August 23, 2018
Author: Don Harrington
Organization: Sage Consulting Group
Sound project management is essential to the efficient and cost effective prosecution and completion of any construction project. Competent and effective project management and supervision is a must if a contractor wishes to timely complete a project within the stipulated contract requirements. While implementation of competent project management is the basis of all successful construction projects, failing to implement competent project management and supervision is one of the most common reasons projects fail.
A. Follow Plans
The basis of all construction projects are the plans and specifications. Plans and specifications delineate precisely how the project is to be constructed. Plans and specifications set forth the desires of the owner. Most construction contracts require the contractor to follow the plans and specifications. It is incumbent on the contractor to review these documents and be familiar with them. This familiarity begins with the estimate. However, in many cases the person who performs the estimate is not the individual who actually constructs the project. It is imperative that the estimator coordinate with the actual individual who will be constructing the project.
During the course of preparing the estimate, the estimator will typically review the plans and specifications in detail to determine how to price the work. During this detailed review questions often arise relative to the plans and specifications. Many times these questions are answered with changes to the plans, which are ultimately incorporated into the contract documents using contract addendum. In many cases the questions may only be answered through pre-bid meetings. In any event, the information obtained and utilized by the estimator must be transmitted to the actual project management team to insure the project is constructed according to the plans and specifications.
Once the actual project management team begins work, it is performed using the approved plans and specifications. The contractor cannot deviate from these approved plans and specifications without written approval from the design team and/or project owner. The contractor cannot make unilateral changes to the approved plans and specifications regardless of the reason. If the contractor does make changes without approval it is at his own risk. If the owner fails to approve such changes the contractor may be liable to remove the unapproved work and replace it according to the contract requirements often at great cost to the contractor.
B. Does Following Building Code Imply Design
Most construction contracts not only require the contractor to perform work according to the approved plans and specifications but also to all applicable building codes and requirements of the jurisdiction in which the project is being constructed. However, in many cases the approved plans may contradict the building code. The contractor is generally not privy to discussions and negotiations that occurred between the owner, design team, and local building department. If the contractor believes that the approved plans and specifications conflict with the building code, the contractor must obtain clarification. The contractor cannot construct to the building code and then claim that the plans and specifications were deficient.
In many cases, the plans may not fully delineate how particular areas should be constructed. For instance, the plans may not describe how window opening are to be installed with respect to flashing. The building code typically requires buildings to be weatherproof and openings to be flashed, yet does not describe how this requirement is to be accomplished. If the contractor decides to utilize flexible flashing along with sheet metal flashing for each opening without either obtaining clarification from the design team or at least informing the design team of its plan, the contractor may be considered the design professional for at least this portion of the work. If there is a failure of the flashing due to design, and not installation, there is the potential for significant property damage. Most contractor’s general liability insurance does not cover design work unless there is a specific endorsement and even then the policy may limit the recoverable amount to the cost of the design work leaving the contractor responsible for significant expense.
The contractor must also be aware of what building code, if any, has been adopted by the building jurisdiction that is responsible for inspecting the project and issuing a building permit. The specific building code requirements applicable to a project can vary dramatically from jurisdiction to jurisdiction.
Competent project management and supervision can avert such possible expense by following the plans and specifications and obtaining approval for all intended procedures that are not specifically set forth in the plans and specifications.
C. Importance of Sound Management Practices
As discussed project management and supervision can make or break a project. Failure to utilize competent project management and supervision can result in substantial cost to the contractor in liquidated damages, correction of defective work and redoing work to conform to the approved plans and specifications. The basis of a successful project is rooted in the ability of the project management team to effectively and efficiently perform the work within the terms of the agreement, the approved plans and specifications and local building jurisdiction requirements.
II. Inefficiencies and Productivity Loss
Disruptions often affect both productivity and time of performance. Disruptions are often found on projects where there have been delays that extend the duration of the work. Studies indicate disruptions in excess of one per 100 hours can cause significant productivity losses.1 Studies also show changes that result in disruptions in the last quarter of the project are six times more expensive than changes during the first quarter of work. The later that changes occur in the project, the less time there is to mitigate the effects of those changes and resulting impacts.
Acceleration occurs when the contractor is required to complete some or all of the work within a shorter duration of time than reasonably planned. Acceleration often results from delays early in a project or to complete more work resulting from change directives in the same duration as originally contemplated in the original contract. Acceleration on a project generally leads to overcrowding and trade stacking, increased crew sizes, increased shift lengths, working more days per week, all of which can result in inefficiencies and lost productivity leading to increased costs.
Overcrowding is the simultaneous operation of several trades in the same area. Lowered productivity can result from having more workers than can function efficiently in a limited working space. A contractor seeking to prove lost productivity from overcrowding must demonstrate that: (1) congestion or trade stacking was not originally contemplated because the work was planned sequentially; (2) the overcrowding was the result of the owner’s actions; and (3) productivity losses resulted from the congestion. As an example, if an electrical item that takes three workers is shifted into a period of time where 15 workers are already performing their drywall and painting activities, a 20% crowding factor (3/15) has been incurred, impacting all 18 workers.
D. Changes in Hours or Crew Size
As more workers are added to the optimum crew size, contractors can expect diminished returns on each additional worker—each new worker will increase crew productivity less than the previously added worker. The optimum crew size for a project or activity represents a balance between an acceptable rate of progress and the maximum return from the labor dollars invested. Increasing crew size above optimum will usually produce a higher rate of progress, but at a higher unit cost. Working more than eight hours per day or more than five days per week introduces premium pay rates for workers, and results in efficiency losses. The efficiency losses result from a slower pace maintained by workers, and fatigue from longer hours.
Working sustained overtime of 50 hours a week for 6 weeks will result in a productivity loss of approximately 15 percent and working 60 hours per week over 6 weeks will result in a productivity loss of approximately 28 percent. As noted in The Business Roundtable, “After five to six weeks of operations, there is a further drop in productivity which levels out at a low point after nine to twelve weeks of sustained overtime operation.”2 Industry studies indicate that the productivity of laborers who work 50 hours per week for a period of 10 weeks can decrease by as much as 35 percent, and that 60-hour work weeks performed over the same time period can result in a decrease of labor productivity up to 45 percent.3
E. Changes to Means and Methods
When a contractor estimates the cost of performing the work, specific means and methods for various portions of the work were determined. The methodology utilized by the estimator must be imparted to the actual construction management team. When a contractor’s means and methods are changed, for whatever the reason, it can have a significant effect on the cost of performing the work. If a contractor’s means and methods are changed or disrupted by the owner it is typically the owner’s responsibility to compensate the contractor for any costs incurred by the contractor as a result of the owner’s actions. However, it is incumbent upon the contractor to provide proof of any alleged increase in cost. It is the responsibility of the project management team and supervision to be knowledgeable of what the anticipated means and methods were, so that they identify when there is a change to those means and methods. It is also incumbent upon the contractor to segregate the costs associated with a change in means and methods. Therefore, the project management team must not only know the planned means and methods but be able to identify when those means and methods have been changed or disrupted so that the cost of the change and/or disruption can be tracked in order to be compensated.
III. Scheduling Issues
A. Inadequate Project Planning
All projects must have a plan, including a schedule, along with means and methods in order to be constructed. It is imperative that a detailed schedule be developed so that the project management team can effectively construct the project. All too often contractors prepare a schedule just because it is a contract requirement. The project schedule is the basis for all work and claims of compensation that are time related. A poorly prepared schedule results in a contractor unable to effectively and efficiently perform the work. It also prevents a contractor to effectively make claims for added cost related to scheduling or project delay issues. Every project should have a detailed plan and schedule that contains enough detail to allow the contractor to not only construct the project within the contract requirements but also to track progress so that potential problem areas can be addressed before they become a major issue and/or impact to the project.
The more detailed and sophisticated the project, the more important a good project schedule and plan becomes. Without a detailed schedule and plan the contractor cannot effectively and efficiently perform the work, which leads to cost overruns and delays, leaving the contractor open to litigation by the owner to recover any costs the owner feels it incurred as a result of the contractors actions. An inadequate plan and schedule leaves the contractor unable to defend such claims.
B. Poor Estimates
The basis of all construction projects begins with the estimate. Quantities are calculated, procedures determined and methodology determined. If the quantities of material are not correctly determined it can lead an improper project schedule. For instance, if the contractor knows it can install 100 linear feet of pipe per day and the estimate determines there is 1,000 linear feet of pipe to install, the scheduler will allow 10 days to install the pipe. However, if there was actually 1,500 linear feet of pipe on the project, then the project schedule should have allowed for 15 days to perform the work. Under this scenario the project schedule is short by 50 percent. The contractor will not have enough material ordered and will not have allowed for sufficient labor to install that material, resulting in delays to the work. Delays cost money either in extended general conditions or acceleration costs utilized to recover the schedule and time lost.
Conversely, if the estimate contains 1,500 linear feet of pipe and there is actually 1,000 linear feet of pipe on the project, the estimated cost will overstate the necessary work to be performed and in all probability the contractor will not be the successful bidder. Estimates are a critical first step in any construction project.
C. Incorporating Change Orders, Delays, etc.
Virtually every construction project will experience changes and delays. It is the responsibility of the project management team to respond to those changes and delays in a timely and cost effective manner. As previously discussed, failure to do so will result in added cost to the project and ultimately the contractor.
As is the case in many states, Colorado has not defined what constitutes a construction defect, either through legislation or court findings. The dictionary defines a defect as a shortcoming, fault, or imperfection. Based on the definitions of “action” and “actual damages” under
Colorado's Construction Defect Action Reform Act (CDARA),4 a defect likely includes any constructed condition that leads to: (a) actual damage to real or personal property; (b) actual loss of use of property; (c) bodily injury or wrongful death; or (d) a risk of bodily injury or death to, or a threat to the life, health, or safety of, the occupants of the real property. Outside of these qualifications, CDARA does not explicitly define construction defect.
Colorado courts have not resolved the ambiguity. The Colorado Court of Appeals has held that a \"defect\" includes an irregularity in the surface or a structure that spoils the appearance of or causes weakness or failure in an improvement to real property, a fault or flaw, or a want or absence of something necessary for completeness, perfection, or adequacy in form or function.5
Most standard form construction contracts also do not contain a specific definition of “defect,” although some indicate that work that fails to comply with the contract requirements may be considered defective. For example, AIA A201-2007, General Conditions of the Contract for Construction, provides in Section 3.5 that the contractor warrants that the work “will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials, or equipment not conforming to these requirements may be considered defective.”
Failure to construct a home or building in a reasonably workmanlike manner may result in a construction defect. This means executing the project without egregious errors in the construction, design, planning, supervision, inspection, or observation that result in a structure with physical damage or an inability to perform in the manner reasonably expected by the buyer. Common examples of construction defects include sagging floors; concrete cracking and heaving from poor drainage and expansive soils; excessive settlement; improper installation of flashing on roofs, balconies, and decks resulting in water intrusion and mold; exterior steel not properly finished; incorrect piping material; improperly sized wiring or too many wires per conduit; and omitted firestopping.
In order to be a construction defect, whether defined as a shortcoming, fault, blemish or imperfection, a condition existing in the structure must be measured against a minimum standard or requirement.
A. Defect Categories
Construction defect claims generally fall into four categories:
- Geotechnical and Subsurface Issues: Construction in Colorado presents considerable challenges for designers, builders and developers. Like much of the Great Plains, large areas of Colorado are underlain by expansive or collapsible soils. Also, building in the state’s many mountain communities introduces other risks and hazards, such as slides and fractured rock. If not properly addressed during design and construction, these geotechnical hazards can lead to cracks in the foundation, foundation movement, settlement, or water infiltration, to name a few problems.
- Issues from Poor Design: Poor design can be an issue in the initial design or as part of a design change during construction. It can manifest in many ways: inadequate coordination between disciplines, a design that is theoretically sound but not constructible in the field, insufficient capacity, overlooked or insufficient details. If the error is discovered after construction has started, it can be hard for an owner or contractor to know how to correct or compensate for it, which may lead to even more problems and delays. An example is a unique but complex roof design that is prone to leaking due to many intersecting ridges and valleys and correspondingly complicated flashing. Another example is a stormwater detention pond that doesn’t have the capacity to meet code requirements, but once design is complete and construction starts, it becomes apparent there isn’t room on the building site for anything larger.
Details are often changed during construction by the owner, the design professional, or even the local jurisdiction’s building department. The reason for the change could be to save money, get something to fit, resolve a conflict between disciplines, or gain compliance with a building department’s interpretation of a code. Any change should be fully coordinated and reviewed by the designer and owner in conformity with the quality control standards of the project to insure compliance with design criteria and local codes.
- Poor Construction Practices or Workmanship: Inexperienced or unqualified contractors and/or their employees could be responsible for defective work being installed. This would be compounded if a construction team succumbs to schedule or budget pressures, abandoning good management practices or quality control oversight. These pressures, present on many construction projects, increase the likelihood of defective work getting installed and not being timely discovered.
- Building Material Failures: Whether due to inadequate materials or low quality, structural components and building materials can fail. This may be due to something that occurred during the manufacturing process or the material may have been incorrectly installed, exposing it to stresses or environmental conditions outside its specifications. Even when installed within the specified tolerances, materials are affected differently by different climates; what works in Florida may not work in Colorado. There could be unforeseen interactions of components or materials that come into contact with each other. Examples of large-scale failures include prematurely deteriorated roof or window systems, spalled concrete, rotted wood elements, and peeling paint.
New construction materials enter the market every year, whether intended to contribute to LEED certification and sustainable construction or simply as advances in material and function, but some may not be adequately tested to determine how they work with more traditional materials or to identify life-cycle issues.
- Defects can result from a lack of maintenance by the owner. For example, minor settling of backfill at a foundation wall might be enough to allow water to flow down to the foundation, causing foundation movement. Water flow around a foundation could also result from over irrigating or improperly adjusted irrigation systems. Deterioration of sealant would allow moisture intrusion and subsequent damage to underlying materials.
B. Inspection for Defects
“Patent” is synonymous with obvious, evident, conspicuous, and unconcealed. A “patent defect” is one that is known or was discoverable by reasonable inspection during the construction period. “Latent,” on other hand, means present but not readily visible or apparent, existing as potential. A “latent defect” is generally defined as defective work that was not known and not discoverable by a reasonable inspection during performance of the work. Thus, whether a defect is patent or latent basically depends on whether someone knows, or should know, about it prior to completion of the work. A patent defect would be discovered by a reasonable and customary inspection, and the failure to conduct such an inspection is not an excuse for overlooking patent defects.6 Whoever is responsible for inspecting must exercise due diligence to ensure the quality of the finished product; due diligence must have been satisfied in order to successfully assert in the future that a latent defect exists.7 It should be noted that the standard of due diligence varies according to the knowledge of the one inspecting for defects. In other words, what may be a latent defect in a building constructed for a private homebuyer could be a patent defect in a facility built for a large, experienced company with construction professionals on staff.8 The distinction is important because an owner that accepts a project as complete will generally be held to have waived any claims as to patent defects, but not as to latent defects.9 Further, in some states, not including Colorado, there are different statutes of limitations for patent and latent defects.
Examples of typical patent defects that readily become apparent and can be repaired during construction include water seepage, a leaking roof, insufficient lighting, wrong material installed, windows installed backwards or upside-down, omitted sealant, and inadequate sound control. Examples of defects that may not be detected until after completion of the work and could therefore be considered latent defects include defective plumbing and electrical systems, improper vapor barrier installation leading to harmful mold and bacteria, improper backfill compaction, and structural failure and collapse.
C. Right to Repair/Right to Cure Law – CDARA Notice of Claim
CDARA §13-20-803.5 Notice of Claim Process establishes a right to remedy and notice provision in the event of alleged problems with construction. The claimant is required to notify the builder of the claim and the alleged defects at least 75 days prior to filing an action for a residential property and 90 days prior for a commercial property. According to the timeline established in this section of CDARA, the construction professional has the right to inspect the claimed defect within 30 days and submit to the claimant a proposal to rectify the problem. This provides the builder the opportunity to address any alleged construction defects outside of the courtroom and potentially bypassing all litigation. The homeowner has 15 days to review the offer and decide whether to accept it. The homeowner may file suit at the earliest 75 days after the Notice of Claim if the construction professional ignores the Notice of Claim, the construction professional fails to make an offer, or the claimant rejects the offer. The Notice of Claim spells out the sequence of steps leading to satisfaction of the parties, either through correction of the defect or mediation/litigation. This bill establishes consequences for unresponsive parties, so it’s important to be familiar with the responsibilities spelled out in this section.
CDARA §13-20-802.5 defines who is a “construction professional” and on whom a Notice of Claim may consequently be served: “…an architect, contractor, subcontractor, developer, builder, builder-vendor, engineer, or inspector performing or furnishing design, supervision, inspection, construction, or observation of the construction of any improvement to real property.” It should be noted that the list does not include materials suppliers or vendors, andit appears that claims against suppliers and manufacturers are governed by the Uniform Commercial Code, rather than CDARA.10
Requests for “ordinary warranty service” are excluded from CDARA’s Notice of Claim process.11 However, claims for breach of warranty are not excluded. In addition, an improper warranty repair can be a construction defect, subject to CDARA, if the repair is “essential and integral to the function of the construction project.”12
Under Colorado’s Consumer Protection Act (CCPA),13 a design professional or contractor may be liable for treble damages if found to violate the CCPA.14 A Colorado district court recently held that an insured under a commercial general liability policy of insurance can state a claim for violation of the CCPA when the insurer handles a construction defect claim in bad faith.15
D. Allocation of Damages
If a construction defect claim is successful, the cost of repairing or replacing the defective work, i.e., the damages, will have to be quantified. If CDARA is applicable, the amount of damages may be subject to certain limitations.16 However, if the injured claimant is able to prove that more than one party’s conduct was a cause of the claimant’s damages, there is no requirement in Colorado that the claimant also establish the percentage fault of each liable party. Instead, under Colorado’s Pro Rata Liability Act, CRS §13-21-111.5, the trier of fact is required to determine the percentages of fault and the proper allocation of damages once the claimant has established liability.17 Thus, if a defendant contends that another party or a thirdparty is responsible for some of the damages for which defendant is otherwise responsible, the burden will be on the defendant to establish such liability.
The allocation of damages among the various responsible parties might not exactly correlate to the parties listed in the complaint. For example, if the owner asserts a claim against the general contractor for damages arising from defective roof construction, the general contractor may assert that the roof design was defective,18 that certain components of the roof were defectively manufactured, and that the roof was improperly installed by one of its subcontractors. All of the allegedly responsible companies are parties to the action, except the manufacturer of the roof components, which went out of business soon after completion of the project. Each of the parties will likely present expert reports detailing the respective liability of the other parties for the defective roof, and some of those reports may allocate some portion of the responsibility to the non-party manufacturer. In addition, the total liability assigned by a given party may exceed 100 percent, since some parties may be alleged to have joint and several liability. Some or all of the parties will also submit expert reports quantifying the costs of repairing the defective repair, and those costs of repair will then be allocated according to the percentage allocations of liability.
Failure to allocate responsibility can have severe consequences. For example, the Boulder County District Court sanctioned builder D.R. Horton by dismissing its $40 million third-party claims against its subcontractors on the Summit at Rock Creek project due to D.R. Horton’s “failure to provide the third-party defendants with a specific apportionment of fault in a timely manner,” along with other discovery failures.19 Thus, although the burden of proof may be on the defendants to establish the appropriate allocation of liability, the claimant may have discovery obligations which require it to submit its allocation of liability to the defendants, absent which the claimant’s claims may be dismissed.
E. Insurance Coverage
Insurance coverage for defective work has been a disputed issue throughout the country for many years. In many states, including Colorado, a CGL policy will cover damage caused by defective work but not the cost to repair the defective work itself. In Greystone Constr., Inc. v. National Fire & Marine Ins. Co.,20 the Tenth Circuit held that, under Colorado law, “occurrence,” encompassed “unforeseeable damage to nondefective property arising from faulty workmanship” under a comprehensive general liability (CGL) policy. The court first determined that Colorado Revised Statute §13-20-808, which was revised in 2010 to specifically provide that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured, could not be applied retroactively.21 The
Court then determined that Colorado would hold that under a CGL insurance policy, faulty workmanship, standing alone, is not caused by an accident, but damage to other property caused by the faulty workmanship, including both the nondefective work product of the contractor and third-party property, may be the result of an accident under Colorado law. The Court found that the issue is not whether the damage was “fortuitous,” but whether it was “foreseeable,” as damage that would not have been foreseeable if the builder and his subcontractors had completed the work properly constitutes an “accident” and thus an “occurrence” under the CGL policy. Based on this analysis, the court held that consequential damages to nondefective portions of the houses, in the form of movement of basement floors and damage to upper living areas, allegedly resulting from houses’ continuous exposure to expansive soils, which otherwise had not been prevented due to subcontractor's poor design and construction of houses’ soil-drainage and structural elements, may have resulted from an unforeseen occurrence, since neither the exposure to the expansive soils nor the resulting damage was intended or anticipated by the policyholders. Thus, the insurer had the duty to defend the insured general contractor under the CGL insurance policy with respect to alleged damage to the homes themselves – the non-defective work product – although those damages did not necessarily occur by chance. In contrast, the damage to the soil-drainage and structural elements of the homes – the defective work product – would not be an “occurrence,” as the “obligation to repair defective work is neither unexpected nor unforeseen under the terms of the construction contract or the CGL policies. Therefore, repairing the foundations represents an economic loss that does not trigger a duty to defend under the CGL policies.
A Colorado appellate court recently held in Melssen v. Auto-Owners Ins. Co.22 that a commercial general liability insurer impliedly consented to the CDARA notice of claim process initiated by homeowners against the insured contractor where the claims adjuster knew of, and did not object to, the contractor's intention to investigate the homeowner’s property damage claim and pursue settlement discussions. The court held the insurer thereby triggered the insurer's duty to defend, even though that duty normally is not triggered until a complaint is filed.
F. Determining Standards of Care
Although there is no exhaustive list of standards of care applicable to construction work against which to measure the potential allegedly “defective” nature of the work, following are potential sources of standards of care:
(1) The construction or design contract documents, including the plans and specifications. This is the first source to consult to determine some of the key applicable standards of care. The contract should identify the standards for the performance of the work, including detailed references in the specifications to applicable codes and standards. A breach of contract is established when it is proven that the contractor or designer did not comply with the contracted for performance.23 A negligence claim can also be established using this standard of care. That is, failing to provide the performance required by the contract is a failure to act as a reasonable contractor would under similar circumstances. Defining the standard of care is facilitated if the construction documents include a very specific list of standards precisely define acceptable performance. Given that the contract will set the duties of the contracting party, the particular contract language must be carefully analyzed, as there are tremendous variations even among the standard form contracts. For example, two common form contracts between the architect and the owner differ considerably in defining the standard of care. AIA B101-2007, Section 2.2, states, “The Architect shall perform its services consistent with the professional skill and care provided by architects practicing in the same or similar locality under the same or similar circumstances.”
In contrast, the AGC’s ConsensusDOCS 240 (2011), Standard Agreement Between Owner and Design Professional, doesn’t attempt to establish a particular definition for the standard of care, but instead requires the architect to accept a “relationship of trust and confidence” and to work together with the owner “on the basis of mutual trust, good faith and fair dealing….” This language indicates a fiduciary relationship, which is a higher standard of care that would normally be imposed under the common law. Design professionals’ insurance policies may not cover what otherwise would be considered errors and omissions if this is how the contract defines standard of care.
(2) Building codes. Most construction contracts specifically require that the work comply with applicable codes and regulations, but these apply as a matter of law. It’s important to be aware that plans and specifications for a particular project may not explicitly comply with applicable codes based on negotiations with the building department. In that case, the contractor’s responsibility to specifically conform to the building codes may potentially be limited.
(3) Common law standards of care. The general duty of workmanlike performance is implied by law in the performance of construction work, which requires the exercise of reasonable care in the performance of the work. A design professional must exercise reasonable care in the preparation of the design documents, which is generally defined as the use of the same degree of care, skill, and diligence as others in the profession would exercise under similar circumstances.24 This can be further determined by expert testimony and/or by reference to standards endorsed by relevant associations that are generally accepted and applied in the locale of the project.
It is important to note that the design and construction of the project should be judged by the standards in place at the time the contract was executed, the design documents issued for construction, and the work was performed.25 If the claim results in a trial or hearing, it could be ten years or more after the structure was built before the facts of the case are presented. Even though the standards applicable to design, construction materials, means and methods in the claim may have changed dramatically, all the documentation relied upon in the case should have existed and been generally accepted before the design/construction activities took place or be based on those pre-existing standards. If repairs or replacement is requirement to correct the defective work, application of the current codes may result in significant changes to the project. The added cost to comply with the current code should not be borne by the contractor or design professional.
In order for a party to meet its evidentiary burden in making a construction defect claim, expert testimony will be necessary if the existence and the cause of the defect, including whether it resulted from the failure to comply with the contract requirements or with applicable standards of care, is not obvious to an average juror.26 However, whether a defect is latent or patent may be determined without expert testimony, depending upon the nature of the defects. In Park Rise Homeowner’s Ass’n v. Resource Constr. Co.,27 the Colorado Court of Appeals reversed a directed verdict in the contractor’s favor, finding no requirement in Colorado that latent defects be identified through expert testimony. “Applying the test of whether such defects were discoverable through reasonable inspection by a home buyer to the eighteen defect categories used by the HOA's damages expert, several of which were broken down into subcategories, the jury could, based on its common knowledge and with a proper instruction, have determined which defects were latent.”
V. Federal, State, and Local Regulations Regarding Construction Defects
A. Building Codes and Standards
Design and construction contracts often cite compliance with building codes as a minimum requirement. The codes might serve as an objective standard to determine if a condition is defective. Although some use less recent editions, the Colorado state government and most major counties and municipalities currently use the 2009 editions of the International Building Code, the International Residential Code, the International Energy Conservation Code, the Uniform Plumbing Code, the International Mechanical Code, the International Fuel Gas Code, and the 2011 National Electrical Code. These codes also incorporate numerous standards, which are typically listed or otherwise identified within the code. Some municipalities, such as Boulder, Fort Collins, and the City and County of Denver, develop and publish amendments to these codes.28 It is important that both the design and construction team are knowledgeable about the applicable codes for the specific project.
Well known federal standards include the Americans with Disabilities Act (ADA); the Occupational Safety and Health Administration (OSHA) Regulations for Construction; and numerous Environmental Protection Agency (EPA) compliance legislation such as National Environmental Policy Act of 1969 (NEPA), as amended, the Endangered Species Act, the National Historic Preservation Act (NHPA), the Clean Water Act, the Clean Air Act, and the National Pollutant Discharge Elimination System (NPDES) program.29 In addition, federal agencies often have their own construction standards and requirements for projects that they fund.
Construction defects may give rise to claims for breach of express or implied warranties. Warranties included and written out in the contract or provided orally are express warranties. To recover for breach of an express warranty, a plaintiff must prove the following elements: (1) an express warranty existed; (2) the defendant breached the warranty; (3) the breach proximately caused the plaintiff’s losses; and (4) timely notice of the breach was given to defendant.30 An express warranty is not required to be in any specific form, and may be written or oral.31
Implied warranties stem from the idea that the construction project generates a product that is guaranteed, which generally applies only to transactions between builder-vendors and the homebuyer, and not to commercial construction. A builder-vendor is one that builds new homes that are sold to the general public through a commercial sale, including commercial entities that build tract and speculative homes, and is held to impliedly warrant that the house is “habitable.”32 A buyer is entitled to relief based on the theory of the implied warranty of habitability if he proves “the house was not built in a workmanlike manner or that it was not suitable for habitation.”33 The warranty of habitability \"has been likened to strict liability for construction defects, and proof of a defect due to improper construction, design, or preparations is sufficient to establish liability in the builder-vendor.\"34 The general contractor of a custom home for a specific owner based on the owner’s design does not owe an implied warranty of habitability because the home is not subject to a commercial sale by the general contractor to the general public. However, if a general contractor builds a “spec” home, or sells a custom home to someone other than the original planned purchaser, the implied warranty of habitability would be applicable, as the contractor would then be a builder-vendor selling to the general public.35
Another implied warranty is the warranty of workmanlike construction. This warranty does not guarantee perfect construction by the builder. \"For construction to be done in a good and workmanlike manner, there is no requirement of perfection; the test is reasonableness in terms of what the workmen of average skill and intelligence (the conscientious worker) would ordinarily do.\"36 Lack of definition for “reasonableness,” along with other ambiguous terms, can be a problem. Both contractors and subcontractors are held to have independent duties of care to construct homes without negligence.37 What constitutes a “workmanlike manner” may vary with individual locations.
Many residential builders’ buy/sell agreements have included express waivers of liability to preclude claims of negligence, breach of contract, or the implied warranty of habitability, in exchange for the builders providing express warranties. These waivers are no longer valid under the 2007 Colorado Homeowner Protection Act.38
C. List of State and Local Regulations
i) CDARA I (2001).
ii) CDARA II (2003).
iii) Homeowner Protection Act (amendment to CDARA) (2007) – The Homeowner Protection Act prevents a construction professional, typically a builder-vendor, from contractually limiting a homeowner’s or homeowner association’s time to sue for a construction defect to a period shorter than that provided under the statute of limitations or repose applicable to each claim for relief asserted.
iv) Breach of implied warranty (i.e., unwritten warranties concerning homes and land imposed by Colorado courts as a matter of law).
v) Colorado's Consumer Protection Act (CPA), C.R.S. Sections 6-1-101, et seq., relating primarily to unfair or deceptive trade practices – CDARA included limitations on a builder’s liability for treble damages under the CPA.
vi) Colorado's Soils Disclosure Statute, C.R.S. Section 6-6.5-101.
vii) Colorado's Common Interest [Condominium/Townhome] Ownership Act (CCIOA), C.R.S. Section 38-33.3-101 – CDARA amended Section 38-33.3-303.5 of the CCIOA to require homeowner associations to disclose claims of construction defects it asserted in litigation to its members and any prospective buyers of units within the association.
viii) Local amendments to international building codes.
D. Statute of Limitations and Repose
The Colorado statute of limitations governing contract causes of action, including breach of contract and breach of warranty, requires that an action be brought within three years after the cause of action accrues.39 Tort-based claims, such as negligence and strict liability, are governed by a 2-year limitation.40 Colorado has also enacted a statute of limitations and repose applying specifically to certain actions relating to the construction of improvements to real property as part of CDARA. Statutes of repose are distinguishable from statutes of limitation in that they specify the absolute time during which a cause of action can arise. Under Colorado Revised Statutes (C.R.S.) § 13-80-104, \"all actions against any architect, contractor, builder, or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall be brought within the time provided in section 13-80-102 [2 years] after the claim for relief arises, and not thereafter, but in no event shall such an action be brought more than six years after the substantial completion of the improvement to the real property.\" If the action accrues in the fifth or sixth year, the action can be brought within two years of the accrual date. Thus, under the statute of repose portion of CDARA, an absolute bar to bringing an action first arises within six years of substantial completion of the improvements, which could pass before the claimant even learns of the problem. An exception is made if the manifestation of a defect first occurs during the fifth or sixth year after substantial completion; in which case, the entitlement to bring an action may be extended beyond the sixth year, but not later than eight years from substantial completion.
Section 13-80-104 is not intended to apply to claims for breach of warranties to \"repair and replace\"; instead, such claims are governed by the general statute of limitations for contracts and warranties.41 Additionally, the limitations under §13-80-104 only apply to negligence in planning, design, construction, supervision, or inspection that results in a defect in an improvement to the property, and to limit actions against building professionals only for claims of injury arising from defects in improvement they create.42
A frequent issue addressed by the courts is when the cause of action for a construction defect arose. Under CDARA, faulty construction that threatens property damage but has not yet caused it is not actionable in negligence until the property damage actually occurs.43 However, Colorado courts have generally held that a cause of action for negligence arises upon the first “physical manifestation of the defect.” For example, a defect claim based upon the alleged negligence of an electrician’s installation of an exit sign that had faulty wiring arose when a fire allegedly caused by the faulty wiring occurred, and not when the insurer received the fire investigator’s report stating that the sign’s faulty wiring caused the fire.44 In some cases, the physical manifestation may occur before the damage. In another case, the Colorado Supreme Court held that a cause of action under C.R.S. §13-80-104 for allegedly defective gutters arose when the homeowner first noticed the obvious physical manifestations of what appeared to be a construction defect, which was the discovery of ice accumulation, rather than when the homeowner later slipped on ice.45
A performance bond surety was held liable for latent defects discovered five years after project completion, notwithstanding a one-year warranty provision in the bond, in Adesta Communications, Inc. v. Utica Mutual Ins. Co.46 In 2008, the general contractor, Adesta, sued the surety for the subcontractor, Lee Engineering, for damage Lee allegedly caused to a sanitary sewer line during Lee’s installation of fiber optic cable in 2002. The surety moved to dismiss on the grounds that the action was time-barred by the three-year statute of limitations for breach of contract actions, since the breach would have occurred in 2002. The court rejected this argument, finding that the claim was based on a latent defect that could not have been discovered before 2007, and was therefore brought within the three-year limitations period. The surety next argued that the language in both the bond (regarding when the bond obligation would be void) and the subcontract (providing for a one-year warranty) demonstrated that the bond was intended to be effective for only a limited time. The court found that the cited language did not support the surety’s position, and that Adesta’s claim was not time-barred.
Determining the date of \"substantial completion\" played a significant role in a recent Colorado case. In Shaw Constr., LLC v. United Builder Services, Inc.,47 an HOA sued Shaw, the general contractor of a multi-phase condominium project, for alleged construction defects. The project included construction of eighty residential units in thirty-three separate buildings, fifteen garage structures, and additional elements such as sidewalks, alleys, benches, courtyards, and landscaping. Shaw’s third-party complaint for indemnity against its subcontractors for construction defects was dismissed under the statute of repose, C.R.S. § 13-80-104. Shaw appealed, contending that substantial completion was achieved only when the project architect certified completion of the entire project. The subcontractors argued that substantial completion occurred when the certificate of occupancy (CO) for the last building of the project was completed, which was when the subcontractors completed their work, as none of the subcontractors worked on the site work which was not completed until after the last building was complete. The court first found that, in applying C.R.S. § 13-80-104 to a multi-phase project, an improvement may be a discrete component of the larger project, which can be substantially completed before the entire project is finished. The court held that the last building of the project was substantially completed, and the six-year statute of repose on Shaw’s indemnity claims commenced, when the CO was issued for that building, rather than when the architect's certificate was issued for the entire project. Although the architect's certificate indicated that exterior court yards, sidewalks and landscape features were not completed until after the CO was issued, subcontractors were not involved in such aspects of the project. Shaw’s indemnity claims against its subcontractors were therefore barred under the statute of repose.
1 Dr. H. Randolph Thomas, and Dr. Amr A. Oloufa, Labor Productivity, Disruptions, and the Ripple Effect, Cost Engineering Journal, Vol. 37/No. 12 (December 1995).
2 The Business Roundtable, Scheduled Overtime Effect on Construction Projects, Construction Industry Cost
Effectiveness Task Force Report (Nov. 1980).
4 C.R.S. Section 13-20-801, et seq. (2011).
5 Irwin v. Elam Constr., Inc., 793 P.2d 609 (Colo. App. 1990), cert. denied (Jul. 9, 1990).
6 See, e.g., Royson Engineering Co., ASBCA 15438, 73-2 BCA p 10,229 (1973) (board found a defect to be patent since it could have been discovered \"without undue effort\"); Cross Aero Corp., ASBCA 14801, 71-2 BCA p 9075 (1971) (the board found that dimensional nonconformities in 385 pins were patent defects since a 100% inspection or a random sample inspection could have led to their discovery).
7 See, e.g., Geranco Manufacturing Corp., ASBCA 12376, 68-1 BCA p 6898 (1968) (contractor's failure to use the specified non-corroding pump in a steam cleaner, which the government did not discover until after acceptance, constituted a patent defect, and the government’s defect claim was therefore barred by the expiration of the applicable statute of limitations; the Board noted that the project involved “contracts for 456 cleaners, at a total price of $347,268.89, to be designed and produced to conform to Government specifications. The specifications contain requirements to be met by materials and components. When the Government specifies that materials and components are to have certain properties and meet certain requirements it presumably has some way of inspecting or testing to see if the specifications are met”).
8 See, e.g., Mastor v. David Nelson Constr. Co., 600 So. 2d 555 (Fla. App. Jun. 19, 1992) (although defects in construction could be observed by visual inspection, owner’s unfamiliarity with reading plans and specifications was considered in determining that there were genuine issues of material facts as to whether defects were latent); Stevens Constr. Corp. v. Carolina Corp., 217 N.W.2d 291 (Wis. May 7, 1974) (architect was unqualified to detect design engineering defects, so defects were considered latent).
9 See, e.g., F.A.R. § 52.246-12 (“Acceptance shall be final and conclusive except for latent defects, fraud, gross mistakes amounting to fraud, or the Government's rights under any warranty or guarantee”).
10 Ranta Constr., Inc. v. Anderson, 190 P.3d 835 (Colo. App. June 26, 2008).
11 C.R.S. § 13-20-807 (2011).
12 See Smith v. Executive Custom Homes, Inc., 230 P.3d 1186 (Colo. 2010).
13 C.R.S. Sections 6-1-101, et seq.,
14 See, e.g., Heritage Vill. Owners Ass’n, Inc. v. Golden Heritage Investors, Inc., 89 P.3d 513 (Colo. App. 2004)
15 D.R. Horton, Inc. – Denver v. The Travelers Indemnity Co. of Amer., 2012 WL 527204 (D. Colo. Feb. 16, 2012).
16 C.R.S. § 13-20-806 (2011).
17 Bohrer v. DeHart, 961 P.2d 472 (Colo. 1998) (Pro Rata Liability Act requires the jury to determine percentages of fault and total damages).
18 City of Westminster v. Centric-Jones Constructors, 100 P.3d 472 (Colo. App. 2003) (contractor not liable for performing its work in accordance with defective design).
28 A full list of the state codes can be found online at: http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251803610306ssbinary=true. Major county and municipality building codes can usually be found on their web page. Rural areas generally do not keep current web pages. Hard copies would have to be obtained for reference.
29 A more complete list of EPA legislation and the applicability of the different Acts is found at http://www.epa.gov/compliance/resources/publications/assistance/sectors/fedenvconstruction.pdf.
30 Fiberglass Component Prod. v. Reichhold Chems., 983 F. Supp. 948 (D. Colo. 1997).
31 Erickson v. Oberlohr, 749 P.2d 996 (Colo. App. 1987).
32 Sloat v. Methany, 625 P.2d 1031 (Colo. Mar. 30, 1981) (implied warranties of workmanlike construction and habitability arose in sale of new home by builder-vendor even though vendor had commenced construction of the home with the intent of residing there with his family).
33 Roper v. Spring Lake Dev. Co., 789 P.2d 483 (Colo. App. 1990).
34 Wall v. Foster Petroleum Corp., 791 P.2d 1148 (Colo. App. 1989).
35 Sloat v. Methany, supra note 18; House v. Thornton, 76 Wash.2d 428 (July 17, 1969) (sale to third party after the original buyer of a custom home backed out of the purchase carried the implied warranty of habitability).
36 Shiffers v. Cunningham Shepherd Builders Co., 470 P.2d 593, 598 (Colo. App. 1970).
37 A.C. Excavating v. Yacht Club II Homeowners Association, Inc., 114 P.3d 862 (Colo. Jun. 27, 2005) (subcontractor had duty to homeowner’s association to perform its work without negligence; thus, the economic loss rule did not apply to relieve subcontractor of liability, as subcontractor’s duty of care was independent of its contractual obligations with the developer and general contractor).
38 C.R.S. Section 13-20-807 (2011).
39 C.R.S. Section 13-80-101 (2011).
40 C.R.S. Section 13-80-102 (2011).
41 Hersh Companies Inc. v. Highline Village Assocs., 30 P.3d 221 (Colo. Jul. 2, 2001).
42 Two Denver Highlands Ltd. Partnership v. Dillingham Const. N.A., Inc., 932 P.2d 827 (Colo. App. Jun. 13, 1996), reh’g denied (Aug. 8, 1996), cert. denied (Feb. 24, 1997) (concrete used to build parking garage was essential and predominant part of garage, and therefore constituted “improvement to real property” for purposes of limitations period applicable to owner’s action against defendants general contractor and concrete subcontractor for defects which developed in garage's upper-level concrete deck; actions of defendant subcontractor, in preparing and installing concrete related to process of building parking garage's defective upper level concrete deck for owner, fell within those protected by six-year statute of limitations against contractors and builders for negligent improvements to real property). 43 C.R.S. Section 13-20-804 (2011) (claim for negligence for non-compliance with building code or industry standard is not actionable unless it causes actual property damage, loss of use, bodily injury, or threatened bodily injury).
44 United Fire Group ex rel. Metamorphosis Salon v. Powers Elec., Inc., 240 P.3d 569 (Colo. App. Jun. 24, 2010).
45 Smith v. Executive Custom Homes, Inc., 230 P.3d 1186 (Colo. May 10, 2010).
46 2010 WL 1240354 (D. Colo. Mar. 19, 2010).
47 2012 WL 311665 (Colo. App. Feb. 2, 2012)