November 27, 2013

If you are responsible for a high volume of construction projects for your company’s corporate facilities, and have experienced any of the following problems, then this article is addressed to you:

• The construction contract with the prime contractor is not executed before the contractor’s work begins.
• Whenever you issue a Request for Proposal soliciting bids from contractors, the contract with the winning bidder is not fully negotiated and executed within one week after the work is awarded.
• The design professional’s obligations under the design agreement are inconsistent with the design professional’s responsibilities in the construction contract.
• Contracts are developed from different templates so that those responsible for administering the contracts are forced to follow different procedures from project to project.

The purpose of this article is to help you overcome these problems, thereby improving your construction contracting process and project administration.

Advisability of Creating Your Own Forms
The first step you should take is to create your own set of forms for design, construction and consulting agreements. Given the high volume of construction projects your company undertakes, it is more than likely that your own form of agreement will be acceptable to the contracting parties, especially if you make it clear that you are using your form agreements for all parties on all projects. Once your own set of documents is in place, your project team’s administration of projects and agreements will be made much more efficient because administrative matters such as the payment application process, change order procedures, dispute resolution and delivery of notices will be uniform throughout all projects. You will also avoid the pitfalls of having agreements in different disciplines not correspond to one another, which can occur if you use a non-AIA form of architect’s agreement, for example, with an AIA form of construction contract. In such a situation, the architect may be responsible for certain tasks in the construction contract that the architectural agreement does not require it to perform.

Creating Templates
For ease of drafting and administration, it would, of course, be ideal if you could create one form agreement to be utilized for all types of projects. But doing so presents you with the unfortunate choice of simplifying the form to adapt it for smaller projects, and thereby diluting its effectiveness for larger projects, or retaining a more comprehensive version, which would prolong negotiations needlessly on smaller projects.

To resolve this dilemma, your library of forms should contain the following four variations of the same agreement:

• Purchase Order
• Short Form Agreement
• Basic Agreement
• Major Projects Agreement

The level of agreement to be employed for a particular project will depend on a number of factors, such as the complexity of the scope, duration of the project and cost of construction. As a general guide:

• Purchase Orders will be used for work with a simple scope, a short duration, usually measured in days or weeks, and a cost which is typically less than $100,000. A Purchase Order is more common for construction work than design services, but can be tailored to accommodate such services.
• Short Form Agreements should be utilized when the work is relatively minor but more complex than the type of work covered by a Purchase Order. While the scope is still fairly basic, the duration will more likely be measured in weeks or months and the cost will generally be more than $100,000. In some cases, the “sensitivity” of the work (i.e., involving critical systems or structural elements) may dictate the use of the Short Form Agreement instead of a Purchase Order.
• Basic Agreements are intended for use on more substantial projects, which include major interior or exterior renovations, build-out of new office space, and replacement of entire operating systems or structural elements. This form of agreement is appropriate for all projects except for ground-up construction of new facilities.
• Major Project Agreements should be reserved for ground-up construction of new facilities.  They will address issues that may receive little or no treatment in the other agreements, such as the owner’s retention of separate contractors, site logistics, wraparound insurance programs, governmental incentive requirements, excavation, utility infrastructure and connections, perimeter fencing and related site security, field shanties and offices, cranes and street traffic restrictions, among others.

When creating your set of template agreements, it is important to make sure that they are coordinated with one another so that the terminology and practices and procedures are integrated throughout all agreements. One of the most critical aspects to coordinate is the responsibility of the design professionals so that their role as depicted in the construction contracts corresponds to their obligations in the design agreements. Uniformity among agreements will also facilitate your team’s administration of projects, both within each project and among all projects, especially in such areas as submittal review, payment procedures, insurance requirements, the project manager’s role, change orders, notice delivery methods and as-built drawings and other close-out deliverables.

It is also important to obtain input from your project personnel responsible for administering the contract so that their practices and procedures are reflected accurately in the contract.

Once your templates have been created, you should not assume your work is over. The templates should be reviewed regularly, say, every six months or so, for a few reasons:

• You want to ensure that the agreements take into account changes in law or practice that may have occurred since they were last revised.
• Once your company has gained significant experience negotiating the template agreements, you may want to revise them to modify certain terms which may have consistently presented obstacles to consummating the negotiations.
• Changes in your company’s policies or procedures may necessitate revisions to the templates.

Master/On-Call Agreements with LetterAgreements
In order to streamline the contracting process for multiple projects, you should consider the use of "master" or “on-call” agreements, which are intended to be used when you plan on retaining a particular contractor for more than one project. Instead of entering into a new agreement with that contractor (or design professional or consultant) for each project, you will execute an on-call agreement which contains the basic terms and conditions applicable to all such projects. If appropriate, you can also fix the compensation formula in the on-call agreement.

To engage the contractor for a specific project, you will enter into a letter agreement with the contractor (in the form annexed as an exhibit to the on-call agreement), which will provide that all of the terms and conditions of the on-call agreement are deemed incorporated into the letter agreement except if and to the extent otherwise stated in the letter agreement. To tailor the letter agreement for the project, you will need to complete designated information either in the body of the letter or on exhibits attached thereto, such as the project description and location, scope of work or services, project or work schedule, compensation and key personnel to be dedicated to the project.

Bidding Process
When soliciting bids from contractors, design professionals or consultants who have not executed on-call agreements, you should include the form of agreement in the bid package and require that the bidder provide all of its comments on the agreement as part of its proposal. There are a few reasons for this practice:

• While pricing and other business terms stated in a bidder’s proposal are certainly critical factors in leveling bids, the bidder’s proposed changes to the contract terms can have a considerable impact on such business issues as the allocation of risk, the nature and extent of damages for contract breaches and the owner’s exposure to cost overruns or additional compensation. The bidder’s position on these and other contract matters should be weighed along with the business terms in determining which contractor presents the true “lowest” cost to the owner.
• If a bidder is directed to provide contract comments before it knows whether it will be awarded the work, it will be more judicious in making proposed revisions simply because it does not want to be eliminated from contention due to an aggressive negotiating position.
  • By receiving contract comments from all bidders, you will be “wiser” in your negotiations. If all or a majority of bidders have the same perspective on a particular issue, you may decide not to fight as hard with the winning bidder on that issue. On the other hand, if the winning bidder is a part of a small minority with respect to a certain contract provision, you can share the majority view with the winning bidder to persuade it that it is being unreasonable.
• If you solicit bids for on-call agreements where there will be multiple awards, your goal should be to try to create one uniform agreement to be used with all successful bidders. To help you achieve this goal, and at the same time convince the bidders that the ultimate agreement is a fair one, you can utilize the “majority rule” tactic—that is, if a majority of bidders have a similar comment on a particular contract term, and their position is reasonable, you revise the form agreement for all bidders to accommodate the majority’s comment; however, comments by a minority of bidders will be disregarded.  Thus, while some comments by a bidder will be rejected, the fact that its agreement will contain “improvements” that it did not even request should satisfy it that the final agreement is a fair one.

Requiring bidders to comment on the contract as part of its proposal may be resisted by some because they do not want to spend the time or money necessary to conduct a thorough review of the contract until they know if they will win the award. However, if they wish to be considered for this and other projects, they will overcome their resistance. Moreover, once they execute their first contract with the owner, they can simply proffer for future projects the same changes that were made by the owner in that initial contract.

Creating Agreements from Templates
Templates should be as user-friendly as possible, enabling your team to convert them easily into actual agreements. The body of the template should have no blank spaces to fill in except for the date and the parties’ names and addresses in the preamble paragraph. If blank spaces are buried in the agreement text, it is more likely that the required information will be omitted when the agreement is prepared. All information peculiar to the project, such as the project description and location, scope of work or services, project or work schedule, compensation, identity of project team members, key personnel, construction documents, special insurance requirements and notice addresses, can be set forth on exhibits to the agreement.

One mistake that is made frequently in the preparation of a project agreement is the incorporation, by reference or as an exhibit, of the contractor’s proposal or the scope of work contained in the proposal. Such proposals often duplicate concepts covered in the agreement, making it more complicated to interpret the agreement. Even worse, a number of terms in the proposal will likely conflict with the agreement, and the “conflicts” provision in the agreement will not necessarily resolve the conflict. Another problem with incorporating the proposal is that the contractor’s language is usually quite casual, and so, instead of the proposal containing “covenant” language such as “shall,” it may use words that are not as strong from an enforceability standpoint.

Conclusion
Implementing the recommendations in this article will help you improve your construction contracting process and project administration, which will undoubtedly produce savings in time and money.

About the Author
Michael A. Scheffler is a partner in the Real Estate Department of Blank Rome LLP, a national law firm with over 500 attorneys. Scheffler is the head of the Construction Law Practice in the firm’s New York City office, and has over 25 years experience in commercial real estate. Scheffler is a member of CoreNet Global and the American Bar Association’s Construction Industry Forum, and has authored articles on construction law and other real estate issues for prominent industry publications.