December 2011

I am frequently asked to review construction contracts both before a project starts and after a dispute arises. Unfortunately , the later is much more common. Contractors are often disappointed to hear that certain contract language limits or even prohibits their right to recover an otherwise justified claim or that the contract shifts risk to them in a manner that “just does not seem fair.”  Moreover, arguments over the application of contractual language typically ends up in expensive litigation; and attorney fees and cost diminish any recovery a contractor ultimately receives.

Contractors can save themselves disappointment, time, and money by paying close attention to what the contract they are signing says and what the language means.  Of course, any lawyer will tell you that every clause of a contract matters.  However, certain clauses in a construction contract are more likely to lead to disputes than others.

Based upon my experience litigating construction cases, the following are 7 typical construction contract clauses that are commonly the source of contractual disputes: (1) scope, price, and time provisions; (2)  flow down clauses; (3) pay-when-paid/pay-if-paid provisions; (4) termination for convenience clauses; (5) no damage for delay clauses; (6) change order clauses; and (7) whether the specifications are performance or design specifications.

In part 1 of this 7 part series we will exam the importance of understanding the scope, price, and time provisions of the contract and why contractors commonly overlook them.

SCOPE, PRICE, AND TIME.

Contract language that states what work you will be required to perform; what you will be paid for it; and how long you have to do it seems so fundamental to the basis of a construction contract it would hardly seem possible to overlook. However, it is more prevalent than one thinks. Moreover, sometimes vague language concerning scope, price, and time is just as bad as no language at all.

1. Scope.

You think you know what work you agreed to perform. You discussed it with the party with your client. You also stated it in your proposal or bid. However, have you carefully reviewed your contract to see what the contract says what you have agreed to do?

A common mistake contractors make concerning the contract’s scope is the attaching a copy of the contractor’s proposal to the contract under the mistaken belief that it controls what the scope of the contractor’s work is.  Unless, the contract contains language specifically incorporating or referencing the attached scope, then the proposal is meaningless if the contract’s definition of scope defers from what your proposal says – most likely it does.

Review one of your contract’s definition of scope.   The contract’s definition of scope is probably much broader than what is set forth in your proposal.  Often contracts will require a contractor not only to perform the work specifically listed on its proposal but also any work that is necessary and is merely “implied” by the drawings.

If your proposal’s scope conflicts with the contract’s definition of scope, this could create the potential for disputes over scope related change orders.  Disputes over scope related change orders are a common source of construction litigation.  Moreover, because a contractor will not be compensated for the change order work until after the dispute is resolved they have a major financial impact on the contractor as well.

2. Price.

Closely related to the scope of the work is the price of the work. Just as you need to make sure the contract’s definition of scope is consistent with what you agreed to perform so must you confirm that the contract says what is included in your price.

Is your price for labor, material, and supervision only? Or, have you included in your price charges for taxes, bonds, insurance, permits, and fees? Typically, contracts will require that these items be included in your price. While you may have stated that these items are excluded from your price in your proposal, you need to make sure that the final contract incorporates those exclusions. Otherwise, you could end up on the wrong end of an unprofitable job.

3. Time.

Does the contract say how long you are expected to be on the job? If the contract does not clearly state an anticipated completion date, you could be required to stand ready to perform indefinitely because of delays that have nothing to do with your work.  In fact, most construction contracts for smaller projects do not contain an estimated completion date or schedule. Do not assume that there is an understanding as to when your work is expected to be complete.  Obviously, more time on the job equals more man hours. More man hours equals more money.  Also, if you are on a job longer than expected your resources are diverted from other work you could be performing.  Finally, if your work includes the ordering of material or equipment with long lead times you could end up unwittingly financing the owner’s project.

Next, week I will review flow down clauses and what they mean subcontractors.

The Spearin Doctrine sounds like a foreign policy declaration from the 19th Century. Actually, the Spearin Doctrine is a powerful legal defense for contractors facing a claim of defective workmanship.

When entering into a construction contract, a contractor agrees to perform a certain scope of work for an agreed upon price. Typically, a contractor’s scope of work includes an agreement that the contractor will construct what is required as set forth on the architect’s drawings and specifications. The architect’s drawings contain general information regarding the size, location, and dimension of the contractor’s work. Meanwhile, the architect’s specifications contain additional design information about the materials to be used, finishes, and tolerances.

However, what happens if a contractor follows the architect’s drawings and builds what is asked as the specifications specify but what is constructed fails to perform correctly? This is where the Spearin Doctrine comes into play.

The Spearin Doctrine gets its name from a 1918 Supreme Court decision, United States v. Spearin. There the Court held that by prescribing the character, dimensions, and location of the work to be built, the owner “import[s] a warranty that, if the specifications have been complied with, the [work] will be adequate.” In other words, if the specifications describe how it is to be built, the owner warrants that the contractor will be able to perform if it follows the specifications.

In order to successfully assert the Spearin Doctrine as a defense, contractors must understand the difference between “performance” and “design” specifications. A performance specification sets forth the standard of performance to be achieved. The contractor is expected to exercise it judgment in how best to achieve the performance standard. A basic example of a performance specification is if a specification states that the contractor shall construct a HVAC system shall maintain a certain level of temperature and humidity level, but leaves the design of the system necessary to achieve the required temperature and humidity levels up to the contractor performing the work.

Conversely, a design specification describes in detail the materials and equipment the contractor must use and the manner in which the work must be performed. As one court put it, “design specifications state how the contract is to be performed and permit no deviations. Performance specifications, on the other hand, specify the results to be obtained, and leave it to the contractor to determine how to achieve those results.”

The distinction between performance and design specifications is important because the Spearin Doctrine applies only to design specifications. Often, determining whether a specification is a performance versus design specification is difficult as a specification may blend elements of both. In order to differentiate between performance versus design specifications, courts look to the level of discretion that exists within the given specification. A contractor arguing that a specification is a design specification – and thus subject to the Spearin Doctrine – must show that the specification “does not permit meaningful discretion.”

Specifying a certain manufacturer of a product alone is not despositive of whether a specification is design rather than performance, especially when a specification permits substitution of a specified product with “an approved equal.” In determining whether a specification is design over performance, courts also look to how much oversight the owner exercised over the contractors work and whether the specifications lay out the contractors means and methods of contraction.

So, next time you are faced with a claim of defective workmanship, look closely at your specifications and see if the Spearin Doctrine can be applied as a defense.

 

 

 

 

Yesterday CBS Philly reported that Mayor Nutter signed Executive Order 15-11 once again making project labor agreements a reality on City owned public works projects in excess of $5 million, which would require all contractors bidding on City projects to hire workers out of a local union hiring hall and abide by onerous, restrictive, and expensive union work rules.  The article states that Mayor and Organized Labor believe the new PLA agreement is a win-win for everyone.  If by everyone, you mean everyone but Philadelphia taxpayers and men and women working in the construction industry.

Why is this a lose-lose for everyone but the Philadelphia Building and Construction Trades Council?

First, the Pennsylvania Bureau of Labor Statistics states that over 80% of Pennsylvanians working in the construction industry elect NOT to join a union.  Therefore, an overwhelming majority of Pennsylvania’s will be excluded from gainful employment in an industry that has an unemployment rate 10% higher than the national average (about 17% of construction workers are unemployed).

Second, studies indicate that union construction costs 10-20% more than the non-union equivalent.   Moreover, there is no evidence that the work union labor will perform is somehow superior to non-union labor and, therefore, deserving of the cost premium.  At a time when Philadelphia is at best cash strapped and at worse teetering on bankruptcy, is selecting the unnecessarily more expensive option fiscally sane and in the best interest of the already tapped out taxpayer?

Third, Mayor Nutter states that the PLA’s will insure diversity.  For years, Mayor Nutter has criticized the local building trades and their lilly white membership.  How exactly have they become more diverse in the last few years?  In many minority communities in Philadelphia, unemployment is a staggering 30%.  Philadelphia’s new PLA order will do nothing to dent that number.

Philadelphia’s new PLA ordinance is another set back for Philadelphia’s long forgotten taxpayer.  The only ones that should be cheering this order are Philadelphia Building and Construction Trades Council.