A Brief Discussion – Liquidating Agreements

Gerard J. Onorata | ConsensusDocs

During a construction project, it is not uncommon for disputes to arise between a general contractor and a subcontractor.  Frequently, these disputes involve claims for extra work and delay damages that can be attributed to the owner of the project due to deficient design or unforeseen conditions.  When these occasions arise, the parties can often resolve these claims without the need for litigation or arbitration by entering into a “liquidating agreement.

What is a Liquidating Agreement?

Because there is no direct contractual relationship between a subcontractor and an owner, there does not exist a legal basis for a subcontractor to assert a breach of contract claim against a project owner.  In legal parlance, this is known as “lack of contractual privity.”  A liquidating agreement bridges this contractual gap and allows a subcontractor to pass its claim against the owner through the general contractor.  Essentially, with a liquidating agreement, the general contractor acts as a conduit for passing through the subcontractor’s claim.

How the Courts Treat Liquidating Agreements

Liquidating agreements have traditionally been upheld by the New York courts, which have permitted a general contractor to prosecute a subcontractor’s claim against the owner.  There is no set form that a liquidating agreement has to take.  Some courts have recognized that a liquidating agreement can be comprised of several documents written over a period of time.  Nonetheless, it is important to note that a pass-through provision or a liquidating agreement is something that must be clearly spelled out in the parties’ contract or by a separate agreement.  A general incorporation by reference provision of the owner’s contract in the subcontract usually will be insufficient to establish a valid liquidating agreement.  Similarly, a provision in the subcontract that defers the general contractor’s obligation to pay until payment is received from the owner, (i.e., a “pay-when paid” or a “pay-if-paid” clause) also will likely not be deemed to be a valid liquidating agreement.  In order to be enforceable, the courts of New York have held that a liquidating agreement must:

  1. Impose liability upon a party (i.e., general contractor) for a third party’s; (i.e., subcontractor) increased cost, and provide the first party with a lawful basis for legal action against the party at fault (i.e., owner);
  2. Liquidation of liability in the amount of the first party’s (general contractor) recovery against the party at fault (owner); and
  3. A provision for the pass-through of that recovery to the third party (i.e., subcontractor).

When to Enter Into a Liquidating Agreement

“Pass-through provisions” which are similar to liquidating agreements can be included in the  subcontract at the time the parties enter into their agreement.  You may think of a “pass-through provision” as a mini liquidating agreement that typically is not as comprehensive as a stand-alone liquidating agreement.

Liquidating agreements are often entered into separate and apart from the subcontract after a dispute has arisen and there is the absence of a well-defined pass-through provision in the subcontract.  Including a pass-through provision in a subcontract and entering into a separate liquidating agreement with a subcontractor at a later point in time both have their pluses and minuses.  Having a pass-through provision agreed to early on in the parties’ relationship provides the general contractor with a certain amount of security and leverage with the subcontractor in the event that a dispute arises.  Conversely, the general contractor should recognize that it has now undertaken the responsibility to pass through the subcontractor’s claim to the project owner.  A subcontractor’s claim that is poorly documented or factually inaccurate may cause the owner to develop a poor opinion of any claim of the general contractor that may be submitted along with the subcontractor’s claim. 

These potential pitfalls could be avoided by waiting until a dispute arises before entering into a liquidating agreement.  In doing so, the general contractor will likely have a better understanding of the subcontractor’s claim and be able to make a more informed decision about whether to enter into a liquidating agreement.  On the other hand, by waiting to enter into a liquidating agreement, the subcontractor’s position may become so entrenched and the parties so adverse that forming a liquidating agreement becomes an impossibility.  Experience has demonstrated that a better course of action from a general contractor’s perspective is to have a comprehensive pass through provision in the subcontract that clearly identifies that the subcontractor’s recovery will be limited by whatever recovery the general contractor receives from the owner. 

Benefits of a Pass-Through or Liquidating Agreement

One of the chief benefits of entering into a liquidating agreement is that such agreements avoid a subcontractor’s dispute being litigated or arbitrated during the same time that a general contractor may be in a battle with the project owner.  The avoidance of having simultaneous suits  prevents the circumstance where a general contractor is taking a position with an owner that may negatively impact its position with a subcontractor, or vice versa.  By including the subcontractor’s claim with the claim of the general contractor as part of a liquidating agreement, the general contractor is maximizing or preserving the value of its claim, along with the value of the subcontractor’s claim.  Another added benefit of a liquidating agreement is that it defers resolution of any disputes with the subcontractor until disputes with the owner are resolved.  At the end of the day, a pass-through provision or liquidating agreement is one of the best tools for avoiding inconsistent results and conflicting liability with the subcontractor and the owner. 

Central Elements of a Liquidating Agreement

Liquidating agreements, like all other contracts, are subject to negotiations between the parties. In order for a liquidating agreement to adequately protect the interest of the general contractor, it should contain the following elements:

  1. It should state that the general contractor will pursue the subcontractor’s “reasonable” claims against the owner;
  2. The general contractor does not verify the subcontractor’s claim;
  3. The subcontractor will reasonably assist, at its own costs and expense, with its claim;
  4. The subcontractor will be bound by any determination that is binding upon the general contractor with respect to the subcontractor’s claim; or
  5. At the very least, the subcontractor will not commence suit or arbitration against the contractor until any dispute with the owner is resolved;
  6. Any suit or arbitration that the subcontractor is permitted to commence or has commenced will be stayed pending the resolution of the dispute with the owner;
  7. Any proceeds of any proceedings against the owner will be distributed between the contractor and the subcontractor on a basis that is set forth in the liquidating agreement; and
  8. The agreement should provide that the general contractor has the sole authority and discretion to settle the subcontractor’s claim.

Closing Thoughts

The importance of having a well written pass-through provision in a subcontract or separate stand-alone liquidating agreement in place with a subcontractor cannot be overstated.  While not a total guarantee that such agreement will prevent litigation with a subcontractor, they substantially reduce the likelihood of such disputes taking place.

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 Case For An Owner’s Representative

Richard s. Reizen and Patrick J. Johnson | Gould & Ratner

The Need for Owners to React in Real Time to Project Changes Caused by Supply Chain Interruptions, Skyrocketing Material Increases and Labor Shortages

A construction project is a marathon and not a sprint. Rushing through the project without preparation and a plan for the long game, will ultimately lead to errors, cost overruns and delays. For that reason, we counsel our clients about the importance of assembling the right team for success, engaging in active project management, and planning for and knowing how to adapt to project pitfalls. Both anecdotal evidence and industry studies have confirmed, there is usually a positive financial return realized in cost and time savings from assembling the correct project team and engaging in early project planning.

The need to make such an investment is even more critical in the current construction climate of unprecedented supply chain interruptions, rising material costs and labor shortages. In this new normal, owners are often compelled to make real time decisions of how to proceed when the selected materials are unavailable, substantially delayed or prohibitively expensive. They also need to implement those decisions with a contractor who may be working with a depleted workforce. Accordingly, any additional support and advice available to the owner can help place them in the best position possible.

While we have previously addressed the need for pre-construction planning, this update will focus on the benefits of engaging an owner’s representative during the construction process.

The Role of the Owner’s Representative

For projects where the owner does not have an internal construction department, the professional skills, or time to manage the owner’s role, an owner’s representative can assume that role. Simply put, the owner’s representative is the eyes, ears and voice of the owner on the project to ensure the owner’s interests are protected at all times. The owner’s representative monitors, rather than manages the job, and the responsibilities should be well detailed in the agreement between the parties. The general responsibilities can include assisting the owner in selecting a project team, managing the bidding process, reviewing scope documents, reviewing project costs, monitoring schedules, and assisting with close-out and general advice to the Owner throughout the project.

Services the Owner’s Representative Can Provide to the Owner

As with any party providing services to the owner on a construction project, detailing the scope and roles of each party involved is key. Likewise, the contract between the owner and the owner’s representative should contain a very specific listing of all services that the owner’s representative will perform as well as those which are excluded. Below is a sample of some ways in which the owner’s representative can assist the owner.

Project Team Assembly and Administration

At the onset of the project, the owner’s representative can make recommendations of architects and general contractors for the owner to consider, assist in the interview process by asking questions an owner might not contemplate, review competing bids to make sure the owner is comparing to apples-to-apples, provide insight on past experiences with the team and their reputations, suggest specific team members from the architect or contractor who should be requested, prepare a directory with the contact information for all team members, and even assist in setting initial milestones and preliminary scheduling.

Pre-Construction Planning

The owner’s representative, through their vast knowledge and construction-related expertise, can also identify potential issues for the owner which will be faced in the project, including but not limited to, anticipated material shortages or pricing escalations, so that these issues and other problems can be adequately discussed and planned for early in the process to avoid further disruption down the road.

Review of Design Drawings

During the design process, an owner can rely on the owner’s representative to convey to the architect the owner’s general design goals. Likewise, they can help explain the drawings to the owner and point out features as the drawings are generated. The owner’s representative can also evaluate design alternatives or value engineering concepts as they are suggested during the process and assist the owner with analyzing corresponding cost impacts to the overall budget. Finally, the owner’s representative can assist with attending public meetings on behalf of the owner as governmental and HOA approvals are sought.

Monitoring of RFI Responses

While the owner’s representative will not generally have responsibility for reviewing RFIs on the project, they can monitor them to make sure they are timely and adequate and the owner’s representative can bring any significant ones to the attention of the owner. Smooth lines of communications lead to fewer delays in responding to such requests and help to keep the project on schedule.

Active Project Participation

Typically, owners have full time obligations outside of managing the construction project on a day-to-day basis. An owner’s representative has the bandwidth to monitor various areas of the project itself to ensure that deadlines are being met, information is being relayed to the owners, and the overall project is being built in accordance with the applicable specifications. This active participation also includes attendance at OAC meetings on the owner’s behalf. Again, this provides real-time input, on behalf of the owner, to issues being discussed to ensure appropriate owner involvement and even documentation of correspondence through meeting minutes if questions arise in the future regarding decisions made in such meetings. Similarly, the owner’s representative can make sure certificates of insurance are being collected from the GC and all of its subcontractors.

Adherence to Construction Schedule

In the event an owner does not have the time, or the requisite knowledge, to properly review construction schedules or corresponding delays, an owner’s representative can step in to ensure deadlines are being met. An owner’s representative can monitor personnel on a regular basis, foresee future scheduling bottlenecks or labor conflicts on the project and actively work with trades to suggest solutions to either minimize such delays or offset future delays.

Budget Issues

Keeping a project on budget can be a time consuming and difficult process. An owner’s representative will continually monitor budgets and review costs as they are submitted all in conjunction with the overall project budget. Additionally, having an individual who continually tracks schedules and promptly responds to construction inquiries in turn reduces the possibility of delays which, almost always, increase project costs.

Disputed Issues During Construction

In addition, an owner’s representative can act as an intermediary between ownership and project personnel. This can be especially helpful when disputes arise or difficult topics need to be addressed with the team depending on the owner’s comfort level and experience with such issues. The owner’s representative can also work with the owner to suggest possible solutions to promptly resolve any further disruption.

Project Close-Out

Last, but certainly not least, is having someone who can assist with effectively wrapping up the project and get the owner across the finish line. Project close-out involves ensuring the project has been completed in accordance with the contract documents, preparing and ensuring compliance with punch lists, ensuring all costs are proper and paid and ensuring the owner has the proper paperwork (i.e. warranties, manuals, drawings, etc.) The ongoing involvement of the owner’s representative can help facilitate the coordination of all necessary documentation throughout the project so that it can be easily assembled when the time comes and help ensure the owner has the necessary paperwork and training it needs to use the project and related components.

Though an owner’s representative adds to project costs (they may be partially or fully recouped in project savings) and may not be necessary on every construction project, especially smaller, narrow scope projects, it is an important consideration for an owner given the recent rise in supply chain interruptions, material and labor shortages and pricing escalations. An owner’s representative can act as a liaison between the personnel and the owner keeping a close eye on each and every aspect of the project in order to keep your project on budget and on schedule. In today’s climate, that can be the difference between success and failure.

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.

New Case Law Alert: Licensed General Contractors Cannot Sue Owners To Recover Funds For Work Performed By An Unlicensed Subcontractor

Michele A. Ellison and Samantha R. Riggen | Gibbs Giden

The opinion in Kim v. TWA Construction, Inc. (2022 Cal. App. LEXIS 412) issued by the Court of Appeal of California Sixth Appellate District, on May 13, 2022, makes it clear that a properly licensed general contractor cannot bring an action for compensation from an owner for work performed by an unlicensed subcontractor.

California licensing law has long made explicit that an unlicensed contractor cannot bring or maintain any action to collect or recover compensation for work that contractor performed unless they were duly licensed at all times during the performance of that work. This new ruling extends the scope of this restriction to licensed contractors who hired unlicensed subcontractors.

The Underlying Dispute

The case involved a dispute between property owners and their former general contractor and its principal (collectively “TWA”). The property owners hired TWA to construct a home, and during the early stages of the project, TWA hired an unlicensed subcontractor to perform tree trimming services and to remove a large eucalyptus tree. The subcontractor partially removed the eucalyptus tree, but was stopped by a neighbor, and it was discovered that the tree was partly located on the neighbor’s property. The neighbor brought suit against the property owners, and eventually TWA, for the damage. The property owners subsequently filed a cross-complaint against TWA, and TWA in turn filed a cross-complaint against the property owners.

Where Does Licensing Come In?

Prior to trial, the property owners filed a motion in limine to address the licensure status of the tree subcontractor. The relevant licensing statute, Business and Professions Code § 7031(a), stated in pertinent part:

[N]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person.

The property owners argued that TWA chose to hire an unlicensed subcontractor to remove the eucalyptus, which required a specialty tree service license, and that TWA should disgorge the $10,000 the property owners had paid TWA for such tree work as a result. The trial court granted the motion, holding that BPC § 7031(a) applied even where a general contractor seeks compensation for services of a purported unlicensed subcontractor and barred TWA from collecting compensation for services performed by the tree subcontractor if the subcontractor was unlicensed at the relevant time.

After jury trial, the court entered judgment in favor of the property owners and ordered TWA to disgorge the $10,000 paid for the tree work performed by TWA’s unlicensed subcontractor. On appeal, TWA argued that the trial court erred in its interpretation of the relevant licensing statutes.

The Policy Behind BPC § 7031(a)

The appellate court addressed in great detail the extreme public policy concerns that led to the codification of BPC § 7031(a). The purpose of the contractor’s licensing law is to protect the public from incompetent and dishonest contractors. The laws are designed to provide minimal assurances that all persons offering contracting services possess the required skill and character, are aware of the applicable local laws and codes, and know the basis of administering a contracting business. BPC § 7031(a) is designed to withhold judicial aid from those who seek payment for unlicensed work by providing a general rule that, regardless of the merits of the claim, a contractor may not maintain any action, legal or equitable, to recover compensation for “the performance of any act or contract” unless he or she was duly licensed at all times during the performance of that act or contract. While it imposes strict and harsh penalties for a contractor’s failure to maintain proper licensure, the statutory intent of BPC § 7031(a) is to discourage and deter unlicensed persons from preforming contracting work.

The Appellate Court’s Statutory Analysis

Looking first to the express words of the statute, the Appellate Court observed that while the plain meaning BPC § 7031(a) was unambiguous, its application to the factual scenario at hand was not immediately clear. On its face, the statute bars a contractor from bringing an action for compensation for its own unlicensed performance of an act or contract where a license is required. Whether that bar extends to a licensed contractor for his use of an unlicensed subcontractor is not immediately apparent from the text of BPC § 7031(a).

After considering the definition of contractor in BPC § 7026 (which is defined as including both “subcontractor and specialty contractor,” and a person does the work “himself or herself or by or through others”), the Appellate Court found that taken together, BPC §§ 7026 and 7031(a) subject subcontractors to the same rules as contractors, prohibiting a subcontractor from taking legal action to recover compensation from the owner or general contractor for unlicensed work performed by the subcontractor. To otherwise narrowly construe the statute and enable a contractor to recover compensation for the performance of unlicensed work, simply because the work was accomplished by hiring a subcontractor, would circumvent the purpose of BPC § 7031(a).

The Appellate Court concluded that it would be unreasonable to permit TWA to collect compensation for work performed by an unlicensed subcontractor when all facets of the licensing laws are directed at ensuring licensing compliance. Thus, in no uncertain terms, the Court of Appeal held that “[BPC § 7031(a)] bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.”

How Does This Interact with Disgorgement Claims under BPC § 7031(b)?

In its decision, the Appellate Court referred to BPC § 7031(a) as “the shield” and BPC § 7031(b) as “the sword” of the Contractors State License Law, as both subsections represent ways in which the laws reinforce licensing requirements and penalize violations. BPC § 7031(b) provides, in relevant part, that:

[A] person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

The statute of limitations for a disgorgement claim was recently confirmed to be a one-year period, which begins running upon the completion or cessation of the performance of the act or contract at issue and is not subject to tolling under the delayed discovery rule. See Eisenberg Village etc. v. Suffolk Construction Co., Inc. (2020) 53 Cal. App. 5th 1201; San Francisco CDC LLC v. Webcor Construction L.P. (2021) 62 Cal.App.5th 266.

Under BPC § 7031(b), parties who hire an unlicensed contractor are entitled to reimbursement for compensation paid to an unlicensed contractor even if they knew the contractor was unlicensed. Importantly though, similar to BPC § 7031(a), it is not readily apparent from the statutory language who the disgorgement claim may be brought against – whether it can be alleged only against an unlicensed contractor, or like in Kim, against a general contractor who hired an unlicensed subcontractor. Case law analyzing this statute thus far appears to be focused only on recovery from and punishment of the unlicensed contractor. See White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 520-21(“unlicensed contractors are required to return all compensation received without reductions or offsets for the value of material or services provided.”); Eisenberg Village etc. v. Suffolk Construction Co., Inc. (2020) 53 Cal.App.5th 1201, 1213 (“the disgorgement mandated by section 7031(b) is not designed to compensate the plaintiff for any harm, but instead is intended to punish the unlicensed contractor.”) However, similar to the analysis in Kim, to narrowly construe the statute would enable a contractor to retain compensation for the performance of unlicensed work, simply because the work was accomplished by hiring a subcontractor, and circumvent the public policy and purpose of BPC § 7031.

The Appellate Court in Kim did not make an express ruling regarding whether the property owners could disgorge amounts paid to TWA for work performed by the unlicensed subcontractor under BPC § 7031(b). At the trial level, this was in fact what happened, as TWA was ordered to disgorge the $10,000 it was paid by the property owners for work performed by the unlicensed subcontractor. However, we are unaware of any legal authority expressly supporting disgorgement from a licensed general contractor for payments for work performed by an unlicensed subcontractor. In light of the Appellate Court’s analysis, such a conclusion appears to be the logical next step, and it is only a matter of time when this issue is addressed at the appellate level.

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.

Out of the Black

Surviving Black Swan Events

John Drentlaw | Construction Executive

Even if you previously weren’t familiar with the term “black swan event,” you’ve likely become intimately familiar with what one looks like over the past two years. Coined by author Nassim Taleb in his book The Black Swan: The Impact of the Highly Improbable, the term refers to a rare, unpredictable event—perhaps, say, a pandemic—that has an extreme impact.

“Extreme” certainly seems to be an accurate description of the impact that the COVID-19 pandemic has had on the construction industry, at nearly every level. The Commercial Construction Index (CCI) fell from 74 to 56 during Q2 2020 and remained statistically unchanged through Q3 of that year. Recovery has been slow, with the CCI remaining eight points below pre-pandemic levels through the end of 2021. Prices for raw materials such as lumber and steel have been extremely volatile, reaching historic highs and dramatic lows. March and April of 2020 alone saw 1.1 million jobs disappear from the industry—roughly half as many jobs as were lost throughout the entire Great Recession (although many of these jobs have since returned).
While the industry has persevered through what should be the worst of these effects, many contractors and project owners are now wondering: How can we predict the next black swan event?

DON’T PREDICT—PREPARE

Black swan events can cause feelings of helplessness and unease—as Taleb points out, we often find comfort in convincing ourselves that events such as these can in fact be predicted. In reality, we never know what or when the next black swan event will be. By its very nature, a black swan event is unpredictable. Unlike other considerations that may be straightforward or easy to foresee, a black swan event threatens uncertainty. And its outsized impact has the potential to doom construction projects—even those with considered approaches to risk.

The task for the industry, then, is to figure out not how to predict the next black swan event but how best to prepare for one. Taleb describes this as “building robustness” during easy times. Through a combination of good business sense, crisis preparedness and behavioral psychology, it’s possible to prevent the next black swan event from meaning death for your project. Here are three measures that you can implement to mitigate the impact of the next black swan event on your projects:

1. Understand your inherent drive to downplay risk. Risk assessment is a key component to any construction project. However, as a crisis approaches, it’s natural to downplay the potential severity of potential outcomes. Black swan events are so sudden and huge that we often have difficulty accepting them. At the beginning of the pandemic, in spring of 2020, it was the projects that pivoted immediately that fared the best. Those that recognized the severity of the pandemic in the early stages are now weathering the ongoing storm, bringing projects back online and adapting to changes on the fly. Many of those that were slow to respond have not fared as well.

As a contractor or owner, it’s critical to recognize that you may be downplaying the level of risk during the middle of a crisis. Being aware of potential threats to your project will allow you to respond to disruptions quickly. Keep updated on the news around an evolving situation from a variety of sources. Pause to reflect on your own attitudes toward the circumstances—make sure that you aren’t putting blind faith in things “not being that bad.” It’s also crucial to identify this in others; you may face pushback when you sound an alarm. However, as the last two years have proven, it might be better to find out later that you overreacted than to lose a project entirely because you didn’t move quickly enough.

2. Create a crisis approach that includes all stakeholders. At the start of a project, it’s important to implement a crisis approach that considers a variety of potential issues. While we can’t predict what the next black swan event will be, ideally, the beginning stages of your crisis response should be applicable no matter what is happening: Who are the decision makers? What does the public need to know? What does my project team need to know?

Consider what you’ll need from your partners and vice versa. Maintaining communication with all parties invested in your project is one of the best things you can do to help it survive a black swan event. Identify the key communication channels for your project and ensure that they stay open. Your main goal is to eliminate as much uncertainty as you have control over; keeping close contact and transparency amid a crisis can head off other potential issues.

3. Tap the expertise of an independent cost estimator. Independent cost estimators (ICEs) are well-equipped to help your project survive a black swan event. These professionals are adept at assessing risk, aligning expectations and maximizing value at every stage of a project. Working with an ICE will reveal opportunities to save money on your project, helping you prioritize value and build financial stability. This stability is greatly beneficial during an unforeseen crisis, giving your project more breathing room to survive times of extreme economic uncertainty. Engaging with an ICE when things are calm can help build agility and nimbleness that will be integral to your project surviving the next black swan event.

THE END IS NEAR

Ultimately, we don’t know what the next black swan event will be. From a global pandemic to terrorist attacks to civil unrest, there is a near-endless list of potential unforeseen threats to your project. The best way to survive them is to be prepared by promoting nimbleness and maximizing value during the good times. As we move toward a post-COVID-19 world, it will be important to focus on building a stable foundation for your projects so that they survive the next black swan—and thrive in the meantime. 

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.

Not Your Average Desktop Printer: How 3D Printing May Impact the Construction Industry

Jason A. Copley and Michael I. Schwartz | Cohen Seglias

We are in the midst of what has been termed the “Fourth Industrial Revolution,” where manufacturing and other industries take advantage of modern advances in smart technology, automation, and cloud computing. 3D printing (also called “additive manufacturing”) is one such innovation starting to disrupt traditional business processes. The healthcare, aerospace, manufacturing, and automotive industries are being transformed by 3D printing methods. Other industries are taking notice including the construction industry, which uses the term “3D printing” to refer to the manufacturing process by which digitally-created designs and models are constructed in the field using robotic arms that pour building material layer by layer.

In its current form, 3D printing is primarily used to construct small residential homes on an individual basis or, more recently, in planned, multi-home developments. The first-ever 3D-printed, fully sustainable neighborhoods in the United States are being constructed in California by the Palari Group in partnership with construction technology company Mighty Buildings. The Palari Group’s goal is to develop net-zero energy communities, with new deliveries planned for spring 2022. Miami-based homebuilder Lennar is planning to build 100 3D-printed homes in the Austin area in 2022. Lennar will build their homes with the Vulcan construction system developed by another construction technology company, ICON. In southeast Mexico, 3D printers are currently constructing a housing community for low-income families, designed to withstand hurricanes, earthquakes, and other natural disasters. The goal is for these homes to have enough durability to be passed down from generation to generation.

As the technology advances and the construction industry becomes more receptive to 3D printing, its natural progression will be to construct larger and more complicated multi-story buildings, even skyscrapers. Presently, the world’s largest 3D-printed building is a two-story municipality building that spans 6,900 square feet in Dubai, where 3D printing technology has been embraced. The Dubai Future Foundation plans to construct 25% of its new buildings using 3D printing, with an ultimate goal of making Dubai the world’s 3D-printing hub by 2030.

Proponents of 3D-printed construction champion this market-disrupting building method as both an effective, time-saving, and cost-efficient way to address the current housing shortage and high demand. 3D printing has already shown an ability to decrease material and labor costs substantially, which can lead to more affordable housing for purchasers and increased profits for builders. Material waste is virtually non-existent in 3D printing as the printer discharges the exact amount of material required for the job, and projects typically do not require formwork for vertical wall installation. Labor inputs are also drastically decreased. In Shenzhen, China, for example, only eight workers were required on site to construct a portion of a museum using 3D printing, as compared to the estimated 160 workers that would have been required if traditional building methods were used. 3D printing is also touted as energy efficient. Traditional square-shaped buildings can be replaced by rounded walls, which have been found to minimize humidity and thus require less cooling. From an aesthetic point of view, architects are intrigued by the endless design possibilities using computerized blueprints and sketches.

Meanwhile, critics of 3D-printed construction are concerned with the associated learning curve, how other trades will be affected, as well as the impact on overall project coordination. From a labor perspective, specific skilled workers in the carpentry, masonry, and drywall trades are worried that 3D printing could lead to widespread job displacement as workers are replaced by 3D printers, and the need for onsite manpower is greatly reduced. Additionally, procuring a 3D printer is difficult due to limited supply and complex customization needs. It can also be cost-prohibitive, depending on whether the printer is purchased or leased, and whether the building components are printed offsite or onsite. If printed offsite, the developer must arrange for transportation and installation of the components similar to a modular construction project. If printed onsite, the printer, which is expensive and oversized, must be safely transported to and from the project site and protected while onsite. Printers often weigh several tons and can cost in excess of $500,000 for the equipment and sophisticated computer programs. Setup and dismantling costs are also significant, making multi-home projects more attractive for 3D printing developers.

A builder’s stance on 3D-printed construction notwithstanding, the truth is that buildings cannot be constructed in the field without the necessary building permits and without complying with all existing codes and regulations. Unlike traditional materials and methods with hundreds of years of collective knowledge as reflected in building codes, 3D printing is a new and evolving construction method that requires similarly innovative regulations to address this developing technology.

One organization, the International Code Council, introduced Appendix AW governing 3D-printed building construction, which was adopted in the 2021 International Residential Code (IRC). The appendix provides for the design, construction, and inspection of buildings, structures, and building elements fabricated by 3D-printed construction techniques. While the appendix shows progress toward a unified building code that recognizes 3D printing as an accepted building practice, state and local jurisdictions will need to formally adopt the new aspects of the 2021 IRC, including Appendix AW. The same is true for constructing non-residential buildings, as the International Building Code (IBC) has yet to incorporate a provision for 3D printing construction technology. Instead, an acceptance criteria for 3D concrete walls (AC509) has been developed under IBC Section 104.11, which allows for alternative materials, design, and construction methods provided that such alternatives meet the intent of the IBC. Regardless, local building codes will need to be modified to accommodate 3D printing, and local building and code compliance departments must become conversant in this new building method.

Once proper permitting is obtained, a builder’s natural next question would be how the 3D printing process could backfire, resulting in legal costs that eclipse any planned savings. Like any other construction contract, a project utilizing 3D printing technology should still contain provisions related to workmanship. While computers may reduce the risk of construction errors, computers may also malfunction like any other piece of equipment. Additionally, all designs require input from people and then execution in the field. This means that architects, engineers, general contractors, subcontractors, and suppliers still face many of the same risks associated with defective work, even if those risks now involve a computerized element.

Conceptually, one could foresee a reduction in litigation related to project delay, as 3D-printed construction is projected to dramatically reduce the time needed to construct a building. One could also foresee that lawsuits related to jobsite injuries might also be substantially reduced, as fewer workers are required onsite and printers are performing a portion of the more strenuous and dangerous tasks. On the other hand, 3D-printed construction could expose a whole new category of potentially liable parties, namely software engineers and manufacturers of 3D printers. While new building methods give rise to initial reservations and skepticism, developers and contractors alike should consider investigating this new frontier in order to stay ahead of the curve.

You can watch the 3D printed construction process in action by visiting: https://youtu.be/XHSYEH133HA.

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.