Recently, a client asked me to review a set of general terms and conditions issued by the owner of a large project. To do this task, which I perform frequently for clients, I apply certain review protocols I developed to ensure all clauses that affect time or money are highlighted. I note each instance in which some form of “notice” is required, and I focus on each clause that demands a report to the owner. On my second pass, I outline the kinds of records, both in form and content, my client needs to generate for the project. These record-keeping criteria are critical to ensuring my client has the necessary documentation.
The actual request by your company for a change order or time extension is the last activity in a chain of events. If your management systems are not sensitive to occurrences that may lead to extra cost or time of performance, the contract’s change order procedures may not be initiated in time, and you may have waived your contract rights.
This article focuses on four contract clauses. Use the meaning of the terms, and suggestions for appropriate responses, the next time you are reviewing a contract and before you sign.
1. Errors in the drawings
Increasingly, designers attempt to insulate themselves from claims of errors and omissions. One common approach is to require that the contractor review the drawings and specifications and detect any mistakes.
The contract I reviewed has a clause that provided that: “Should the contractor perceive an error or inconsistency in the drawings or specifications, the contractor shall not proceed with the work, but promptly consult with the owner.”
Because this clause applies during performance, it may be likely that your field personnel will first detect any drawing errors. Have they been instructed as to the steps they need to take? And note, in this clause there does not have to be provable error but simply a problem that looks like an error or inconsistency (“should the contractor perceive …”).
This clause has no overt mandate that the owner be notified in writing but only that the owner be consulted. You need to ensure that the person consulted as the “owner” is the authorized representative. For that purpose, it may be helpful to give your supervisory personnel a “drawing error” memo pad they can use to confirm the notification with the correct person and where they can describe the work stoppage. A memo is also needed to fulfill the “changes” clause notice requirements.
2. “Conditions” at the site
One clause in the contract appeared innocuous to me on first reading but caught my attention because of a short “written notice” factor. If this clause were to be interpreted literally, a contractor may be advised to send notice letters every two days, which seems unreasonable.
The clause reads: “If the contractor becomes aware of any condition which is likely to cause delay, the contractor shall notify the owner in writing within two days.”
The operative words are “any condition” and “likely to cause delay.” With some contracts, a weekly status report to the owner can be used to satisfy some notice clauses, but with this provision, a report every seven days is not enough.
The “condition” could be an error in the drawings, interference from another contractor, a physical site condition, or any number of other circumstances. For language this all-encompassing, it would be worthwhile to seek a clarification from the owner and incorporate the clarification into the contract.
The “two days” has some flexibility as the time runs from your becoming “aware” of a condition, which is an ill-defined moment. In any event, the clause may require you to send your daily logs to the owner, assuming the log form contains a message block for site conditions.
3 Constructive delays
It is common for a contract to give the owner the right to suspend all or part of the work or redirect the work. A written directive normally exercises this right.
Where a delay or suspension occurs because of something unexpected or conditions at the site, and there is no express directive from the owner to stop or redirect the work, the term used is “constructive delay.”
The clause I reviewed covered this circumstance: “If an act of the owner causes delays, interruptions or suspensions of the work, the contractor shall notify the owner in writing within four days after the occurrence of the delay and shall provide the owner with a written itemization of cost and time impact within 14 days of the conclusion of the delay.”
Putting aside the question of when there is an “occurrence” of a delay, ask yourself what would prompt you to use this clause and send a four-day notice. Legally speaking, there may be no bright line distinction between an “act” of the owner and a “failure to act” (e.g., approval of a shop drawing). And, does an act of the owner (four-day notice) also constitute a “condition” (two-day notice)?
Again, weekly reports may not be sufficient, but daily logs may be.
4 Right to change
One of the large problems frequently encountered in contracting is the unauthorized change. The owner or general contractor, through a field representative, informally instructs your foreman to perform added or different work or perform work in a different way. While verbal instructions may be common, your agreement to the change can create a loss for your company.
In the contract I reviewed, there is a clause that is worded to protect the owner, which simply states: “The owner shall have the right to change the work. The contractor shall not proceed until authorized in writing.”
This clause does not require the owner’s initial direction to change in writing. The burden is on the contractor to decide that the order involves a change, that the order is from an authorized representative of the owner, and that the order is confirmed in writing. If you perform the change without the paperwork, you may have waived your right to claim an extra and a time extension. Worse, you may have to tear out the unauthorized changed work, reconstruct the work and be held accountable for any resulting delays.
The contract terms and conditions analyzed here are simply variations of clauses in other contracts. This discussion conveys the need for you to take a second or third look at even familiar terms and decide whether your company is prepared for them.
While you may not encounter some of these examples in your construction contracts, it still may be a good idea to manage your documentation on a daily basis as if these clauses were in every one of your contracts. Better to be safe than sorry.