Some time ago, a friend of mine who worked for a construction management firm explained one of his company’s philosophies. The firm divided all owners into two types: the first consisted of owners which regularly bought construction services; the second (such as hospitals, schools, prisons, etc.) engaged in major construction only occasionally.
The difference is extremely important. With Type 2 owners, you are dealing with people who are not attuned to the realities of construction or construction costs.
Recently, I was asked to assist a company who had made an error in its bid for work at a major university. Correcting the bid error would have kept the low bidder in lowest place. The next contractor’s bid was more than $1 million higher. Even so, the university didn’t have a mechanism or policy in place to address that situation. By contrast, in federal government contracting (a Type 1 owner), bid mistakes are commonly addressed in a very straight-forward manner.
A similar distinction can be made with contractors, especially systems contractors. Yours may be a successful company with an annual volume of a few million dollars. All of a sudden, you get a $3 million or $4 million contract to upgrade a hospital’s security system or to install new security systems in a school. Are you prepared?
A tale of a jail
Jails and prisons are a growth industry. Large amounts of federal and state funds have been earmarked for a variety of detention facilities. Obviously, an integral part of construction involves heavy amounts of security monitoring, from simple smoke detectors, to systems which control doors and jail-cell openings, CCTV, motion detectors, etc. The systems themselves normally involve known technology with almost off-the-shelf devices. Programming and integration are the challenges for the technicians.
But there is a bigger challenge. For a major construction project, the systems contractor is the first and the last to appear. Early on, you perform the rough-in, then wait, sometimes for months, until the building is ready for your sensitive equipment. You do not want to install your devices until the building areas are relatively dust-free, painting is complete, and other disruptive construction activities are nearing completion.
On one such facility, the systems contractor paid little attention to the project while it was waiting for the time it could install its equipment. For a variety of reasons, the jail was substantially delayed, and multiple revised completion schedules were issued by the architect. The systems contractor raised no objections to the revised schedules and, as a result, did not request time extensions or delay damages. When the contractor was notified that the facility was ready for its installation, it discovered a badly out-of-sequence structure. The systems installation proved to be sporadic and difficult. In the end, the systems installation took six months rather than two, and the contractor was sued by the owner for liquidated damages.
What went wrong?
For years, NECA has presented programs and seminars and has published monographs on contracting, scheduling, claims and contract administration. Electrical contractors, exposed to this wealth of information, have been sensitized to these contracting issues. The same is not generally true for systems contractors.
For the jail project, the contractor should have reviewed the schedules, should have raised objections, and should have asked for time extensions. When the job was made available, the contractor should have performed a walk-through to confirm the true status of the work, and to prepare its own completion schedule. By not taking these steps, the contractor found itself in a defensive position, explaining itself after the fact.
In an old case, a security device (fire alarm) manufacturer was sued by homeowners whose residence was damaged by fire. The alarm had failed to sound when the house caught fire. The manufacturer’s defense was ingenious but unpersuasive: it argued that the alarm was not designed to prevent fires.
Is there an analogy to security cameras and motion detectors in a parking garage? Or smoke and fire detectors in a night club? Or a computerized security system in an office building?
A systems failure may not lead simply to a warranty claim. And your contract with the owner will not protect you from third-party claims. It is a dangerous area.
At a minimum, you should make certain that your suppliers have the same exposure as you have. Careful drafting of your purchase order forms and design agreements is essential. Also, you should carefully review your suppliers’ “acknowledgment of order” forms and look for clauses which purport to limit damages or liabilities.
Where you are a subcontractor, read the general contractor’s “indemnity” clause and make sure you understand it and how it applies to you. This is a powerful clause that can increase your liability, not only for personal injury and property damages, but also for consequential damages (lost profits, lost business opportunities, etc.).
Handshake agreements may not be a thing of the past, but they are risky. You need to manage construction. You also need to manage the contract and you need to obtain enough advice about contract law so that you can avoid the “jail problem.”