THE FUNDAMENTALS OF CONSTRUCTION CONTRACTS
The Issues in California Presented by:
Patrick D. Harder, Esq. Nossaman Guthner Knox & Elliott LLP © Copyright, 2005 Nossaman Guthner Knox & Elliott, LLP. All Rights Reserved. The information contained herein does not constitute a legal opinion and should not be relied upon by the reader as legal advice or be regarded as a substitute for legal advice.
Overview Construction and Professional Contracts • Balancing and Managing Risk through Creative Contracting Practices Project Delivery Methods Essential Contract Terms Indemnification and Insurance Coverage Payment and Performance Bonds Public Contracting 2
Project Delivery Methods • Design-Bid-Build • Design-Build • Construction Management/CM at Risk • Fast Track/“Design Sequencing” Caltrans
• Public-Private Partnerships 3
Choosing the Delivery Method • Managing Risk • Control • Legal/Regulatory Environment
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Fast Track • Incomplete Design
• Time savings
• Coordination
• Efficiencies
• Impact/Changes
• Cost Savings
• Final Cost?
• Maximize Access to Income Streams/ Revenue
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Design-Build • Performance-Based Specification or Conceptual Design
• Single Point of Responsibility • Reduces Claims Based on Deficient Design Exception for Prescriptive Specifications ¾ White v. Edsall Construction, 296 F.3rd. 1081 ¾ Donohue Electric, Inc., VABCA No. 6618, 2003-1 B.C.A.
• Selection Criteria Best Value (Price + Other Factors) Qualifications-based Shortlist, with Low-Bid Selection
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Design–Build For Public Works • Statutory Limitations • Competitive Procurement or Best Value Procurement
• Development Agreements • Applicability of Subcontractor Listing Law Post-Award Subcontractor Selection Using Competitive Process 7
Construction Management • Owner as General Contractor • CM to Manage the Process • Primarily an Advisory Role to the Owner • Authority/Control over Trade Contractors as Owner’s On-Site Representative
• No Contractual Privity with Trade Contractors • No Stake in the Outcome 8
CM At Risk • Participates in Design Development and Constructability Reviews
• Makes Value Engineering Recommendations • Buys-in to the Design • Direct Contract with Subcontractors • At Risk/Stake In Outcome 9
Design-Bid-Build • Competitive Procurement, Transparent Process • No Contractor Risk for Design, Unforeseen Conditions (Spearin Doctrine)
• Lump Sum Fixed Price or Cost Plus a Fee with a Guaranteed Maximum
Cost-Plus Contracts Often Involve Sharing in Savings Below the Guaranteed Maximum 10
Public-Private Partnerships • A Process for the Realization of Public Works with the Financial Participation of Private Enterprises Transportation Projects Water Supply/Water Treatment Other Infrastructure Entertainment/Leisure Facilities Educational Facilities 11
The Bidding Process • Short-Listing Based on Qualifications, Experience,
Financial Capability • Bidding Method Dependent Upon Contract Delivery Method More Complete Design ¾ Fixed Price, Firm Schedule Contract
Less Complete Design ¾ Price + Other Factors ¾ Cost Plus Fee With or Without a Maximum
Conceptual Design/Performance Specification Only ¾ Fixed Price Turn Key Contract
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Your Project is Unique! • Remember that Every Project is Unique Each Project has its own risks Consider: ¾ Design Risk ¾ Geo-Technical/Environmental Risks ¾ Labor Unrest ¾ Material Price Escalation ¾ Political Risks ¾ Financial Risk, including Bankruptcy of Contractor 13
Essential Contract Terms • Implied Terms • Scope of Work • Payment Terms • Indemnification • Insurance/Bonds 14
Implied Contract Terms • Owner’s Obligations
• Contractor's Obligations
Site access
Cooperate with owner
Timely review
Work free from defects
Timely decisions
Work will conform to contract documents
Not interfere Coordinate consultants Timely furnish owner equipment Inspection delays?
Coordinate subcontractor work Field coordination vs. Lack of design detail 15
Scope of Work
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Scope of Work • Precise Scope Description is Critical • Reference to Plans and Specifications • Mandatory vs. Reference Documents • Performance Specifications • Prescriptive Specifications • Substitutions 17
Payment Terms • Invoicing Requirements Lien Releases Schedule Updates
• Approvals/Certifications • Retention • Final Invoices
O & M Manuals As-Built Drawings Insurance Certificates Written Warranties
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Prompt Payment Law • Prompt Payment Statutes Progress Payments ¾ Business and Professions Code Section 7108.5 ¾ Public Contract Code Sections 10261.5; 10262; 10262.5
Retention Payments ¾ Civil Code Sections 3260; 3260.1 ¾ Public Contract Code Sections 7102; 7200
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Prompt Payment Law (cont.) • 2% per Month for Failure to Pay Amounts not in Dispute
Business and Professions Code Section 7108.5 Public Contract Code Section 7107;10262; 10262.5 Civil Code Sections 3260; 3260.1
• Owner may Withhold 150% of Amounts in Dispute
Civil Code § 3260 20
Payment Disputes • Right to suspend for non-payment Civil Code Section 3260.2
• Right to withhold payments 150% of Amounts in Dispute Applies to Public and Private Works
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Owner’s Payment Bond • California Civil Code Section 3110.5 • 25% of the Contract Value for Projects with a completion Schedule of 6 Months or Less
• 15% of the Contract Value for Longer-term Projects • Surety bond, Letter of Credit or Escrow Account • Projects over $5 Million (over $1 Million where Owner has leasehold or other interest in the Property)
• Does not apply to Single Family Residential Projects • Exemption for Publicly-traded Companies or Companies with Net Worth in Excess of $50,000,000
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Indemnification Provisions • Broad Form Indemnity • Indemnification against Indemnitee’s own negligence
Civil Code Section 2782
• Indemnity Based On Comparative Fault • Inter-relationship With Insurance Coverage (Contractual Liability Coverage)
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Insurance Coverage • Commercial General Liability Completed Operations Coverage Contractual Liability Coverage ¾ Supports Indemnity Provisions
Work Product (“Business Risk”) Exclusion Mold Other Exclusions Economic Damages ¾ F & H Construction v. ITT Hartford Ins. Co., 118 Cal.App.4th 364 (2004) 24
Insurance Coverage (cont.) • Worker’s Compensation/Employer’s Liability Third Party Over Actions
• Property Insurance/Contractor’s All Risk • Professional Liability Insurance • OCIP Wrap Policies 25
Insurance Issues • Certificate of Insurance Form vs. Evidence of Insurance Form • Additional Insured Endorsements
ISO Form 2010 Inter-relationship with Contractual Liability Coverage
• Notice of Cancellation • Tail Coverage for Claims-Made policies • Defense Costs (“Burning Limits”) 26
Payment and Performance Bonds • Risk Mitigation At a Cost (1-2% of Construction Cost)
• Not Insurance • Surety Entitled to Step into the Shoes of the Contractor in the Event of a Default “Green Book” requirement
• Payment Bonds Statutorily Required for Public Work Projects
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Payment and Performance Bonds (Cont.) • Current Market Conditions for Surety Industry – Tightened Underwriting Standards
• Large Projects - >$250 million • Performance Bonds for Design-Build Projects
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Public Works Contracting • Competitive Procurement / Subcontractor Listing Exception in Case of “Emergency” – Public Contract Code Section 1102
• Stop Notices • Prevailing Wage Requirements • MBE/WBE Goals California Constitution, Art. I, Section 31 - Proposition 209
• Additional Requirements Where Federal Funds are Involved
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Licensing Issues • Ensure Contractor/Design Professional holds the Correct License
• No Lien Rights for Unlicensed Contractor • Disgorgement of Revenue if Unlicensed Business and Professions Code Section 7031 MW Erectors, Inc. v. Niederhauser
• Liability of Owner for Using Unlicensed Contractor Workers Compensation/General Liability Future Construction Defect Claims Building Inspection Issues
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Question/Answer
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Contact Patrick D. Harder, Esq. Nossaman Guthner Knox & Elliott LLP 445 S. Figueroa Street 31st Floor Los Angeles, CA 90071 Phone: (213) 612-7859 Fax: (213) 612-7801 E-mail:
[email protected] www.nossaman.com
