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PDAC’s Fourth Quarter Event – Tactics for Negotiating Successful Contracts

On Thursday November 14th the Professional Development Advisory Council (PDAC) held the final committee event of 2019.  To cap off a busy inaugural year, and to provide members a taste of what is to come in 2020, PDAC brought together themes from earlier in the year relating to collaboration and advocacy – integrated project delivery (IPD) and salary negotiation – and engaged in an evening of discussion on Tactics in Negotiating Successful Contracts.

PDAC thanks AECOM for hosting the event in their newly renovated space and for the generous and continued support of our sponsors AECOM Tishman, AECOM, Syska Hennessy Group, and Faithful + Gould.

 

Who

The event was introduced by Nicole Woolard, PWC Board Member and AECOM Assistant General Counsel, who presented the moderators, Cathy Dolan-Schweitzer and Minna Choi.  Following introduction of the panelists and their roles, the audience was taken on a journey through the fine art of contracting as seen from each of the Owner’s, Designer’s, and Contractor’s perspectives and, of course, the Claims Specialist.  Panelists included the following,

Alexandra Gellman, Contractor’s Counsel (AECOM Tishman)

Todd Mayo, Claims Specialist (Capital Project Management Inc)

Sarah Sparer, Designer’s Counsel (Skidmore, Owings & Merrill LLP)

Robin Zeidel, Owner’s Counsel (Zeidel & Associates P.C.)

 

Overview

In order to give the audience some context, discussion between the panelists was based on a fictional scenario relatable by most in the construction profession.  During the construction of a building, excavation to a depth provided by the Design team was proven insufficient to support the footings of the proposed structure, resulting in the need for deeper excavation and additional incurred costs to the Contractor and/or Owner.

Because each of the Owner/Designer/Contractor parties were well-represented in the PWC member audience, questions and challenges to the panelists reflected what could be described as preconceived ‘prejudices’ about responsibility.  The expert panelists contained the discussion and maintained a level field of commentary and insight about the different viewpoints on the matter and provided some key tips.

First, the panelists advised, always refer to the contract, and if necessary, engage legal counsel to assist with interpretation of terms.

Keep the language in contracts straightforward with as much clarity as possible to ensure both sides understand the implications of each clause, particularly where modifications to the contract may have been under discussion until agreement was reached.

 

Owner/Designer Contract

In the Owner/Designer contract, Design professionals are deemed to perform to an agreed industry standard of care, and disputes are often referred to Design peers or to third parties for review to ensure the standard has been maintained.

Designers should endeavor to agree on scope and the ability to meet that scope, including risk management, in as clear terms as possible.  In the scenario presented, the Designer could have been negligent in evaluating the existing conditions when the excavation depth was determined.  Also, if the agreement between Owner/Designer does not specify limitations of engagement, the original Designer could be implicated in the final version of the design, even if another designer completed the construction documents.

Designers should carefully negotiate intellectual property rights with Owners, especially for Owners that might intend to re-use the same design at multiple sites or properties.  For example, hotel chains strive to retain established brands and could hire local or less expensive architects to execute the initial design on future projects.

A Designer’s reputation and/or license might be at risk and/or copyright fees forfeited if the intellectual property right is not effectively protected.  In some cases, Designers might consider withholding ownership of drawings to obtain desired clauses in the Owner/Designer agreement.

 

Notice

The panelists could not emphasize enough the importance of the notice provision in Owner/Contractor agreements.

In the case presented, the Contractor should have notified the Owner of the excavation depth issue prior to commencing additional work and incurring associated costs and schedule delay.

To provide proper notice, the generally accepted process is by formal letter with mail/return receipt carrier.  By agreement between all parties, emails with electronic read-receipt stamps might constitute acceptable notice.  In some cases, emails might be considered a courtesy notice pending receipt of the formal letter.  Text messages, meeting minutes, and other informal communications are not acceptable under the notice term in most agreements.

Notices provisions are becoming more stringent for contractors in that timing of the notice from the Contractor to the Owner is specified in great detail and is strictly construed by all parties. The panelists explained that providing notice to the Owner as soon as possible allows for mitigation of issues earlier in the project, potentially saving the Owner time and money.

With respect to schedule delay, responsibility and costs generally fall into one of four classifications:

  1. Delay that impacts the critical path is one that extends the date of substantial completion.
  2. When an Owner causes a delay, that is an excusable compensable delay, and the Contractor can claim additional costs.
  3. When a delay is not the fault of any one party to the agreement, that is an excusable non-compensable delay, and the contractor is allowed additional time to complete the project only.
  4. When a delay is non-compensable, the Contractor is responsible to address the issue within time and cost constraints.

 

When negotiating the terms of a contract, the Owner might seek schedule protection through establishment of schedule milestones leading to an overall completion date.

 

Cost and Change Orders

Setting forth a clear process and authority in negotiating and signing off change orders is key to maintaining a project budget.

Properly identify signatory authorization for change orders within the contract.  For example, who on the Owner’s team can sign the change orders? Is it the Owner, the Owner’s representative, or someone else?

The clause “submit change order within 21 days… or waive your right to the change order” is also now being included in contracts.  This language pushes the contractor to tighten up timing of change order requests and to maintain control of the trade subcontractors.

In this panelist’s construction scenario, the Designer unilaterally instructed the Contractor to proceed with the additional work, apparently without the Owner’s express authorization and without clarity on rights and responsibilities for directing changes.

 

Damages

The main types of damages found in construction agreements are Actual Damages, Consequential Damages, Liquidated Damages, No Damages for Delay, and Mutual Waiver.  The panelists’ discussion focused on Liquidated Damages and Consequential Damages, both of which are often misunderstood by parties.

The Contractor’s counsel generally encouraged Liquidated Damages, as they are fixed-sum damages agreed to by the contracting parties up front, payable in the event of a breach of contract.  The fixed-sum term is advantageous to the Contractor, particularly in a catastrophic breach that could otherwise cost the Contractor and/or trade subcontractors their respective businesses.

The disadvantage for the Owner is that the amount of damages agreed to in the contract could be inadequate to cover loss incurred by a breach.  Liquidated Damages generally limit the Contractor’s risk and transfers that risk to the Owner.

Conversely, the Owner’s counsel advocated for Consequential Damages.  These damages are more favorable for the Owner, as they can be determined after the fact (i.e., can have occurred during the project but liability goes beyond the term of contract if the actions which flow from the failure of a party to fulfill an obligation cause loss to the Owner).  An example of Consequential Damages is the delayed opening of a restaurant or a hotel and the resultant costs or loss of earnings.

Collectively, the panelists agreed that the term “Fee of prevailing party is paid by unsuccessful claimant” helps to keep a check on “frivolous” claims or potential lawsuits by requiring the losing party to pay attorney and other legal fees.

 

Terminating for Convenience

Another important clause is one that allows any party to essentially walk away from a contract, provided all responsibilities under the agreement are met, and all outstanding costs are resolved, up to the date of termination.

Terminating for Convenience allows the Owner to terminate the engagement of a Designer and/or Contractor without reason and resume the project with someone new, provided costs are paid to date.

Alternatively, a Designer may withhold drawings pending overdue payment by the Owner, or the Contractor might suspend construction for non-payment of, or pending dispute resolution with, the Owner.

 

Conclusion

Understanding terms in construction agreements is key for the Owner/Designer/Contractor industry.  The construction scenarios and solutions presented by the panelists and noted above are just some of the points touched upon during the Q4 event.  Animated discussions and questions continued well into the networking hour that followed.  PDAC plans to revisit this topic and build on this event in 2020 and beyond to support construction professionals in delivering projects successfully.

 

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