Fall-09 Drewry-Ciliberto Paper - Workshop D (00315263).DOC

Introduction

Negotiating and drafting a construction contract is an exercise in risk allocation. In order to allocate that risk, the construction lawyer must first be able to identify and understand the risks likely to be encountered. The ability to do this effectively, whether as outside or in-house counsel, is driven not simply by a familiarity with construction law, but by a fuller understanding of your client’s business operations and the project itself. A detailed risk identification and assessment exercise with counsel early in project development will flush out not only the legal questions, but also those business risks and issues inherent to a given project. By doing so, all participants are better informed at the outset of the project, the contract will likely better serve the parties, and the odds are enhanced that the participants’ anticipated benefits and goals from the transaction will be met, including the final cost of construction resembling the original price of the contract.

In the companion presentation and discussion to this article, we will hear from an experienced panel as to the risk assessment techniques and philosophies implemented by AEC companies and how they seek to manage the contract process on a given project. The proliferation of industry standard form contracts has a direct and, often times, significant impact on these risk assessment techniques, philosophies and management processes because each set of industry forms comes from a different drafting perspective.

In negotiating and drafting the construction contract, however, whether under the “new” forms or custom documents, certain key clauses and issues consistently put all of this to the test. This companion paper will examine these “key clauses” with the goal of explaining the attendant issues and drafting considerations for each from the view of both the owner and contractor. Additionally, excerpts from the following three families of industry standard forms are provided to show how contract templates have tried to address the same clauses: ConsensusDOCS^TM, a coalition of 22 leading construction industry associations; the American Institute of Architects (AIA) and the Engineers Joint Contract Documents Committee (EJCDC).

§ 1 Standard of Care

For attorneys, the term “standard of care” carries particular significance. More often than not, we view “standard of care” in connection with the design professional and its performance, or lack thereof, in completing the design services for the Project. Contractors are typically not held to professional standards of care. Rather, they are subject to the contractual warranty or guaranty of performance covering the quality of their work, which is discussed in the following section.

Generally, design professionals are held to a “professional negligence” standard of care in performing the design services unless the contract expressly states otherwise. The AIA family of documents has consistently utilized this common law approach to govern the performance of design services.[1] This trend has continued in the new AIA 2007 documents, but for the first time the AIA has expressly adopted this professional standard of care in its basic Owner-Architect Agreement (B101-2007):

AIA – B101 (2007), § 2.2 The Architect shall perform its services consistent with the professional skill and care ordinarily provided by architects practicing in the same or similar locality under the same or similar circumstances. The Architect shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project.

As such, the AIA documents do not specify a different or higher, contractual standard of care other than professional skill and care.

The ConsensusDOCS take a slightly different approach.[2] Rather than simply rely on the “professional negligence” standard, the ConsensusDOCS take the further step of contractually establishing or articulating the fiduciary obligation owed by the design professional to the Owner (or Design/Builder depending on the relationship) in the performance of its services. The EJCDC documents likewise adopt prevailing common law principles in their contractual standards of care for the performance of design services.[3]

As the complexity and cost of construction increases, many owners seek increased performance guarantees with respect to the performance of design services (not to mention construction). As a result, some owners attempt to ratchet up the common law “professional negligence” standard included in most of the industry forms. However, design professionals must tread carefully in this area, as a heightened standard of care may take it outside of its errors and omission coverage. If the design professional accepts this increased risk, it must be careful in structuring the remainder of the agreement (and its insurance) to limit or manage the risk appropriately. From the owner’s point of view, the higher performance guaranty, while seemingly adding protection against loss, may fail its purpose by leaving the owner with an uninsured loss.

Additionally, as collaborative project delivery methods gain footholds in the industry, and emerging technologies such as Building Information Modeling achieve the wide-ranging use anticipated by many experts, the contractual “standard of care” will evolve and adapt. These changes must be taken into account when negotiating and drafting the agreements. Particular attention should be given when developing a Construction Manager at Risk (CM at Risk) contractual relationship. The contractor’s standard of care requirements become immensely important to define with regard to preconstruction activities, as well as when the owner and CM relationship changes as the project moves from the design phase to the construction phase.

§ 2 Warranty Obligations & Performance Guaranties

The warranty provision is the contractual representation made by the contractor or subcontractor as to the quality of its work. Each of the industry standard forms contains provisions addressing the contractor’s warranty obligations and correction of work guarantee.

In the ConsensusDOCS 200, the Contractor warrants “to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit.”[4] Additionally, the Contractor has the obligation to obtain from the Material Suppliers and Subcontractors “any special or extended warranties required by the Contract Documents.” However, the Contractor’s liability regarding such warranties is limited to the one-year period detailed in the Correction of Work section (see next paragraph), but that after said period the Contractor shall “provide reasonable assistance to the Owner in enforcing the obligations of Subcontractors or Material Suppliers.”[5] The ConsensusDOCS warranty terms provide:

§3.8 WARRANTY

§3.8.1 The Contractor warrants that all materials and equipment shall be new unless otherwise specified, of good quality, in conformance with the Contract Documents, and free from defective workmanship and materials. At the Owner's request, the Contractor shall furnish satisfactory evidence of the quality and type of materials and equipment furnished. The Contractor further warrants that the Work shall be free from material defects not intrinsic in the design or materials required in the Contract Documents. The Contractor's warranty does not include remedies for defects or damages caused by normal wear and tear during normal usage, use for a purpose for which the Project was not intended, improper or insufficient maintenance, modifications performed by the Owner or Others, or abuse. The Contractor's warranty pursuant to this Paragraph 3.8 shall commence on the Date of Substantial Completion.

§3.8.2 The Contractor shall obtain from its Subcontractors and Material Suppliers any special or extended warranties required by the Contract Documents. All such warranties shall be listed in an attached Exhibit to this Agreement. Contractor's liability for such warranties shall be limited to the one-year correction period referred to in Paragraph 3.9. After that period Contractor shall assign them to the Owner and provide reasonable assistance to the Owner in enforcing the obligations of Subcontractors or Material Suppliers.

The ConsensusDOCS 200 also provides for a notice and correction period of any defects found “prior to Substantial Completion and within one year after the date of Substantial Completion of the Work…”, often times referred to as the “call-back” warranty.[6] If within the warranty period, and upon proper notification, the Contractor “shall promptly correct the Defective Work at it own cost and time and bear the expense of additional services required…”[7] Of course, this one-year correction of work period, or “call-back” warranty does not “constitute a limitation period with respect to the enforcement of the Contractor's other obligations under the Contract Documents.”[8] Also, § 3.10 addresses the correction of covered or in-place work.

ConsensusDOCS - §3.9 CORRECTION OF WORK WITHIN ONE YEAR

§3.9.1 If, prior to Substantial Completion and within one year after the date of Substantial Completion of the Work, any Defective Work is found, the Owner shall promptly notify the Contractor in writing. Unless the Owner provides written acceptance of the condition, the Contractor shall promptly correct the Defective Work at its own cost and time and bear the expense of additional services required for correction of any Defective Work for which it is responsible. If within the one-year correction period the Owner discovers and does not promptly notify the Contractor or give the Contractor an opportunity to test or correct Defective Work as reasonably requested by the Contractor, the Owner waives the Contractor's obligation to correct that Defective Work as well as the Owner's right to claim a breach of the warranty with respect to that Defective Work.

§3.9.2 With respect to any portion of Work first performed after Substantial Completion, the one-year correction period shall be extended by the period of time between Substantial Completion and the actual performance of the later Work. Correction periods shall not be extended by corrective work performed by the Contractor.

§3.9.3 If the Contractor fails to correct Defective Work within a reasonable time after receipt of written notice from the Owner prior to final payment, the Owner may correct it in accordance with the Owner's right to carry out the Work in Paragraph 11.2. In such case, an appropriate Change Order shall be issued deducting the cost of correcting such deficiencies from payments then or thereafter due the Contractor. If payments then or thereafter due Contractor are not sufficient to cover such amounts, the Contractor shall pay the difference to the Owner.

§3.9.4 If after the one-year correction period but before the applicable limitation period the Owner discovers any Defective Work, the Owner shall, unless the Defective Work requires emergency correction, promptly notify the Contractor. If the Contractor elects to correct the Work, it shall provide written notice of such intent within fourteen (14) Days of its receipt of notice from the Owner. The Contractor shall complete the correction of Work within a mutually agreed timeframe. If the Contractor does not elect to correct the Work, the Owner may have the Work corrected by itself or Others and charge the Contractor for the reasonable cost of the correction. Owner shall provide Contractor with an accounting of correction costs it incurs.

§3.9.5 If the Contractor's correction or removal of Defective Work causes damage to or destroys other completed or partially completed Work or existing buildings, the Contractor shall be responsible for the cost of correcting the destroyed or damaged property.

§3.9.6 The one-year period for correction of Defective Work does not constitute a limitation period with respect to the enforcement of the Contractor's other obligations under the Contract Documents.

§3.9.7 Prior to final payment, at the Owner's option and with the Contractor's agreement, the Owner may elect to accept Defective Work rather than require its removal and correction. In such case the Contract Price shall be equitably adjusted for any diminution in the value of the Project caused by such Defective Work.

ConsensusDOCS - §3.10 CORRECTION OF COVERED WORK

§3.10.1 On request of the Owner, Work that has been covered without a requirement that it be inspected prior to being covered may be uncovered for the Owner's inspection. The Owner shall pay for the costs of uncovering and replacement if the Work proves to be in conformance with the Contract Documents, or if the defective condition was caused by the Owner or Others. If the uncovered Work proves to be defective, the Contractor shall pay the costs of uncovering and replacement.

§3.10.2 If contrary to specific requirements in the Contract Documents or contrary to a specific request from the Owner, a portion of the Work is covered, the Owner, by written request, may require the Contractor to uncover the Work for the Owner's observation. In this circumstance the Work shall be replaced at the Contractor's expense and with no adjustment to the Contract Time.

Under the 2007 AIA A201 General Conditions, the Contractor warrants that the work will be free from defects and will conform to Contract Documents.[9] In the 2007 version, however, the warranty text is rephrased to narrow the warranty exclusion for defects not “inherent in the quality required or permitted.” It now reads that the work will be free from defects, “except for those inherent in the quality of the Work the Contract Documents require or permit.”[10] The new language ties the exception directly to the Contract Documents rather than a vague industry standard.

AIA § 3.5 WARRANTY

The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials, or equipment not conforming to these requirements may be considered defective. The Contractor’s warranty excludes remedy for damage or defect caused by abuse, alterations to the Work not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage. If required by the Architect, the Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment.

Similar to the ConsensusDOCS, the AIA forms have extensive correction of work provisions set forth in Article 12.[11] These provisions likewise set forth a notice and correction period for any defects found prior to, or within one year after, the date of Substantial Completion (the “call-back” warranty).[12] The AIA form also expressly states that the “call-back” warranty addresses only the requirement that the contractor correct the work and does not limit any other contractual rights or obligations, i.e. the contractual guaranty of the quality of the work, which is limited by the applicable statute of limitations, e.g., for a written contract, and may be limited ultimately by the applicable state statute of repose (which typically runs from substantial completion).

AIA - §12.2 CORRECTION OF WORK

§12.2.1 BEFORE OR AFTER SUBSTANTIAL COMPLETION

The Contractor shall promptly correct Work rejected by the Architect or failing to conform to the requirements of the Contract Documents, whether discovered before or after Substantial Completion and whether or not fabricated, installed or completed. Costs of correcting such rejected Work, including additional testing and inspections, the cost of uncovering and replacement, and compensation for the Architect’s services and expenses made necessary thereby, shall be at the Contractor’s expense.

§12.2.2 AFTER SUBSTANTIAL COMPLETION

§12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Section 9.9.1, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty. If the Contractor fails to correct nonconforming Work within a reasonable time during that period after receipt of notice from the Owner or Architect, the Owner may correct it in accordance with Section 2.4.

§12.2.2.2 The one-year period for correction of Work shall be extended with respect to portions of Work first performed after Substantial Completion by the period of time between Substantial Completion and the actual completion of that portion of the Work.

§12.2.2.3 The one-year period for correction of Work shall not be extended by corrective Work performed by the Contractor pursuant to this Section 12.2.

§12.2.3 The Contractor shall remove from the site portions of the Work that are not in accordance with the requirements of the Contract Documents and are neither corrected by the Contractor nor accepted by the Owner.

§12.2.4 The Contractor shall bear the cost of correcting destroyed or damaged construction, whether completed or partially completed, of the Owner or separate contractors caused by the Contractor’s correction or removal of Work that is not in accordance with the requirements of the Contract Documents.

§12.2.5 Nothing contained in this Section 12.2 shall be construed to establish a period of limitation with respect to other obligations the Contractor has under the Contract Documents. Establishment of the one-year period for correction of Work as described in Section 12.2.2 relates only to the specific obligation of the Contractor to correct the Work, and has no relationship to the time within which the obligation to comply with the Contract Documents may be sought to be enforced, nor to the time within which proceedings may be commenced to establish the Contractor’s liability with respect to the Contractor’s obligations other than specifically to correct the Work.

AIA - §12.3 ACCEPTANCE OF NONCONFORMING WORK

If the Owner prefers to accept Work that is not in accordance with the requirements of the Contract Documents, the Owner may do so instead of requiring its removal and correction, in which case the Contract Sum will be reduced as appropriate and equitable. Such adjustment shall be effected whether or not final payment has been made.

The EJCDC C-700 also provides similar terms and conditions regarding warranting that the “Work will be in accordance with the Contract Documents and will not be defective” and that the materials and equipment “shall be as specified for or, if not specified, shall be of good quality and new, except as otherwise provided in the Contract Documents.”[13]

EJCDC – Article 1 – Definitions and Terminology

§1.02B1 Intent of Certain Terms or Adjectives: The Contract Documents include the terms “as allowed,” “as approved,” “as ordered,” “as directed” or terms of like effect or import to authorize an exercise of professional judgment by Engineer. In addition, the adjectives “reasonable,” “suitable,” “acceptable,” “proper,” “satisfactory,” or adjectives of like effect or import are used to describe an action or determination of Engineer as to the Work. It is intended that such exercise of professional judgment, action, or determination will be solely to evaluate, in general, the Work for compliance with the information in the Contract Documents and with the design concept of the Project as a functioning whole as shown or indicated in the Contract Documents (unless there is a specific statement indicating otherwise). The use of any such term or adjective is not intended to and shall not be effective to assign to Engineer any duty or authority to supervise or direct the performance of the Work, or any duty or authority to undertake responsibility contrary to the provisions of Paragraph 9.09 or any other provision of the Contract Documents.

§1.02D The word “defective,” when modifying the word “Work,” refers to Work that is unsatisfactory, faulty, or deficient in that it:

a. does not conform to the Contract Documents; or

b. does not meet the requirements of any applicable inspection, reference standard, test, or approval referred to in the Contract Documents; or

c. has been damaged prior to Engineer’s recommendation of final payment (unless responsibility for the protection thereof has been assumed by Owner at Substantial Completion in accordance with Paragraph 14.04 or 14.05).

The C-700 goes on to define “perform” and “provide” as: “ when used in connection with services, materials, or equipment, shall mean to furnish and install said services, materials, or equipment complete and ready for intended use” in §1.02E3

EJCDC - §6.03B - Services, Materials, and Equipment - All materials and equipment incorporated into the Work shall be as specified or, if not specified, shall be of good quality and new, except as otherwise provided in the Contract Documents. All special warranties and guarantees required by the Specifications shall expressly run to the benefit of Owner. If required by Engineer, Contractor shall furnish satisfactory evidence (including reports of required tests) as to the source, kind, and quality of materials and equipment.

EJCDC §6.19

A. Contractor warrants and guarantees to Owner that all Work will be in accordance with the Contract Documents and will not be defective. Engineer and its officers, directors, members, partners, employees, agents, consultants, and subcontractors shall be entitled to rely on representation of Contractor’s warranty and guarantee.

B. Contractor’s warranty and guarantee hereunder excludes defects or damage caused by:

1. abuse, modification, or improper maintenance or operation by persons other than Contractor, Subcontractors, Suppliers, or any other individual or entity for whom Contractor is responsible; or

2. normal wear and tear under normal usage.

C. Contractor’s obligation to perform and complete the Work in accordance with the Contract Documents shall be absolute. None of the following will constitute an acceptance of Work that is not in accordance with the Contract Documents or a release of Contractor’s obligation to perform the Work in accordance with the Contract Documents:

1. observations by Engineer;

2. recommendation by Engineer or payment by Owner of any progress or final payment;

3. the issuance of a certificate of Substantial Completion by Engineer or any payment related thereto by Owner;

4. use or occupancy of the Work or any part thereof by Owner;

5. any review and approval of a Shop Drawing or Sample submittal or the issuance of a notice of acceptability by Engineer;

6. any inspection, test, or approval by others; or

7. any correction of defective Work by Owner.

Under the payment provisions of each of the three forms, by submitting its payment applications, the contractor also warrants that title to all of the work, equipment and/or materials furnished to the project and covered by that particular pay application will pass to the owner upon payment.[14]

Additional considerations should be addressed in negotiating the warranty and correction of work provisions. First, should the one-year call-back warranty run from the date of final completion or substantial completion? From the contractor’s perspective, it makes sense to run the warranty from substantial completion as that limits (and compared to the alternative, shortens) the call-back period. It also arguably is a fair result in that at substantial completion the work should be sufficiently complete. Owners, on the other hand, will push for final completion as that extends out the call-back warranty obligations, which inures to the benefit of the owner. For contractors, final completion under the contract is often delayed well past substantial completion due to payment tails and certifications that are designed to protect the owner from liens and claims. They view construction sufficiently complete for call-back purposes at substantial completion, and pushing it to start at final completion simply calls for a de facto one-year plus call-back warranty because corrective work which otherwise would be treated as call-back work under a substantial completion benchmark instead will be required up to the point of final completion as “punchlist” work. The owner may need to increase the value of this “extended” warranty in the negotiated price.

Second, both the owner and the contractor must be mindful of the potential gap in coverage between a manufacturer’s warranty and the start of the contractor’s warranty under the Contract Documents. Most manufacturer warranties will run upon date of delivery (varying between date shipped and date delivered to the site), whereas the contractor’s warranty will not start until substantial or final completion. Thus, for early installation items, the manufacturer’s warranty will be running well in advance of the contractor’s warranty, and, in turn, will run out before the expiration of the contractor’s warranty. At that point, the contractor that furnished or installed the defective item takes on the risk of the defect without recourse to the manufacturer for that timing difference (between the start of the manufacturer’s warranty and the start of the contractor’s warranty). Likewise, a project under delay with corresponding pushed out dates of completion will also widen this gap between the contractor’s warranty term and downstream supplier or manufacturer recourse when equipment may be shipped on time but installed late and started up even later still due to delays.

The contractor can attempt to draft around this gap liability by expressly limiting its warranty and carving out any manufacturer’s warranty. In short, to the extent a manufacturing defect or warranty issue arises, the owner agrees to pursue only its rights under the manufacturer’s warranty not the contractor’s warranty, thereby taking the contractor out of the loop on that liability item. The contractor may also try to extend out the manufacturer’s warranty beyond its original terms. However, even if the manufacturer agreed (presumably most major manufacturers would not be so inclined) such an extension would come at a price that would either have to be absorbed by the contractor or passed upstream to the owner. An owner looking to maximize its warranty protections will run the contractor’s warranty from final completion and make that warranty applicable to all manufacturer warranties as well.

Finally, the drafter must be cognizant of any implied warranties that survive by statute or common law. The law has always “implied” or assumed that certain terms and responsibilities exist between the contracting parties, even if they are not expressly stated. Many of these implied warranties apply (or may apply) to contractors, including: (a) the implied warranty of skill and fitness (workmanlike construction); (b) habitability (a new residential improvement will be habitable and fit for habitation); (c) duty not to hinder performance (neither party will hinder the other in his discharge of the obligations imposed upon him nor increase his cost of performance); (d) merchantability (goods are merchantable and fit for the ordinary purposes for which such goods are used); (e) and fitness for a particular purpose (the goods are fit for a particular purpose for which goods are required, the seller has reason to know that purpose, and buyer relies on seller's skill or judgment to select or furnish suitable goods). Nevertheless, these warranties can generally be disclaimed by express contractual terms and compliance with any applicable statutory procedure.

§ 3 Changes

The construction contract between the owner and contractor sets forth in detail the contractor's performance obligations, but the parties need flexibility to adapt the contract to actual construction conditions encountered. Although traditional contract law permits the parties to a contract to modify or change their arrangement by mutual agreement, in construction the owner needs to be able to unilaterally change the contract to accomplish his underlying purpose on the project.

The contractual mechanism in construction contracts for handling contract modifications or changes and claims for extra work in connection with them, is the “changes” clause. The “changes” clause entitles the owner to unilaterally direct changes in the work without the contractor's consent and without breaching the contract provided the change is within the general scope of the contract. For a proposed change to be “within the general scope” of the contract, the change in the work must be regarded as fairly and reasonably within the contemplation of the parties when they entered into the contract.

In exchange for this right to direct changes, the contractor is entitled to receive additional compensation for the changed or extra work. Both the contract price and the contract time to perform the work are subject to adjustment. The changes clause establishes the procedure for the owner to make a change and for the contractor to seek compensation for the changed work to be performed. Thus, the negotiation and drafting of the changes clause in many ways sets the stage for the contractor’s dilemma of how to address field performance claims for formal and/or constructive changes.

A typical “changes” clause is that found in Article 7 of the AIA A201 General Conditions of the Contract for Construction. The AIA documents identify three different types of changes: (1) Formal Change Orders (signed by both the owner and the contractor);[15] (2) Construction Change Directives (signed only by the owner and need not be signed by the contractor);[16] and (3) Field Orders (signed by the architect only - for minor changes in the work).[17] The formal change order is used when the parties are in agreement as to the scope and pricing of the change. The change directive is utilized when there is not total agreement on the terms of the change. Minor change orders, by definition, involve no adjustment to the contract price or time for performance.

Similarly, ConsensusDOCS refers to types of changes, primarily the Change Order and an Interim Directed Change:

ConsensusDOCS - §8.1 CHANGE ORDER

§8.1.1 The Contractor may request or the Owner may order changes in the Work or the timing or sequencing of the Work that impacts the Contract Price or the Contract Time. All such changes in the Work that affect Contract Time or Contract Price shall be formalized in a Change Order. Any such requests for a change in the Contract Price or the Contract Time shall be processed in accordance with this Article 8.

§8.1.2 The Owner and the Contractor shall negotiate in good faith an appropriate adjustment to the Contract Price or the Contract Time and shall conclude these negotiations as expeditiously as possible. Acceptance of the Change Order and any adjustment in the Contract Price or Contract Time shall not be unreasonably withheld.

ConsensusDOCS - §8.2 INTERIM DIRECTED CHANGE

§8.2.1 The Owner may issue a written Interim Directed Change directing a change in the Work prior to reaching agreement with the Contractor on the adjustment, if any, in the Contract Price or the Contract Time.

§8.2.2 The Owner and the Contractor shall negotiate expeditiously and in good faith for appropriate adjustments, as applicable, to the Contract Price or the Contract Time arising out of an Interim Directed Change. As the Changed Work is performed, the Contractor shall submit its costs for such work with its application for payment beginning with the next application for payment within thirty (30) Days of the issuance of the Interim Directed Change. If there is a dispute as to the cost to the Owner, the Owner shall pay the Contractor fifty percent (50%) of its estimated cost to perform the work. In such event, the Parties reserve their rights as to the disputed amount, subject to the requirements of Article 12.

§8.2.3 When the Owner and the Contractor agree upon the adjustment in the Contract Price or the Contract Time, for a change in the Work directed by an Interim Directed Change, such agreement shall be the subject of a Change Order. The Change Order shall include all outstanding Interim Directed Changes on which the Owner and Contractor have reached agreement on Contract Price or Contract Time issued since the last Change Order.[18]

The EJCDC C-700 also discusses changes and states that the Contract Documents can be amended by either a Change Order or a Work Change Directive, and that they may be supplemented to incorporate minor various in the Work generally by 1) a Field Order, 2) Engineer’s approval of a Shop Drawing or Sample, or 3) Engineer’s written interpretation or clarification.[19] The EJCDC change order procedure is set out in Article 10, while the concomitant change in contract price or time addressed in Article 12.

EJCDC – Article 10.01 Authorized Changes in the Work

A. Without invalidating the Contract and without notice to any surety, Owner may, at any time or from time to time, order additions, deletions, or revisions in the Work by a Change Order, or a Work Change Directive. Upon receipt of any such document, Contractor shall promptly proceed with the Work involved which will be performed under the applicable conditions of the Contract Documents (except as otherwise specifically provided).

B. If Owner and Contractor are unable to agree on entitlement to, or on the amount or extent, if any, of an adjustment in the Contract Price or Contract Times, or both, that should be allowed as a result of a Work Change Directive, a Claim may be made therefor as provided in Paragraph 10.05.

10.02 Unauthorized Changes in the Work

A. Contractor shall not be entitled to an increase in the Contract Price or an extension of the Contract Times with respect to any work performed that is not required by the Contract Documents as amended, modified, or supplemented as provided in Paragraph 3.04, except in the case of an emergency as provided in Paragraph 6.16 or in the case of uncovering Work as provided in Paragraph 13.04.B.

10.03 Execution of Change Orders

A. Owner and Contractor shall execute appropriate Change Orders recommended by Engineer covering: 1. changes in the Work which are: (i) ordered by Owner pursuant to Paragraph 10.01.A, (ii) required because of acceptance of defective Work under Paragraph 13.08.A or Owner’s correction of defective Work under Paragraph 13.09, or (iii) agreed to by the parties;

2. changes in the Contract Price or Contract Times which are agreed to by the parties, including any undisputed sum or amount of time for Work actually performed in accordance with a Work Change Directive; and 3. changes in the Contract Price or Contract Times which embody the substance of any written decision rendered by Engineer pursuant to Paragraph 10.05; provided that, in lieu of executing any such Change Order, an appeal may be taken from any such decision in accordance with the provisions of the Contract Documents and applicable Laws and Regulations, but during any such appeal, Contractor shall carry on the Work and adhere to the Progress

Schedule as provided in Paragraph 6.18.A.

Each of the three forms contains detailed procedures for pricing the changed work, addressing disputed changes and work directives, and entitlement to a change in contract time and/or price.[20] Generally, even if the contractor disputes an ordered change, it must proceed with the work seek recourse through the claims provisions of the respective contract.[21] Under the ConsensusDOCS, however, the Owner must pay the Contractor 50% of the estimated cost to complete the disputed work, whereas no such obligation exists under the AIA or EJCDC forms. This is an added protection to the contractor and benefits the owner as well by allowing the project to move forward while the parties figure out the details.[22]

The typical “changes” clause requires written authorization for the change. Likewise, there is a written authorization requirement in most subcontract forms. These clauses require that there be a written change order or directive before the commencement of the changed or revised work. Moreover, the existence of the change order or written authorization is typically a condition to the contractor's right to receive compensation for the extra work performed. It is imperative that the contractor be familiar with, and follows closely, this contract mechanism or procedure in order to receive an adjustment to the contract price and/or time.

Although not all courts have been so strict in interpreting the written change order requirement, opting instead to rely on the doctrines of waiver and subsequent verbal modification to overcome the impact of the writing requirement on the contractor’s claim, the general rule remains that the contractor who performs the work without a written directive to do so when the contract provides for a written change order may not have a legally enforceable claim.[23] Consequently, the writing and notice requirements articulated in a changes clause should be carefully reviewed by both the owner and contractor in negotiating the contract. Otherwise, the contractor will be left arguing that the requirement was waived – an argument that may or may not have viability.

One drafting consideration from the owner’s perspective is to include in the contract a requirement that the contractor must continue performance of the work, including any change work, pending the necessary modification of the contract sum or time. The reason for this is a recognition that changes are inevitable and that owners need to be protected against possible work stoppages and delays while negotiations over the contract sum and/or time are in progress. Standard contract language typically provides the owner or its architect and engineer the right to order the contractor to proceed with the disputed change work, unless the work at issue is so far beyond the scope of the contract as to constitute a cardinal change.

From the contractor’s perspective, it is important to clearly articulate who has authority on behalf of the owner to direct changes in the work. The reason for this is simple. If the contractor receives directions or instructions to perform changed work or extra work from an individual that does not have the requisite authority to do so, the owner may not be bound under traditional agency law. Consequently, the contractor may find that he has performed the work as a volunteer and may not receive any money for it. To manage this risk, the contractor should include in the contract a clear designation of authority of both the owner’s representative and project architect, as well as include a mechanism or timing provision that permits the contractor to verify authorization of a change or extra work order without violating the contractual duty to proceed with disputed work.

§ 4 Differing Site Conditions

Many times a contractor will experience differing site conditions from those anticipated or set forth in the plans and specifications. When the contractor encounters these conditions, he must have a means of receiving additional compensation in order to recover the resulting increased costs of performance. The contractual provision that allows recovery or adjustment in the contract price for differing site conditions is the “differing site conditions” clause.

From the contractor’s point of view, the need for this clause in the contract documents is essential because without it, the contractor may well be treated as having assumed the risk of the unforeseeable conditions and will have to bear the additional costs occasioned by that condition. In short, the “differing site conditions” clause eliminates the risk of not being compensated for unanticipated conditions encountered. The clause provides the contractor a means of getting a fair adjustment in his contract price if and when differing site conditions are encountered.

From the owner’s point of view, the presence of the clause eliminates the risk to the owner of receiving bids that are higher than may otherwise be necessary in order to cover unanticipated sub-surface or other differing site conditions that may or may not actually occur on the project. Because of the risk of encountering those conditions, a contractor has to build in some of his anticipated costs in his bid price. If the conditions are not encountered, then the owner has simply bought a more expensive project. With the “differing site conditions” clause, the owner must only pay for the increased cost of performance caused by differing site conditions if and when the contractor actually encounters these conditions and if the contractor complies with the notice requirements in the clause.

The respective points of view of both the contractor and owner obviously drive the drafting of the “differing site conditions” clause.[24] A good “differing site conditions” clause, however, should have two primary components: (a) a definition or delineation of qualifying unanticipated sub-surface or site conditions; (b) a clear expression of the contractor’s notice and time requirements for submitting a claim under the clause.

The AIA “differing site conditions” clause, set forth at ¶3.7.4 of the 2007 AIA General Conditions of the Contract for Construction (AIA Document A201, 2007 ed.), defines two types of conditions that trigger the protections of the clause. The first type, referred to as “Type One” conditions, are concealed conditions below the surface or other concealed physical conditions that are materially at variance with the conditions indicated in the contract documents. These are unforeseeable conditions. The second type, referred to as “Type Two” conditions, consist of unknown physical conditions of an unusual nature differing materially from those ordinarily found to exist and generally recognized as inherent in the particular type of construction. These are atypical conditions.

The AIA notice and time requirements have become more restrictive in the 2007 version of the AIA A201 General Conditions. Under the 1997 edition, the differing site conditions clause (located at ¶4.3.4), required prompt notice by the party observing the differing site condition (normally, this will be the contractor) to the other party before the conditions are disturbed and in no event later than 21 days after the first observance of the conditions. The architect is then required to investigate the site and determine whether a differing site condition is present. In the 2007 revisions (¶3.7.4), the notice obligations are placed squarely on the shoulders of the contractor, not the party that first observes the condition. The 2007 changes retain the 21-day notice requirement to the architect. However, there is no deadline by which the architect must make its determination or respond. As such, the contractor may be required to make a claim under the Article 15 claim deadlines before a determination has been made by the architect. The notice is not required to be in writing, but (at a minimum) it should be confirmed in writing.

Both the 2007 and the 1997 AIA A201 differing site conditions clauses tie into the “disputes” clause or claims clause to the extent that the contractor makes a claim for additional compensation or extension of time. If a dispute develops over whether a differing site condition has been encountered, or how it is to be paid for, a claim must be submitted by the Contractor to preserve his rights. Under the new 2007 AIA General Conditions, the disputes or claims clause is set forth in ¶15.1.4 for additional costs and ¶15.1.5 for additional time of Article 15 on Claims and Disputes, (AIA Document A201, 2007 ed.). Notice must be given of a contractor's claim within 21 days (¶15.1.2 of AIA A201 General Conditions).

By comparison, the ConsensusDOCS 200 differing site conditions clause, being §3.16.2, breaks down the types of conditions along the Type I and Type II definitions long utilized in the AIA documents. The ConsensusDOCS form provides that Type I (i.e., conditions different from the Contract Documents) and Type II (i.e., conditions different from those reasonably expected on a similar site) conditions can result in excusable and compensable claims in terms of time and money. (ConsensusDOCS 200 §3.16) The ConsensusDOCS differing site conditions clause similarly ties into the claims clause to the extent that the contractor makes a claim for additional compensation or extension of time.

ConsensusDOCS §3.16 WORKSITE CONDITIONS

§3.16.1 WORKSITE VISIT The Contractor acknowledges that it has visited, or has had the opportunity to visit, the Worksite to visually inspect the general and local conditions which could affect the Work.

§3.16.2 CONCEALED OR UNKNOWN SITE CONDITIONS If the conditions at the Worksite are (a) subsurface or other physical conditions which are materially different from those indicated in the Contract Documents, or (b) unusual or unknown physical conditions which are materially different from conditions ordinarily encountered and generally recognized as inherent in Work provided for in the Contract Documents, the Contractor shall stop Work and give immediate written notice of the condition to the Owner and the Architect/Engineer. The Contractor shall not be required to perform any work relating to the unknown condition without the written mutual agreement of the Parties. Any change in the Contract Price or the Contract Time as a result of the unknown condition shall be determined as provided in Article 8. The Contractor shall provide the Owner with written notice of any claim as a result of unknown conditions within the time period set forth in Paragraph 8.4.

ConsensusDOCS - §8.4 CLAIMS FOR ADDITIONAL COST OR TIME Except as provided in Subparagraph 6.3.2 and Paragraph 6.4 for any claim for an increase in the Contract Price or the Contract Time, the Contractor shall give the Owner written notice of the claim within fourteen (14) Days after the occurrence giving rise to the claim or within fourteen (14) Days after the Contractor first recognizes the condition giving rise to the claim, whichever is later. Except in an emergency, notice shall be given before proceeding with the Work. Thereafter, the Contractor shall submit written documentation of its claim, including appropriate supporting documentation, within twenty-one (21) Days after giving notice, unless the Parties mutually agree upon a longer period of time. The Owner shall respond in writing denying or approving the Contractor's claim no later than fourteen (14) Days after receipt of the Contractor's claim. Any change in the Contract Price or the Contract Time resulting from such claim shall be authorized by Change Order.

Under the ConsensusDOCS, the Contractor encountering a differing site condition must: (1) Provide the Owner with notice of the differing site condition immediately upon uncovering the condition; (2) Stop work; and (3) Wait until the parties reach a resolution as to how to handle the condition.[25]

The EJCDC C-700, §4.03, provides that if the Contractor finds any subsurface or physical condition that (1) may establish “technical data” on which the Contractor may rely, (2) will require a change in the Contract Documents, (3) differs materially from the Contract Documents, or (4) is of an unusual nature and different materially from conditions ordinarily encountered, the Contractor “shall, promptly after becoming aware thereof and before further disturbing the subsurface or physical conditions or performing any Work in connection therewith… notify the Owner and Engineer in writing.”[26] It further delineates how and under what circumstances the contractor may be entitled to an adjustment in contract price and/or time.

The major forms, AIA, ConsensusDOCS and EJCDC, provide guidance with respect to the type of conditions that trigger the protections of the “differing site conditions” clause, as well as the timing and notice requirements the contractor must comply with in order to seek recourse under that clause. However, additional issues sometimes arise in conjunction with a differing site conditions claim that stem from other contractual duties or provisions, such as the contractor’s duty to investigate the site, owner disclaimers and general notice requirements, all of which should be addressed prospectively through the drafting of the contract when considering and allocating the risks targeted by a differing site conditions clause.

First, most construction contracts provide that the contractor “acknowledges” his legal and contractual obligations to investigate the job site in order to become totally familiar with all job site physical conditions.[27] This obligation is set forth in what is referred to as the “site investigation” clause. In order to recover on a “differing site conditions” claim, the contractor must show that the condition was latent or not one which was reasonably anticipated by the plans and specifications. He cannot rely on site conditions indicated in the contract if a reasonable pre-bid site inspection would have revealed those conditions, and he is put on constructive notice of what a reasonable site inspection would reveal. Conversely, a site condition that could not be discovered through a pre-bid site visit by a reasonably prudent contractor can give rise to a differing site conditions claim.[28] However, such clauses require only a reasonable investigation, and they typically will not obligate the contractor to discover hidden subsurface conditions. While site investigation clauses do not totally shield the owner from claims due to unanticipated site conditions, they do provide a potential hurdle or gatekeeper function for the Owner for obvious site conditions. It also serves as a strong forewarning to the contractor of his investigation responsibilities.

Second, Owners often attempt to limit their exposure to liability by virtue of various disclaimers or exculpatory clauses, which are intended to disclaim any liability or responsibility for the accuracy of the plans and specifications, boring surveys or other subsurface data, or for subsurface conditions generally. Many courts have been reluctant to allow an owner to utilize exculpatory or disclaimer clauses to escape liability he would otherwise have under the differing site conditions clause in the contract.[29]

Third, as discussed above, notice requirements are an essential part of nearly every “differing site conditions” clause, and certainly the ConsensusDOCS, AIA and EJCDC standard clauses discussed herein. These clauses typically require that the contractor give immediate notice of a differing site condition when it is encountered and before it is disturbed. The purpose of the notice requirements is to allow the owner to determine whether a differing site condition in fact exists and to decide how the contract work should proceed from that point forward. If the contractor proceeds to perform the work and disturbs or destroys the conditions encountered without complying with the notice requirements to the owner, then the contractor may have waived his right to obtain an equitable adjustment in his contract price.[30] Thus, both the contractor and owner must look closely at the notice periods set forth in the contract, as modification to the notice requirements, (both within the “differing site conditions” clause itself and the general claims provision) may significantly impact the ability to recover on a differing site conditions” claim.

As a corollary to the differing site condition and issues related thereto, are the hazardous materials provisions. While separate and distinct from a differing site condition, these clauses are conceptually similar in that they constitute contractual risk allocations for unanticipated conditions encountered on the site, and will generally shift liability to the owner provided the contractor is not at fault and complies with the notice and protection provisions set forth in the contract. All three standard contract forms (ConsensusDOCS, AIA and EJCDC) contain extensive Hazardous Materials clauses that set forth the procedures to be followed when handling and/or encountering hazardous materials or environmental conditions on the project. They typically permit the contractor encountering a hazardous material or condition to immediately stop work, report the condition to the owner, architect/engineer or relevant agency, and await further directive as to how to proceed. They also generally provide grounds for a time extension, and/or adjustment in the contract price.

ConsensusDOCS - §3.13 HAZARDOUS MATERIALS

§3.13.1 A Hazardous Material is any substance or material identified now or in the future as hazardous under any federal, state or local law or regulation, or any other substance or material that may be considered hazardous or otherwise subject to statutory or regulatory requirement governing handling, disposal or cleanup. The Contractor shall not be obligated to commence or continue work until any Hazardous Material discovered at the Worksite has been removed, rendered or determined to be harmless by the Owner as certified by an independent testing laboratory and approved by the appropriate government agency.

§3.13.2 If after the commencement of the Work Hazardous Material is discovered at the Worksite, the Contractor shall be entitled to immediately stop Work in the affected area. The Contractor shall report the condition to the Owner, the Architect/Engineer, and, if required, the government agency with jurisdiction.

§3.13.3 The Contractor shall not be required to perform any Work relating to or in the area of Hazardous Material without written mutual agreement.

§3.13.4 The Owner shall be responsible for retaining an independent testing laboratory to determine the nature of the material encountered and whether the material requires corrective measures or remedial action. Such measures shall be the sole responsibility of the Owner, and shall be performed in a manner minimizing any adverse effects upon the Work. The Contractor shall resume Work in the area affected by any Hazardous Material only upon written agreement between the Parties after the Hazardous Material has been removed or rendered harmless and only after approval, if necessary, of the governmental agency with jurisdiction.

§3.13.5 If the Contractor incurs additional costs or is delayed due to the presence or remediation of Hazardous Material, the Contractor shall be entitled to an equitable adjustment in the Contract Price or the Contract Time.

EJCDC - §4.06 Hazardous Environmental Condition at Site

A. Reports and Drawings: The Supplementary Conditions identify those reports and drawings known to Owner relating to Hazardous Environmental Conditions that have been identified at the Site.

B. Limited Reliance by Contractor on Technical Data Authorized: Contractor may rely upon the accuracy of the “technical data” contained in such reports and drawings, but such reports and drawings are not Contract Documents. Such “technical data” is identified in the Supplementary Conditions. Except for such reliance on such “technical data,” Contractor may not rely upon or make any claim against Owner or Engineer, or any of their officers, directors, members, partners, employees, agents, consultants, or subcontractors with respect to:

1. the completeness of such reports and drawings for Contractor’s purposes, including, but not limited to, any aspects of the means, methods, techniques, sequences and procedures of construction to be employed by Contractor and safety precautions and programs incident thereto; or

2. other data, interpretations, opinions and information contained in such reports or shown or indicated in such drawings; or

3. any Contractor interpretation of or conclusion drawn from any “technical data” or any such other data, interpretations, opinions or information.

C. Contractor shall not be responsible for any Hazardous Environmental Condition uncovered or revealed at the Site which was not shown or indicated in Drawings or Specifications or identified in the Contract Documents to be within the scope of the Work. Contractor shall be responsible for a Hazardous Environmental Condition created with any materials brought to the Site by Contractor, Subcontractors, Suppliers, or anyone else for whom Contractor is responsible.

D. If Contractor encounters a Hazardous Environmental Condition or if Contractor or anyone for whom Contractor is responsible creates a Hazardous Environmental Condition, Contractor shall immediately: (i) secure or otherwise isolate such condition; (ii) stop all Work in connection with such condition and in any area affected thereby (except in an emergency as required by Paragraph 6.16.A); and (iii) notify Owner and Engineer (and promptly thereafter confirm such notice in writing). Owner shall promptly consult with Engineer concerning the necessity for Owner to retain a qualified expert to evaluate such condition or take corrective action, if any. Promptly after consulting with Engineer, Owner shall take such actions as are necessary to permit Owner to timely obtain required permits and provide Contractor the written notice required by Paragraph 4.06.E.

E. Contractor shall not be required to resume Work in connection with such condition or in any affected area until after Owner has obtained any required permits related thereto and delivered written notice to Contractor: (i) specifying that such condition and any affected area is or has been rendered safe for the resumption of Work; or (ii) specifying any special conditions under which such Work may be resumed safely. If Owner and Contractor cannot agree as to entitlement to or on the amount or extent, if any, of any adjustment in Contract Price or Contract Times, or both, as a result of such Work stoppage or such special conditions under which Work is agreed to be resumed by Contractor, either party may make a Claim therefor as provided in Paragraph 10.05.

F. If after receipt of such written notice Contractor does not agree to resume such Work based on a reasonable belief it is unsafe, or does not agree to resume such Work under such special conditions, then Owner may order the portion of the Work that is in the area affected by such condition to be deleted from the Work. If Owner and Contractor cannot agree as to entitlement to or on the amount or extent, if any, of an adjustment in Contract Price or Contract Times as a result of deleting such portion of the Work, then either party may make a Claim therefor as provided in Paragraph 10.05. Owner may have such deleted portion of the Work performed by Owner’s own forces or others in accordance with Article 7.

AIA - §10.3 HAZARDOUS MATERIALS

§10.3.1 The Contractor is responsible for compliance with any requirements included in the Contract Documents regarding hazardous materials. If the Contractor encounters a hazardous material or substance not addressed in the Contract Documents and if reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons resulting from a material or substance, including but not limited to asbestos or polychlorinated biphenyl (PCB), encountered on the site by the Contractor, the Contractor shall, upon recognizing the condition, immediately stop Work in the affected area and report the condition to the Owner and Architect in writing.

§10.3.2 Upon receipt of the Contractor’s written notice, the Owner shall obtain the services of a licensed laboratory to verify the presence or absence of the material or substance reported by the Contractor and, in the event such material or substance is found to be present, to cause it to be rendered harmless. Unless otherwise required by the Contract Documents, the Owner shall furnish in writing to the Contractor and Architect the names and qualifications of persons or entities who are to perform tests verifying the presence or absence of such material or substance or who are to perform the task of removal or safe containment of such material or substance. The Contractor and the Architect will promptly reply to the Owner in writing stating whether or not either has reasonable objection to the persons or entities proposed by the Owner. If either the Contractor or Architect has an objection to a person or entity proposed by the Owner, the Owner shall propose another to whom the Contractor and the Architect have no reasonable objection. When the material or substance has been rendered harmless, Work in the affected area shall resume upon written agreement of the Owner and Contractor. By Change Order, the Contract Time shall be extended appropriately and the Contract Sum shall be increased in the amount of the Contractor’s reasonable additional costs of shut-down, delay and start-up.

§10.3.4 The Owner shall not be responsible under this Section 10.3 for materials or substances the Contractor brings to the site unless such materials or substances are required by the Contract Documents. The Owner shall be responsible for materials or substances required by the Contract Documents, except to the extent of the Contractor’s fault or negligence in the use and handling of such materials or substances.

§ 5 Limitations of Liability

Waiver of Consequential Damages

Generally, the standard forms follow general and well-established trends in their approach to contractual limitations of liability. The AIA retains in its 2007 family of forms the mutual waiver of consequential damages. The ConsensusDOCS contain a limited waiver of consequential damages. The EJCDC form, in contrast, typically slants in favor of the engineer in its limitations on liability.

Although these mutual waivers (whether full or limited) have become commonplace in both standard and custom contract forms, the standard forms vary greatly in how they define or address the scope of damages waived as consequential damages. For example, the AIA clause does not delineate what types of damages fall within the waiver. In contrast, the ConsensusDOCS forms typically include the Owner’s loss of use, rental expenses, loss of income, profit or financing related to the Project, and the contractor’s and designer’s damages for loss of business, financing, profits (unrelated to the Project), overhead and expenses, loss of reputation, and loss of profits unrelated to the Project. The EJCDC forms generally offer a variety of liability limitation options – again, all of which tend to inure to the benefit of the designer.

ConsensusDOCS - §6.6 LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES Except for damages mutually agreed upon by the Parties as liquidated damages in Paragraph 6.5 and excluding losses covered by insurance required by the Contract Documents, the Owner and the Contractor agree to waive all claims against each other for any consequential damages that may arise out of or relate to this Agreement, except for those specific items of damages excluded from this waiver as mutually agreed upon by the Parties and identified below. The Owner agrees to waive damages including but not limited to the Owner's loss of use of the Project, any rental expenses incurred, loss of income, profit or financing related to the Project, as well as the loss of business, loss of financing, principal office overhead and expenses, loss of profits not related to this Project, loss of reputation, or insolvency. The Contractor agrees to waive damages including but not limited to loss of business, loss of financing, principal office overhead and expenses, loss of profits not related to this Project, loss of bonding capacity, loss of reputation, or insolvency. The following items of damages are excluded from this mutual waiver:

§6.6.1 The provisions of this Paragraph shall also apply to the termination of this Agreement and shall survive such termination. The Owner and the Contractor shall require similar waivers in contracts with Subcontractors and Others retained for the project.

AIA - §15.1.6 CLAIMS FOR CONSEQUENTIAL DAMAGES The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes

.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and

.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

EJCDC - §5.07 B & C - Waiver of Rights

B. Owner waives all rights against Contractor, Subcontractors, and Engineer, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for:

1. loss due to business interruption, loss of use, or other consequential loss extending beyond direct physical loss or damage to Owner’s property or the Work caused by, arising out of, or resulting from fire or other perils whether or not insured by Owner; and

2. loss or damage to the completed Project or part thereof caused by, arising out of, or resulting from fire or other insured peril or cause of loss covered by any property insurance maintained on the completed Project or part thereof by Owner during partial utilization pursuant to Paragraph 14.05, after Substantial Completion pursuant to Paragraph 14.04, or after final payment pursuant to Paragraph 14.07.

C. Any insurance policy maintained by Owner covering any loss, damage or consequential loss referred to in Paragraph 5.07.B shall contain provisions to the effect that in the event of payment of any such loss, damage, or consequential loss, the insurers will have no rights of recovery against Contractor, Subcontractors, or Engineer, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them.

Consequently, in drafting and negotiating a waiver of consequential damages clause, the definition of what damages are or are not considered “consequential” is of particular significance. While the waiver of any subset of damages by contract tends to be cause for any construction lawyer’s concern, the waiver of consequential damages warrant a frank discussion with both your client and the other party to identify the risks each are truly concerned about and what damages each seeks to avoid. More discussion on consequential damages is often well worth the effort.

“No Damages For Delay”

In an attempt to shield themselves against the potential for substantial dollar claims for delays, owners, with increasing frequency, are including a clause in their contracts that sets out that even if an excusable delay is encountered, no damages for delay will be paid to the contractor. This clause is known as a “no damages for delay” clause. The AIA (both the 1997 and 2007 editions), ConsensusDOCS and EJCDC standard forms do not contain such clauses. Under these forms the “no damages for delay” clause would be a completely manuscript term.

The effect of such a clause is to provide a time extension as the exclusive remedy to a delayed contractor, thereby eliminating the owner’s exposure to delay damages. From the Owner’s perspective, a “no damages for delay” clause is a major protective device against spiraling construction costs. From the contractor’s perspective, it is a major restriction on the ability of an injured party to recover increased costs not reasonably anticipated when the contract was entered into. In any event, no damages for delay clauses are typically enforced by the courts, which ultimately results of these types of clauses appearing in more and more agreements.

Nevertheless, because of the harshness of its effect, courts have fashioned some exceptions to the enforceability of a “no damages for delay” clause, which will likely stymie an otherwise well-drafted clause. The five more notable exceptions include:

(1) The delay is beyond the original contemplation of the parties at the time the contract was entered into;[31]

(2) The delay is for such a long period of time it becomes, in effect, an abandonment of the contract;

(3) The delay results from bad faith, misrepresentation, concealment, or arbitrary action by the owner;

(4) The delay is the result of the owner's active interference; and

(5) The delay is the result of the owner's inaction in the face of an implied duty to act (e.g., if the contractor was delayed when the State failed to secure a right-of-way necessary for the construction).[32]

Despite these exceptions, however, the cases addressing “no damages for delay” clauses have trended towards enforcement of the clauses. The underlying assumption of these decisions is that the contractor considered the likelihood of delays at the time of bidding and presumably extracted a higher price from the owner in return for agreeing to the “no damages for delay” clause, and the owner is entitled to the benefit of its bargain. In short, for the contractor, the presence of a “no damages for delay” clause will cause it to hedge against the risk of delay by factoring that contingency into its bid price. Consequently, the owner must consider whether the clause is always worth the extra cost? Alternatively, the owner may be able to control the contractor’s hedged risk through establishing control of contingencies.

When drafting a “no damages for delay” clause, it is imperative, first and foremost, that the clause clearly provides for an extension of time as the sole and exclusive remedy in the event of delay. Additionally, the parties should consider articulating the types of damages that constitute “delay damages” precluded by the “no damages for delay” clause. While a failure to adequately define the scope of damages precluded do so may not render the clause unenforceable, it will succeed in creating an ambiguity or fight over what is and is not covered under the clause.

Indemnity

Indemnification is a quintessential contractual risk allocation provision. The contractor agrees to indemnify the owner and the architect/engineer for certain acts or omissions on the part of the contractor and the contractor's subcontractors and suppliers. The contractor, in turn, normally requires the subcontractor’s suppliers and material men to indemnify the contractor.

As stated previously, an indemnification clause is intended to get one party to indemnify, defend and hold harmless another party for any negligence or other potential liabilities. This clause imposes three separate obligations: (1) the duty to indemnify against losses and damages; (2) the duty to hold harmless, which is akin to a contractual bar, and means agreeing to not pursue claims back against the party being indemnified; and (3) the duty to defend.

There are differing degrees of indemnity, all of which can be drafted into the terms of the agreement. Limited indemnity provides indemnification only for damages caused by the contractor’s (or indemnitor’s) sole negligence. Intermediate indemnity requires the contractor (indemnitor) to indemnify against all losses to the indemnitee even if that party may have also caused the harm. Broad form indemnity requires indemnification against losses to the indemnitee including those caused solely by the indemnitee.[33]

In the A201 General Conditions, the standard indemnity provision is set out in §3.18.[34] It is an intermediary type of indemnity provision, i.e., it requires indemnification against all losses from the one party even though the other party may be partly at fault also, but it does not require indemnification for losses caused solely by the party being indemnified. Section 3.18 and its subparts state:

AIA - §3.18.1 To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Section 3.18.

§3.18.2 In claims against any person or entity indemnified under this Section 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Section 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers’ compensation acts, disability benefit acts or other employee benefit acts.

While the typical indemnification clause like §3.18.1 deals with claims, damages, and losses involving personal injury or property damage, indemnification clauses may provide that the Contractor indemnify the Owner more than just personal injury and property loss. An expanded indemnification provision can include such other items as (1) damage to the Work itself or to the existing real property, (2) contractual performance losses, (3) economic loss damages; and (4) attorney fees.

The ConsensusDOCS Indemnity Clause states:

ConsensusDOCS - §10.1 INDEMNITY

§10.1.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, the Owner's officers, directors, members, consultants, agents and employees, the Architect/Engineer and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured under Subparagraph 10.3.1, including reasonable attorneys' fees, costs and expenses, that may arise from the performance of the Work, but only to the extent caused by the negligent acts or omissions of the Contractor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Contractor shall be entitled to reimbursement of any defense costs paid above Contractor's percentage of liability for the underlying claim to the extent provided for under Subparagraph 10.1.2.

§10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Contractor, its officers, directors, members, consultants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured under Subparagraph 10.3.1, including reasonable attorneys' fees, costs and expenses, that may arise from the performance of work by Owner, Architect/Engineer or Others, but only to the extent caused by the negligent acts or omissions of the Owner, Architect/Engineer or Others. The Owner shall be entitled to reimbursement of any defense costs paid above Owner's percentage of liability for the underlying claim to the extent provided for under Subparagraph 10.1.1.

§10.1.3 NO LIMITATION ON LIABILITY In any and all claims against the Indemnitees by any employee of the Contractor, anyone directly or indirectly employed by the Contractor or anyone for whose acts the Contractor may be liable, the indemnification obligation shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for the Contractor under Workers' Compensation acts, disability benefit acts or other employment benefit acts.[35]

While EJCDC provides the following indemnification clause:

EJCDC - §6.20 Indemnification

A. To the fullest extent permitted by Laws and Regulations, Contractor shall indemnify and hold harmless Owner and Engineer, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them from and against all claims, costs, losses, and damages (including but not limited to all fees and charges of engineers, architects, attorneys, and other professionals and all court or arbitration or other dispute resolution costs) arising out of or relating to the performance of the Work, provided that any such claim, cost, loss, or damage is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property (other than the Work itself), including the loss of use resulting therefrom but only to the extent caused by any negligent act or omission of Contractor, any Subcontractor, any Supplier, or any individual or entity directly or indirectly employed by any of them to perform any of the Work or anyone for whose acts any of them may be liable .

B. In any and all claims against Owner or Engineer or any of their officers, directors, members, partners, employees, agents, consultants, or subcontractors by any employee (or the survivor or personal representative of such employee) of Contractor, any Subcontractor, any Supplier, or any individual or entity directly or indirectly employed by any of them to perform any of the Work, or anyone for whose acts any of them may be liable, the indemnification obligation under Paragraph 6.20.A shall not be limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable by or for Contractor or any such Subcontractor, Supplier, or other individual or entity under workers’ compensation acts, disability benefit acts, or other employee benefit acts.

C. The indemnification obligations of Contractor under Paragraph 6.20.A shall not extend to the liability of Engineer and Engineer’s officers, directors, members, partners, employees, agents, consultants and subcontractors arising out of:

1. the preparation or approval of, or the failure to prepare or approve maps, Drawings, opinions, reports, surveys, Change Orders, designs, or Specifications; or

2. giving directions or instructions, or failing to give them, if that is the primary cause of the injury or damage.[36]

In addition to the “standard” indemnity clauses set forth above, the new contract templates impose indemnity obligations in conjunction with the handling of hazardous materials encountered on, or brought onto, the project. All three standard contract forms (ConsensusDOCS, AIA and EJCDC) have extensive Hazardous Materials clauses that impose additional indemnity obligations that should be taken into consideration in drafting and negotiating the contract.

The 2007 edition of the AIA A201, at ¶10.3.3, ¶10.3.5 and ¶10.3.6, requires the Contractor to indemnify the Owner for the costs and expenses the Owner incurs (1) for remediation of material that the Contractor brings to the site and negligently handles; or (2) where the Contractor fails to perform its obligations under §10.3.1 (dealing with Contractor encountered hazardous material or substance “not addressed in the Contract Documents”), except to the extent that the costs and expenses are due to the Owner’s fault or negligence.[37] This marks a fundamental shift from its 1997 predecessor, where the risk for hazardous materials was on the Owner.

The ConsensusDOCS, §3.13.6, in contrast, provides that the Owner must indemnify the Contractor (as well as its subcontractors) for all claims, damages, etc. “arising out of or relating to the performance of the Work in any area affected by Hazardous Material.”[38] The Contractor’s or subcontractor’s negligence obviates this indemnity obligation of the Owner.

The EJCDC document, (§4.06(G) and §4.06(H), include reciprocal indemnification requirements similar to those created under the AIA documents. The Owner must indemnify the Contractor for any claims or damages “arising out of or relating to a Hazardous Environmental Condition, provided that such Hazardous Environmental Condition: (i) was not shown or indicated in the Drawings or Specifications or identified in the Contract Documents to be included within the scope of the Work, and (ii) was not created by Contractor or by anyone for whom Contractor is responsible.”[39] The Contractor must indemnify the Owner for any claims or damages “arising out of or relating to a Hazardous Environmental Condition created by Contractor or by anyone for whom Contractor is responsible.”[40]

From the contractor’s viewpoint, the primary goals in negotiating an indemnification clause upstream with the owner are as follows:

(1) Eliminate the duty to defend the indemnified party. The defense obligation is a separate and distinct obligation from the duties to indemnify and hold harmless. The duty to defend commences immediately even while the underlying issue of fault is resolved through litigation or arbitration. Also, by eliminating the duty to defend while the lawsuit or proceeding is ongoing, the contractor keeps everyone at risk until the final adjudication or decision, which allows the contractor to maintain a better negotiating position on the claim.

(2) Limit the scope of the indemnity obligation. Limiting the scope of the clause to personal injury and personal or tangible property damage claims results in not only a reduced risk window but it also brings the claims within the coverage of the typical CGL insurance of the contractor. Conversely, the contractor should seek to avoid indemnifying against economic loss damages, contract breaches, or damages to real property or improvements, i.e., the work itself.

(3) Eliminate attorney fees and expert fees from the indemnity obligation. This can be a significant cost on top of the underlying loss or damages being indemnified. From the contractor’s perspective, each party can bear its own costs of defense. Including the expert fees in the exclusion likewise is beneficial because these costs can easily reach six figures on a major loss.

(4) Limit indemnity to a pro-rata or comparative indemnity or causation. The contractor wants to be responsible only to the extent that it is determined to be at fault. This will significantly narrow and lower the indemnity cost. It also avoids the dilemma that the standard industry type of intermediate indemnity clause creates of a situation where the contractor is 20% at fault and the Owner or other parties to be indemnified are 80% at fault. Under an intermediate standard indemnification clause, even though the parties to be indemnified are 80% at fault, the contractor has to indemnify them all, in full. If there is a pro-rata or comparative indemnity obligation, the contractor will only be responsible for 20% of the loss or damages incurred.

(5) Watch for hidden indemnity obligations elsewhere in the Contract Documents. Often provisions dealing with lien claims, hazardous materials, or environmental risks on site, site safety (including OHSA citations and fines), code or regulatory compliance violations, and assumed design liability if there is a design build component to the work, can all impose an indemnity obligation on the contractor separate and distinct from the formal indemnification article.

(6) Finally, flow down the risk. It is imperative that the contractor expressly references the indemnification clauses and obligations in the “assumption of duties” and “flow down” obligations of the subcontract(s). Otherwise, the contractor runs the risk of a reviewing court/panel interpreting the indemnity clause as not otherwise being included in the subcontract because it is not expressly referenced.

§ 6 Force Majeure

As a general rule, a contractor is liable for all costs incurred by an owner as a result of the contractor's unexcused delay in completing a project. Delays for which the contractor does not assume responsibility in the contract are called “excusable” delays. Excusable delays usually include delays for which the owner is responsible as well as delays specifically excused by the contract that are not attributable to anyone's fault. The former are compensable, the latter are not. The presence of an excusable delay clause in the construction contract is critical to the contractor. If a delay is excusable under the contract terms, the contractor need not pay the owner damages for the late completion and is entitled to a time extension to complete the contract.

Force majeure is a type of excusable delay. Force majeure is the concept of excusing contractual performance as a result of unforeseen circumstances. Although force majeure clauses usually encompass extraordinary events identified as “Acts of God,” the actual application of the term may have a much wider or narrower scope, depending on the wording of the specific contract clause at issue.[41] Defined more simply, the term force majeure is an unforeseen, supervening event beyond the owner’s or contractor’s control.[42]

The force majeure doctrine is typically used to excuse performance in the context of a project delay, rather than as support for a delay claim. Over time, and depending on the jurisdiction, the doctrine of force majeure has morphed or developed into “physical impossibility,” then “frustration of purpose,” and (more recently) to “commercial impracticability.”[43] These arguments are most frequently used in the context of material price escalation cases, and they will be discussed in more detail below.

The purpose of the force majeure clause in a contract is to (1) allocate risk and (2) provide notice to the parties of events that may suspend or excuse performance. Typical force majeure events included in contract clauses are bad weather, war, Acts of God, and political risks. Generally, these clauses are structured to allow for an extension of time, but not necessarily a price or equitable adjustment.

The industry standard documents typically include a force majeure clause, or the equivalent. For example, the ConsensusDOCS, EJCDC and AIA standard contract documents all include a “force majeure clause” as part of their respective general delays and extension of time article, but do not use the force majeure label.

Sample clauses from ConsensusDOCS 200, EJCDC C700 and AIA A201 include:

ConsensusDOCS - §6.3 DELAYS AND EXTENSIONS OF TIME

§6.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of the Contractor, the Contractor shall be entitled to an equitable extension of the Contract Time. Examples of causes beyond the control of the Contractor include, but are not limited to, the following: acts or omissions of the Owner, the Architect/Engineer or Others; changes in the Work or the sequencing of the Work ordered by the Owner, or arising from decisions of the Owner that impact the time of performance of the Work; transportation delays not reasonably foreseeable; labor disputes not involving the Contractor; general labor disputes impacting the Project but not specifically related to the Worksite; fire; terrorism, epidemics, adverse governmental actions, unavoidable accidents or circumstances; adverse weather conditions not reasonably anticipated; encountering Hazardous Materials; concealed or unknown conditions; delay authorized by the Owner pending dispute resolution; and suspension by the Owner under Paragraph 11.1. The Contractor shall submit any requests for equitable extensions of Contract Time in accordance with the provisions of Article 8.

EJCDC - 12.03 Delays

A. Where Contractor is prevented from completing any part of the Work within the Contract Times due to delay beyond the control of Contractor, the Contract Times will be extended in an amount equal to the time lost due to such delay if a Claim is made therefor as provided in Paragraph 12.02.A. Delays beyond the control of Contractor shall include, but not be limited to, acts or neglect by Owner, acts or neglect of utility owners or other contractors performing other work as contemplated by Article 7, fires, floods, epidemics, abnormal weather conditions, or acts of God.

...

C. If Contractor is delayed in the performance or progress of the Work by fire, flood, epidemic, abnormal weather conditions, acts of God, acts or failures to act of utility owners not under the control of Owner, or other causes not the fault of and beyond control of Owner and Contractor, then Contractor shall be entitled to an equitable adjustment in Contract Times, if such adjustment is essential to Contractor’s ability to complete the Work within the Contract Times. Such an adjustment shall be Contractor’s sole and exclusive remedy for the delays described in this Paragraph 12.03.C.

AIA §8.3.1 – DELAYS AND EXTENSIONS OF TIME If the Contractor is delayed at any time in the commencement or progress of the Work by an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner; or by changes ordered in the Work; or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes beyond the Contractor’s control; or by delay authorized by the Owner pending mediation and arbitration; or by other causes that the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine.

AIA - § 8.3.2 Claims relating to time shall be made in accordance with applicable provisions of Article 15.

AIA - § 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.

Enforceability of a force majeure clause is determined by the intent of the parties, which is evidenced by the language in the contract.[44] The specificity of the force majeure clause is crucial when seeking to excuse nonperformance. A party will typically only be excused from performance if the clause itself specifically and expressly includes the event alleged to have prevented performance.

Generally, the parties are free to define force majeure events however they wish. The contractor will push for a broad definition of force majeure events, such as inclement weather. The owner, on the other hand, will want a very tight or narrow definition of force majeure. For example, the owner should condition the inclusion of inclement weather as a force majeure event on the contractor’s ability to establish that the weather was severe or unusual enough that it would not normally be expected in the area. However, the owner should be mindful of the likely premium in the contract price the owner will pay if it wants a contractor to assume the risk of any force majeure event on a project, as the Contractor will add contingencies into his bid price. Due to the number of risks involved in the performance of a contract, parties typically agree to a broad, general force majeure clause. Both parties should take into consideration the relief sought – affirmative claim relief (i.e. recovery of increased costs), an extension of the contract time, or both.

§ 7 Price Escalation Clauses

Material price increases has been a hot button issue in the construction industry with steel and copper in recent years as the cost of materials experienced dramatic and sudden spikes due to increased consumption, shortages of raw materials, and limited shipping capacity.

Many contractors faced severe financial consequences as a result of the increases, and were forced to seek price adjustments to their contracts, which in most cases did not have price escalation clauses for that purpose. General Contractors with their subcontractors and Owners fought to enforce their fixed price contracts. The general rule is that without a price escalation clause, the contractor bears the financial risk of increased material prices.[45]

There are three different types of escalation clauses, each based upon a different method of pricing the material increase: the invoice method, the index method, and the combination method.[46] Under the invoice method, bids, quotes, invoices or letters from the supplier are used to substantiate the material price escalation from the time the contract was signed to the time of the actual purchase. Under the index method, a designated price index guide, such as that of the U.S. Department of Labor or MEPS (International), Ltd., is used to determine changes in price. Under the combination method, the parties agree on a contract price based upon the contractor’s estimate for the raw materials from the supplier. At the time that the contractor actually purchases the raw materials, if the supplier’s price has increased by more than a specified percent (e.g., 5%), that increase is added to the contract price, but the contractor absorbs the initial price (i.e., up to 4.99%).[47] None of the three standard form documents discussed herein have specific price escalation clauses. However, all three forms are designed so that they can be modified to fit each project’s and its parties’ needs.

Additionally, in drafting a price escalation clause, both parties must review all contract terms in the context of a price escalation issue, as there may be other clauses that are general or broad enough to encompass price increases such as the changed conditions clause. Also, from a contractor perspective, be aware of express clauses that prevent recovery for increased price increases and specifically state that a contractor assumes the risk for increased materials costs.

§ 8 Liquidated Damages

Proving the amount of delay damages is often a difficult task. For that reason, contracts frequently include a provision for “liquidated damages” to be calculated on a per diem basis for every day that completion is delayed. In that regard, liquidated damages are basically a pre-arranged fixed amount of damages assessed for each day of delay. For example, a contractor who is five days late in finishing a project under a contract that has a $1,000.00 per day liquidated damages clause will be liable to the owner in the amount of $5,000.00, regardless of what the owner's actual damages may be.

Liquidated damages clauses can be beneficial to an owner who otherwise may have difficulty in precisely proving its actual losses. This is particularly true in the case of a public owner, which would not typically have lost profit or lost use types of damages. Conversely, while often in the minority of situations, liquidated damages actually can be equally useful to the contractor by limiting the contractor’s exposure for actual delay damages, which can sometimes far exceed the per diem amount. Liquidated damages clauses may also serve to cap the takeover surety’s liability for delay damages, shielding the surety against exposure of the owner’s claims for consequential delay damages.[48]

The ConsensusDOCS form makes liquidated damages available to the parties as an option to be selected by the parties:

ConsensusDOCS - §6.5 LIQUIDATED DAMAGES

§6.5.1 SUBSTANTIAL COMPLETION The Owner and the Contractor agree that this Agreement _____ shall/_____ shall not (indicate one) provide for the imposition of liquidated damages based on the Date of Substantial Completion.

§6.5.1.1 The Contractor understands that if the Date of Substantial Completion established by this Agreement, as may be amended by subsequent Change Order, is not attained, the Owner will suffer damages which are difficult to determine and accurately specify. The Contractor agrees that if the Date of Substantial Completion is not attained the Contractor shall pay the Owner __________ Dollars ($__________) as liquidated damages and not as a penalty for each Days that Substantial Completion extends beyond the Date of Substantial Completion. The liquidated damages provided herein shall be in lieu of all liability for any and all extra costs, losses, expenses, claims, penalties and any other damages of whatsoever nature incurred by the Owner which are occasioned by any delay in achieving the Date of Substantial Completion.

§6.5.2 FINAL COMPLETION The Owner and the Contractor agree that this Agreement _____ shall/_____ shall not (indicate one) provide for the imposition of liquidated damages based on the Date of Final Completion.

§6.5.2.1 The Contractor understands that if the Date of Final Completion established by this Agreement, as may be amended by subsequent Change Order is not attained, the Owner will suffer damages which are difficult to determine and accurately specify. The Contractor agrees that if the Date of Final Completion is not attained the Contractor shall pay the Owner __________ Dollars ($ __________) as liquidated damages and not as a penalty for each Days that Final Completion extends beyond the Date of Final Completion. The liquidated damages provided herein shall be in lieu of all liability for any and all extra costs, losses, expenses, claims, penalties and any other damages of whatsoever nature incurred by the Owner which are occasioned by any delay in achieving the Date of Final Completion.

§6.5.3 OTHER LIQUIDATED DAMAGES The Owner and the Contractor may agree upon the imposition of liquidated damages based on other project milestones or performance requirements. Such agreement shall be included as an exhibit to this Agreement.

In contrast, the AIA and EJCDC forms contemplate the inclusion of a liquidated damages provision in the Contract Documents, but only as a manuscript clause.[49]

There is a judicial reluctance to rewrite the parties' negotiated terms of contract, including a liquidated damages clause, which is an expression of the parties’ determination of the economic impact of delay. Therefore, as a general rule, courts will enforce liquidated damages clauses so long as the damages are not viewed as a penalty.[50] Whether the provision is upheld or is deemed to be unenforceable as a penalty depends upon the particular circumstances surrounding each contract. If the liquidated damages are grossly disproportionate to the actual damages sustained by the aggrieved party, or are unreasonable or unconscionable in excess of the loss sought to be avoided, the damages will be considered as a penalty, and the liquidated damages clause will not be enforced.[51]

Thus, in negotiating a liquidated damages provision, the per diem amount must be proportionate to the estimated actual damages that could be sustained by the owner. While the parties will obviously not have concrete supporting data for actual damages, it is good business practice to incorporate into the clause and per diem amount some basis or supporting data for their ascertainment, as this is an obvious ground for attack in enforcing the clause.

§ 9 Incentive Clauses

In contrast to liquidated damages provisions, which seek to “incentivize” performance with penalties, incentive clauses encourage early or cost efficient performance with monetary rewards. There are two basic types of incentive clauses – the early completion bonus and a shared savings provision.

The early completion bonus provides a monetary incentive to the contractor to complete its work prior to the contractual completion date. Both the need for an early completion bonus and the structure of the arrangement are driven by the value of early completion of the project to the owner. For example, on road projects or major retail construction, the owner has both political and pecuniary motives for opening the project early. Incentive clauses can be structured a number of ways. The incentive can be either a lump sum amount based upon a benchmark early completion date, or a per diem amount allotted for each day prior to the contractual completion date. In the case of the latter, the clause operates as almost a reverse liquidated damages provision. Also, some owners will place a cap on the total incentive amount.

It is important to note that typically there is no sharing of the savings of early completion under an early completion clause. The contractor receives all of the monetary benefit. The owner receives its project earlier.

The second common type of incentive clause is the shared savings clause. This type of clause is often used in conjunction with a cost plus contract or GMP. If the contractor brings the project to completion under a pre-set cost threshold, the shared savings compared to the original project budget or fee is realized as an incentive. From a contract-drafting standpoint, the key is what happens to the shared savings? Are they shared with the owner or do they inure solely to the contractor?

The industry standard forms typically do not include incentive clauses in the base agreements. However, some of the new integrated or collaborative documents do incorporate a pain-share, gain-share concept.

Conclusion

As the above issues demonstrate, there is no singular approach to these key contract clauses. The final negotiated clause will be driven by the parties’ perspective (including their prior project experience in working under one or more sets of industry forms), risk philosophies and processes, the circumstances of the given project, and the parties’ relative bargaining power. While the latter can certainly dictate less desirable results for the contractor, an understanding of the key issues and attendant risk in those issues can help both parties to better draft a construction contract that effectively, and acceptably, manages that risk consistent with each participant’s risk assessment techniques, philosophies and management processes. Although the industry forms provide guidance for many of the clauses discussed, this is not always the case. When combined with the fact that most industry templates are significantly modified, such an understanding of the issues and attendant risk become ever more important.