September 24, 2018
Author: James H. Landgraf, Esq.
Organization: Dilworth Paxson LLP
Public construction contracts in New Jersey, whether they be contracts for public construction for municipalities and other entities operating under the Local Public Contracts Law, school boards operating under N.J.S.A. 18A:18A-1, et seq., the New Jersey Schools Development Authority or the State, tend to be extremely voluminous and, in many local and school board situations, a patchwork of standard form provisions, statutorily required provisions and favored provisions from the architect’s or attorney’s respective form files. The one common denominator with contract documents on public construction projects is that the document is being prepared by and presented by the owner on essentially a non-negotiable basis. This is a two-edged sword. On the one side, the public owner gets to insert whatever provision it feels is appropriate (with certain exceptions) and any contractor who wishes to perform the work is required to accept those provisions and the risk allocations associated with those provisions. On the other edge, if the provisions are inconsistent, vague or otherwise subject to some level of interpretation, the courts have told us that such interpretations are to go against the “drafter” of the contract language. Accordingly, in a situation where a voluminous contract has provisions of the AIA and inconsistent provisions that have been included in other segments provided by the architect or the attorney, the owner may have a difficult time in getting the court to rule in its favor on what it had sought as very favorable terms.
How the relationship of the parties is defined will depend on the provisions of the contract. Ideally the contract has provided clear identification of the rights and obligations of each of the parties and the mechanisms needed to enforce and assert those rights and obligations. This article addresses some of the specific provisions and issues that may arise.
I. KEY CONTRACT PROVISIONS
Construction projects are controlled, at the most basic level, by the contract terms between the various parties. Specific terms within a contract may cause significant issues during the course of construction that can result in tremendous cost increases, delay and other adverse consequences. Some of the more significant subjects of contract language follow.
A. Parties to the Contract.
By definition, a contract creates rights and obligations between those parties who have signed the contract. If a party has not signed the contract, it may not be entitled to enforce terms of the contract nor be subject to terms of the contract. There are notable exceptions to the typical scenario. In a litigation posture, claims of negligence, strict liability in tort and sometimes warranty obligations may transcend the “privity of contract” requirements. Additionally, there may be obligations and rights which are created under the doctrine of “third party beneficiary” or under an “incorporation by reference” clause in a contract. It is essential for parties entering into construction contracts to have full knowledge of who the contracting parties are, who may have rights against them, against whom they may have rights and where they may stand in the hierarchy of the respective parties to a construction project (prime contractor, first or second tier contractor or supplier, etc.). Public contracting adds its own nuances to this topic, in that proceeding on an unsigned contract may be deemed ultra vires and therefore void or voidable and the law has rejected the prospect of third party beneficiary status in public contracting, unless clearly identified.
Identifying the parties to a contract may seem too obvious. One looks at the first page and last pages of the contract and that identifies who the parties are and who is signing. It is not always that simple. The parties signing a contract may or may not in reality have the personal ability to fully perform and may not be in a position against which another party can compel performance. Examples of problematic identification of parties to a contract which may create problems during the course of construction include the following:
1. Misnaming the true owner of the project (i.e., John Jones identified as the owner on a residential project when the deed is really in Mary Jones’ name).
2. Misnaming the corporate status of a party.
3. Naming a non-owner construction manager as the “owner” which can affect all lower tiers for lien and bond purposes.
4. Lack of clear understanding as to whether the owner is a public entity and if so at what level they operate (may affect bond/lien rights and such specific requirements as licensing and prevailing rate obligations).
5. “Mixed ownership” where the property may be owned by a public entity, but the project is being developed by a private or even a separate public entity. In the public bidding area, most public entities will take appropriate steps during the bidding process to assure and confirm who the bidding contractor truly is including identification of the precise nature of the entity (corporate, partnership, etc.), shareholder disclosure requirements, corporate capacity requirements regarding the signatory on the bid, etc. In addition to being statutorily required, each of these inquiries and bid obligations are included for the purpose of assuring that the contractor is “responsible,” maintains appropriate licenses, is authorized to bid on the project, etc.
As the project moves down to the subcontract and lower levels, these safeguards are often skipped. Accordingly, the contractor may not have a full and complete understanding of the legal business capacity of the sub-contractor, its financial viability, of the legal capacity of the individual executing the contract, of whether appropriate licenses are held by the sub-contractor, etc. Due diligence should be exercised by the owner to confirm the corporate/partnership, etc., of the entity, to obtain a Certificate of Good Standing if that is the case, to obtain appropriate corporate documents authorizing this execution of the contract and to search licenses. If the proposed contractor comes up lacking in any of these capacities, there should be reconsideration of whether the contract should be entered and/or whether personal guarantees, letters of credit or other protective devices need to be sought.
Looking upstream, subcontractors, suppliers and the like, need to confirm, prior to entry into the contract, the precise owner. If it is a public owner, they must determine whether they fall under state or local definitions and the extent to which any interceding parties exist between their level and that of the owner. Failure to confirm these points may result in unenforceability of claims, loss of lien and bond claims, or confusion that may result in loss of time opportunities to file the proper claims.
B. The Scope of Work.
The contract for construction, whether it is between owner and contractor, contractor and subcontractor or subcontractor and supplier, requires performance of the scope of work in exchange for payment of the contractual fee. It is the rare construction project that does not include at some point during the course of construction an issue regarding whether or not particular work falls within the contracted scope of work. The scope of work may be identified by way of incorporation by reference of detailed plans and specifications. At the lower contract levels, it may be identified by limited incorporation of plans and specifications (i.e., only the specifications associated with supply and installation of cabinetry and casework), it may be identified by incorporation of plans and specifications with a list of exceptions or it may be identified by the supplier/subcontractor’s stated proposal. Regardless of the manner in which the scope of work is identified, for the benefit of all parties to the contract, it must clearly identify the full and comprehensive work responsibilities of the contractor or subcontractor. It must identify whether it is simply on a lump sum basis or whether there are unit price components. In renovation projects, it must identify the extent to which hidden work is in or out of the base scope of work.
On public projects the owner/prime contractor contracts are relatively clear with respect to the scope of work. The contractor is responsible for performance of the work identified in the plans and specifications. Issues still arise where multiple prime bidding is called for and/or with the general provisions in the specifications that call for all “reasonably inferable” work. On a multiple prime project, each contractor will have certain identified specification sections for which they are responsible. They will typically be responsible for all work associated with those specifications as further identified within the plans. Unfortunately, a contractor for general construction may have work identified not only on the architectural plans but also on structural plans, electrical plans, mechanical plans and others. The specifications typically require each contractor to carefully review all plan sheets whether or not they would historically or typically fall within that contractor’s trade. This is not always done and results in problems during the course of the project where a particular framing detail that would be the responsibility of the general construction contractor is located on a structural steel plan. The general contractor claims that that detail, therefore, was a responsibility of the structural steel contractor who, of course, denies all responsibility for it does not deal with structural steel.
The other typical problem arising in the scope of work for contractors on public projects deals with the “reasonably inferable” obligations. Although plans may be extremely detailed and comprehensive, it is not unusual for design professionals to include “typical details” and/or to miss certain components. An example is where two rooms have different ceiling elevations resulting in the need for installation of a dry wall soffit at a given location. That soffit may or may not show specifically on the plans and the contractor may raise the claim that this additional drywalling is beyond his scope. The owner will counter with the position that an extended wall exists, by having two different ceiling heights such extended wall height is inevitable and since it can’t be left open, installation of a drywall soffit at that location was “reasonably inferable.”
On downstream contracting, the scope of work becomes more problematic. Private projects do not always include the level of detail and comprehensive plans and specifications that may be found on a publicly bid project. The obligation on the part of the contractor to clearly identify the limits of its scope of work by way of specific affirmative statement of what its scope of work includes as well as identifying exceptions to the scope of work is required. This may also be addressed by way of building in “allowances” and/or “unit prices.” If the latter is used, a base quantity of the particular work needs to be identified (i.e., any fill material in excess of X cubic yards shall be compensated at a stated rate per cubic yard).
Subcontractors, suppliers and other downstream parties to the project face even greater difficulties in establishing the scope of work. They are typically asked to provide a quote to perform certain work that may be identified within one or two plan sheets or a limited section of the specifications. After that quote is provided and the prime contractor enters into a contract with the owner, a subcontract will be issued to the subcontractor that may significantly expand the work that the subcontract felt it was quoting. This may be accomplished by including other items and/or by incorporating by reference all terms of the owner/prime contractor contract and the plans and specifications. If the subcontractor has not seen those documents prior to executing the subcontract, it may be surprised to later discover that additional work was required on other plan sheets or specification sections. It is incumbent upon the subcontractor/supplier prior to executing any subcontract (preferably prior to issuing a quote) to obtain access to and to review the proposed owner/contractor agreement and the full set of plans and specifications. It is further incumbent on the subcontractor/supplier to include in its quote all exceptions and limits upon which it is quoting.
C. Payment Methods.
At the time of contracting, the manner in which payments are to be made and the limitations regarding payment obligations need to be clearly defined. On an overall basis, payment scheduling on a construction project is typically included within a milestone payment provision or a schedule of values/progress payment provision. Under the former, fractions of the overall payment responsibility are to be made upon completion of certain milestones. This may include an initial payment at contract signing with follow up payments at milestones such as completion of footings and foundations, completion of framing, completion of roofing, substantial completion and final completion. This method is most typically used in residential and private renovation work.
On most public projects, the schedule of values/progress payment process is used. Under this process, primary work functions are identified on a schedule of values with a particular value associated with each component. The cumulative values of each of these scheduled value items adds up to the total contract price. The schedule of values is prepared by the contractor and submitted to the owner for its approval. As the project progresses, on typically a monthly basis, a payment application is issued whereby it is represented by the contractor that it has performed a certain percentage of one or more of the identified work components. It is then paid after approval of the application for the percentage of completion of those components. A percentage of retainage is typically withheld on each payment so that at the time of substantial completion the owner will be holding not only the value of remaining line items on the schedule of values, but also the stated percentage. This is for purposes of assuring that the work will be completed and that any corrections will be made.
Variations to these two primary payment methods may exist including unit price payments, allowances and time and materials billing. In all instances, the contract should include timing provisions for the submission of invoices or applications, timing for when payment is required, provisions that would allow the owner or contractor to withhold downstream payments and submission of supporting documentation that may include material invoices, storage invoices, certified payrolls, delivery tickets and the like. This has become more crucial with the amendments to the New Jersey Prompt Payment Act (N.J.S.A. 2A:30A-1 et seq.).
Regardless of the payment method selected, certain common problems arise with regard to payment obligations. A subcontractor or supplier may execute an agreement that calls for a “pay when paid” clause or worse, a “pay if paid” clause. Under these clauses, regardless of the timing provisions that may exist in the subcontractor/contractor agreement, if the contractor has not been paid by the owner (regardless whether it was due to the subcontractor’s acts or omissions), the subcontractor may not have an immediate entitlement to payment. The courts in New Jersey have typically sided with the subcontractors on “pay when paid” clauses to the extent that the courts have agreed that this is not an infinite ability of the contractor to withhold payment. There have been no cases decided in New Jersey on enforcing “pay if paid” clauses although that has occurred in other states where the clause is comprehensively drafted. More general contractors are including “pay-if-paid” clauses into their subcontracts, including language that has been successful elsewhere in enforcing such clauses. They have coupled this clause with a lien waiver clause, which is enforceable on public contracts. This combination of provisions can leave a subcontractor with little recourse if payments are not timely made. Even a bond claim (discussed infra) can be affected on the basis that the pay-if-paid clause precludes the
accrual of a bond claim. Another frequent problem that arises with regard to payment provisions deals with the upstream party’s ability to withhold payments. AIA and other form contracts identify those instances where payments may be withheld and require for written notice of the withholding.
Private contracts and/or subcontractors may or may not include limits on the ability to withhold. Contractors and subcontractors who enter into these contracts need to carefully review them to ascertain the upstream party’s ability to withhold payments and the circumstances under which and procedures by which withholding can occur.
Subcontractors and suppliers need to be alert to the contractor’s ability to ignore payment obligations for “extra work.” Many subcontracts and purchase orders issued by contractors will include provisions that effectively state that the subcontractor or suppliers ability to receive funds for extra work is limited to instances where the contractor has the ability to receive such funds. If the subcontractor’s work is outside of its personal scope of work, it should not matter whether or not the contractor is able to obtain an overall change order from the owner since it is not uncommon for a scope of work item to exist in the owner/contractor overall scope but in some fashion have been excluded from the subcontractor’s obligations. Finally, although outside of the basic payment terms, the contract should identify mechanisms under which change orders or claims for additional or deducted work should be priced. Often problems arise during the course of construction where there may be agreement that particular work is outside of the scope of work but disagreement arises with respect to valuing that extra or changed work. Mechanisms must exist in addition to the standard issuance of a quotation, acceptance of the quotation and then issuance of a change order that handle disputed cost functions. This may be addressed by work directives followed by time and material provisions, use of dispute resolution boards or other neutrals to value the work, unit price development or similar mechanisms.
D. Bonding Requirements.
In New Jersey, all public projects in excess of $100,000.00 require the issuance of performance and payment bonds on behalf of the contractor. For projects under $100,000.00, bonds can still be required as part of the bid solicitation. On public projects, the bond that is required is to be compliant with the statutory bond under N.J.S.A. 2A:44-143 et seq. which is a joint performance and payment bond and is relatively liberal with regard to the ability of the owner and/or payment bond eneficiaries to make claims. It has been determined that on a public project, even if the form of bond presented by the contractor and its surety is a more restrictive AIA form of bond, the terms of the statutory bond will prevail (Gloucester City Bd. of Ed. v American Arbitration Ass’n., 333 N.J. Super 511 (App. Div., 2000)).
E. Construction Schedule and Delays.
A well developed package of contract documents should address and describe responsibilities pertaining to the construction schedule and handling delays that may occur on the project.
The construction scheduling portion of the specifications will typically place primary responsibility on development of the construction schedule with the contractor(s). It will identify the format in which the schedule is to be prepared (CPM, bar charts or otherwise) and will identify the extent of detail required. It should also identify a process for updating the schedule as the project progresses to take into account “as-built” progress and to address the manner in which changes in the schedule may be needed.
The scheduling provisions may place the responsibility for physical preparation of the schedule (particularly if it is a detailed CPM schedule that is required) with an outside scheduling agency, the construction manager or the contractor, itself. The owner through its own personnel, the construction manager, or the architect will have approval powers with respect to the schedule. Properly drafted, this does not place scheduling within the responsibility of the owner, but is geared to a focus of logical sequences and whether or not the schedule will meet the ultimate end date and/or interim milestones.
Contractors must be alert to the scheduling responsibilities. The schedule serves a number of valuable purposes for the contractor including the benchmark against which to raise delay claims, the ability to memorialize its proposed sequence of work and creates a valuable administrative tool in dealing with its subcontractors, suppliers and own forces. Failure to properly consider the construction scheduling responsibilities can, conversely, lead to the inability of the contractor to establish entitlement for delays, create confusion in scheduling equipment and material supplies, manpower needs, coordination of subcontractors and its coordination with co-prime contractors, if any. Failure to abide by the construction scheduling responsibilities may also trigger the ability of the owner to withhold payments and, obviously, impose liquidated damages.
While development of the schedule, itself, creates an administrative task that is often considered superfluous by the contractor, it does create the ability of the contractor to maintain some control over its means, methods, coordination and sequencing. When the contractor is issuing its bid, it typically has a general sequence and logic in mind. It is that sequence and logic which the contractor then needs to memorialize by way of communication with the owner, coprime contractors, subcontractors, suppliers and the like.
Subcontractors also need to familiarize themselves with the construction schedule. It should be requested from the contractor at the outset of the work to assure that they know when their work is anticipated, when their materials are required, what work will be performed simultaneously and to assure that they are not being placed into an excessively constricted work area, sequence or duration. As with the contractor, the ability of the subcontractor to seek delay remedies will be controlled, at least in part, by the contractor’s construction schedule. As an example, if the contractor has submitted a schedule to the owner which has been accepted (or at least not rejected) showing that the subcontractor’s work is to occur in October and November, but due to the lack of preexistence work, the subcontractor cannot commence work until the dead of winter, the subcontractor has a much better argument for delays, increased costs, productivity claims and the like against the contractor and/or owner.
Since the owner typically has overall approval ability with regard to the schedule, when a schedule is submitted to the owner it should not simply be filed away. It should be analyzed, not only to assure that the work is being scheduled to occur within the contract durations, but also to determine whether or not the schedule makes sense and whether it is consistent with stated owner needs. Receipt and failure to object to or question a construction schedule can lead to the contractor’s ability to make claims for allegedly delayed work where it is clear that the work could never have been completed in the sequence or duration identified in the schedule.
Assuming the owner has reviewed and found the schedule to be acceptable, any claims for delay by the contractor need to be compared against the schedule to confirm whether or not the delay was simply the delay of a particular function or whether it had an impact on the overall job completion and/or critical path.
As indicated above, claims for delay by either the owner or the contractor are ultimately a product of comparing the as-built progress against the schedule. Delay claims by any party can have one or more ramifications. If the contractor and/or subcontractors beneath it have caused a delay to the project, the owner may have the ability to seek either liquidated damages (if established within the contract) or actual damages occasioned by a delay in the completion of the project or a stated milestone. Conversely, a delay by the owner may entitle the contractor to a time extension without further compensation and/or to damages associated with productivity losses, constructive acceleration, extended general conditions site overhead or extended home office overhead. Historically, many owners have attempted to avoid such claims by the inclusion of a “no damages for delay” clause that provides that where a contractor is delayed, the contractor’s sole remedy is a time extension. Those provisions have been enforced by the courts in New Jersey and other jurisdictions in instances where the delay is not occasioned by active interference by the owner or its representatives. Recently, on New Jersey public projects, statutory changes have held that such clauses are void as against public policy (N.J.S.A. 18A:18A-41 (school boards) and N.J.S.A. 40A:11-19 (local public contracts)), unless they are phrased in such a fashion as to reflect specifically contemplated occurrences.
A properly drafted contractual relationship will address both delays by the contractor and by the owner. They may tend to limit damages or to establish a formula damages such as a liquidated damage clause. They may, as provided in the 1997 AIA forms, include mutual waivers of “consequential damages” which arguably include delay damages. They will include provision for non-compensable delays caused by force majeure in which the contract time is extended but is deemed non-compensable.
F. Site Condition Responsibilities and Changed Conditions.
In a typical public design-bid-build project, the owner is responsible for existing site conditions. In New Jersey, owners have been held liable for representations regarding the site conditions (PT&L Construction v N.J.D.O.T., 108 N.J. 539 (1987)). Even though the contract documents may place inspection and notice requirements as a burden to the contractor, the practical realities are that a contractor has little or no control over existing site conditions (whether it be underground conditions or conditions behind walls and above ceilings in a renovation project) and has minimal opportunity to investigate those conditions prior to bidding and entering into a contract. Ultimate responsibility for latent site conditions constitutes a risk allocation/cost analysis issue. Some owners will try to place the entire responsibility for existing conditions on the part of the contractor thereby seeking full immunity from claims where the contractor comes across conditions that it did not anticipate and which affect its work, costs and time. Sophisticated contractors will analyze this allocation of risk at the time they are preparing their bid and where it appears that the owner is placing inordinate risk on the contractor, will adjust their price accordingly. By doing so, the owner is essentially paying for that risk allocation. If conditions turn out to be problem free, the owner may well have paid considerably more simply by placing the risk on the contractor.
Most form contracts as well as most public contracts create a partial allocation of risk. They do place a responsibility on the part of the contractor to make a prebid investigation and to alert the owner any conditions which appear at odds with those represented in the bid documents.
However, they further provide a two prong ability on the part of the contractor to seek time extensions and/or additional costs associated with unforeseen site conditions. The AIA and other standard form contracts frequently include a 2-phase unforeseen site condition clause. Unforeseen or concealed site conditions may be compensable if they either are subsurface or otherwise concealed conditions which differ materially from the conditions indicated in the contract documents, or if the conditions were both unknown and of an unusual which materially differ from those generally found. The first instance would include discovery of rock under the surface where the contract documents included soil borings showing sand/clay etc. The second instance would be where the contract documents did not include any information regarding subsurface conditions, but rock was found in a South Jersey shoreline project.
The purpose of this method of risk allocation is to assure the owner that it is not paying for risks that do not exist. At the same time, it recognizes that where truly unforeseen conditions are discovered the contractor will be fairly compensated for the changed or additional work.
G. Changes Clauses.
It is inevitable that there will be changes to the work identified in the construction documents during the course of the project. A change may result from clarifications in the design. It may result from errors or omissions in the design. It may result from owner changes in the scope, from contractor requests to substitute materials or certain elements of the project or from unforeseen site conditions. It is not unusual to find clauses pertaining to changes in the work located in several different areas of the contract documents. These may be found in the site condition provisions, specific “changes” or “change order” provisions, time extension provisions, provisions pertaining to substitutions or elsewhere.
Prior to entering into a contract or subcontract, all the parties must be cognizant of the scope of the clauses pertaining to changed work. They must be aware of circumstances under which changed work will be addressed by changes in compensation or time to perform the work.
They must be very cognizant of the notice provisions relative to changed work. They certainly must be aware of the manner in which changed work will be compensated. As indicated above, it is not unusual for many subcontracts (prepared by the prime contractor) to limit changes to those for which the prime contractor receives a change order. Contractors and subcontractors must be familiar with provisions concerning work directives and whether or other written directive must be in existence before the work is performed or, alternatively, whether they may proceed with the work and simply provide timely notice of the fact that they considered a change and/or the cost and time associated with the work.
Failure of a party to the contract to comply with the requisite notice provisions may, particularly in a court situation (as opposed to arbitration) find that they have effectively waived their claim for additional compensation or time. Similarly, an owner who engages in a course of dealing with the contractor whereby procedural requirements regarding changes are not honored, may at a later time find that it has waived its rights to enforce the notice requirements for extra work that it disputes.
Appropriately drafted changed work clauses should include a pricing mechanism. This allows all of the parties to enter into a changed work situation with recognition of how and under what circumstances it will be compensated. The obvious preferred method is that the contractor provide written notice of the fact of changed work and upon determination of what must occur to address the changed condition presents a price proposal which can then be negotiated and placed into the form of a written change order. Upon execution of the change order by all parties, the contractor commences with the work. This ideal situation seldom occurs. Construction scheduling seldom allows the luxury of fully negotiated change orders prior to having the work performed. Parties also often have different opinions with regard to the extent of the change and, more importantly, the cost or time impact. Where such conditions exist, the changes clause should include the ability of the owner to issue a “work directive” requiring the contractor to perform the extra work. The work directive would, if the parties agree that it is a change in the contractor’s work, provide for either a time and materials or a unit pricing arrangement which would then be analyzed and agreed to after the work is completed. The changes clause should also include a specific formula providing for certain percentages that would be allowed for overhead and profit for the contractor and/or subcontractors involved in the changed work.
Finally, since there often are instances where the parties dispute whether or not a particular claimed change is in fact a change in the contractor’s scope, a mechanism needs to be developed to allow the contractor to present its position and provide the opportunity to resolve the issue prior to completion of the entire project. Under AIA and other standard form agreements, this function is often first handled by the architect (or the construction manager). While that may be an appropriate initial step, since construction managers and architects may well have an agenda that favors the owner, ADR processes should be put into place by way of a standing neutral, a dispute resolution board or other ability on the part of the contractor to seek an immediate resolution of a disputed change in its scope of work. Otherwise, particularly where numerous disputed changes exist or the costs associated with particular changes are significant the owner may obtain a pyrrhic victory. While it can force the contractor to perform the work, if the contractor is not capable of financing that work over a long project, the owner may find itself without a contractor. Even if a surety is involved in the project, time is lost and costs are incurred.
H. Indemnification and Insurance.
Most standard form construction agreements provide for certain types and levels of insurance coverage to be provided by the contractor. These typically include comprehensive general liability coverage, automobile coverage, workers compensation coverage and in some instances and umbrella policy to provide extended coverage. Specific levels of coverage are also typically designated in the contract documents with the requirement that the contractor, prior to commencing work, provide proof of insurance coverage at the designated levels. The contract documents may require that the contractor include the owner as an “additional insured” on the terms of any such policies. The contract may require that the contractor also obtain and present similar insurance certificates from all or at least its primary subcontractors. Even if the contract does not require such evidence of subcontractor insurance, it is beneficial to the contractor to assure that such insurance is in place throughout the course of the project.
With respect to the contractor’s insurance, certain clauses need to be understood. Most comprehensive general liability policies do not include insurance coverage for the contractor’s own work. Accordingly, if the contractor builds the roof and the roof leaks, while insurance coverage may be available for water damage inside the building, the insurance will not cover repair or replacement of the poorly constructed roof. Many CGL policies include, however, an exception to the “own work” exclusion under which the insurance carrier will cover the contractor for work performed by subcontractors. Accordingly, under the example given above, if the roof was installed by a subcontractor, the owner would still have the ability to pursue the contractor and its insurance company for repairs or replacement to the roof since that was constructed by a subcontractor. This information does not appear on the declaration sheet, so the
Owner should get a copy of the actual policy.
Secondly, it needs to be known whether the policy is an occurrence based policy or a “claims made” policy. If it is an occurrence policy and the improper work leading to damage was installed in 2005 but the claim is not made until it is later discovered in 2006, that policy would not cover that claim. Conversely, under a claims made policy, the applicable date for insurance coverage under that particular policy is the date when the claim is made regardless of when the contractor may have negligently performed work.
In addition to the contractor’s policies, the owner will typically provide a project policy to cover damage to the structure that is not the result of the contractor’s actions and which occurs while construction is in progress. This protects both the owner and the contractor by providing insurance coverage for such damages as wind, fire, etc. The owner receives the funds and can thereupon pay the contractor to rebuild.
With respect to indemnification, this essentially is a concept whereby one party to the contract is responsible to make the other whole under certain circumstances and to defend the other party against claims associated with the indemnifying party’s actions. The standard form agreements typically provide that the contractor will indemnify the owner for personal injury and property damage claims made against the owner that result from the work of the contractor. Many owners will also include further provisions in the contract under which the contractor would additionally undertake to indemnify the owner including defense and defense costs where economic claims are made against the owner that result from the contractor’s work (i..e., a separate contractor claiming that it was delayed by the work of the first contractor). In publicly bid or other projects in which the contractor (or by extension the subcontractor) has little bargaining ability, it simply must be aware of the extent to which it may have indemnification obligations. In negotiated contracts, efforts should be made by the contractor to remove or limit its indemnification responsibilities and/or at least provide for mutual indemnification whereby the owner would be obligated to indemnify the contractor under circumstances where it was the owner’s acts or omissions that resulted in the claim. It should be noted that in New Jersey the legislature has determined that an indemnification agreement in a construction contract that includes obligations on the part of the indemnifying party to indemnify the other party for that other party’s own negligence are void as against public policy (N.J.S.A. 2A:40A-1).
I. Contract Administration.
During the course of construction, at least at some point in the process, there will typically be involvement of design professionals, the construction manager or a clerk of the works to administer the construction in the Owner’s interest. Under standard AIA and similar forms, the owner’s design professional maintains certain specific functions including review and response to requests for information, modifications and clarifications to design issues, periodic site visits, review of payment applications, review of change orders and review of shop drawings and submittals. Under the AIA forms, the architect is also provided with the initial review of contractor claims for changes associated with time or costs and acts as the initial “arbiter” of issues. In that capacity, they are anticipated to play the role of a neutral with respect to interpretations and decisions with respect to the relationship and responsibilities as between the owner and contractor. The architect is also provided a role in certifying substantial completion, certifying final completion, reviewing close out documents, certifying pay application withholdings, certifying acts of default which may lead to termination, issuing notices of rejection of work and/or correction to work.
Where a construction manager or clerk of the works is also employed by the Owner, care must be taken to maintain consistency with what the architect or engineer is doing, to avoid confusing duplication of activities, to avoid gaps and to provide for appropriate lines of communication.
Parties to the contract need to clearly understand the role of the design professionals and other owner representatives during the course of construction. They need to assure that communications are filtered to the appropriate individuals. The owner must similarly assure that the lines of communications are clear and are maintained. Otherwise, communications may go in different directions resulting in different answers to the same questions which creates not only confusion on the project but also potential liability.
J. Provisions for Dispute Resolution.
Historically, construction contracts have included ADR procedures by way of binding arbitration. Under state law, public entities engaging in construction contracts must include a method of ADR, but not necessarily arbitration. Given the attitude of courts toward construction litigation, even if a construction contract does not include an alternate dispute resolution provision, it is likely that a dispute that is litigated will be pushed into a court sponsored arbitration or mediation program.
Use of an AIA form agreement will typically provide first that the architect makes a nonbinding determination regarding claims and issues and secondly that there will be binding arbitration. It is notable that in an AIA contract, the arbitration action between the owner and the contractor can not be joined with a dispute with the architect absent the architect’s agreement.
Other options for alternate dispute resolution forums include the employment of a dispute resolution board which is a panel of “experts” who will regularly convene during the course of the project to review progress and potential disputes, enter their opinions regarding certain scope of work and other issues and perhaps be given binding arbitration abilities. Mediation is becoming more popular and may be incorporated into the contract documents to include the American Arbitration Association or similar entity mediator, to allow the parties to select a mediator or to establish an existing mediator who will hear issues as they arise. It should be noted that in the absence of any specific provision in the contract to mediate or arbitrate, disputes default to litigation.
The parties should be aware that the Courts will enforce most ADR clauses against the signatories to the contracts, which will preclude use of the court system for claims falling within the clauses. A non-signatory will NOT be compelled to participate in the ADR process, however. Thus, unless the subcontractor has contractually agreed to participate and join its claims in an Owner/contractor ADR proceeding, the contractor will be required to institute a separate action with the subcontractor if there are claims that exist.
One area that will not be controlled at first instance by contractual ADR terms deals with lien claims. Under statute, municipal mechanics lien claims (N.J.S.A. 2A:44-125 et. seq.) must be pursued only in the court system. However, where there exists a contractual arbitration clause, the courts may “stay” the court proceeding on the lien enforcement action pending the outcome of the contractual arbitration,
Construction contracts will typically include some level of termination provision. At the most basic level, particularly where there is a one sided bargaining ability, there will be termination allowed to the stream party for breach of the obligations by the other party. Termination under such circumstances typically has very little notice provision but does require “fault” to be established by the terminated party.
More typically, each side has termination ability. The owner should have the ability to terminate under a number of listed circumstances as well as general breach of performance obligations by the contractor. The acts that may lead to termination typically include failure to perform, failure to maintain schedules, failure to properly man the project, failure to correct work, failure to make payment to subcontractors and suppliers that may lead to liens as well as a general provision pertaining to breach of contract. There will be notice provisions that must be issued with a time period established to “cure” an act of default. Failure to cure the act of default after being provided with notice then provides the owner with the ability to issue a formal termination. The contractor will also typically be entitled to termination rights. These are normally limited to non-payment issues but again will typically provide for written notice as well as a grace period in which the other party may comply and thereby cure the default.
Many of the standard contracts also provide the owner to “terminate for convenience.” Such a termination again requires formal notice but does not require that any reason be given for the termination. Those provisions typically are used where a substantial scope change is being contemplated by the owner, where permitting issues arise, financing problems arise or other factors will cause an indeterminate delay in completing the project or substantially modify the nature of the project. A termination for convenience may also occur in instances where the owner feels that it has significant problems with a particular contractor but those problems have not reached the level of default. A termination for convenience provision may or may not include a termination fee. Where a termination fee is contemplated, it will typically include a formula for providing the contractor with payment for work in place, materials that have been purchased and cannot be returned, demobilization and perhaps some manner of calculating lost anticipated profits.
When the contractor is terminated for cause, the termination provision will typically provide that it is entitled to payment for work in place but such must be net of the costs to complete. Since costs to complete may also involve delay and other factors, claims against a contractor following termination for cause can be significant. The parties must be very careful in reviewing and implementing the termination for cause provisions. All procedural requirements involving notice, grace periods, etc., must be met. Failure to comply with termination procedures may result in a “wrongful termination.” Where the contractor wrongfully terminates its contract with the owner, it may be subject to a counter termination, costs of completion, delay costs and similar items. Conversely, where an owner wrongfully terminates a contractor, it will be subject not only to claims for work in place as well as losing its potential claims for completion but may also be subject to the contractor’s claims for loss of anticipated profits on the project.
L. Warranties, Guarantees and Maintenance Bonds
Construction contracts will typically identify certain specific warranties required of the contractor. Most typically, these include a one-year warranty on general workmanship and specific warranties for equipment, systems, and materials that will identify the warranty as the manufacturer’s standard warranty, or identify specific warranty requirements. They may additionally include a requirement of maintenance bonds to be issued for some or all of the work with a duration equal to the warranty. The system, material and equipment warranties will typically commence upon the owner’s use of the particular system, equipment, or product (most particularly notable in HVAC equipment warranties).
The owner benefits from the warranties and maintenance bond through the assurance that for a given period of time defects or deficiencies in the warranted work or product will be corrected without additional cost to the owner. The level and term of that protection is dependent in part on the contract language, but largely based on the language of the specific warranty, particularly with products. Most warranties do not protect the owner from consequential losses that it may sustain resulting from the given defect. Nor does it provide coverage for work not specifically within the product or system(i.e. – a roofing warranty will cover the materials provided and installed as part of the defined roofing system, but if leakage occurs due to improperly installed flashing, which may not have been part of the system, the warranty is inapplicable). A warranty additionally will normally limit the remedies to “repair or replacement” as opposed to monetary damages. Lastly, a warranty for equipment or products will typically include a series of disclaimers of not only the types of damages and the types of remedies that may be available, but also disclaimers of implied warranties including implied warranties of fitness for purpose, merchantability, habitability, etc. The owner often has little ability to modify product and manufacturer warranties except the potential ability to obtain an extended period of time. The terms of the workmanship warranty and maintenance bond are within the owner’s control.
From the contractor’s standpoint, the equipment and product warranties will provide the contractor with the ability to pass owner complaints downstream. Due to the various limitations that exist on product and equipment warranties, however, the contractor may not necessarily receive full protection from the existence of the warranty due to the same factors described above. The contractor’s workmanship warranty and its maintenance bond, if required, may require expanded responsibilities and will not typically include disclaimers similar to those provided by the manufacturers. The contractor must be fully aware of the terms of the warranties that it is obtaining from manufacturers since its workmanship warranty may come into play on an otherwise warranted product where the product warranty has expired.
While the owner often can do very little with respect to manufacturer warranties and the limitations that are created within manufacturer warranties, except assure that the product or equipment that is being supplied has a warranty of sufficient duration. The owner may have control over when manufacturer warranties commence, the contractor’s workmanship of warranty, and the maintenance bond. The owner should include in the contract provisions that the manufacturer warranties shall not commence until there has been final acceptance of the project or, at the very least, the owner has beneficial use and occupancy of the portion of the structure where the warranty applies. With respect to the contractor’s warranty, under no circumstances should the owner include any provision other than the commencement of that warranty upon final completion. The owner should also specifically include within the warranty language that the contractor’s responsibility is not only to repair and replace the defective work, but also to repair and replace any damages resulting from the defective work. This provision should similarly be included in any maintenance bond that is required. The standard form maintenance bond does not clearly identify this as an obligation under the terms of the bond. To the extent possible, the owner should consider having an extended contractor warranty protected by a maintenance bond even if the owner needs to agree to pay the premium on the extended bond. Finally, the owner should include language within the contractor’s warranty that it does not constitute a release or waiver on the part of the owner of any latent defects within the contractor’s work.
M. Means, Methods and Supervision
Under practically all contract forms, control over the means and methods of construction is left to the contractor. The contractor is required to provide adequate supervision. This control of means and methods has mutual benefits. It releases the owner and design professionals from the responsibility of mundane operations and areas of expertise that are better left to the contractor. At the same time, maintaining control of means and methods from the contractor’s standpoint allows it to construct the project in a method that benefits its economics and that is consistent with its experience and knowledge of the industry.
The contractor is still required to perform the work in an acceptable and workmanlike manner, to perform the work consistent with code requirements and industry standards, to meet identified specifications and plan requirements and to otherwise perform all work consistent with the contract documents. Similarly, the contractor, in order to control its means and methods is required to provide supervision. The owner’s control over supervision under the standard forms includes the ability under certain circumstances to require a change in supervisory personnel on the part of the contractor. This level of control should be exercised with tremendous care since forcing the contractor to replace supervisory personnel can result in delays and in claims by the contractor that the owner is interfering with its means and methods.
The contractor bid the project with a certain internal sequencing in mind. An experienced contractor, within the parameters of a given set of plans and specifications, knows or should know how it intends to prosecute its work. It should vigorously protect its control over means and methods and where it feels this control is being usurped should immediately go on notice objecting to the actions of the owner or design professional. Once the contractor losses effective control of its means and methods, unless it has placed the owner on notice, it can become liable for work that was dictated by the owner or design professional. It also loses a significant control over its costs.
The owner where it anticipates sequencing or means and methods to be of concern to it, should identify in the contract documents appropriate limitations on the contractor’s means, methods, and sequencing. If the owner’s intent is that the building be constructed from east to west, that needs to be identified in the initial contract documents to avoid the contractor’s subsequent claim that it intended and based its bid on proceeding from west to east and then claiming interference with its means, methods, and sequencing resulting in delay and monetary damage claims. The owner and design professional who may have concern with the manner of installation of work should include within the front-end documentation identification of all applicable codes as well as including in the technical specifications such detail as are deemed necessary and appropriate. Thereafter, if three nails were required by the technical specifications or by a specific code and the design professional notices only two nails being used, it can compel the use of a third nail without interfering with “means and methods”. The owner should include some objective criteria for the exercise of its power to require replacement of the supervisor, and similarly should include language that either limits or eliminates any exposure for financial impact resulting from an appropriately exercised demand to change supervisory personnel.
N. Notice Provisions
Throughout the terms of the construction contract there will be numerous references to the providing of notice. These include notice of differing site conditions, notices for time extensions, notices of change orders and claims on the part of the contractor and, from the owner’s perspective, notices to complete or correct work, notices to stop work, notices of payment withholdings, and notices of suspension and others Each side will also have notices that are required in the event of an intended termination. The contract will normally provide the form of notice, the time period in which notice is to be given and the individual to whom notices are to be sent. In certain instances, piggyback notices are required before the notifying party can take other actions.
Failure to receive written notices in a timely fashion may provide the owner with ultimate defenses to contractor claims. On the other hand, the owner’s failure to properly comply with its notice requirements may provide a defense to the contractor or its surety on a termination or default situation.
Frequently, the contractor experiences conditions on the project that require immediate attention. Contractors often face or at least perceive the inability to provide immediate written notice to the owner of conditions that may cause changes in the Work resulting in changes to the contract sum or time. It is not unusual for a contractor, late in the project, to provide a shopping list of events that it feels may entitle it to increase time or to price increases. In some situations, this late epiphany arises about the same time that the contractor recognizes that it is losing money on the project or that it is facing potential liquidated damages. While there may be timely notice of job condition changes often prevent the contractor, even where such are legitimate, from recovering or, a the very least, make the efforts to recover much more difficult. Similarly, as a contentious project draws to an end the Owner may “forget” earlier verbal instructions and requests for various added items that it readily handled on a verbal/handshake basis, thereby creating a claim that the course of dealing of the parties has changed the contract requirements.
In creating the contract, the owner needs to review, particularly in the event of a form contract, the timing of notices that are required and the situations where a notice must be followed by a second notice. The owner should carefully review the timing requirements for notices by the contractor for changed conditions, monetary increases or time extensions. It is virtually impossible for an owner to expect the contractor to provide notices of changed conditions before work is started (change site conditions) or to be able to provide within a matter of a few days the full impact of a changed condition or instance of changed work. At the very least, however, there should be a reasonably short period of time for the contractor to provide a notice of actual or potential impact even if details are not included. This benefits the owner since a changed condition or changed work may have a ripple impact that could be compounded dependent upon the manner in which the change is addressed. The sooner the owner knows of the existence of a potential impact, the more informed its ultimate decision will be. Finally, specific language needs to be included within the contract that makes the notice a clear and unalterable condition precedent to the contractor’s prosecuting an ultimate claim (whether for money or time).
The contractor needs to recognize that written notices have a place in the project administration. The contractor should endeavor to minimally provide a short written notice of a condition, even if it cannot at that point elaborate on full impact or cost.
O. Project Completion/Closeout
Project completion is that seemingly never occurring point when the owner accepts the work in its entirety and releases the final payment to the contractor. In the typical public construction project, interim completion dates are included into the process of “substantial completion”. Substantial completion is normally defined as that point in time where the owner is able to take beneficial occupancy and make use of the project or portions of the project. The standard form agreements provide further for a list of events that must occur before substantial or final completion may be declared. These will include identification of work that must be performed as well as what may be a significant list of closeout documents including warranties, guarantees, a maintenance bond if required, as-built drawing, subcontractor and contractor lien releases, operating manuals and other documents that are typically identified both within the front end and technical specifications.
Substantial completion for the owner means that it will be able to make use of the project or a defined portion of the project. Substantial completion means that the owner should receive in hand a temporary or final certificate of occupancy. Warranties may commence on equipment and materials. Payment of the contract balance less retainage and other identified withholdings must occur. Liquidated damage provisions will cease. There may be a provision calling for a reduction of retainage upon substantial completion. The owner will typically require the issuance of a certificate of substantial completion to be issued by the design professionals. Punchlists must be prepared. The statute of repose that creates in New Jersey a ten-year period of time in which suits may be commenced regarding the design and construction of the project starts running.
Upon final completion, the maintenance bond, if required, will typically commence. All contract balances including retainage must be released. All closeout documentation must be produced. From a public owner’s standpoint, final acceptance (typically involving a resolution accepting the project) starts the final 60-days in which the Municipal Mechanic’s Lien can be filed. The contractor’s one-year warranty on workmanship typically commences, as does the owner’s ability to require the contractor to return to the project to fix subsequently discovered defects and deficiencies.
From the contractor’s standpoint, substantial completion in many of the standard form agreements requires it to submit a request for the issuance of a certificate of substantial completion that would also identify any remaining work. Upon issuance of the certificate of substantial completion of the project or identified portions of the project the various equipment and material warranties may start. At this point the contractor is typically entitled to receipt of the contract balance less specifically identified funds such as retainage or a fund necessary to complete non-punchlist work. The contractor is still required to complete all items identified on its list as well as any punchlist items that fall within its scope of work. Closeout documentation needs to be compiled and submitted. Between the time of substantial completion and final completion, the contractor typically remains subject to completion items noticed by the owner and/or design professionals. Upon final completion, the contractor is entitled to receive the balance of its funds, but remains liable for workmanship issues as ell as for certain latent defects that may thereafter be discovered by the owner. Statutes of limitation for the owner’s ability to sue the contractor for defects with the work may commence although would be subject to the discovery rule that allows an owner the ability to sue a contractor to an extension of the statutes of limitation to commence from the point of discovery of the defect as opposed to the final completion. From an owner’s perspective one of the most frequently encountered problems on any construction project is obtaining the last work required from the contractor. This may be due to insufficient funds held to provide adequate leverage. It may be due to the fact that the funds that are being held are all subcontractors’ monies. It may be due to problems that exist between the contractor and subcontractors where the contactor is having difficulty in obtaining response to completion items from its subcontractors. In any event, the owner needs to define at what point substantial completion occurs and what the contractor’s responsibilities are following substantial completion. To the extent possible, since the owner’s liquidated damage clause typically terminates upon substantial completion, the owner needs to include the ability to seek costs and losses associated with the post substantial completion work.
The owner needs to assure that the schedule of values includes sufficient funds held not only for retainage, but for final completion on the contract balance. Although there is no prohibition from the owner declaring default even following substantial completion, the owner should include this remedy in the contract. Closeout documentation requirements need to be defined and identified. If the contractor has been able to negotiate a release of retainage upon substantial completion, the owner should take steps to assure that the contract includes the its ability to retain at least the value of the completion work plus an appropriate percentage. If maintenance bonds are being required, they should not commence until final completion is declared and should cover not only the contractor’s workmanship obligations, but also otherwise warranted work and equipment particularly where warranties commenced at the time of substantial completion and may therefore have a limited lifespan following final completion. From the contractor’s standpoint, it too is benefited by having a clear definition of what constitutes substantial completion. It is in the contractor’s interest to attempt to negotiate an automatic reduction in retainage at the point of substantial completion, particularly where retainage has been maintained at a fairly high level. It is to the contractor’s interest to wrap up its work and obtain final completion as soon as possible. The contractor should attempt to require that the owner prepare the final punchlist within a set period of time following substantial completion and that punchlist inspections are to occur within a set period of time following the contractor’s request for those inspections. During the course of punchlist work, the contractor should obtain signoffs from the owner’s representative on the work when it is performed. This may limit or avoid the inevitable issues of whether or not work was performed. Where portions of the project had been performed by other contractors, the contractor needs to build into the contract that its ability to perform punchlist work, that its ability to obtain final acceptance, that its ability to protest request punchlist work are preserved.
II. TYPES OF CONSTRUCTION FORMS
As noted above, construction projects in New Jersey often use standard form contract documentation for the contract rights, remedies and obligations. These may include forms that may have been used by a particular department or agency on the state level, such as the Department of Transportation, and more recently the Schools development Authority. They may involve forms that have been developed by particular local public agencies or school boards who have engaged in a series of construction projects and have developed certain form language that they now include in all projects. At the local and school board level more frequently, however, standard industry forms such as AIA contract documents or in certain instances the Engineering Joint Commission (EJCDC) documents may be employed, particularly where it is the design professional who is initially involved in preparing the documents for review by the owner prior to placing them into the project manual. In most instances, the use of such form contract documents are accompanied by “supplemental terms and conditions” that may be supplied by the design professional based upon their experience in dealing with these projects or by the owner’s attorney.
Use of form contract documents, whether it be the AIA forms, Consensus Documents, EJCDC or even an AGC (Association of General Contractors) form, do provide certain benefits.
They are known in the industry and have been accepted in most instances within the industry as representing relatively balanced approaches to the contractual relationships. Secondly, they are typically very thorough to the extent that they address most of the issues and points of contention that can arise during a normal construction project. In many instances there exist court decisions with regard to specific provisions thereby providing some additional predictability to the enforcement of the contract clauses. Each of these organizations have developed a series of contract documents that are interrelated and are consistent with each other thereby avoiding some inconsistencies that can accidentally occur if such integrated documentation systems are not used.
Finally, with the advent of computer software, these documents have become very easy to modify. Prior to the software, an AIA standard form of Terms and Conditions (A201 form) followed by a 15 to 20 page rider or addendum whereby different clauses were removed, modified, inserted, etc. This can now all be performed on the base AIA or EJCDC form without having to create a rider that in many instances was longer than the basic terms and conditions themselves.
There are, however, negative aspects associated with the use of such form contract documents. First, even though the documents have been developed with an effort to maintain a degree of neutrality, each set of documents inevitably have certain biases (the AIA with the architect, EJCDC with the engineer, AGC with the general contractor, and so on) which do not necessarily provide the full panoply of protections to the public owner who is developing and issuing the contract documents. By use, without modification, of AIA or similar form documents, the owner may be ignoring certain rights and protections that it could otherwise develop and incorporate into the contract.
Secondly, although the documents can be readily amended and supplemented, since each family of documents are integrated, the owner or owner’s attorney who amends the documents must be mindful that changing certain sections may require changes in other sections and/or other documents to maintain consistency.
Another issue that arises with the use of form documents is that unless specifically tailored to a given project, they may or may not be appropriate in their base form to the project.
Ready examples include the fact that the AIA documents that are frequently used in school construction projects do not readily lend themselves to all the issues that can arise in a school district’s use of a multiple prime contractor situation. Secondly, AIA contracts reference AIA forms of bonds which are inapplicable to public contracting in New Jersey based upon the provisions of N.J.S.A. 2A:44-143, et. seq. Lastly, absent modification, AIA and other standard forms may not appropriately address such primary terms as “no damage for delay” clauses liquidated damage clauses or indemnification provisions that pass muster under the existing New Jersey statutes.
If a set of form documents is used, the owner and contractor must be aware of the fact that these will incorporate other documents within that family of documents. As an example, if the AIA form of contract (A101) and Standard Terms and Conditions (A201) form the primary provisions of the contractual relationship, additional AIA form documents typically are involved unless specifically addressed as being modified or supplemented including the schedule of values, payment applications, lien waivers, certificates of substantial and final completion and similar documents. These are all forms that the parties will need to contend with during the course of the project and the parties will need to assure that these are consistent with the other contractual provisions.
III. SAFETY CONCERNS
An ever present issue pertaining to construction projects deals with safety on the job site. Safety concerns will involve workers, delivery people, and other individuals associated with the construction project itself as well as students, staff, parents, and other persons on the property for educational purposes, particularly when the project involves renovation.
The one absolute is that if someone is injured during the course of a construction project, there is the potential that any or all persons associated with the project can be brought into a lawsuit. Regardless of what efforts are taken to disclaim responsibility, to divert responsibility, to reassign responsibility, to provide for indemnification or similar provisions, there may be factors that supersede all such efforts. By statute, parties in a construction project are not entitled to seek indemnification from others for their own negligence (N.J.S.A. 2A:40-1, et. seq.). With respect to professional engineers, there is further statutory language as follows:
A professional engineer or engineering firm, or any employee or representative of a professional engineer or engineering firm, who is representing the professional engineer or firm, shall only be liable for any injury on a construction project or site resulting from a breach or disregard of construction safety standards or practices on the construction project or site for which compensation is recoverable under N.J.S.A. 34:15-7, et. seq., if
(a) the professional engineer or firm has by written contract expressly assumed, to the extent stated therein, responsibility for the implementation, discharge or monitoring of safety standards or practices; or
(b) In a multiple prime project, the professional engineering or firm is the representative of the project owner and no contractor has been designated to be responsible for the safety; or
(c) it is shown that:
(1) the professional engineer or firm, including its employees or representatives was present at the portion of the project or site for which the engineer had provided services, prior to or at the time of the accident or both.
(2) the professional engineer or firm including its employees or representatives had actual knowledge of the site conditions which are alleged to be a cause of an imminent danger; and
(3) the professional engineer or firm including its employees or representatives, had the opportunity to notify the responsible contractor and worker of the presence of the site conditions which are alleged to be a cause of imminent danger, and failed to do so within a reasonable period of time. If that notice is provided, and the responsible contractor fails to respond within one business day, the engineer or firm shall immediately provide that notice to the project owner. (N.J.S.A. 2A:29B-1) There are no similar statutory provisions directed specifically to owners, architects, construction managers or others on a construction project. Even with what appears to be a series of hurdles necessary to find the project engineer responsible, a careful reading of the above statutory provision presents a number of “loopholes” whereby factual allegations or occurrences could occur that would bring the engineer into potential liability for the injury to a worker on the site. It is also notable that the above statute does not have any impact on potential liability of an engineer if a student is injured.
The typical set of contract documents for a public construction project transfers responsibility from the public owner to one or more of the contractors for project safety. It may also place responsibility for oversight and collection of safety plans and similar “administrative” responsibilities on the part of a construction manager, project engineer or architect. Those efforts are typically, in and of themselves, limited since they will often parrot the limitations as stated in the above cited statute dealing with professional engineers. That is, those administrative personnel of the architect, construction manager or engineer would only take responsibility to require the contractor to provide safety training and plans and establish potential liability only in instances where clear dangerous conditions are observed but nothing is done.
The other contractual set of provisions dealing with safety are in fact the insurance provisions. The owner should assure that adequate insurance is in place for all parties involved in the project including contractors, design professionals and the construction manager. The contract will also typically require that the contractor obtain and require insurance from its subcontractors. The owner is typically listed as a named insured on the direct policies. While the presence or absence of insurance does not necessarily make the project safer, it does provide some level of monetary protection for the benefiting parties should an accident occur and the standard procedure of suit against everyone associated with the project is commenced.
IV. SPECIFIC CLAIM CONCERNS
Contract documents will typically include provisions dealing with “claims.” For purposes of a construction contract, claims may include requests by the contractor for additional time to complete its work due to interferences by other contractors, the owner, design professionals or typical force of majeure issues or from changes in the work; requests from the contractor for increased compensation due to changed conditions, change in the work, or interferences with its work; requests for reduction in contract sums by the owner due to changes in the scope of work; requests by the owner for liquidated damages as a result of delays by the contractor; or any other of numerous issues that may arise resulting in a request by one side or the other for time or monetary consideration. A well drafted contract will include specific provisions dealing with the process under which claims are to be handled. At the very minimum, this should include prompt notice of the claim, prompt response to a claim, identification of the manner and nature of support that needs to be provided with respect to a claim and the manner in which parties may resolve the claim through litigation or alternate dispute resolution proceedings.
The parties must be mindful that there do exist outside limitations on the ability to pursue claims. These include the New Jersey Contractual Liability Act that creates certain notice provisions and time limits for the initiation of a suit against the State of New Jersey. Statutes of limitation and statutes of repose may also affect the ability of a party to bring a suit and create time limits for such a suit. With regard to state colleges, specific provisions deal with a requirement of a ninety day notice and the filing of suit within two years of the notice or one year of project completion, whichever is sooner. Parties may have lien or bond claims which have their own time restrictions under N.J.S.A. 2A:44-125 (Municipal Mechanics Lien Law) or N.J.S.A. 2A:44-143, et seq. pertaining to bond claims. Certain notices must be filed with regard to lien and bond claims dependent the level of the claimant in the hierarchy of construction parties. Accordingly, where a party may feel that it is entitled to certain relief by way of time extensions or monetary relief, it must be mindful of the contractual provisions dealing with claims which may create time limitations and conditions precedent and it must be aware of extra contractual statutory provisions that may limit or affect its ability to initiate a claim.
V. TIME AND COST CONSIDERATIONS
While scheduling requirements and the details pertaining to scheduling are intended to facilitate the construction process and to allow all parties to the project, the opportunity to monitor progress, issues arising from scheduling are normally manifested in the occurrences and claims of delay. The delay may result from the actions of one or more of the parties involved in the project. The consequences of a delay event can affect any number of parties involved in the project. The more events that are critical to the schedule, the more opportunities there are for a delaying occurrence.
A. Interim and Milestone Delays
Many projects will include as part of the scheduling requirements the establishment of certain milestones. These may be due to simply establishing scheduling benchmarks or, in the instance of “renovation and addition” projects, may provide for completion of a certain portion to utilize that completed portion while other work is performed. The failure to reach scheduled milestones must be quickly remedied to avoid significant problems. By example, a school district project for renovations and additions may require the completion of an addition prior to the commencement of the ensuing school year to allow the staff and children to move from the existing school structure to the addition while renovations occur in the existing structure. If the addition is not completed in time, it can affect this transition of students from the old to the new section thereby disrupting the sequenced events.
If any owner desires to create milestones or phased construction, it must include those requirements with sufficient clarity within the bid or contract documents. Failure to include identified phases or milestones and the sequencing of such within the bid and contractual documents can create a situation where later imposition of such sequencing can result in significant claims by the contractor for changed work or interference with “means and methods”.
The owner should also carefully review the milestones to determine whether or not it can legitimately consider liquidated damages for the failure of the contractor to meet the identified milestones. If a contractor’s failure to meet a milestone does not relate to potential monetary losses or additional costs to the owner, the arbitrary placement of a liquidated damage clause
may prove unenforceable. On the other hand, if the failure to meet a milestone could legitimately be anticipated to result in costs associated with relocation, increased administrative costs or other definable monetary damage to the owner, effort should be made to establish the parameters of a liquidated damage provision. The owner should keep in mind that liquidated damages cannot be arbitrarily established or represent a penalty.
Other options may present themselves to the owner if properly included within the contract documents including a specific ability to withhold payments in the event that a milestone is not met. The Owner should require a “make-up schedule” promptly implemented by the contractor. The withheld payments can be tied to the presentation and implementation of a proper make-up schedule. Costs associated with additional administration pertaining to a make-up schedule may be imposed outside of a liquidated damage provision if, again, properly incorporated within the contract documents.
Failure to meet milestones may also impact the contractor’s schedule resulting in potential losses. Where a contractor has scheduled its work to complete certain phases before it can move to the next phase, owner generated changes or delays as well as delays of separate contractors can create havoc in the contractor’s productivity. The same jobsite costs that may result from a delay in the final completion of the project could well develop in a milestone delay.
While there typically are no specific provisions within contract documentation that provide a contractor with specific rights in the event of a milestone delay, the contractor may well suffer costs associated with acceleration, escalation on future portions of the project, extended storage and equipment costs as well as the potential ripple effect on future work.
B. Owner’s Delay Remedies and Damages
Given that the overall project duration is typically established by the owner and that consequences or failure to meet that schedule are similarly established by the owner, the owner must maintain a significant degree of control in the contract documents.
Where a project does not complete in a timely fashion, the owner may bear significant costs associated with the delay. These can include claims by other contractors who have incurred delay costs associated with a specific delaying contractor, the cost of extended involvement on the part of its design and construction management professionals, costs associated with the loss of use of the facility (these may include costs such as storage, relocation, productivity losses, lost rentals from tenants, additionally costs for remaining in existing facilities, lost profits, and the like); the owner may also have financing costs that are increased by any extended time on the job.
An owner may seek recovery of these costs for a delay occasioned by the contractor’s delays by imposing a liquidated damage provision, by maintaining the ability to seek actual damages in the event of a delay or by a combination of the two. The owner may also impose other contractual remedies including withholding of payment applications, back charging for actual costs incurred, or imposing and withholding liquidated damages as the project progresses following the passage of whatever milestone or project duration endpoint may apply.
The New Jersey Courts have allowed certain owner related delay expenses: J.L. Davis & Associates v Heidler, 263 N.J.Super. 264 (App. Div. 1993) – upholding liquidated damage clause for contractor delay; Utica Mutual Insurance Co. v DiDonato, 187 N.J.Super. 30 (App. Div. 1982) – establishing standards to enforce liquidated damage provisions) The most commonly used provision by owners to protect themselves from contractor created delays in completion of the project (or of a milestone) is the imposition of a liquidated damage provision. This provision imposes a per diem cost for each day that the project extends beyond the established date for substantial completion, resulting from a contractor delay. The operable date, unless otherwise established, is typically the date for “substantial completion”.
This is typically defined as the date on which the owner obtains beneficial use and occupancy of the structure. Following substantial completion, the owner’s right to seek liquidated damages is limited since the owner effectively has use, possession, and control of the building and is not being “damages” by subsequent delays by the contractor in completing punchlist and other final completion work.
The Courts have imposed a number of limitations on the use of liquidated damages. Liquidated damages are allowed by the Courts where the basis for establishing the per diem charge is based upon a good faith calculation by the owner of potential damages that it might sustain in the event of a delay. The theory of liquidated damages is that at the time of contracting, the parties cannot accurately determine the precise damages that the owner might sustain in the event of a delay. Therefore, the Courts have imposed an obligation on the part of the owner to make an effort at the time of contracting to identify generally the types and quantum of damages that it might conceivably incur in the event of a delay in its ability to use the project. See: J.L. Davis v Heidler, supra.; Utica Mutual insurance Co. v DiDonato, supra; 218-220 Market St. Corp. v Krich-Radisco, Inc., 124 NJL 302 (E&A 1940). The Courts have not described how that process is to occur, but have generally made it clear that simply “pulling a number out of the air” or imposing a very high liquidated damage per diem number without any effort to consider how that number can be supported can void the entire liquidated damage clause. The New Jersey courts have determined that a liquidated damage provision is enforceable if it represents a good faith effort to estimate actual damages that may be occasioned in the event of the triggering a liquidated damage provision (Westmont Country Club v Kameny, 82 N.J. Super 200, 205 (App. Div., 1964). The Courts have further determined that such determination of reasonableness depends upon “totality of circumstances.” (Metlife Capital Financial Corp. v Washington Avenue Associates, LP, 159 N.J. 484, 495 (1999)). In determining such reasonableness under the totality of circumstances test, actual damages sustained should be reviewed (Days Inn Worldwide, Inc. v BFC Management, Inc. , 544 F. Supp. 2d 401, 406-407 (D.N.J., 2008). If the owner has selected liquidated damages as its recourse in the event of a delay without also reserving the right for actual damages, a determination by a Court that the liquidated damage providing is unenforceable may leave the owner with little or no recourse in the event of a delay.
Some owners will impose a liquidated damage provision, but include language that makes the liquidated damages cumulative to actual damages. This can be a dangerous proposition for an owner. By reserving its claim for actual damages associated with the contractor delay, the liquidated damage provision becomes a thinly veiled penalty clause. A better position by an owner who wants to hedge its bets would be a provision that states that actual damages may be sought by the owner either as an alternative or in the event that the liquidated damage provision may be determined to be unenforceable.
Another approach by an owner may be to include certain items such as the extended job costs for the design professionals and construction manager and others as a direct charge back not associated with a liquidated damage provision and then use a reduced number for the actual liquidated damages.
If the liquidated damage clause provides for a per diem that is too low and the owner subsequently discovers that its actual costs are significantly higher, to the extent that the liquidated damage provision is found to be appropriate and enforceable, the owner may be barred from seeking its further actual damages. On the other hand, if the liquidated damage provision is found excessive or otherwise is determined by the Court to constitute nothing more than a penalty, the Courts have determined that such a provision is unenforceable River Road Associates v Chesapeake Display and Packaging Co., Inc., 104 F. Supp. 2d 418, 423 (D.N.J., 2000 .
The alternative approach by an owner is to skip the liquidated damage provision and simply reserve its right to seek actual damages associated with the delay. This avoids the issues of unenforceability discussed above. It also assures that an owner has the opportunity to present all of its damages associated with the failure of the contract to substantially complete the project within the established time. Actual damages are not necessarily limited by the substantial completion dates since there may be actual damages incurred even after substantial completion.
The potential problems with the owner’s use of an “actual damage” provision are several fold. First, unless the owner specifically reserves the right in the contract documents to withhold funds while the project is progressing and following the contracted substantial completion date, the owner risks the possibility of providing the contractor with a claim that the owner is in breach of its obligations for non-payment. Secondly, the whole purpose of a liquidated damage provision is to compensate for fact that owners frequently have significant proof problems in establishing all their actual damages including loss of profits, additional financing costs, etc.
The “beauty” of a liquidated damage provision, if enforceable, is that the owner does not need to bring in reams of paper and experts to establish what may be fairly esoteric losses.
The current AIA general terms and conditions (AIA A201 2007) includes a joint waiver of consequential damages by the owner and the contractor. It does provide, however, that the owner may still invoke liquidated damages notwithstanding the waiver. Assuming that the owner has gone through the proper motions to establish a liquidated damage provision, it may be well served to consider the inclusion of this term since it is giving up much less than the contractor.
Finally, when faced with a delay issue, the owner must recognize that simply because substantial completion has not been obtained by the date that has been established in the contract or by any change order for its time extensions, its rights to seek delay damages under any theory is not unfettered. The contractor may be entitled to additional time extensions as a result of owner generated delays, co-prime contractor delays, Acts of God, or concurrent delays. While at first blush, the owner will typically start the meter running on its delay damages as of the date established by the contract or signed change orders for substantial completion, it may find itself with significant issues on the underlying facts that caused the contractor to miss the substantial completion date.
C. Contractor’s Delay Remedies and Damages
When the contractor signs onto a construction contract, it is agreeing that it will perform the contractual scope of work within the time period established by the contract. It is receiving an expressed or implied warranty by the owner that the project can be constructed in accordance with the owner supplied plans and specifications. Under the standard AIA and other form contracts, there is recognition that events may occur during the course of the project that will provide the contractor with additional time. Where an event occurs that the contractor can reasonably anticipate will delay its completion of the project (or a particular milestone), the contractor has certain rights and obligations to notify the owner of the event and to seek a time extension. These events may fall within the “Acts of God” category, beyond the control of any party. They may result from owner or design professional acts or omissions that may range anywhere from changes is the scope of the project to errors or omissions in the design documents to failure to obtain permits or approvals that may be the responsibility of the owner to delays in acting on contractor submittals and request for information.
In addition to seeking a time extension (the purpose of the time extension is to allow the contractor adequate additional time to complete the work and therefore to avoid imposition by the owner of its delay claims) the contractor will have certain rights with respect to costs associated with the delay. Absent an enforceable “no damage for delay “clause (discussed below) a contractor will have the right to seek a number of categories of costs associated with a delay in its work including:
- Labor and material cost escalation;
- Acceleration costs including expediting costs, premium time, increased manpower costs, and the like particularly where an delay event has occurred, but the owner has refused to extend the project completion date – typically referred to as “constructive acceleration”;
- Extended field condition costs represented by the cost of having utilities, trailers, equipment, etc. on the site longer than had been anticipated;
- Productivity and disruption costs represented by such factors as “downtime” for labor while answers are being sought, working out of sequence, mobilizing/demobilizing/remobilizing, and productivity factors associated with excessive overtime and/or over manning a job;
- Extended home office overhead (discussed below); and
- Consequential losses including the effects of tying up bonding capacity, the inability to move onto other projects, or to bid other projects
The New Jersey Courts have approved certain contractor delay damage categories: St. Joseph’s Hospital v Muirfield Construction Co, 362 N.J.Super. 540 (App. Div. 2003) – discussing acceleration costs; V.A.L. Floors Inc v Westminister Communities, 355 N.J. Super. 416 (App. Div. 2002) – discussing lost profits; Broadway Maintenance Corp. v Rutgers, 180 N.J. Super. 350 (App. Div. 1981); American Sanitary Sales Co. v State (178 N.J.Super. 429 (App. Div. 1981); Alliance Electric, Inc v CJ Electrical Contractors of South Jersey Inc, 2004 WL 583211 – App. Div. 2004 – discussing acceleration and constructive acceleration.
For the most part, contractor delay costs are established by calculating the actual costs associated with delays to the project. The categories of cost escalations, premium time, extended site overhead can often be verified and proven without too much difficulty assuming that the delay itself can be established as a compensable event. Productivity and disruption costs becomes more difficult and typically requires expert testimony to establish the “norm” or what was anticipated by the contractor verses what actually occurred and the costs associated with what actually occurred. Similarly, unabsorbed home office overhead has historically been a more theoretical loss. A contractor under a theory of unabsorbed home office overhead, is assumed to have calculated that a given project covering a specified period of time would result in revenues that would not only handle its job related costs, but would also contribute to covering its unallocated home office overhead (office rental, officers salaries, general insurance, owned equipment, etc.). All projects that the contractor would be performing during that period of time are assumed to be contributing funds on a pro rata basis to cover that home office overhead.
Where project completion is extended as a result of compensable delay, the theory of damages for unabsorbed home office overhead is based upon the idea that since the contractor is not receiving an increase in its contracted revenues, and cannot fully cover that projects portion of the home office overhead with substituted work since it is still dedicating its attention to that project, it is entitled to a monetary award to cover its home office overhead attributable to that project during each day of delay. To determine how that calculation is to be made, the Federal Courts have claimed and United States District Courts dealing with Federal delay claims have generally accepted what is known as the Eichleay formula (Eichleay Corp. 60-2 B.C.A.(CCH) 2688, 1960) as follows:
Contract Billing Total Home Office Home Office
_______________ x for contract period = overhead
Total company allocable to
Billing for contract contract
_________________ = Daily home office overhead allocable to project
Days of Contract performance
Daily overhead rate x Number of days of compensable delay
= total compensable extended home office overhead
If numbers relating to the identified categories are placed into this formula, it results in a per diem cost that is designed to compensate the contractor or delayed projects proportionate share of the contractor’s home office overhead during the time of the extended performance. The New Jersey Courts have not specifically adopted the Eichleay theory and the theory, itself, has undergone certain restrictions as the years have passed. The Eichleay formula today, requires further proofs by the contractor with regard to its claimed inability to find a substitute source of revenue during the period of delay P.J. Dick Incorporated v Principi, 324 F. 3d 1364 (Fed Cir 2003); Charles G. Williams Construction, Inc. v White, 326 F. 3d 1376 (Fed Cir 2003).
Accordingly, a contractor’s desire to pursue a delay claim that includes unabsorbed home office overhead is a very detailed and fact specific process.
A contractor’s ability to seek delay damages may also be impacted by the inclusion of a “no damage for delay” clause within the contract. These clauses have typically been inserted in construction contracts by owners standing for the proposition that any delay, with a cause by an act of god or by the owner, will entitle the contractor only to the right to seek a time extension, but not damages or cost associated with the delay. Such clauses have over the years been affected by legislation with regard to public entities. By statute, a no damage for delay clause that prevents the contractor from seeking costs associated with a delay resulting from the acts of a public owner or its representatives is now against public policy and unenforceable. (N.J.S.A. 18A:18A-41). Even in private projects where the statutes do not apply, case law has established that a no damage for delay clause will have limited effect and shall not be enforced to the extent that a delay resulting from an affirmative act or active interference of the owner or its representatives (Edwin J. Dobson, Jr., Inc. v State, 218 N.J.Super. 123 (App. Div. 1987). It should be noted that the AIA A201 form does not include a no damage for delay clause and therefore the contractor operating under the A201 form will retain the right to seek damages associated with a delay, unless such are classified as consequential damages subject to the waiver provisions of the A201 form.
VI. SPECIAL PROCUREMENT PROVISIONS
State projects N.J.S.A. 52:25-1 et seq.; 52:27BB-1 et seq.; 52:18A-78.1 et seq.; 52:32-2 et seq.; 52:34-6 et seq.
Local public projects N.J.S.A. 40A:11-1 et seq.
Public school construction N.J.S.A. 18A:18A-1, et. seq.
New Jersey Schools Development Authority projects N.J.S.A. 18A:7G-1, et. seq.
New Jersey Pay to Play provisions N.J.S.A. 19:44A-1, et. seq. N.J.A.C. 19:25-26, et. seq.
New Jersey Prompt Payment Act N.J.S.A. 2A:30A-1, et. seq.
New Jersey Municipal Mechanics Lien Law N.J.S.A. 2A:44A-125 et seq.
New Jersey Public Improvement Bond Act N.J.S.A. 2A:44-143, et. seq.
Dating back to 2004 and earlier, the Governor’s office and legislature has placed a number of disclosure requirements and limitations on the public contracting and processes associated with what is known as “pay to play”. This has reached the point to bear upon not only state contracts and procurement but also upon county, local, authorities and Boards of Education engaged in public procurement under the quilt-work of various “pay to play” executive orders, regulations and legislation. On top of the state wide requirements, counties and localities have been permitted to pass and implement their own “pay to play” laws. The laws may be enforced by the individual counties and localities, as well as the Department of Treasury, ELEC (“Election Law Enforcement Committee”), the Department of Community Affairs. Division of Local Government Services, among other entitles.
The primary emphases of the laws are first disclosure and secondly potential disqualifications. Under the disclosure requirements, a contractor/vendor would be required to disclose total contributions either prior to the contract award or through an annual disclosure statement. An example would be the provisions of N.J.S.A. 40A:11-51 et seq. (frequently known as “Chapter 271”). More frequently these disclosure requirements are being included within the bid documents, although pursuant to the statute, it is not necessary under that legislation to provide the disclosure until after the bid and as a condition of award.
On a second level, contractors/vendors may in fact be disqualified from bidding or responding to a procurement request based upon certain contributions which may render them ineligible to receive contract awards during a prescribed period of time. These are typically not included within the initial bid submittal but represent a required disclosure following bid opening but prior to award (see Executive Orders 134 and 117, and N.J.S.A. 19:44A-21.13.) These provisions also require a termination of a contract already entered where the contractor/vender makes such a disqualifying contribution during the term of the contract.
In certain instances, the “pay to play” laws may have exceptions where there is a “fair and open” contracting process which would include those awarded under public competitive bidding, competitive contracting or public advertisement. This exception is inapplicable, however, to contracts over $17,500, which are subject to Executive Order 117 and 134 as well as N.J.S.A. 19:44A-20.13.
Depending upon the statue or executive order (or locally adopted requirement) there is typically a minimum limit on the amount of the contribution (state “pay to play” laws require a contribution of $300 or more); there may be extended application of contributions such as those made by shareholders, subsidiaries, partners, spouses, and the like; and there may be an aggregation of contributions that will be applicable.
The “pay to play” laws may also include geographical limits with respect to the recipient of a contribution. There are also very limited circumstances in which a contribution made can be rescinded thereby removing the applicable qualification. At the disclosure level (N.J.S.A 40A:11-51 and N.J.S.A. 19:44A-20.26 to 20.27), the requirements are applicable to all levels of government for “non-fair and open” contracts. These are very broad in attribution with respect to shareholders, partners, subsidiaries, officers, spouses, etc. and are also broad with respect to what must be disclosed including contributions to state, county and municipal parties, PACs, legislator leadership committees, and state, county and municipal candidates.
There have not been any legislative changes at this stage, nor any case law or other formal addressing of the situation involving “Super-PACs” that was addressed in Citizens United v. Federal Election Commission, (558 U.S. 50, 2010) regarding “non-controlled” political action committees.
There has been surprisingly little caselaw originating out of the Pay-To-Play laws. The primary cases have simply upheld various provisions against constitutional challenges (See: In re Langan Engineering & Environmental Services, Inc., 425 NJ Super. 577 (App. Div. 2012) and In re