The Role of Contract Review in Preventing Construction Disputes

by Tooey Courtmanche CEO on LinkedIn Pulse

Complexity spawns disputes, and construction today is increasingly complex. Bringing together a wide range of disparate materials and processes, and blending them to create a final project that meets the original scope and budget, is a monumental task. It takes the good will and efforts of countless organizations and their staff.

Construction disputes come with price tags that include costs in time, money and resources. The average bill on a global basis in 2013 averaged $32.1 million per dispute, according to ARCADIS, global natural and built-asset design and consultancy firm. In the U.S., dispute values hit $34 million, a threefold increase over 2012.

Using a project management solution like Procore can allow you to limit disputes by using the advanced communications, record keeping and scheduling tools available to you. There is a contractual side to minimizing disputes though. The ARCADIS report listed five primary reasons for disputes developing, three of which were directly related to contracts.

Dispute Triggers

Topping the list of reasons for disputes in the U.S. was incomplete contract documents, followed by inflexibility in granting interim awards for time extensions and payments. Site conditions, incomplete design or employer requirements, and incorrect administering of the contract, rounded out the top-five list. Some dispute causes have changed little over the years.

More than 20 years ago, Michael V. Griffin, then Senior Vice President of Hill International Inc., talked about the importance of contract administration saying, “There is no substitute for what I call aggressive contract administration” by construction players on the provider side. He emphasized thoroughly understanding not only the terms and conditions of the contract, but also the “day-to-day events and issues of the project.” Interestingly, “failure to properly administer the contract” wasn’t on the top-five list compiled by ARCADIS in 2012, but reappeared in 2013.

Project managers, superintendents, and other managers dealing with the day-to-day operations of a project are on the front lines of contract administration. There are specific areas of construction contracts that pose the greatest threats for disputes, and by reading them you can spot potential trouble areas that you can flag for attention by your legal counsel.

It’s All in the Contract

In his paper, “A Tactical Guide to Avoiding Construction Contract Disputes,” Wally Zimolong, Esq., a construction litigation attorney, names seven of the construction contract clauses where he sees the greatest amount of litigation. Not surprisingly, scope, price and time top the list.

When you first read the contract, pay attention to what is required of you. It might sound simplistic, but all too often construction contracts are written with very broad scopes. If your proposal doesn’t match what’s being required of you in the scope, then some adjustments should be made. At a minimum, you should note the differences and check with your legal counsel. Similarly, the price should accurately reflect the total amount you intend to charge. Is there a completion date and if so, is it realistic based on what you know the scope to be? If a schedule has been prepared, how accurately do the two line up?

Another issue with scope in contract documents is the prevalence of documents being reused from one project to the next. These broadly worded contracts can include cut and paste artifacts that have nothing to do with the project at hand. They can also include language that shifts responsibility and risk from the other party to you. Look for wording that makes blanket requirements or that limits your ability to make valid claims. Also check to make sure the project delivery method is one that would work well for the project, and one that matches your assumptions.

Time Bomb Clauses

The “no damage for delay clause” is a particularly contentious contract clause and is often in contract documents at bid time. By bidding, you are accepting the limits it imposes and proves in court that you’re due delay damages. According to the law offices of Crawford & Bangs, enforcement of the clause is sporadic and often dependent on the circumstances surrounding the delay.

Another type of clause that creates many disputes is the kind that attempts to make the contractor responsible for the quality of design documents. These clauses usually appear in the bid documents so you have to carefully consider their effects. In their simplest form, the contractor guarantees the plans are adequate for providing a price and building the project. More complex examples require the contractor to certify the guaranteed maximum price won’t be exceeded.

Other clauses needing careful consideration relative to disputes are termination for convenience, obligation to continue work, changed conditions and dispute resolution.

Eliminating disputes in construction replaces adversarial relationships with cooperative ones. With so many players having to watch out for self-interest motives, an interim approach is to be sure at the beginning of the project, that everyone is clear on their contractual responsibilities. Read your contracts, understand them and if in doubt, check with legal counsel.

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