Traps for Contractors

Every year, federal and state courts issue hundreds of decisions on construction contracting. Most of these cases are highly fact-specific, although they apply well-established contract law. Often, the difference between winning and losing lies in how the facts are presented and what legal arguments are used in support. The following are a few snapshots of recent rulings on topics of importance to electrical contractors. Written notice It is commonplace for construction contracts to have multiple written “notice” clauses. These clauses apply to extras, delays, disruptions, and a host of other job impacts. What happens when you do not send the notice letter? What if you are told by the owner’s representative or the general contractor not to send a notice letter? In F. Garofalo Electric Co. v. New York University, the contractor learned the answers to these questions. During construction, other contractors damaged Garofalo’s work. It alleged that the cause of the problems was inadequate coordination by the construction manager. The CM orally instructed the contractor to repair the work and itemize its additional costs, which the contractor did through weekly written reports. At project conclusion, the owner refused to pay for the extra work, relying on a contract provision that required written notification of any claims directly to the owner. The court held that the CM’s oral directive and knowledge, and the contractor’s weekly, written extra cost reports did not modify or waive this contract condition. The moral of the story: Failure to follow express contract terms can lead to an expensive result. Contractors should make a list of all written notice clauses at the start of each job, keep it handy, refer to it often, and conduct regular surveys of their compliance. Front-end loading and deductive modifications Unbalancing your line item breakdown for billing purposes can have obvious advantages, principally for cash flow. But what happens if an entire line item is deleted by a deductive change order? Is the deductive value the same as that you placed on the line item, or is a different valuation used? The issue can be more complicated if the deleted work is substantial. In the case of Capital Elect. Co., for example, a federal board treated the deletion of over 70 percent of one major line item as a partial termination for convenience. A variation on this theme was presented in Cottman Mechanical Contractors, Inc. where the Navy issued a deductive change order near the end of the project, and made a valuation of the deduct using the Means Guide. Cottman complained because it had billed 99 percent against the contract price, leaving a balance of only a few thousand dollars, much less than the Navy wanted to take. The Board ruled that a deductive credit is valued at the contractor’s savings, and not at the bid price (which could have been high or low) or the contract amount. Conflicts between drawings and specifications What do you do when, during construction, you discover that the drawings and specifications demand different things? Hundreds of cases address this issue. The terms of art used include (1) latent versus patent defects; (2) latent versus patent ambiguities; and (3) order of precedence (the contract law priorities within a contract, so that generally the more specific the provision, the higher the priority). An interesting application of these concepts occurred in J.E. Dunn Construction Co. v. GSA. In that case, the specifications contained a performance requirement (design/build) for glass curtain walls. A detailed drawing showed a specific construction method for the curtain wall with dimensions and selected materials. The contractor’s shop drawings followed the drawing details, but were rejected because the proposal would not meet the performance requirements in the specifications. So who won? A federal Board of Contract Appeals ruled that the contract contained both performance and detailed specifications. Both could not be achieved. However, the conflict was not obvious (latent) and could not reasonably be detected until the shop drawings were engineered. Accordingly, the contractor recovered its additional engineering, material, and labor costs. Delay damages for on-time performance On federal government contracts, the general contractor can sponsor a subcontractor’s claim. This principle is not generally recognized for private construction projects or in state law for public works. What if the subcontractor experiences delays with attendant costs, but the general contractor completes its work on time? The court in E.R. Mitchell Construction Co. v. Danzig was confronted with just this issue. In Mitchell, defects in government drawings caused a 60-day suspension in a mechanical contractor’s work. The direct costs were paid by a change order, but the subcontractor maintained its Eichleay formula claim for unabsorbed overhead. The government initially rejected the claim because there was no delay to the project. On appeal, the court ruled that the sub’s claim was valid and should be compensated. But take care. The heart of this decision was that the government had approved the subcontractor’s planned schedule. It remains to be seen whether the result will be the same when the government has no knowledge of the subcontractor’s performance plan. The effect of inspections Here is the scenario: The general contractor and/or project architect inspects your work regularly. Nonconforming installations are required to be fixed, but everything else is checked off as acceptable. At the end, the general or A/E re-inspects and finds unapproved deviations from the specifications. A tear-out order follows. Do the interim inspections help you? According to one recent case, the answer is a resounding, “No!” In Blumenthal Kahn Electric LP v. Bethlehem Steel Corp., the electrical subcontractor was to install junction boxes and stub-outs to the interior of tunnel walls for the Boston Central Artery project. The agreement stated that “all” work and materials should be subject at all times to the inspection and approval of Bethlehem Steel’s engineer. After inspections and approvals were done, the tunnel sections were submerged and encased in concrete. Later, it was found that the stub-outs were improperly located. Fixing this was very expensive. The electrical contractor claimed that if Bethlehem had noticed the deficiency before the tunnel sections were set, the repair would have been simple. According to the sub, Bethlehem owed a duty to notify him of the problem. The court of appeals rejected this defense. It found that Bethlehem had no duty to inspect for the sub’s benefit. The contract expressly stated that Bethlehem’s periodic inspections did not relieve the subcontractor of its obligation to meet all contract requirements. The result might have been different if the electrical subcontractor had notified Bethlehem of the variances from the contract design. Note that, particularly in federal government contracting, a “final inspection” and acceptance might have led to the opposite result. In conclusion, learn from these cases. • Maintain a good record-keeping system so your notices of job impacts are timely and properly made. • Get expert advice on the law of your contract and applicable statutes. Be sure to consult your attorney before you sign the contract as well as during the project when issues arise. • Be careful how you present your claim. You need to base your case on the appropriate legal theory, supported by all the pertinent facts. Your request for compensation should be a road map that gives specific directions to the result you want and deserve. ITTIG, of Ittig & Ittig, P.C., in Washington D.C., specializes in construction law. He can be contacted at (202) 387-5508, e-mail:, or his Web site,

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