Top Ten Tools for Your Construction Project
by
Derke J. Price
The decision by any unit of local government to undertake a construction project
is, like the construction of the building itself, a journey through many stages. You face risks, tests, traps, and other obstacles to be surmounted before the golden shovel goes in
the ground and then before the ribbon is cut and the doors opened. Proper preparation
and good contracts can, however, significantly reduce the number of obstacles the public body will confront and can get the public body through those hazards that are inevitable. This chapter is intended to give you an overview of the top ten tools you can use to make
for a better project.
Schematic of the Project
The process begins when you, the "Owner," seek to fulfill some particular goals
by constructing a new public improvement. The first step is typically the selection of a design professional: an Architect or Engineer (the "A/E"), whose job is to translate your
vision into an actual, constructible plan. Here, the first contractual commitments are made and the first risks taken.
Next, you let the project for bid and then awards the contract to the successful bidder(s) (the "Contractor"). More risk – risk you need to control in the contract
documents that were prepared before the project is bid!
In an ideal setting, the project proceeds to completion. But issues always develop. Questions arise as to the meaning or absence of items or errors in the contract documents; dates and milestones are missed; specified materials may be late, not available, or more expensive than possible substitutes; the quality of work may be challenged as less than acceptable; payments get delayed; and accidents happen, people get hurt and property gets damaged. Hopefully the parties are prepared for these developments and can react predictably and quickly so that the project continues to progress. Sometimes, however, litigation or arbitration is necessary to resolve the issues before the project can once again move forward.
Construction law is almost entirely the law of contracts, although statutes play a role in defining the rights and obligations of the Owner, A/E and Contractor. Thus, there
is no more important advice for the Owner than that of the Construction Specifications Institute: "There is no effective substitute for clear, correct, complete, concise and carefully coordinated construction documents" (Construction Specifications Institute Manual of Practice, 1996, FF/190). In that regard, there are a number of "families" of
standard-form construction contracts available to help achieve that goal. These families include the American Institute of Architects ("AIA"), the Engineers Joint Contract
Documents Committee, the American General Contractor's Association, the Design-
Build Institute of America, the National Society of Professional Engineers, and the
Construction Managers Association. By far, the most popular family is the AIA standard forms which have the added benefit of a substantial amount of case law interpreting their provisions.
All of the various families, as their publishers' names imply, are the product of certain industry groups and, although the drafting committees welcome comments from
all sectors, the final products do tend to reflect the perspective of the group publishing the document. Notably, there is no family of construction documents published by any organization representing units of local government, or even any group generally
representing "Owners" for that matter. Accordingly, as further explained below, the
standard form documents require careful reworking. There are blanks to be filled in,
various documents to incorporate, and others to cross-reference and coordinate. It is easy
for ambiguity to creep in and that ambiguity can be expensive to resolve. Here, then, are ten tools you should use to rework these agreements:
1. Eliminate the Waiver of Subrogation
Each of the parties (the Owner, Contractor and Architect) is typically required to provide different types of insurance. The Owner, for example, typically provides
property insurance in the form of "builder's risk" insurance to protect the work-in-
progress until such time as the work is completed and turned over to the Owner. After completion, the new improvements are added to the Owner's standard property insurance policy. For units of local government, insurance is often provided through "pool"
arrangements with other similar units of government.
When property damage or personal injuries occur during the course of construction, the Owner immediately contacts its insurer and that insurer typically steps
in to help the Owner get the project back up and running. Then, through the principles of
"subrogation", the insurance company can bring a claim against those responsible for
causing the damages to recover what it paid. For pool participants, this recovery through
subrogation helps keep down premium costs for members.
The standard contracts waive this right of subrogation. This means that if the Owner's insurance responds to a claim–even where it turns out that one of the other parties was clearly responsible for causing the damages or even where the Owner's insurance responded only because the other insurers were responding too slowly–then the Owner's insurer cannot obtain recovery from the party that was the true cause of the
damages. This, for units of local government, means greater losses and higher premiums.
As a general rule, liability follows knowledge and control. Because you, the Owner, have relatively little knowledge or control over the particulars of the project, at least as compared to the Contractor or Architect, the waiver of subrogation gives you relatively less protection and more risk. Improve upon that balance of risk and reward by striking the provision.
2. Amend the Indemnification Provision
Similarly, the standard indemnification provisions in the contracts favor the Contractors and Architects and not the Owners. Although the Construction Contract Indemnification for Negligence Act, 740 ILCS 35/0.01 et seq., as a matter of Illinois law, effectively rewrites these provisions to give pro-rata liability for negligence (it voids any indemnification clause in a construction contract that purports to make any party liable
for the negligence of another), there is still room to write a more comprehensive indemnification provision to gain several important advantages. First, as compared to a common law claim for contribution in tort, contractual indemnity offers the ability to
recover both the loss for which the indemnitor is liable and the attorneys' fees, costs and
other expenses incurred in pursuing that recovery. Typically, such costs cannot be
recovered under a claim for contribution. Second, it is a tool through which to obtain recovery for acts and losses for which there may be no insurance coverage (e.g., deliberate or intentional acts). Third, the indemnification provision also presents an opportunity to avoid having to make up a shortfall in damages paid by a Contractor or subcontractor due to the limits on the amount or type of damages, compensation, or
benefits recoverable under the Workers' Compensation Act, Disability Benefit Act, or
Employee Benefit Act (in Illinois this is known as the waiver of Kotecki limits). Without
the proper language, the Owner could find itself paying to make up the difference between what the injured worker received under workers' compensation and the amount
of damages awarded by a jury for that injury.
3. Examine the Insurance Limits
Design professionals need to carry both errors and omission insurance ("E&O coverage") and commercial general liability ("CGL") coverage for their actions outside of using their professional judgment: when they drive their firm's truck onto your property
and cause damage to a person or property, it is the CGL policy, not the E&O policy, that covers the claim. Surprisingly, many design firms do not have CGL coverage in place
and therefore it is imperative that the Owner require the same. Likewise, if the design firm has to rely upon consultants, the Owner should require E&O and CGL coverages for
those consultants as well.
Like the design firms, it is essential that the Contractors and subcontractors have workers compensation insurance, comprehensive automobile liability insurance, commercial general liability insurance, and valuable papers insurance. The time to review and define these requirements is when the contract is being assembled before being bid upon, thus rolling the cost of the insurance into the bidding price.
All of the contracts should provide that the policies of the design firm or the
Contractors and subcontractors are primary to the Owner's insurance (as this will save the
pool money) and certain terms should be specified (e.g., claims-made vs. occurrence;
"wasting" and "aggregate" limits, notice at the time of renewal) in order to maximize your
protection.
4. Meet the Statutory Requirements
The various state codes applicable to different units of local government throughout the State of Illinois mandate that governmental entities include certain provisions in their construction contracts. A failure to properly include the required provisions in your contracts can expose you to additional costs and even penalties. Among the provisions you must include in the contract are the following: prevailing wage requirements, non-discrimination and sexual harassment policy requirements, surety bond requirements, and worker and product preference statements. Although you must include these provisions, you also need to modify them. For example, with respect
to prevailing wages, you should include a term that prohibits making any claims for additional compensation beyond the bid amount due to changes in the prevailing wage schedules.
Likewise, the Public Construction Bond Act, 30 ILCS 550/1 et seq., mandates that
the public body require every Contractor to furnish, supply and deliver a surety bond to secure the performance of the contract and the payment of all subcontractors and material suppliers. The purpose of the Bond Act is to protect the expenditure of tax funds by obtaining a guarantee of performance, and to protect those who furnish labor and material
to the Contractor by guaranteeing their payment. In contrast to a private construction project where the subcontractors and material suppliers can place a lien on the property of
the Owner to secure payment, subcontractors and material suppliers on a public works project can only lien those funds in the hands of the Owner due and owing to the Contractor (770 ILCS 60/23). The Bond Act effectively substitutes the bond in place of
the land as security for payment of the subcontractors and material suppliers. Failure to demand or enforce the requirement that the Contractor supply a payment bond may make
the Owner liable for the debts of the Contractor, even if the Owner has fully paid the
Contractor all amounts due under the contract.
5. Review Information Requirements Imposed on Owner
The standard form contracts frequently try to provide escape clauses for the design professional or the Contractor on the basis of the information provided by the Owner. But you are busy running a unit of government and not studying every aspect of
the property or project – that's the expertise of Architects and Contractors. Make the
professionals working for you help you get the right information. For instance, the
Owner is responsible to obtain and pay for surveys and geotechnical information so that
the design firm can properly design the structure. The most common example of such a report is a "soils report." Because this information will be relied upon by the Architect to
design the project, the Architect should help you define the scope of the geotechnical
Engineer's work (how comprehensive) rather than avoiding any responsibility for it.
Incomplete or erroneous information in the documents also exposes the Owner to claims
from the Contractors, and in some instances can even stop work on the project until matters are resolved. Put them on notice that they have to help you find such errors where reasonably possible and have them waive the right to stop the work while you
work out any additional costs or compensation. In short, the risks of unforeseen conditions need to managed either by shifting some of them or spreading some of them.
6. Streamline the Relationship with the Surety
Under Illinois law, every construction project for a public body must be underwritten by a surety bond provided by the Contractor that covers performance of the contract and payment of subcontractors. The notice provisions and manner of resolving claims under these bonds can be a labyrinth that will handcuff the Owner when the time comes, resulting in increased delay and dissatisfaction. By setting forth requirements for certain terms in the surety bonds, you lock in procedures that help you get the project done and people paid instead of subjecting you to endless questions and frequent delays.
Likewise, as Owner, you will owe the Surety certain duties (notice of default, protection of the income stream). Set the ground rules for how you will meet these duties right up front.
7. Consider Liquidated Damages for Delay
Illinois law recognizes the inconvenience that occurs to the public when a Contractor does not provide the public improvements in a timely fashion. Illinois law also recognizes that it not easy to quantify, in dollars, the value of such inconvenience. Accordingly, Illinois permits Contractors and public bodies to set a liquidated amount for
such delay damages. Provided they do not constitute a "penalty" and are reasonably
related to the amount of delay, such clauses are enforced and can assist in managing the
expectations of all of the parties and making the Owner whole for delay. The standard form contracts, perhaps not surprisingly, waive such claims on the part of the Owner.
8. Tighten the A/E's Responsibility for the Budget
There are few things as omnipresent to the unit of local government or a school district as the budget. The standard form contracts acknowledge the importance of the budget, but they then put the burden back on the Owner to clearly explain its goals in the language of construction, or the Architect is excused from having to meet that budget
number when the bids come in. But isn't that why you hired the Architect – to help you
build what you need and within budget? Make the Architect work for you and respect
your budget by obligating them to study your programming needs, and if the lowest responsive and responsible bid is more than 10% over the budget when the bids are opened, by giving you the option to have them redesign the project, at no additional cost,
so the project comes in within the budget.
9. Tighten the A/E's Responsibility for Evaluating Payment Requests
You owe a duty to the Surety and the subcontractors not to over-pay the
Contractor. Accordingly, you need to set up a system of evaluating pay requests that
includes obtaining a comprehensive schedule of values from the Contractor and the review and certification of pay applications by the Architect.
10. Own the Documents
Last, you need to own the design documents and all of the notes and studies that
go into that design. The standard form contracts give ownership to the design professional, but the public should own the design of their building and control the ability
to start and stop the project as budgets change, and to freely add to or duplicate the building in the future if necessary – without paying again for the design you already purchased. You will need to give the design professional certain protections and guarantees, but ownership by the public entity will avoid future conflicts over who owns
the solutions depicted to your programming needs and values.
Routine use of these 10 tools should help you keep all of your projects running smoothly, and help lead your project to a timely and efficient completion. The analysis suggested here should take place beginning with the first design contract with the Architect and continue up until the final payment and the release of any surety bonds. Ancel Glink attorneys can work with you without delaying the process or increasing
construction costs. Signing "form" documents without review or revision forms a road to
disaster. A longer discussion of these issues can be found in Article 7 of Ancel Glink's
2007 Guide for Newly-Elected Officials, available for free download at www.ancelglink.com.
All chapters:
Ten Steps to Help Keep Your Employees From Suing You (Or To Help Defend You If They Do), by
Margaret Kostopulos
Ten Lessons Learned by a Former Elected Official, by
Gregory S. Mathews
Ten Rules to Live by for Public Management Labor Negotiators
, by
Gregory S. Mathews
Donald W. Anderson
Moving Ten (Giga) Steps to the Digital Future
, by
Adam B. Simon
Ten Things Governmental Officials Should Know About
The Illinois Governmental Tort Immunity Act
, by
Darcy L. Proctor
How Governments Can Win in Cases Before Appellate Courts – 10 Examples
, by
Ellen K. Emery
Ten Rules About Running for Local Government Office, by
Keri-Lyn J. Krafthefer
Top Ten Tools for Your Construction Project, by
Derke J. Price
Ten Steps to Creating a TIF District, by
Paul N. Keller
Ten Things Governmental Officials Don't Know About
Workers' Compensation, by
Gerald A. Granada and W. Britt Isaly
Ten Things Municipal Officials Should Know About
Local Prosecution and Ordinance Enforcement, by
Scott Puma and John Christensen
The Zoning Game in Ten Easy Lessons , by
David S. Silverman
Ten Ways Municipalities and Park Districts Can
Intergovernmentally Cooperate, by
Scott A. Puma
Ten Steps to a Closer Relationship Between Municipalities
and School Districts, by
Margaret Kostopulos
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