Constructing the Construction Case - Tips, Traps and Tricks

Project Owners and developers should not build costly projects without a critical path/master schedule (CPM). It schedules all the activities required to complete the project, the duration each activity takes to complete and the relationship between the activities. Since any delay of an activity on the critical path directly impacts the planned completion date for the project, it is necessary to periodically revise the CPM. It would be foolish, if not reckless, to proceed with construction without a CPM. It is a construction industry staple. An owner or developer could not expect to convince a panel of construction arbitrators that a general contractor (GC) or subcontractor was responsible for delay and resulting costs if a CPM was never prepared. They will ask themselves, "How competent could this developer be if it did not use one of the most important tools modern developers have to insure timely progress and efficient completion of a project?"

GCs and subs must have a master schedule to stay on schedule. Owners and developers also need it to measure subcontractor performance, determine whether all the work is completed on time, and make adjustments for the inevitable problems that arise. In sum, critical paths are critical.

TIP 2: CAREFULLY DRAFT THE CONTRACT DOCUMENTS

Clearly Define Scope. The "scope of work" is a vital part of construction contracts. The problem with defining "scope" is that several sections of the contract often deal with it. This can allow contradictory language to insinuate into the deal. To avoid this problem, the drafter should describe in meticulous detail all work expected to be done by the design professionals, the general contractor or subs. The initial effort this takes outweighs the costs of litigation resulting from simplistic summaries of task descriptions or worse, form check lists. So don't summarize or use short cut phrases or technical abbreviations because you think that "everyone in the business knows what it means." Everyone knows until a dispute arises and that crystal clear phrase now has at least two conflicting meanings. So draft in haste, repent in arbitration.

Follow the Money. Make certain the conditions for payment are clear and consistent in all contract provisions relating to the work to be performed and the timing of payments. I can't emphasize enough how often contract language dealing with scope and payments for work are scattered throughout the contract documents resulting in a confusing labyrinth and inevitable disputes as to what was actually agreed upon. Where the agreements provide for payments in more than one section, such as where a GC pays a sub for its primary and secondary work, check every section where payments are referenced and carefully define or reference the work expected. Also scrutinize the schedules and specifications (including the standard "spec" list) for inconsistencies, for it's often in the ancillary documents where conflicts reside.

Don't Overreach. The covenant of good faith and fair dealing will be implied in every construction contract. This covenant is taken seriously by arbitrators when parties draft highly unfair provisions. Given the broad discretion granted to arbitrators in managing arbitration proceedings and deciding arbitrable issues, it is difficult to envision a reviewing court3 overturning an award that finds a party in breach of the implied covenant of good faith and fair dealing.

Here are two examples of overreaching in contract drafting.4 The first involved highly onesided termination provisions in a GC's subcontract form used on an office/residential project. The subcontract provided that the contract could be terminated by the GC with cause, without cause, for any reason, or for no reason. "Cause" covered nearly everything, including the GC's opinion that the sub improperly discharged its obligations, or otherwise failed to properly perform under the contract. Another section stated that upon termination, the sub would be entitled to cost plus up to 10% for overhead and profit regardless of the basis for termination.

The GC terminated the sub without cause after the sub completed nearly all its work. The GC refused to pay the balance of the contract price. The case ended up in arbitration, where the GC maintained that its position was justified because the parties were sophisticated, experienced and fully negotiated the GC's subcontract form.

The arbitrators could not help but focus on the unfairness of the termination provisions, which allowed the GC to escape its obligation to pay the full contract price by terminating the subcontractor at will after completion of substantially all its work. The result might have been different had the GC agreed to pay the balance of the contract price if the arbitrators found that the subcontractor was not in default under the subcontract.