Construction Law An Introduction for Engineers, Architects, and Contractors RSMeans Series

A clear, concise introduction to construction law for professionals

Construction Law: An Introduction for Engineers, Architects, and Contractors offers a comprehensive review of the U.S. legal environment, focusing on the legal concepts and issues applicable to the design and construction industries. Topics covered include:

• Basic legal principles
• Project participants
• Project delivery systems
• Construction contracts
• The design process
• Procurement
• Pricing construction projects
• Subcontractors and suppliers
• Time for performance
• Construction scheduling
• Contract administration
• The payment process
• Changes to the work
• Differing site conditions
• Termination of the construction contract
• Mechanic's liens
• Construction insurance
• Surety bonds
• Liability for defective construction
• Calculations of damages
• The Economic Loss Doctrine
• Alternative dispute resolution

This book serves as an excellent introduction to construction law for students as well as professionals in the construction industry.

Preface xix

1 Law and Government 1

1.1 Introduction 1

1.1.1 The Powers of Governments 1

1.1.2 City and County Governments 2

1.1.3 The Powers of the Federal Government 2

1.2 The Sources and Hierarchy of Law 3

1.2.1 The Constitution 3

1.2.2 Statutes and Ordinances 3

1.2.3 Agency Regulations 4

1.2.4 International Treaties 4

1.2.5 Appellate Court Opinions 4

1.3 The American Judicial System 4

1.3.1 Structure of the Court Systems 5

1.3.2 Federal Trial and Appeals Courts 5

1.3.3 State Trial and Appeals Courts 6

1. 4 Common Law 6

1.4.1 Stare Decisis 7

1.4.2 Restatements of the Law 7

1.5 Legal Codes 8

1.5.1 Uniform Codes 8

1.5.2 The Uniform Commercial Code 9

1.6 Legal Doctrines 9

1.7 Choice-of-Law Clauses 10

1.8 Criminal Law versus Civil Law 11

1.9 Cause of Action 11

1.10 Summary Judgment 12

2 Basic Legal Principles 15

2.1 Legal Issues in Construction 15

2.2 Principles of Contract Law 15

2.2.1 Unilateral Contracts versus Bilateral Contracts 16

2.2.2 Oral Contracts 16

2.2.3 Third-Party Beneficiaries 17

2.2.4 Contract Interpretation 17

2.3 Principles of Agency Law 21

2.3.1 Apparent Authority 21

2.3.2 The Principal’s Liability for the Agent’s Acts 22

2.3.3 Ratification 22

2.4 Principles of Tort Law 23

2.4.1 Intentional Torts 23

2.4.2 Unintentional Torts (Negligence) 23

2.4.3 Strict Liability 27

2.4.4 Misrepresentation 28

3 Project Participants 29

3.1 The Owner 29

3.1.1 Access to the Building Site 30

3.1.2 Restrictions on Use of the Property 31

3.2 The Design Professional Team 31

3.2.1 Site Evaluation Consultants 32

3.2.2 The Geotechnical Consultant 33

3.3 The Construction Team 33

3.3.1 Subcontractors and Suppliers 34

3.4 Construction Lenders 34

3.4.1 Collateral Assignment to Lender 35

3.4.2 Other Lender Requirements 35

3.4.3 Construction Loans 36

3.4.4 Bond Financing 37

4 Project Delivery Systems 39

4.1 Design-Bid-Build 39

4.2 Multiple Primes 41

4.3 Construction Management 41

4.3.1 Agency Construction Management 42

4.3.2 Construction Management At-Risk (CMAR) 42

4.4 Design-Build 43

4.4.1 Design-Build Proposals 44

4.4.2 Advantages and Disadvantages of Design-Build 45

4.4.3 Bridging Consultants 46

4.5 Engineer-Procure-Construct (EPC) 46

4.6 Turnkey Construction 47

4.7 Integrated Project Delivery (IPD) 47

4.8 Fast-Track Construction 47

4.9 Public-Private Partnerships 48

4.9.1 History of Public-Private Partnerships 49

4.9.2 Constraints on Public-Private Partnerships 49

5 Construction Contracts 51

5.1 The Construction Contract 51

5.1.1 Prebid Conferences 51

5.1.2 Right to Reject Bids 52

5.2 The Contract Documents (Owner-Contractor) 52

5.2.1 The Contractor’s Bid 53

5.3 Conflicts between the Documents 54

5.4 Errors in the Documents 54

5.4.1 Latent Discrepancies 55

5.5 Specific over General; Written over Printed 56

5.6 Interpretation against Drafter 56

5.7 Specifications 57

5.8 Description of the Work under a Construction Contract 57

5.9 Third-Party Beneficiaries 58

5.10 Industry Standard Forms versus Custom Forms 58

5.10.1 Drafting Custom Forms 59

5.10.2 AIA Contract Documents 60

5.10.3 Engineers Joint Contract Documents Committee (EJCDC) 62

5.10.4 Consensus DOCS 63

5.10.5 Comparing the AIA, EJCDC, and Consensus DOCS  Documents 64

5.10.6 AGC Forms 65

5.10.7 Other Industry Standard Forms 65

5.11 Commencement of Work Prior to Contract 65

5.11.1 Letters of Intent 66

6 The Design Process 67

6.1 Design Responsibilities 67

6.1.1 Contractor’s Responsibility for Design 67

6.1.2 Value Engineering 68

6.2 The Owner’s Program 68

6.3 The Design Agreement (Owner-A/E) 68

6.3.1 Schematic Design Phase 69

6.3.2 Design Development Phase 69

6.3.3 Construction Documents Phase 69

6.3.4 Bidding or Negotiation Phase Services 70

6.3.5 Construction Phase Services 70

6.3.6 Basic Services versus Additional Services 71

6.3.7 The A/E’s Compensation 71

6.4 Standard of Care Applicable to Design Services 71

6.4.1 Contractual Standard of Care 72

6.4.2 Proving Violation of the Standard of Care 73

6.4.3 Implied Warranties 73

6.4.4 Designing to the Owner’s Budget 74

6.4.5 The A/E’s Liability for its Estimate 74

6.5 Ownership of the Design Documents 75

6.5.1 Use of the Plans and Specifications 75

6.6 Termination of the Design Agreement 76

7 The Procurement Process 77

7.1 Selection of Contractors for Public Projects 77

7.1.1 The Bid Package 78

7.1.2 Duty to Award to the Lowest Bidder 78

7.1.3 Bid Responsiveness 78

7.1.4 Responsible Bidder 79

7.1.5 Bid Protests 80

7.1.6 Bid Security 81

7.1.7 “Best Value” Awards 81

7.2 Selection of Design Professionals 82

7.3 Alternatives to Design-Bid-Build in the Public Sector 83

7.3.1 Design-Build Construction in the Public Sector 83

7.4 The Federal Acquisition Regulation (FAR) 84

7.5 Procurement on Private Projects 85

8 Pricing Construction Projects 87

8.1 Fixed-Price Contracts 87

8.1.1 Fundamental Characteristic of a Fixed-Price Contract 87

8.1.2 Allowances 88

8.1.3 Material Price Escalation Clauses 88

8.1.4 Index Pricing 89

8.2 Cost-Plus Contracts 89

8.2.1 Labor 90

8.2.2 Subcontracted Work 90

8.2.3 Heavy Equipment 91

8.2.4 Small Tool Allowance 91

8.2.5 Reasonableness or Necessity of Costs Incurred 91

8.2.6 Contractor’s Overhead and Profit 92

8.2.7 Estimates and Cost-Plus Contracts 92

8.2.8 Timely Payment Discounts 93

8.2.9 Audit Rights 93

8.3 Cost-Plus with Guaranteed Maximum Price 93

8.4 Unit-Price Contracts 94

8.4.1 Variation in Estimated Quantities (VEQ) Clauses 94

8.5 Unbalanced Bidding 95

8.6 Bidding When the Design Is Incomplete 96

9 Subcontractors and Suppliers 97

9.1 Subcontractors versus Suppliers 97

9.2 Owner’s Control over Subcontractor Selection 98

9.3 Subcontractor Bids 98

9.3.1 Enforcing a Subcontractor’s Bid 99

9.3.2 The Subcontractor’s Right to Enforce Its Bid 100

9.4 Incorporation by Reference 100

9.5 Flow-down and Flow-up Provisions 101

9.5.1 Rights and Liabilities of the Parties under Flow-down  Provisions 101

9.6 Duty to Cooperate and Coordinate Subcontract Work 102

9.6.1 Limiting the Liability for Coordination 102

9.6.2 Coordination of Multiple Primes 103

9.7 Subcontractor Payment 103

9.7.1 “Pay-If-Paid” versus “Pay-When-Paid” 104

9.8 Subcontractor Claims against the Owner 105

9.8.1 The Pass-through System 106

9.8.2 Liquidating Agreements 106

9.9 Conditional Assignment of the Subcontracts to the Owner 107

9.10 Minority and Disadvantaged Business Programs 108

9.10.1 Federal Minority and Disadvantaged Business Programs 109

9.10.2 Agency DBE Programs 111

10 Time for Performance 113

10.1 Time Is of the Essence 113

10.1.1 Time-Is-of-the-Essence Clauses in Construction Contracts 114

10.2 Date of Commencement/Time for Completion 114

10.2.1 Delays in Commencement of the Work 115

10.2.2 Waiver of Time for Completion 115

10.3 Substantial Completion 116

10.3.1 The Significance of Substantial Completion 116

10.3.2 Establishing Substantial Completion 117

10.4 Final Completion/Final Payment 117

10.4.1 Acceptance of Defective Work 118

10.5 Delays 119

10.5.1 Determining Whether a Delay Was within a Party’s Control 120

10.5.2 Delays Due to Weather 121

10.5.3 Concurrent Delays 122

10.6 Liquidated Damages 122

10.7 Constructive Acceleration 124

10.8 Right to Finish Early 124

10.9 Milestones 125

11 Construction Scheduling 127

11.1 Bar Charts 127

11.2 Critical Path Scheduling 128

11.2.1 Activity Logic 128

11.2.2 Arrow Diagramming 128

11.2.3 Precedence Diagramming 129

11.2.4 As-Planned (Baseline) Schedule 129

11.2.5 Float 130

11.2.6 Critical Path 130

11.2.7 Multiple Calendars 131

11.3 Scheduling Specifications 131

11.4 Schedule Updates 132

11.5 Resource Leveling 132

11.6 CPM-Based Methods for Proof of Delay Claims 133

11.6.1 Total Time Analysis 133

11.6.2 Impacted As-Planned (“What-If”) 134

11.6.3 Collapsed As-Built (“But For”) 134

11.6.4 As-Planned versus As-Built 134

11.6.5 Windows Analysis 135

11.7 Expert Witness Testimony 135

11.8 Using CPM to Estimate Extensions of Time 136

11.9 Using Bar Charts to Prove Delay Claims 137

12 Contract Administration 139

12.1 The A/E’s Role in Contract Administration 139

12.2 A/E’s Liability for Contract Administration 140

12.2.1 Approval of Shop Drawings and Other Submittals 140

12.2.2 Site Visits and Inspections 141

12.2.3 AIA B101 Provisions 142

12.2.4 The Right to Stop Work 142

12.2.5 Approval of Progress Payments 143

12.2.6 Responding to Change Order Requests 144

12.2.7 Requests for Information, Interpretations, and Clarifications 144

12.3 A/E’s Role in Contractor Termination 144

12.4 Initial Decision Maker (IDM) 145

13 The Payment Process 147

13.1 Progress Payments 147

13.1.1 Schedule of Values 147

13.1.2 The Application for Payment 148

13.1.3 Certification of Payment 148

13.2 Retainage 149

13.2.1 Payment of Subcontractor’s Retainage 150

13.2.2 Claims on Retainage 150

13.3 Accord and Satisfaction 150

13.3.1 Payment of an Accord by Check 151

13.4 Joint Checks 152

13.4.1 Joint Payee versus Alternative Payee 152

13.5 Title Insurance 152

13.6 Obligations of the Lender 153

13.7 Evidence of Financing 153

13.8 Prompt Payment Acts 154

13.8.1 The Progress Payment Request 154

13.8.2 Payment on Subcontracts 154

13.9 The Owner’s Payment Obligation on Private Construction 155

13.10 The False Claims Act 155

13.10.1 Liability for False Claims 156

13.10.2 Prosecution of False Claims 156

13.10.3 State False Claims Act 157

14 Changes to the Work 159

14.1 Contract Changes 159

14.1.1 Construction Change Directives 160

14.2 Pricing Change Orders 160

14.2.1 Determination of Price by a Third Party 161

14.2.2 Schedule Adjustments 161

14.3 Constructive Changes 161

14.3.1 Owner’s Direction or Improper Rejection of Work 162

14.3.2 Notice Requirements for a Constructive Change 162

14.3.3 Waiver of Notice Requirement 163

14.3.4 Extra Work versus Additional Work 163

14.4 Federal Government Contracts 163

14.4.1 Equitable Adjustments 164

14.4.2 Escrow of Bid Documents 164

14.5 Authority to Issue Changes 165

14.5.1 Apparent Authority and Ratification 165

14.6 Duty to Perform the Changed Work 166

14.7 Reservation of Rights 166

14.8 Changes Clauses in Subcontracts 168

14.9 Documentation of Costs 168

14.10 Cardinal Changes 169

14.10.1 The Contractor’s Options 169

15 Differing Site Conditions 171

15.1 The Purpose of the Differing Site Conditions Clause 171

15.2 Differing Site Conditions Claims 172

15.2.1 Type I—Conditions Materially Different Than Indicated 172

15.2.2 Type II—Conditions of an Unusual Nature 173

15.3 Limitations on Claims for Differing Site Conditions 174

15.3.1 Duty to Make a Site Inspection/Duty to Investigate 175

15.3.2 Disclaimers 175

15.3.3 Notice 177

15.3.4 Waiver of Claims 177

15.4 Variations in Estimated Quantities Clause 177

15.5 Geotechnical Baseline Summary Report 178

15.6 Hazardous Materials 178

15.7 Tort and Breach-of-Contract Actions 178

15.7.1 Misrepresentation (Intentional or Negligent) 179

15.7.2 Owner’s Breach of Implied Warranty of Plans and Specs 179

15.7.3 Failure to Disclose Superior Knowledge 179

15.7.4 Mutual Mistake 180

16 Termination of the Construction Contract 181

16.1 Unilateral Termination 181

16.2 Contractual Termination Provisions 182

16.3 Termination by the Contractor for Cause 182

16.4 Termination by the Owner for Cause 183

16.4.1 Notice and Opportunity to Cure 183

16.5 Wrongful Termination 184

16.6 The Role of the Performance Bond Surety 185

16.7 Termination for Convenience 186

17 Mechanic’s Liens 187

17.1 Purpose of a Mechanic’s Lien 187

17.2 Procedures for Filing a Lien 188

17.3 Lien Entitlement 188

17.3.1 Liens for Services 189

17.3.2 Liens for Materials 189

17.4 Enforcement of the Lien 190

17.4.1 Priorities 190

17.4.2 Bonding Off 191

17.5 Interests Subject to a Lien 191

17.5.1 Subcontractor and Supplier Claims 192

17.5.2 Amount of the Lien 192

17.6 Lien Waivers 193

17.6.1 No-Lien Contracts 194

17.7 Rights of Owners and Third Parties 194

17.8 The Effect of Bankruptcy on a Mechanic’s Lien 194

17.9 Trust Fund Statutes 195

17.10 Stop Notices 195

17.11 Liens on Public Property 195

18 Construction Insurance 197

18.1 Types of Insurance 197

18.2 Commercial General Liability 198

18.2.1 Bodily Injury and Property Damage 198

18.2.2 Exclusions to Coverage 199

18.2.3 Additional Insured Status 200

18.3 Builder’s Risk Insurance 200

18.4 Workers’ Compensation Insurance 201

18.5 Professional Liability Insurance 201

18.6 Wrap-up Insurance Programs 202

18.7 Waiver of Subrogation 202

19 Surety Bonds 205

19.1 Use of Surety Bonds in the Construction Industry 205

19.1.1 Bid Guarantees 206

19.1.2 Payment Bonds 206

19.1.3 Performance Bonds 208

19.2 Rights and Remedies of Sureties 208

19.2.1 Indemnity Agreements 209

19.2.2 Discharge of the Surety’s Obligations 209

19.3 Bonding Requirements 210

20 Liability for Defective Construction 211

20.1 Determining Liability 211

20.2 Owner Claims against the Contractor 212

20.2.1 Warranties 212

20.2.2 Notice Requirements 213

20.2.3 Tort Claims 213

20.3 The Spearin Doctrine 214

20.3.1 Application of the Spearin Doctrine 214

20.3.2 Limitations on Spearin 215

20.4 The A/E’s Liability for Defective Construction 216

20.5 Affirmative Defenses 217

20.5.1 Statutes of Limitation 217

20.5.2 Statutes of Repose 218

21 Calculations of Damages 221

21.1 Compensatory Damages 221

21.1.1 Consequential Damages 222

21.2 Punitive Damages 222

21.3 Duty to Mitigate Damages 223

21.4 Owner’s Damages 223

21.4.1 Owner’s Damages for Late Completion 223

21.4.2 Economic Waste 224

21.4.3 Betterment 224

21.5 Contractor’s Damages 226

21.5.1 Equipment Costs 226

21.5.2 Home Offi ce Overhead 227

21.5.3 Cost Increases for Labor and Materials 228

21.5.4 Methods of Estimating Loss of Productivity 228

21.6 Limitation of Liability 230

21.6.1 Exculpatory Clauses 230

21.6.2 Indemnification Agreements 231

21.6.3 Limitation-of-Liability Clauses 232

21.6.4 Waiver of Consequential Damages 233

21.7 Specific Performance 234

21.8 Tort Claims 234

21.9 Recovery of Damages in the Absence of an Express Contract 235

21.9.1 Reliance Interest—Promissory Estoppel 235

21.9.2 Implied-in-Fact Contracts—Quantum Meruit 236

21.9.3 Restitution Interest—Unjust Enrichment 236

21.9.4 Quantum Meruit versus Unjust Enrichment 237

22 The Economic Loss Doctrine 239

22.1 Tort versus Contract Law 239

22.1.1 Definition of Economic Loss 240

22.1.2 Development of the Economic Loss Doctrine 240

22.1.3 Basis for the Doctrine 241

22.1.4 Public Policy Considerations 241

22.1.5 Strict Application of the Doctrine 242

22.1.6 Exceptions to the Economic Loss Doctrine 242

22.2 Claims of Defective Construction Products 243

22.2.1 Damage to Other Property 244

22.3 Claims of Defective Construction Services 244

22.3.1 Claims of Defective Design Professional Services 245

22.4 Potentially Dangerous Products (Risk of Harm Exception) 246

22.5 Negligent Misrepresentation 247

22.5.1 Negligent Misrepresentation Claimants 247

22.5.2 Tort versus Contract Claims for Negligent   Misrepresentation 248

23 Alternative Dispute Resolution 249

23.1 Arbitration 249

23.1.1 Arbitration Clauses 250

23.1.2 Arbitration Statutes 250

23.1.3 Arbitration Organization Rules 251

23.1.4 Prehearing Activities 251

23.1.5 Selection of Arbitrators 252

23.1.6 The Arbitration Hearing 252

23.1.7 The Award 252

23.1.8 Appealing the Award 253

23.1.9 Costs of Arbitration 254

23.1.10 Typical Schedule for Arbitration 254

23.1.11 Joinder and Consolidation 254

23.1.12 Waiver of Arbitration Rights 255

23.1.13 Effect of Arbitration on the Surety 256

23.2 Litigation versus Arbitration 256

23.3 Mediation 257

23.4 Other Types of Alternative Dispute Resolution 258

23.4.1 Med/Arb 258

23.4.2 Mini-Trial and Summary Proceedings 258

23.4.3 Dispute Resolution Boards 259

23.4.4 Standing Neutrals 260

23.5 Dispute Prevention 260

Appendix A: List of Abbreviations 261

Appendix B: Table of Cases 265

Appendix C: Understanding Case Citations 267

Glossary 271

Index 279

GAIL S. KELLEY is a Professional Engineer and LEED Accredited Professional as well as a licensed attorney in Maryland and the District of Columbia. Gail has an extensive background in design and construction having worked in construction management, structural design, and structural evaluation.