How Construction Contracts Cause Litigation
An explanation of some of the common causes of construction claims.
By Robert C. Epstein, Greenberg
Traurig, New Jersey Office
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We live in a litigious society, and construction can contribute a fair
share of disputes. Claims and litigation seem to be an inevitable part of
construction projects, but this does not mean that nothing can be done to
reduce the risks, or at least limit the delays, disruptions and expense,
caused by conflicts on construction projects. History teaches that the parties
and projects may change, but the issues and types of disputes surrounding
construction projects do not. Knowing the areas where conflict is likely
to arise, and carefully planning to address them, can reduce the risk of
conflict, and therefore increase the chance of a successful project for
|"Knowing the areas where conflict
is likely to arise, and carefully planning to address them, can
reduce the risk of conflict, and therefore increase the chance of
a successful project for all concerned."
Some of the areas that generate conflicts are as follows:
Owner-drafted contracts frequently reflect the mentality that conflict
can be avoided by protecting the owner from all possible claims. Such contracts
contain exculpatory language, waivers and limitations intended to bar virtually
all claims by the contractor. The idea is to protect the owner from all
foreseeable and unforeseeable risks by shifting responsibility for those
risks to someone else.
One-sided contracts, however, may generate as many claims as they prevent.
Construction claims principally are caused by: (a) unforeseen or changed
project conditions; (b) changes in the work; (c) late provision of drawings,
access, permits, equipment or materials; (d) inadequate drawings or specifications;
and (e) interference in the work. When commencing construction, contractors
justifiably expect that all necessary permits are in place; they will have
access to the work; they will receive timely engineering and owner-supplied
Information; shop drawings will be promptly reviewed; and unexpected conditions
or changes will be fairly compensated. Where these expectations are not
met, contractors often lose money on a project, prompting claims no matter
what the contract provides. In a worse case scenario, severe losses may
force a contractor out of business, resulting in a failure to complete the
work and the attendant delays, disruptions and inevitable costs to the project.
Construction disputes are more likely to be avoided through a fair allocation
of project risks. The guiding principles are that risks should be allocated
as follows: First, risks should be allocated to the party who has direct
control over the portion of the process that creates the risk. Second, where
no party has direct control, risk should be allocated to the party who is
best able to protect against an unexpected loss or casualty. Finally, where
no party has control, risks become the responsibility of the owner, who
is the party that initiated the construction project and presumably is the
ultimate beneficiary of the results.
Project Delivery Systems
The delivery system selected for a project, and the contract structure
reflecting that system, can greatly affect the risk of conflicts regarding
such fundamental issues as scope, time, money and risk allocation.
The traditional single-prime contract for a fixed price between the owner
and contractor is the most commonly used and best understood project delivery
format. This type of contract, with a clear chain of command, removes all
ambiguity regarding which party is responsible for management of the construction
work and which is responsible for the design.
Driven by market forces, recent decades have seen the use of innovative
project delivery systems and innovative contract forms reflecting those
systems. Design-build, construction management and fast-track delivery systems
often provide economic benefits to the owner. An owner may need an office
building by April, a shopping center by June, or a school by September.
Such circumstances can justify a fast-track or design-build approach.
Innovative project delivery systems, however, often blur the traditional
roles and responsibilities of parties on a construction project. Owners
should understand that the use of non-traditional contract approaches creates
greater risks of misunderstandings, particularly where the scope of work
and compensation are changing continuously during the project. Owners, therefore,
should understand that the contingencies involved in non-traditional construction
approaches are greater than in the traditional single prime contract approach,
and should plan accordingly.
An incomplete, inaccurate or poorly coordinated design inevitably will
produce a project with conflicts and unanticipated costs and delay. Conversely,
nothing diminishes the risk of misunderstanding and litigation, and provides
more protection for the owner, than an accurate and complete design.
The traditional single prime contract can succeed only if, when the contract
is priced, the plans and specifications are reasonably detailed and complete.
Otherwise, the contract sum becomes an unreliable figure subject to changes
and claims for delays and impact damages.
However, in order to obtain a complete and accurate design, the owner
must give its architect/engineer a reasonable period of time to develop
a complete set of plans and specifications, and provide a fair fee for that
service. The owner who pinches pennies with its architect and sets an unreasonable
schedule invites substandard plans/specifications, and time and cost overruns.
The owner’s failure to pay fairly for adequate design and engineering will
drive its design team to use off-the-shelf specifications and uncoordinated
drawings, requiring the contractor and the design team to design the project
as construction progresses.
For similar reasons, fast-track construction increases the risk of misunderstanding
and litigation. While commencing construction before a complete design is
in place may be justified by the owner’s economic needs, the costs and risks
of that approach should be considered when estimating cost and projecting
Views differ on whether, and to what extent, a contract should provide
additional compensation for differing site conditions. Some form contracts
(such as the federal and American Institute of Architects standard general
conditions) include a differing site conditions clause which entitles the
contractor to additional compensation for unexpected subsurface conditions
meeting certain criteria. Some owners (public and private) model their contracts
on these forms. Other owners utilize contracts that are silent on the issue,
or expressly prohibit recovery for differing site conditions while placing
all of the risk of the unknown on the contractor.
The assurance of equitable compensation for differing site conditions
encourages prudent contractors to submit lower bids, unencumbered by contingencies
for unknown conditions. Perhaps just as importantly, a differing site conditions
clause helps protect prudent contractors against being underbid by competitors
who are either too careless or too reckless to include such a contingency.
Because hidden conditions can make the difference between a profitable contract
and a financial disaster, competent contractors often insist on an equitable
adjustment clause before submitting a bid on a job with significant risk
of differing site conditions.
No matter which approach is taken, the wise owner will make a thorough
subsurface investigation so that as much can be known about the site as
possible. That information should be shared with the contractor whether
performing under a differing site clause or as a part of a contract with
Reliable structural engineering and design, and realistic pricing by
the contractor, cannot be generated in the absence of such knowledge. A
good exploratory program by a competent engineering firm will diminish misunderstandings
and disputes resulting from extra work and foundation failures. The quality
of this investigation, as much as an exculpatory clause, will diminish disagreements
leading to litigation.
Generally, the owner has no contractual obligation to provide for inspection
or site monitoring. The contractor has the obligation to provide its work
in accordance with the plans and specifications, and free from defect. Nevertheless,
the prudent owner will provide on-site representatives for significant projects.
That representative may be from the architect’s office or it may be a permanent
employee of an owner who does major construction work.
Unfortunately, some owners, even on large projects, attempt to avoid
overhead costs by cutting corners here. Even if the owner ultimately proves
that the contractor made a bad pour or connected the steel improperly, it
is infinitely better that the defect be discovered early rather than well
into the construction stage, where litigation is usually the result. A good
inspection is the contractor’s and owner’s best friend. It is just common
sense for the owner to protect itself from the catastrophic consequence
of others’ failures.
Who is in Charge?
A careful reading of many construction contracts makes it difficult to
find anyone in charge. The architect’s role has dwindled from inspector,
to observer, to an occasional presence disclaiming most responsibility.
The architect/engineer often provides generic specifications, pushing true
design responsibilities for specialty items down through the prime contractor
to various sub-levels of subcontractors and suppliers. There have been catastrophic
failures because no one was in charge, with each of the parties attempting
to shift the risk to another.
The owner and its architect/engineer, whatever their approach to exculpatory
and risk-shifting provisions, should carefully review technical data to
make certain that the project will function, even if that means that an
owner has to employ outside consultants or experts during the construction
The contractor also should not allow its subcontractors’ work to be performed
and integrated into the project without careful observation. The contractor
is responsible for its subcontractors. It is in charge of their work, and
needs to assure that it is properly done.
The shop drawing process seeks to avoid failures and misunderstandings
by allowing the contractor to demonstrate the detailed application of the
architect/engineer’s design. It is here that the prime contractor, the owner
and architect have the best opportunity to avoid non-conforming products
or defective work. Unfortunately, prime contractors often rubberstamp subcontractor
and supplier submittals while relying on the architect/engineer for approval
Although the architect has final legal responsibility to approve or reject
shop drawings, a contractor who does not give time and attention to this
area substantially increases the risk of failure and litigation. Contractors
have a substantial self-interest in making sure that material and equipment
suppliers conform to the design plans, and that no unauthorized changes
have been made. In short, all parties who have the opportunity to review
shop drawings bear the responsibility to do so in order to assure successful
project completion, no matter what the contract provides.
The areas discussed above, if given proper attention, present opportunities
to reduce conflict on construction projects, so long as all parties recognize
their responsibilities. The contractor must provide quality workmanship.
The architect must provide a quality design. The owner must pay a reasonable
price for these services. No contract language will prevent disputes where
these responsibilities are not met.
© 2004 Greenberg Traurig
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This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys
provide practical, result-oriented strategies and solutions tailored to
meet our clients’ individual legal needs.