals requires constant communication across disciplines—between architects, engineers, and related professionals, as well as all downstream designers, fabricators, and constructors. Project managers should consider the important interplay between design and construction work. Sometimes cost or time-saving shortcuts in construction will nullify important aspects of the design.

(e) Any other relevant parties typically involved in construction projects?

Banks, lenders, and insurers play a large role in construction projects, especially large-scale ones. Loan covenants and insurance coverages can sometimes be implicated by decisions made during the execution phase of a project, so they should be carefully consulted whenever significant decisions are made that may depart from the original project plan.      

Contracts and performance

Standard contract forms

What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?

U.S. construction projects do not rely on one standard contract form. In fact, even when a form is used, the parties often make revisions. The most commonly used forms are those developed by the American Institute of Architects (AIA) and the American Society of Civil Engineers (ASCE), or are state-specific. AIA forms are popular in commercial real estate and are considered architect-friendly, so owners and contractors often push for a negotiated AIA. ASCE forms are more common in the industrial context. Residential construction contracts, such as for single-family homes, often rely on forms established by individual states. While forms from the International Federation of Consulting Engineers are popular in Europe, they are typically not used in the United States.

For larger projects, the parties often find it advantageous to negotiate their own contract, without relying on a standard form.

Definition of ‘construction work’

How is ‘construction work’ legally defined?

There is not one single definition for ‘construction work.’ Generally, individual states’ lien, anti-indemnity, or other construction-related statutes define construction broadly. The scope of work is usually defined by contract and will vary in specificity from project to project.      

Governing law

Are there any rules or restrictions on the governing law of construction contracts?

Many states have ‘home court’ rules specific to projects constructed in the respective state. While the language in each statute differs, the general rule is that a provision in a construction contract is void or voidable if it requires litigation to occur in, or be subject to the laws of, another state. To get around the venue rules, parties may agree to arbitrate, rather than require litigation in a specific court system. That said, any contractual provision purporting to require the application of the laws of a state other than the state where the project is being built could still run afoul of the home court rules. These governing law restrictions can be complicated when horizontal construction occurs across borders, such as a pipeline running through different states.      


Are construction contracts subject to any formal requirements?

Construction contracts are subject to state-specific requirements. Many states have requirements on issues such as retainage, anti-indemnity provisions, prompt payment, and waivers of negligence or gross negligence—to name a few. These requirements often differentiate between the type of project: residential, commercial, or industrial. When drafting a construction contract, the best practice is to review the contract law of the relevant state.    

Mandatory/prohibited provisions

Are there any mandatory or prohibited provisions in relation to construction contracts?

Whether a construction contract has prohibited provisions is subject to state-specific requirements. Every state has some restrictions on risk-shifting, but the extent of those restrictions varies. Similarly, the states scrutinize waivers of rights and responsibilities, as well as limitations of liability. Some states also restrict or prohibit the use of design-build delivery systems for public projects, although this method is becoming increasingly more popular in the public space. While there are restrictions, the states do not have mandatory contract provisions. When drafting a construction contract, the best practice is to familiarize oneself with the relevant state’s contract law.    

Implied terms

Can any terms be implied in construction contracts?

The terms most commonly implied in construction contracts are warranties, which are subject to state law. Both owners and contractors may be subject to implied warranties. Under the Spearin Doctrine—effectively adopted by all 50 states—there is an implied warranty of accuracy for any information that the owner shares with the contractor. This can be critical for engineering, procurement and construction (EPC) contracts, but the majority of states allow the parties to waive this implied warranty. Various implied warranties apply to the contractor’s work, such as the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

In addition to implied warranties, state-specific products liability and consumer protection laws may be implied by law into contracts.    

Risk allocation

How are risks typically allocated between parties to construction contracts?

The contract delivery strategy dictates how liabilities are handled. A traditional design-bid-build model is one liability set that consciously separates the liabilities (e.g., the construction contractor is not responsible for design errors unless the contractor discovers the error and fails to report it). In the EPC context, greater risk falls on the EPC contractor. There are many ways to allocate risks between parties to construction contracts (e.g., indemnities, limitations of liability, risk of loss provisions, performance guarantees, etc.), and that allocation often depends on the parties. The liability structures also depend on the industry, what is being built, who can bear the risk, each parties’ financial wherewithal, economic undercurrents, geography, issues with union labor, and political considerations.    

Limitation of liability

How and to what extent can parties to construction projects contractually limit or exclude their liability?

There are many ways to contractually limit or exclude liability, through clauses such as limitations of liability, risk of loss provisions, waivers of consequential damages, and waivers of implied warranties. The states have their own restrictions on such limitations. For example, most states will enforce a limitation of liability provision only if it is explicit, prominent, clear, and unambiguous. Indemnities are also used to limit liabilities, but the drafter should take into account construction anti-indemnity statutes. Because each state has its own requirements, one should always analyze the relevant state-specific rules when drafting a construction contract.

In addition to the aforementioned mechanisms to limit or exclude liability, the parties may also shape their liabilities with warranties and representations, as well as contractual limitations on when and how relief may be sought.      

Liquidated damages

How are liquidated damages typically calculated and to which liabilities are they usually applied?

Liquidated damages are traditionally used as a remedy for delay (including the contractor’s failure to mobilize or failure to complete its scope of work by a specified date), but they may also address performance elements. Interim liquidated damages can be based on delivery dates for multi-prime coordination.

Most states have specific case law on how liquidated damages should be determined and when they will be held unenforceable. Generally speaking, most states require liquidated damages to be calculated based on a genuine pre-estimate of what the party believes its damages would be in the event of breach by the other party. The damage amount may consider lost profits related to failure to start up. For commercial real estate, it may be calculated based on lost real estate rental income. Liquidated damages amounts can also take into account debt service and the extension of corporate and on-sight overhead.

Force majeure

How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?

There is not a single legal definition of force majeure events in the United States, as these clauses are analyzed on a state-by-state basis. As a general rule, a force majeure event must be beyond the reasonable control of the party, or unforeseeable at the time the parties entered into the contract. Force majeure typically allows only for schedule relief, rather than cost relief.  

The parties may choose to define force majeure in the construction contract as they see fit, and they may agree that cost relief will be available in certain limited circumstances. Force majeure is negotiated differently depending on the industry, location, what is being built, and how the parties want to handle risk. In many contracts, the parties will negotiate and agree upon an exclusive list of events that qualify as a force majeureevent, rather than relying upon a general definition.      

General performance obligations

What are the general performance obligations of contractors and employers?

The parties’ general performance obligations depend on many factors, including what is being built, how the delivery system is set up, the expectations for the project, and the express terms of the contract.

Construction professionals are subject to various ethical and professional obligations. For example, engineers generally have a duty to perform to the standard of a reasonably prudent engineer, although the relevant contract may establish an even higher standard. For example, if the contract is an EPC contract, the standard in the industry is that there shall not be any defects in design or engineering, rather than relying solely on the standard of a reasonably prudent engineer. Contractors may also be subject to agency rules and fiduciary duties. 

Project delays

How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?

Project delays are one of the most commonly litigated construction issues in the United States. Well-drafted contracts establish clear grounds for entitlement to relief for delay. Disputes often arise regarding who caused the delay and how to calculate the relief for such delay. The modern trend in most U.S. jurisdictions is to allow apportionment of fault for delays. Additionally, contractors often challenge liquidated damages for delay as unenforceable penalties. To overcome that challenge, the party seeking to recover liquidated damages must generally be able to show that the amounts were a genuine, good-faith pre-estimate of the damages that would be incurred in the event of delays.

Contract variations

To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?

A well-written contract will prohibit contractual variations unless it is done through a formal amendment or approved change order. Contract provisions are often found ambiguous, though, in which case most courts will allow some extrinsic evidence to resolve the ambiguity. In practice, this sort of evidence can change many core components of the parties’ arrangement. For this reason, even if the contract seems perfect, parties to a construction contract must stay engaged and ensure that the trail of paperwork properly reflects the contractual intent. The rules on contract variations exist on a state-by-state basis.      


What are acceptable grounds for the termination of a contract?

Typically, a contract may be terminated for convenience or cause. Termination for convenience is common in construction contracts and is usually available only to the owner. When properly described in the contract, it allows an owner to terminate its contractor at will, and pay for costs incurred by the contractor up to the termination date. These costs largely depend on the industry and contract.

The contract should also define when an owner may terminate a contractor for cause. Termination for cause can be for many reasons, including, but not limited to, the contractor’s failure to perform the work, refusal or failure to supply enough skilled workers, failure to pay its subcontractors, and insolvency. Sometimes the owner may replace the contractor for safety reasons or because the contractor has repeatedly disregarded applicable laws.

The contractor can also terminate the contract for default, but that right is typically narrower.  Justified reasons for doing so generally include the owner’s failure to pay undisputed amounts under the contract after a grace period has expired.    

Remedies for breach

What remedies are available for the breach of construction contracts?

The owner generally has several different remedies for the contractor’s breach, including liquidated damages, termination of the contractor (for convenience or cause), and withholding payment. In certain circumstances, the owner may also pursue injunctive relief or specific performance. Under express and implied warranties, the owner can require the contractor to correct defects to its work, or pay for a third party to do so, then pass that cost on to the contractor.

The contractor’s remedies are often more limited, but may include termination for cause if the owner defaults. The contractor’s primary remedy is an entitlement to additional cost or schedule extension when an owner breaches its obligations. In the event of non-payment, the contractor may also lien the project. This often requires the contractor to satisfy specific requirements, defined by each individual state.

Either party may proceed under standard breach of contract theories. All of these remedies should be defined by the contract and may be addressed more generally by state law.    


Types of financing

What types of financing are used for construction projects in your jurisdiction? Which are the most common? Are there any restrictions on available financing methods?

The different types of financing used for construction projects depend in large part on the size of the project. For smaller projects, such as residential or commercial construction, the contractor or bank will finance the company or the project itself. Public construction projects often rely on bonds (e.g., a municipal bond may raise funds for a sewer project), and the federal government will finance larger infrastructure projects (e.g., interstate highways). Many parties to large-scale projects use non-recourse project financing, where the lender provides financing based on the contract commitments and the equity in the project, and without a guarantee from the project owner or its affiliates or parent companies. Parties may also use balance sheet financing, where the company finances the project out of its own cash reserves.


What forms of security are used in construction project financing?

It depends. Owners often require performance and payment bonds, letters of credit, parent company guarantees, and hold retainage to guaranty performance. Public-private partnerships will use surety bonds with a liquid element that is similar to a letter of credit. Bank guarantees are more common abroad, and less common in the United States.    


Methods and timing

What are the typical methods and timing of payment for construction work? Are there any restrictions on ‘pay when paid’ and ‘pay if paid’ provisions? Do any other rules, restrictions or procedures apply?

The timing of the owner’s payment to the prime contractor is typically 30 days, although the payment term may be longer or shorter. The prime contractor’s payment to subcontractors is often less than 30 days.

Contract language is often unclear as to whether the parties intend to create a ‘pay when paid’ or ‘pay if paid’ arrangement. Conflicting interpretations of these clauses can mean the difference between subcontractors receiving payment within a reasonable time after the prime contractor is paid, or the subcontractors remaining unpaid until the prime contractor resolves disputes with the owner. These clauses are commonly litigated in state court, and many courts interpret ambiguities as creating a ‘pay when paid’ arrangement. Common grounds for challenging a ‘pay if paid’ arrangement includes arguing the clause is contrary to the parties’ intent, the clause is unconscionable, or the party has waived its right to enforce the clause by making partial payments.

The most common restriction to these clauses is that the prime contractor is not permitted to enforce an otherwise valid contingent payment clause if the reason for the owner’s non-payment is the prime contractor’s own failure to comply with the contractual requirement.


How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?

The most common way for a contractor to secure itself against non-payment by the owner is by filing a lien against the project. Each state has its own rules describing the necessary steps to secure a lien, and many of these rules have very specific requirements. However, where project financing is used, the contractor should recognize that it will be required to subordinate its liens to the lenders.

The contractor may also terminate the contract for default, usually after a contractually defined grace period. The parties can include other remedies in the contract to protect the contractor in the event of non-payment, including circumstances that expressly authorize suspension of the work.

How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?

In the event of non-payment, subcontractors may lien the project, then require the owner and prime contractor to resolve the issue of non-payment. The availability of this relief, and the directions for how to file such a lien, are state-specific. The subcontractor should put the owner on written notice immediately if payments are past due. In many jurisdictions, such a ‘fund trapping’ notice may require the owner to hold certain funds for the subcontractor or place them in a trust account until the subcontractor’s dispute with the general contractor is resolved. The subcontractor may also begin the dispute resolution process based on the contractor’s breach of contract.

Generally, a subcontractor should be very careful about suspending work for non-payment as doing so may result in the subcontractor’s own breach of contract. In the instance of the prime contractor’s non-payment, it is important for the subcontractor to understand its rights and responsibilities under the contract before taking any action. This may be affected by the existence of a ‘pay when paid’ or ‘pay if paid’ clause in the subcontractor’s contract.      

On what grounds can payments be withheld?

Payment can be withheld if the contract permits withholding and if the withholding does not run afoul of the respective state’s prompt payment act.      


Contractor insolvency

What recourse is available to employers in the event of the contractor’s insolvency?

In the event of the contractor’s insolvency, the owner usually may terminate the contract for cause, provided that termination is not prohibited under applicable bankruptcy laws.      



What mandatory insurance coverage applies to parties involved in construction projects? Is any additional coverage recommended?

The United States has no uniform federal insurance law, and the types and amounts of coverage required vary by state. In most states, businesses with one or more employees are required to carry worker’s compensation/employer’s liability insurance, and businesses that own one or more automobiles are required to carry automobile liability insurance. Other recommended coverages for construction projects include:

  • all risk/builders risk;
  • commercial general liability;
  • umbrella or excess liability;
  • environmental/pollution liability;
  • professional liability (including coverage for construction or design professionals);
  • delay in start-up;
  • marine cargo (insurance on equipment);
  • property coverage (e.g., to cover damage to existing facility if the facility is on a brownfield site);
  • employer premise liability;
  • performance bonds/contractor default insurance;
  • wharfingers coverage (e.g., if a ship hits a dock);
  • crime and fidelity insurance;
  • cyber liability insurance; and
  • owners/contractors’ protective professional indemnity and liability insurance.

The need for these coverages depends on the role of the entity seeking coverage (e.g., whether the design professional, construction contractor, or project owner is the insured). Certain coverages may be purchased on a project-specific basis—for instance, in the form of wrap-up programs or policies issued to joint ventures.  

Tax issues


What tax liabilities arise in relation to construction projects?

A variety of different tax considerations must be taken into account for construction projects. This includes, but is not limited to:

  • state-by-state sales and use tax;
  • state and federal income tax;
  • statutory and employment taxes, which may be depend on the corporate/formal structure for the project;
  • import duties; and
  • property taxes, including the local appraisal district’s taxation of assets on the property (e.g., compressors or other equipment).

Owners and contractors also need to be increasingly mindful of tariff issues.


Are there any tax incentive schemes to promote construction and development in certain areas?

The availability of tax incentive schemes to promote construction depends on the state. There are often manufacturing or process exemptions for construction projects such as refineries or processing plants. In these situations, sales and use tax exemptions may be available. It is important for an owner to explore possible tax incentives before committing to build the project in a particular locale.

Environmental issues

Environmental protection

What environmental protection legislation and regulations apply to construction projects in your jurisdiction?

Construction projects that are built on previously used land may trigger applicability of remediation provisions under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA). Remediation liability is strict liability, and a party cannot claim that it acted in accordance with industry standards, or even that it acted negligently only, to avoid liability. CERCLA liability applies retroactively, and holds the potentially responsible parties jointly and severally liable. Most states have equivalents to CERCLA and RCRA (although the restrictions and protections vary greatly), including ‘voluntary clean-up’ programs that can offer liability protection for a new project.


What environmental authorisations and certifications are required for construction projects and how are they obtained?

Construction projects are required to comply with a range of environmental laws, including obtaining any applicable permits or other authorizations, and these may include federal authorizations and equivalents that are state-specific. The most commonly required authorizations for construction activities include air permits (particularly for concrete batch plants and diesel generators), stormwater (for construction runoff), and spill prevention and reporting. Certain projects may also require permits for water use, hydrostatic testing, noise, and waste management. In addition, other authorizations are often required to address potential land use impacts. These may include a general environmental impact review, as well as more specific clearance for impacts to wetlands and waters, threatened or endangered species, archaeological or historical sites, and navigable airspace. Every project needs construction permits from the local jurisdiction. How each is obtained varies widely by municipality, county, and state.      

‘Green’ regulations and incentives

Are there any regulations or incentive schemes in place to promote the construction of energy-efficient and low-carbon buildings?

While the United States has incentive schemes to promote the construction of green energy projects, the most recent tax reform has reduced some of those incentives. Many states and municipalities will provide tax abatements and deferments for green construction, which is especially common in the residential and commercial space.    

Employment issues

Employment and labour law

What employment and labour legislation applies to construction projects in your jurisdiction? What rights and protections are provided to construction workers?

The Fair Labor Standards Act establishes minimum wage and overtime pay requirements for construction worker ‘employees’ across the United States, in addition to state-specific rules that may establish more stringent standards. While individuals classified as ‘independent contractors’ are not subject to the same protections, the Department of Labor is increasingly suspicious of misclassifications of employees as independent contractors.

The Occupational Safety and Health Administration protects the health and safety of construction workers, and the states may promulgate more stringent standards. The states’ worker’s compensation laws also provide insurance protections for injured workers.       

Occupational health and safety

What occupational health and safety regulations apply to construction projects?

Construction projects are subject to the health and safety regulations of the Occupational Safety and Health Administration, and analogous state agencies, which may choose to promulgate more stringent standards.     

Employment contracts

What types of employment contract are typically used for constructions work? Are there any mandatory or prohibited provisions in relation to employment contracts?

Construction workers are contracted as employees or independent contractors. This structure depends on many factors, including the size and scope of the project. A construction company with a small employee base may choose to contract with a large number of independent contractors. Other companies will use a subcontractor, or even its own subsidiary, as a staffing contractor. Most states regulate the scope of non-competition agreements and tend to strictly construe them.

Some projects use union labor, but the strong trend is towards at-will employment, subject to state-specific provisions. Many states regulate the scope of non-competes in employment contracts.      

Foreign workers

What rules, restrictions and considerations apply to the hiring of foreign workers?

Foreign workers are not subject to any special rules and restrictions, apart from needing work authorizations under U.S. immigration law. There are several different visas available to foreign workers, such as the H-2B Visa (permitting employers to hire foreign workers to perform temporary non-agricultural labor) or the E-B3 Visa (providing work certification to skilled workers, professionals, or non-temporary unskilled workers).

Often there are state and municipal tax incentive schemes with local content requirements. While not a restriction, this often incentivizes the employment of local workers instead of foreign workers. Hiring foreign workers can also create issues with local unions. For large-scale projects, especially those anticipating hiring thousands of workers, hiring foreign workers can cause unwanted political and media attention.    

Anti-corruption rules

Applicable rules

What regulations and procedures are in place to combat corruption, bribery, fraud, collusion and other dishonest practices in the construction sector in your jurisdiction?

The primary restrictions on corruption and bribery come from the U.S. Foreign Corrupt Practices Act, which broadly prohibits paying or offering anything of value to government officials and employees of government-owned or government-controlled businesses. Within the United States, the domestic bribery statute prohibits similar conduct as to U.S. government officials. Many states also have enacted prohibitions on commercial bribery that prohibit paying or offering benefits to employees of private companies to obtain an improper business advantage.    

Best practices

What best practices are advised to ensure compliance with the relevant anti-corruption rules?

Compliance with applicable restrictions depends on strong internal policies and procedures that are explained to employees in routine training sessions. Successful compliance programs combine consistent communications from senior management about the importance of compliance and ongoing monitoring of potentially risky activity, including standardized processes for vetting agents and other third parties operating on behalf of the company.    

Dispute resolution


What courts are empowered to hear construction disputes in your jurisdiction? Are there any specialist construction courts?

State courts most commonly preside over construction disputes, though construction disputes are brought to federal court when the court has diversity jurisdiction or there is a federal question at play. The parties’ contract may identify an agreed court for litigation, although these provisions cannot confer jurisdiction on a court if it is otherwise lacking, and the parties must be careful of ‘home court’ venue rules. In addition to traditional litigation, many parties choose to resolve disputes through arbitration. The American Arbitration Association and International Institute for Conflict Prevention Resolution are two of the most commonly used institutions to administer U.S. domestic construction arbitrations.    

Common disputes

What issues are commonly the subject of construction disputes?

The issues most commonly the subject of construction disputes are:

  • breaches of contract;
  • liquidated damages;
  • delay and disruption damages;
  • limitations of liability;
  • breaches of express and implied warranties;
  • non-payment by the owner or prime contractor;
  • disputes related to change orders, and amendments to the contract, or the scope of work; and
  • occasionally, fraud or fraudulent inducement claims based on representations made before or during the course of the construction project.

There are many additional issues—such as employment, environmental, or IP concerns—that can intersect with a construction dispute.   

Statute of limitations

What is the statute of limitations for filing construction-related claims?

The statute of limitations for construction-related claims depends on both the state and the underlying cause of action. When contemplating a specific claim, the best practice is to review the statutes of limitation for the relevant state, as well as considering tolling, how each state describes the discovery rule, and any relevant statute of repose.      


Is pre-litigation mediation required or advised for construction disputes?

Pre-litigation mediation is not required for construction disputes, although it is often required under the contract. Recently, mechanisms like Dispute Resolution Boards and Dispute Adjudication Boards are being used to resolve in-project disputes on larger projects. It is often advisable to require some level of dispute resolution or mediation between the parties before formal disputes are initiated.    


How often is arbitration used to resolve construction disputes? What arbitration forms and institutions are typically used?

Arbitration is becoming increasingly common in the construction dispute context, and more parties are requiring arbitration in their contracts. The American Arbitration Association and International Institute for Conflict Prevention Resolution are two of the most commonly used institutions to administer U.S. domestic construction arbitrations, although the parties may select whether the arbitration is administered or non-administered.

Effective Documentation Techniques for Construction Project Participants

Michael Kaney | Shutts | December 28, 2018


Project documentation can help avoid claims or litigation altogether.  Good and timely communication can mitigate or eliminate surprises between parties.  A clear understanding of what transpired during a project can prevent claims from turning into costly litigation.

Project documentation helps answer the important question of: “who knew what, when?”  If an issue is well documented then there is very often no reason to disagree and any questions that arise will generally have an answer that is supported by a paper trail of documentation.

The outcome of construction litigation is determined by the FACTS of what occurred at or on the project.  The facts can be shown through accurate and up-to-date documentation.  Thus, effective project documentation can lower litigation costs or prevent litigation altogether.


Daily Reports

Daily reports can be essential for supporting and defending pre-litigation and litigation construction claims.  These reports should be created contemporaneously with the work that is completed each day, meaning, these reports should actually be daily reports.  It is much easier to recall what happened on a particular day the day it occurred as oppose to trying to piece the puzzle together a few days later.  Daily reports should become a routine.

Daily reports can consist of some of the following items:

  • Workforce
    • Who worked on the project that day?
    • Who are they employed by? Are they covered by insurance?
    • What are their daily duties/tasks?
    • Were those tasks completed? If not, why?
    • How many hours were workers present on the job site?
  • Equipment
    • What equipment was used on the job site that day?
    • Who owns the equipment? Is the equipment owned by the contractor(s) or was it rented?
    • What was the purpose of the equipment?
  • Events/Jobs
    • What events were scheduled for the day? Were they completed?
  • Weather
    • What was the weather on the given day?
    • Were there any delays due to weather? How long were the delays and will that affect the overall completion time of the project?
  • Time and Date
  • Visitor and/or Delivery Log
    • Who visited the job site? What was their purpose of visiting?  How long did they stay?
    • Were there any deliveries to the job site? If so, what were they and what purpose did the materials serve?

Meeting Minutes

Meeting minutes should be a complete reflection of every topic or issue discussed during the meeting.  The overall purpose of the meeting should also be reflected.  This ensures that anyone reading the minutes thereafter that was not in attendance has a comprehensive understanding of what transpired during the meeting.  The minutes should be inclusive insofar as they capture all comments from both sides on any particular issues or topics that were discussed.  Accuracy and completeness are the goals of documenting meeting minutes.

E-Mails / Text Messages

How are you currently set up?  One server?  Multiple servers?  Employees use personal email?  E-discovery issues!!  Text?  Company phone or personal?

All emails are subject to discovery and turnover to the other side in the unfortunate event of a lawsuit.  E-mails and text messages should only be sent with the understanding that they may become public in litigation at some point.  I know that is scary.  What is your email retention program?  Do you print and file your emails?  It may be useful to print and store hardcopy emails just like you should store these electronically in whatever email retention program you have.

Emails are useful as a form of contemporaneous communication.  Emails are just as important as hard copy correspondence and thus must be given the same due diligence as any form of hard copy communication.


Schedules allow contractors to provide the owner of a project with a timeline for when specific work will be completed.  Schedules serve as guideposts for all parties involved in a project.  A schedule should set out attainable deadlines that give each party the ability to understand what is occurring at any given point on a project.  Schedules are a record of what has happened and what will happen on a project and should be used as a contemporaneous communication between the owner and contractors.


  • Daily reports in the version of a checklist can help save time.
  • Electronic checklists on a phone or tablet can also save time and ensure that information is stored legibly as opposed to handwriting a daily report.
  • Take pictures! Pictures capture the facts, evidence, and events at a project.  Be sure to note the time and date the picture was taken.

This list is not exhaustive or all encompassing.  Rather, it is a good starting point for construction project participants to ensure they are documenting their projects in a way that can hopefully prevent costly litigation in the future.