Monthly Archives: October 2022

Prime Contractor Beware, No. 1: Watch Out for Owner/Lender Consent and Assignment Agreements

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David K. Taylor | BuildSmart

Here’s the Scenario:

After months of working with a new developer client (and providing hours of unreimbursed value engineering) and hard negotiations over the cost plus GMP contract (fighting over indemnity/escalation/savings/liquidated damage clauses), you have a deal. You pop a cork with all involved since the developer has said this is one of many future projects. Your very patient subcontractors have held their prices. You have assurances of financing (after all, it’s not the “developer’s” name that’s on the prime contract, it’s the specially created “limited liability” company that’s the “owner”). The Notice to Proceed is forthcoming. But then you receive an email from your developer saying that the construction loan for the project is going to close in two days, and please sign and return the enclosed lender required “Consent Certification and Agreement.” While there’s been zero discussion of such an agreement, certainly none in the prime contract, the pressure is on. You want to be cooperative because if there is no loan, there is no money… and no project.

A Warning

Don’t blindly sign this “tri-party” agreement (owner, lender, and contractor). It is a binding contract between you and the lender and is applicable if the LLC owner defaults under the loan. While the content of these agreements differs from lender to lender, here’s what they normally contain:

  1. A contractor consent to a potential assignment of the prime contract to the lender in the event the owner defaults;
  2. The circumstances under which the contractor will or will not get paid for past and future work;
  3. A waiver of lien rights for work in place; and
  4. Obligation on the contractor to seek prior written permission directly from the lender, during the project, and prior to any possible default by the owner, for any change in the plans, the schedule, and even any change orders.

Will this requirement for lender permission be followed during the project? Almost never. But what’s the risk if it does not happen? Suppose there is an owner default. The lender provides formal notice that it’s your “newest best friend” and is stepping into the shoes of the owner. Now, you have “breached” the contractual obligations to provide notice to the lender.

Yes, you have little leverage on the front end. Many times, the lender’s lawyers say to the owner (and then pass it onto the contractor), “No negotiations; get it signed or no deal.” While you may have faith in your hugely successful developer client, again (see above), your contract is with a single use LLC whose only asset is the land that is about to be heavily mortgaged to the lender. If there is an owner default/foreclosure and this agreement is invoked, you may have a fight over payment, completion, and retainage. And if there have been multiple change orders, delays, suspensions, or major changes in scope of work without obtaining lender permission, you better believe the lender will pull out this agreement and argue “material” breach.

What Can You Do?

First, try to negotiate the terms. You cannot get around a basic assignment but try to provide some better language about getting paid for work in place and future work. Do not waive lien rights in advance (which in many states would not be enforceable). Put the burden on the owner to obtain written permission from the lender for any amendments, change in plans, schedule, or change orders. Another option is to try to improve the definitions of the terms. Add “material” to changes in the scope of work. For change orders, propose a monetary amount ($100,000) for the requirement to obtain written permission from the lender. And be prepared for the developer (and their lawyers) to come down on you like a house of bricks for not being a “team player” and potentially screwing up the “deal” that “has to close on Friday.” And don’t worry — “We will never default, so why haven’t you signed the agreement?”  

The Bottom Line

In 98% of your projects, there should never be a need to “go back” and read the fine print of the prime contract. But it’s the 2% of the projects that can go sideways that suck every drop of profit out of the rest of the projects. Will such a lender assignment and owner default ever happen? The odds are overwhelmingly no, but just in case, be aware and pay attention to these kinds of agreements. Do not simply sign without reading through the fine points and details. Call your “friendly neighborhood” construction lawyer, and get some sage advice about pushing back on some of the terms. If the answer is “no,” then you have a business decision to make. If that decision is to sign, be sure that the entire project team knows about these requirements for advance written permission. And then when the owner (or architect) complains about delays in executing change orders, remind them about the agreement.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

What Are The Different Kinds Of Construction Claims?

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KPPB Law

The process of completing new construction requires communication and adaptability from all involved parties. However, when a project fails to adhere to the agreed upon scope, price or details, both contractors and owners may have the grounds to pursue legal action against the other.

Helping you to navigate such claims, whether you are the plaintiff or the defendant, is in the purview of a legal professional. The following are the most common types of construction claims and how they arise.

How Construction Is Fertile Ground For Legal Action

Most construction projects have many moving parts and if these parts come into conflict, legal action can arise. This could happen because parties misunderstood each other, didn’t complete a task on time, went over budget or there was a breakdown in communication.

The timeline can be one of the most contentious parts of a construction contract. Sometimes, missing deadlines is unavoidable due to acts of God or other uncontrollable events. Other times, poor planning or change orders leave the project unfinished by the time that the task should have been completed. No matter the cause, failure to adhere to the timeline established in the original agreement is a common sticking point between parties.

Materials acquisition may pose an issue. For example, contractors may not order the materials they need in time, making them unable to start the project as anticipated. Supply chain issues can also cause shipping delays; even if the product was ordered in a timely manner, the job may not start right away.

Sometimes, the wrong items are ordered; contractors may not discover until they start work that they don’t have the materials they expected or that the materials do not work for the intended purpose. Similarly, the wrong materials are delivered entirely, or they are delivered in the wrong quantity.

If a builder exceeds the allocated budget, or the owner requests changes that do not adhere to the previously agreed upon expense limit, this can result in conflict. A lot of money is changing hands during these projects, often between multiple parties, which can lead to uncertainty and disagreements. When an owner does not receive what was promised and agreed to in the initial contract, they can sue the contractor(s) involved in the project.

Many of the legal consequences that arise are a result of a breakdown of communication between all parties. Architects, engineers, owners, general contractors and subcontractors are some of the more typically involved parties; disputes can arise between any two or more of these parties or all parties. In general, contractors are responsible for resolving issues between themselves and their subcontractors.

Keeping goals on time, on budget and on track is also about managing expectations. Contractors can encounter challenges in any of these areas and more. A more detailed look at some of the most common claims in construction include:

When The Completion Date Is Delayed

When the completion of a project exceeds the timeline, the owner may pursue a remedy. The timeline should be clearly delineated in the original contract, in conjunction with any extenuating circumstances (such as acts of God) that could impact when legal action is acceptable.

In general, even if the cause was unforeseen events, a delayed completion date can result in a legal claim. Permit issues, defective materials and weather or natural disasters may not be the fault of the contractor, but they may still delay the completion of a project and result in lost income or damages for the owner.

However, in some instances, a project is not finished on time due to direct negligence by the contractors in charge of the project. This could include their failure to work in a timely manner or properly plan the scope of the project. They may also fall short in other areas such as the quality of their work, in which case the owner may ask that they reconstruct sections to a proper standard.

The extra time spent correcting mistakes could delay the completion date, and even if they do successfully complete the project up to adequate standards, the contractor may still be liable for their failure to abide by the initial timeline.

Of course, all of this exists in conjunction with change orders, or other amendments to the original contract that change the scope of the work. If the owner decides before a project is complete that they would like more or different work performed, they can submit a change order. Alterations to the contract brought about by change orders can cause tension between parties, especially if the new changes are expected to fit into the preexisting timeline.

When The Price Changes

Prices on a contract can change over time due to a variety of factors. Most often, this is a shift due to changes in material costs, change orders (as mentioned previously), other unforeseen conditions or even the owner or contractor wanting to change the price.

Material costs can be particularly problematic for properly planning a construction task. While it is fairly simple to identify the cost of materials during an initial order, the problems usually arise if more materials are later required. Contractors may find that the price of the material has increased, the identical material is no longer available or shipping is more expensive.

Unforeseen conditions are another big culprit behind price changes in construction projects. Most often, these appear within the site itself. An example of this would be if the contractor started to build and discovered unsuitable soil conditions. This would change the scope of the project in a way that was not predicted and may result in higher costs to accommodate.

When The Property Is Damaged

Contractors may occasionally cause damage that creates a legal situation. Damage to the owner’s property may occur during construction, such as by hitting underground lines (sewer, internet, etc.) that must then be replaced. The contractor may claim that the area was not properly marked and claim the damage was an accident, while the owner may be asking for the contractor to pay for these damages which creates a legal dispute.

Owners have the right to specify any areas that they do not want to have changed or disturbed. For example, an owner may state that they want a specific tree to be preserved throughout construction. If a contractor cuts down or severely damages that tree, it may qualify as property damage from which the owner can seek legal remedy.

Contractors are not the only parties directly at fault; subcontractors can also cause damage. In this situation, it is the contractor who is typically responsible for subcontractor damage. Subcontractors may carry specific insurance to protect against this; however, with all of the involved parties, legal claims can quickly become complex.

Possible Secondary Claims

While the above scenarios represent the most common construction claims, other construction issues can also arise. This is why it is important to work with a legal professional during the contract drafting phase, to ensure such potential issues are addressed in advance:

  • Contractor pollution: If a builder pollutes the area (such as by dumping chemicals into the ground), the owner may sue for damages.
  • Defects in the construction: No matter which contractor is completing a project, the finished work must adhere to a minimum reasonable standard of quality. Construction must be finished according to the level of skill that is typical for that trade. Additionally, the contractor is required to exercise a reasonable degree of care, skill, and ability under similar conditions and like surrounding circumstances as is ordinarily employed by others in the same profession. If a contractor does not adhere to these standards and creates defective work, the contractor may be liable for damages, or be required to correct the work.
  • Failure to comply with code: Every type of construction project must adhere to local municipal codes for how the building is expected to be constructed. This includes placing the main water shutoff valve in a certain protected location, ensuring there are enough exits and more. It is the responsibility of the contractor to stay current with changing codes and regulations and abide by them as required. If a building receives a code violation as a result of the contractor’s work, the landowner may make a claim to recover those damages and fix the problem.
  • Failure to comply with plans and specifications: Most often, disagreements in this area will arise when a contractor does not comply with the details that the owner specified. This may include building the structure differently than the original plan or to different size specifications. If a building does not include amenities that were incorporated into a contract, this could be another fertile ground for legal action. If an owner believes that their contractor did not abide by the plans the parties agreed upon, they can file a legal claim to be provided with construction that meets the plans and specifications that were promised.

Trust The Professionals To Help You Navigate A Legal Claim During A Construction Project

Many issues can arise during a construction project, regardless of the size or scope, giving both the owner and the contractor the right to pursue a claim against the other. Materials may change cost, a number of issues could arise that impact the completion date or the workmanship may not adhere to the specifications that were agreed upon from the beginning of the project.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Florida Building Codes Made a Big Difference for Newer Homes in Ian, Reports Show

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William Rabb | Insurance Journal

In the hardest-hit parts of southwest Florida, many newer structures survived remarkably intact in Hurricane Ian’s winds, suggesting that updated Florida building codes are making a difference in reducing property losses, according to early assessments.

“From what I saw, the structures and roof systems that were installed since the last couple of cycles of building codes did relatively well,” said Mike Silvers, a roofing contractor and director of technical services for the Florida Roofing and Sheetmetal Contractors Association, who toured the Fort Myers and Naples areas after the storm.

Two reports, one from university professors who studied the damage and one from CoreLogic, the data analytics company, agree. A preliminary report to the Florida Building Commission last week included an aerial photograph of Fort Myers Beach that gives a stark picture of modern building techniques.

The graphic, from State University of New York Distinguished Professor Michel Bruneau, tracked the age of homes on one beach area. It shows 18 homes built before 1981 that were completely wiped away by the storm. But one house, built in 2020, appears to be almost unscathed. The home is elevated above much of the storm surge level, but the roof also looks undamaged.

In a ground-level photo of the 2020-built house, “one can clearly see that the storm surge punched through the elevated first floor, and that the walls were made of concrete blocks (with what appears to be reinforced concrete block posts around garage doors),” Bruneau wrote on his Linkedin page. “This clearly was not the case for the surrounding homes built in the ’20s, ’30s, ’40s, ’50s, ’60s.”

A wind map produced by Applied Research Associates shows peak wind gusts of 100 mph at Fort Myers Beach, and up to 120 mph on part of nearby Sanibel Island, just to the northwest, according to the building commission report, which was submitted by David Prevatt, of the University of Florida, and David Roueche, of Auburn University. Those windspeeds were somewhat less than was predicted by forecasters, but still powerful enough to cause significant damage across parts of Florida.

Ian was the tied for the 5th-strongest hurricane to hit the U.S. mainland, CoreLogic meteorologist Curtis McDonald noted.

In a webinar last week, CoreLogic showed that wind losses in Lee County, one of the coastal areas with the most damage in Ian, were twice as high for structures built before 1996, when the state began tightening building codes for wind load.

Florida is known for developing some of the strongest building codes in the nation for wind resilience, largely as a result of the wrenching impact that Hurricane Andrew had on southeast Florida in 1992. These have included stronger roof-to-wall connections, more impact-resistant windows, and better hurricane shutters, Smith said.

“Building codes definitely played a role in reducing losses,” said David Smith, senior director for model development at CoreLogic.

Overall, CoreLogic’s computer models predict insured losses from Hurrican Ian to be in the range of $22 billion to $32 billion, not including flood damage. That’s lower than some other organizations have predicted. And it’s much lower than the losses that coastal Florida would have seen if newer structures had not been built to the stronger standards, CoreLogic and other experts said.

“I do think the things that we have been doing with the code are improving the situation,” said Silvers, who has worked with the Building Commission through the years on roof standards.

The codes continue to evolve. The Florida Building Commission this month, in fact, is examining an issue raised by legislation passed in the 2022 property insurance special session of the Florida Legislature.

Silvers

Lawmakers in May approved Senate Bill 4D, which changed the building code to allow repair of roofs surfaces in most cases, if less than 25% of the surface area is damaged. The previous code and a state law often required insurers to pay for an entire roof replacement if a just small section was damaged.

But the statute did not address a key question: Must the repaired section of roof meet current building code requirements, or can it be repaired to the code that was in effect when most of the roof was installed?

The commission is expected to deliberate on the question over the next few weeks.

The statute also has met with a legal challenge by contractors who argue that the law unfairly singles out roofing companies and violates constitutional requirements.

That case is pending in Leon County Circuit Court. Citizens Property Insurance Corp., Security First Insurance, Tower Hill Insurance and U.S. Coastal Property & Casualty Insurance last week all intervened in the suit, asking the court to rule against the plaintiffs, Restoration Association of Florida and Air Quality Assessors.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

The Future Has Arrived: New Technologies in Construction

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Sarah Biser | ConsensusDocs

The construction industry has traditionally been slow to adapt to new technologies, but things are changing.  

Construction companies are keen to control costs (including increased costs due to supply chain issues), improve efficiency, maintain productivity while dealing with labor shortages, and enhance safety, and protect data bases from cyberattacks. New technologies, including robotics, 3D printing, cloud and mobile computing, augmented reality, blockchain, and cybersecurity, are helping construction companies achieve those goals.  

Here are some key takeaways. 

Augmented Reality (AR) vs. Virtual Reality 

Augmented Reality is a technology that superimposes a computer generated image upon a user’s view of the real work. Virtual Reality, on the other hand, creates a virtual environment to replace the real one. 

AR has uses in many industries. For example, shoppers using AR can see what furniture or appliances will look like in their own homes and offices. Medical professionals can also use the technology to visualize organs and simulate procedures prior to operations. 

Similarly, in the construction industry, AR permits the users — with advanced cameras and sensor technology — to create models with all existing building data. AR headsets are placed on safety helmets or workers use handheld devices. The user, whose AR devices orients to the user’s point of view, views the building data digitally displayed over the physical surrounding in real time.  So, using GPS and cameras, Augmented Reality presents real time data to the user as he or she moves through a building space. 

Project Planning: Augmented Reality is used in project planning, to generate 3D models directly onto a 2D plan. The models are combined with Building Information Modeling (BIM) so that construction companies can produce detailed, interactive models of projects from the outset — allowing owners and project teams to conduct a walk through before a project is executed. 

Automated Measurements: AR equipment can measure height, width and depth of spaces. Construction companies incorporate this data into existing models to get a total view of how the project will look. Workers with an AR unit can tap the unit to automatically take measurements of the built environment to compare against the BIM model. In turn, they can quickly make adjustments if there are inconsistencies.  

Project Modification: AR has the ability to make changes to building models directly at the site. Users wearing or holding an AR device can display interior and exterior views of a structure and make modifications to virtual plans while keeping the original view intact. Engineers will be able to virtually remove or relocate structural components and modify a building’s layout with just a few taps on the AR device. Further, digital data is continuously updated.  

On-Site Project Information: Field workers can view information (location of pipes, walls, outlets, switches and ventilation) in layers, and toggle between layers to help monitor a project against its building plan. AR also allows users to virtually see the building’s progress against its schedule. 

Team Collaboration: All users can share notes and videos of errors or design issues in real time, reducing the cost and time it takes to resolve problems. 

Safety Training: AR can simulate hazard scenarios and equipment to educate workers. With the help of the AR headset, workers can access virtual drills, instruction and safety scenarios. 

Current Usage of AR in Construction

3% Have not used AR and are not interested in the technology 
46% Have not used AR and are interested in the technology 
19% Have explored or are exploring AR applications 
15% Have tested or are testing AR applications 
17% Have used AR on at least one project 

The benefits of Augmented Reality are that the process streamlines projects and keeps them on schedule while preventing expensive reworking and improving collaboration. On the other hand, the equipment is susceptible to adverse weather conditions, digital information is static, a strong internet connection is required and there is a learning curve. 

ROBOTICS 

As with Augmented Reality, construction is seeing an increase in the use of robotics because of the reduced supply and increased cost of labor, safety issues, and the desire to increase productivity. 

The construction industry has found many uses for drones: site mapping, surveying, site planning, building inspection, structural inspection and progress monitoring. The adoption and increased use of drones has been driven by low acquisition costs, enhanced navigation features, autonomous flight capabilities, increased battery life and multiple types of onboard sensors. 

3D PRINTING 

3D printing has great promise for the construction industry. It provides the ability to create and produce tools and parts to precise dimensions, on or near the project site. 3D printing can eliminate the dependence on supplies from international locations, reducing the cost related to the vagaries of supply chain issues. Some 3D work can be done in days or even hours, instead of weeks. 3D printing can also reduce human error, and decrease waste in the production process because components can be printed to order. 

However, 3D printing has been slow to gain traction in the United States. The hurdles are the up-front costs of equipment and a lack of people trained to design computer models and operate and service the equipment. 

The first 3D printed house in the United States was completed in December 2021 in Williamsburg, Virginia using an Alquist 3D printer. The 1,200 square foot home is a three-bedroom, two-bath concrete structure that can withstand hurricanes and tornadoes. The exterior was built in 28 hours. 

CYBERSECURITY 

Construction was the third most common industry to experience ransomware attacks in 2021 in North America – 13.2% of all attacks that year. Experts believe it is because the construction industry is largely unregulated regarding cybersecurity and privacy. Furthermore, construction involves sensitive financial data, which is attractive to hackers. Construction companies also work with multiple vendors, each one a possible entry for hacking.  Nevertheless, 74% of construction related organizations are not prepared for cyberattack and do not have a response plan in place.  

The risk of cybersecurity may depend upon a number of factors:  

a. The nature of the project (public infrastructure v. residential home builders) 

b. Customers (government, corporation and/or individuals) 

c. Technologies involved in projects (the internet of things, drones GPS, biometrics) 

d. Jurisdiction in which the business is located and the project is constructed 

e. The nature of personal and sensitive business data in a particular organization (hospitals, financial institutions, state or federal governments.) 

Owners, developers of projects, construction companies, suppliers and vendors need to evaluate these risks and determine the types of precautions that should be taken to prepare for ransomware attacks. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Select the Best Contract Model to Mitigate Risk and Achieve Energy Project Success

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Gregory S. Seador | Construction Executive

Power and energy projects are inherently complex and risky. Therefore, management and proper allocation of risk among project participants are essential to success.

Careful drafting of the engineering, procurement and construction (EPC) contract is a critical first step in managing risk. The standard contract format used for power and energy construction projects is the EPC contract. In its traditional form, the EPC contract makes the EPC contractor responsible for the entire project, including engineering (design of the power plant), procurement (purchase, installation and performance of all equipment) and construction (construction of the plant).

EPC contracts can, however, employ different contract models and pricing structures, each of which carries differing levels of risk for project participants. Selecting the appropriate contract model and pricing structure to meet the unique needs of the project is important.

CONTRACT MODELS

The full wrap model: Under a full wrap or “turnkey” model, the EPC contract creates a one-stop shop for the design, procurement and construction of the project. The EPC contractor is responsible for and provides the detailed engineering design of the project, procures all the equipment and materials necessary for the project and then constructs and delivers a functioning facility to the owner. The EPC contractor is responsible for the project from start to finish and assumes all responsibility and risks. This includes designing the project in accordance with the agreed scope book, ensuring all equipment and the facility meet the performance guarantees and providing the owner with a warranty on all of the EPC contractor’s work, in addition to delivering to the owner the manufacturer’s warranties on the equipment.

The partial wrap model: Under a partial wrap model, the EPC contractor does not accept total responsibility for the entire project. For example, in a partial wrap, the EPC contractor may be responsible for engineering and construction but not for procuring the major equipment. In this scenario, the owner purchases the major equipment and then either:

  1. Agrees with the EPC contractor on the terms by which the EPC contractor is willing to accept an assignment of the purchase orders for the equipment; or
  2. Provides the equipment to the EPC contractor and the EPC contractor installs it. In this second scenario, the EPC contractor is relieved of the obligation to procure the equipment but is responsible for the integrity of the design and installation of the equipment.

In a partial wrap model, the owner assumes greater risk because it no longer has a single entity responsible for the entirety of the project. If, for example, equipment does not achieve the required performance guarantees or is defective, there is the possibility of a dispute between the owner and EPC contractor regarding the cause and responsibility for the defective performance.

FIXED, FIRM AND TARGET PRICE MODELS

There are various pricing models included in EPC contracts. Commonly used pricing models in EPC contracts are “fixed,” “firm” and “target” prices:

Fixed price: In an EPC contract using the fixed-price model, the EPC contractor agrees to perform the entire EPC scope of work for a fixed price, subject to increases for owner changes and other circumstances as determined in the contract. The EPC contractor assumes 100% of the risk of the cost of the work exceeding the agreed fixed price. Because the risk of cost increases rests exclusively with the EPC contractor, the original fixed contract price will of necessity include dollars to cover that risk.

Firm price: Under a firm-price model, the owner and the EPC contractor agree to a fixed price subject to an adjustment for escalations of specified commodities. For example, if there is a risk that the cost of certain key building elements, such as steel, may sharply escalate, the EPC contract will often include a steel escalation clause that sets forth the circumstances under which the contract price will be increased and the formula to be used to adjust for escalation. With the dramatic inflation in the cost of building materials due to the impacts of the COVID-19 pandemic, EPC contacts regularly include COVID-19 escalation clauses in which the parties address the risk of pandemic-related cost impacts and delays and allocate the risk among them.

Target price: A target-price model is typically used in EPC contracts for extremely large projects. When this model is employed, the parties agree to engage in an open-book estimate process to arrive at a non-binding target price for the project. The contract is a cost reimbursement contract in which the EPC contractor is paid for all allowable costs, including overhead. The EPC contractor’s fee is typically reduced if the project costs exceed the target price. In this model, the owner carries the risk of the ultimate cost of the project while the EPC contractor’s risk is limited to its fee recovery.

Power and energy projects are technologically and commercially challenging and risky. It is important that project participants evaluate the plusses and minuses of the different contract models and pricing systems and determine the most appropriate approach for their project. Failure to do so can often result in an unsuccessful, overbudget project.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.