Stuart Rosen | Construction Executive
When negotiating a construction contract, a contractor and its advisers must first determine the areas of greatest concern.
For example, if the contractor believes that the drawings that were prepared by the architect and other design professionals are deficient, the contractor may want to reference those deficiencies in the contract. The contractor should emphasize that it is not responsible for the drawings and to the extent the project schedule is extended to allow the parties to address such issues with the drawings, the contractor would be entitled to additional compensation.
This article provides contractors with additional tips, with a broad focus on project delays, for their protection when negotiating and drafting construction contracts, and helps contractors understand the rationale for such tips to better prepare contractors in such negotiations.
CONTRACTOR’S LIABILITY TO THE OWNER FOR DELAY DAMAGES
It is imperative that the contract include a waiver of claims for consequential damages. AIA Document A201TM – 2017 includes such a waiver, which provides, in pertinent part, “The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract … This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14.”
The purpose of the waiver is to insulate the contractor from open ended liability, which could be astronomical, should the contractor delay the project. If a contractor were liable for consequential damages, an owner could, by way of example, seek to recover extended interest on its construction loan at the rate of tens of thousands of dollars a day on large scale construction projects.
Further, because a contractor is not the owner’s partner and does not share in its profits, the contractor should not assume all of the owner’s risk and the contractor’s liability should not be open ended. Accordingly, if an owner seeks to impose liability on a contractor for delay damages and the contractor is agreeable, the parties can negotiate a liquidated damages provision.
Typically, a liquidated damages provision provides that the contractor will pay the owner a fixed amount for each day of delay caused by the contractor. In exchange for its agreement to liquidated damages, the contractor should attempt to do each of the following:
- in its subcontracts, the contractor should pass any liquidated damages on to its subcontractors;
- the contractor should insist on increasing the contract sum to cover not only its additional risk, but to also cover increased subcontract costs (since subcontractors will similarly insist on increasing their respective contract sums);
- the contractor should try to negotiate a grace period; that is, an agreed number of days of delay before liquidated damages are assessed;
- the contractor should try to negotiate a cap on liquidated damages (for example, an agreed percentage of its fee); and
- during the course of the project, the contractor should evidence any delays to the project for which it is not responsible by timely submitting applicable documentation to the owner and architect.
OWNER’S LIABILITY TO THE CONTRACTOR FOR DELAY DAMAGES
An owner may seek to include a “no damages for delay” clause in its construction contract. That is, should the project be delayed for reasons beyond the contractor’s reasonable control, an extension of time provided for the completion of the work would be the contractor’s sole remedy for delay and the contractor would not be entitled to recover monetary damages.
First and foremost, a contractor should try to avoid such a clause, insisting that it should be entitled to an increase in the contract sum and an extension of the contract time in the event of delays beyond its reasonable control.
Assuming, however, that the parties express an interest in some middle ground, the contractor should try to negotiate a limited grace period; that is, an agreed number of days of delay before it would be entitled to an increase in the contract sum. The contractor should also exempt delays caused by the owner’s gross negligence or willful misconduct; the rationale being that if the owner acts egregiously, it should compensate the contractor for the consequences thereof.
OWNER’S RIGHT TO REQUIRE THE CONTRACTOR TO PERFORM DISPUTED WORK
AIA Document A201TM – 2017 permits an owner to issue a Construction Change Directive, in the absence of total agreement on the terms of a Change Order, directing a change in the work prior to agreement on adjustment, if any, in the contract sum or contract time, or both. A Construction Change Directive may be problematic for a contractor, if, for example, the owner sets the cost for such change in the work at a much lower price than the contractor and its subcontractors.
To the extent feasible, the contractor should remove Construction Change Directives from its construction contracts, insisting instead that a change in the work may proceed only with its agreement to a Change Order. Otherwise, the contractor should insist on an agreed limit, either individually or in the aggregate, or both, above which the contractor need not proceed with disputed work.
Contractors should engage knowledgeable and experienced counsel. As is often the case, the devil is in the details, and if these and other clauses are not drafted with care and precision, irrespective of the parties’ intentions, a contractor may not receive the benefit of the terms and conditions for which it thought it had negotiated.