How does incorporating dispute resolution into a contract along with procedures to encourage transparency and collaboration among parties help
when an issue arises?
Bryan Thomas
Partner
Bradley Arant Boult Cummings LLP
Dispute provisions should be designed to encourage transparency and collaboration. In my 17 years advising on construction projects and litigating those that cannot be reasonably resolved, I have observed that those that
reach the courtroom or an arbitration panel remain unresolved because of the dispute process, the associated costs and the related leverage provided by the contractual structure of the process. My advice on the front-end is twofold: have a useful mediation provision and develop a practical fee-shifting provision to encourage real exchanges and resolution. While early non-binding dispute procedures, like DRBs, can be helpful on the largest of projects, an early mediation requirement is more practical and helpful for most projects. The key is making sure all parties are encouraged to meaningfully participate in the mediation. Thus, linking a mediation requirement with a carefully crafted fee-shifting provision can encourage mutual engagement, drive transparency and collaboration throughout the process, and ultimately lead to resolution rather than incurring the significant costs associated with fighting in the dispute process. My recommendation is to develop a fee provision that objectively requires the parties to set their own binding bar for determining the “prevailing party.” That can be achieved through the required exchange of early written offers “X” days after (or before) mediation, trial or both. Nothing can be more sobering to all parties than considering the possibility of having to pay both parties’ legal fees. Not surprisingly, most contracts that incorporate this approach result in the transparency needed for efficient and early resolution.
Timothy Woodward
Chair of the Construction Law Practice Group
Shutts & Bowen LLP
When done earnestly and with attention to detail, a stepped dispute resolution process can and often does actually result in resolving issues without lawsuits. Or, at a minimum, it will ensure the parties understand why a lawsuit was truly necessary (sometimes they are). As a trial counsel handling significant construction disputes for the last 25 years, I have seen many disputes blow up and cost the parties significant fees and energy that may have been completely avoidable but for misunderstandings as to one another’s positions. In many cases, better options exist. By requiring parties to escalate disputes internally among management personnel or to utilize a project neutral or dispute review board to address disputes on a project, it allows an opportunity for savvy,
business-minded people to step in and unemotionally evaluate the relative claims, defenses, risks and rewards. This process proves most effective when it is not merely prescribed by one party’s form contract, but rather when the parties confer during the contract formation and negotiation process and talk through what both sides think would be an effective way to deal with issues if they arise. When both parties to an agreement are invested in the process and feel like they contributed to the dispute resolution process, the probability of resolving issues improves dramatically.
Dean Thomson
Senior Shareholder
Fabyanske, Westra, Hart & Thomson PA
Contracts often require mediation as a condition before starting a lawsuit or arbitration, but more is needed if the parties want to increase the chances of mediation being successful. The contract should specify the type of
mediation they want. An increasing trend is to specify using guided choice mediation techniques. Typical mediations involve sending a statement of position to the mediator days before the scheduled session and then hoping the mediator can help the parties reach a settlement, but the typical process can often lead to impasse or just other future sessions once the parties discover what additional information they might need to actually settle their dispute. In contrast, if the parties use GCM, they will engage their mediator well in advance of the scheduled session to ensure their specific information needs are met, that all appropriate insurers are engaged and informed, and that all current impediments to settlement are known by the parties. In short, GCM is designed to ensure the
parties and their insurers are prepared for the mediation and ready to attempt to settle. With GCM, surprises and new information are kept to a minimum, and insurers have had plenty of time to evaluate the claims and set appropriate reserves. As a result, use of GCM more frequently resolves the dispute on the scheduled mediation date.
Kimber Davison
Managing Shareholder
Griffith Davison PC
Having drafted and negotiated construction contracts for three decades, the importance of clear, creative dispute resolution clauses has become increasingly prevalent and the focus of experienced construction counsel. As the costs and complexity of litigation rise exponentially due to multiple factors including increased attorney hourly rates, the cost of electronic discovery and expert witness fees, construction contract attorneys have faced the issues head on. Traditionally, only cursory review was given to standard, bare bones arbitration and litigation clauses where the focus was on venue and choice of law. The parties were not encouraged, let alone required, to resolve a dispute quickly or cost-efficiently. Beyond a skeletal addressing of how disputes would be resolved, not much thought was given to these clauses and the overall impact on the speed and cost that would be expended to resolve a dispute. In recent years, construction contract attorneys have learned from their clients and their litigation counterparts that more attention needs to be paid to issues such as: how will e-discovery be conducted and by whom, how many arbitrators will be necessary and are there any particular qualifications they should have, should mediators or arbitrators be selected in the contract, should there be agreed limits on discovery, what pre-suit dispute resolution proceedings are required beyond a traditional mediation, and will there be guidelines for the recovery of fees and costs. All of these factors can be addressed in the contract such that collaboration between the parties in working towards an early and cost-effective resolution is not only encouraged but often mandated.
What advice do you have for contractors with regard to the recently announced tariffs and contract provisions for escalations in material prices?
Anthony Byler
Partner
Cohen Seglias
The full impact of tariffs is not likely to be felt for months. And no one knows for certain whether current tariffs will be reduced or increased. In the short term, however, it is reasonable to expect that the cost of commodities and equipment are likely to continue to increase, while their availability decreases. For contractors working under fixed-price contracts, tariffs can independently make good projects losers. So, there is no better time than the present to dust off escalation clauses—which allow the contractor to recover some to most increases to material costs—that came to popularity during the pandemic. Escalation clauses should be negotiated into future contracts. For existing contracts, contractors should alert their customers to significant increases in the cost and time to secure materials, asking those increases to be treated as changed conditions because they were unforeseeable at the time of bid.
Rob Remington
National Chair, Construction Practice Group
Hahn Loeser & Parks LLP
The U.S. recently increased existing tariffs and imposed new tariffs on nearly all imports from an indiscriminate number of countries. Although the majority of these tariffs have been temporarily paused, a blanket 10% tariff is currently in effect and tariffs on Chinese imports have increased to 145%. The construction industry is among the most vulnerable to tariffs due to the kinds of goods and materials that are commonly imported and used in construction projects. Although there is no perfect solution, contractors can protect themselves through the following approaches:
Be clear about your pricing assumptions and what your pricing includes and excludes. Ensure your contract allows for price adjustments due to changes in laws and taxes. For products from countries subject to temporarily reduced tariffs, make advance purchases of materials when possible and ensure the materials clear customs and are delivered before the 90-day temporary reduction expires.Utilize pricing contingencies. For multi-year projects, consider including a price escalation clause that allows pricing to increase based on commodities, inflation, labor indexes or another mutually agreed metric.Require suppliers to have alternative sourcing or backup production capacity. Ensure clear communication with your customer and suppliers to manage expectations and fairly allocate risk. The unpredictable risks of tariffs affect everyone: owners, prime contractors, subcontractors and material suppliers.
Much like the effects of the COVID-19 pandemic, the effects of recent tariffs are outside the control of contracting parties. In order to maintain harmony and minimize costly disputes, ensure that risks are not allocated inequitably.
Mark Mercante
Construction Group Chair
Baker, Donelson, Bearman, Caldwell & Berkowitz PC
Given the unpredictable landscape that the construction industry is currently navigating on tariff-related impacts, we are strongly recommending to all clients to include discussions on the subject in all future contract negotiations. For
contractors, standard industry contracts may not adequately cover the risks of both delays and cost increases, while owners should be wary of the possibility of increased costs and contingencies being built-in to contractor pricing to cover risks that may not materialize. An open dialogue about risks and reasonable risk/cost sharing provisions can benefit all parties. For contractors that are unsure of whether your existing contracts contain provisions for tariff-related relief, we would nevertheless recommend providing prompt formal notice of potential cost and time impacts.
What are the key risks that should always be taken into consideration before
any construction contract is signed?
Joshua Levy
Partner
Husch Blackwell
Construction is inherently risky. Over the past five years, we’ve seen risks beyond anyone’s control, such as weather, civil unrest, tariffs and a pandemic. Other risks stem from human factors like inconsistent effort and quality. Key considerations for your risk management checklist include project financing stability, supply-chain disruptions, materials price escalation, equipment performance in system installations, insurance gaps like pollution coverage, pre-construction work with uncertain fees, and slow permit approvals for civil and other designs. When drafting the owner/contractor agreement, these risks should be transparently addressed so the party best positioned to manage the risk remains accountable for its impact on the project. The owner should never withhold evidence of the ability to fund the project with contingency. Parties should negotiate fair price escalation clauses that recognize the owner’s responsibility for unforeseen increases and the contractor’s responsibility to timely buyout the work. If the contractor agrees to perform preconstruction services before a full agreement is ready, a simple LOI should set forth the basis for payment. Schedules should be prepared with a realistic evaluation of the
requirements for substantial completion and the durations for design completion and permit approval. When project stakeholders review risks and assign them properly, every project enjoys the best chance for success.
Gregory Spaun
Partner
Welby, Brady & Greenblatt LLP
Many people will point to the insurance provisions, the indemnity provisions or the claims provisions, amongst others. While those must obviously be taken into consideration, there is a larger, overarching consideration these provisions (and many others) implicate: properly flowing down the risks you, as the contractor, assumed from either the owner or the general (or upstream sub) contractor. Equally important are the provisions flowing up claims and other liabilities from your downstream subcontractors so that your liability is limited to what you receive from upstream. Many contractors think that they have this covered by simply incorporating a prime or other upstream contract into their downstream contracts. Unfortunately, contractors often learn, at their peril, that incorporation by reference clauses are only sufficient to incorporate provisions relating to the scope, quality, character and manner of the work. Accordingly, the legal provisions—which are the chief provisions allocating risk—need to be tailored to match the contract in which they are found in order for risk to be fully delegated. In that regard, I often advise that even if the form of contract is relatively straightforward, it should be reviewed by counsel to ensure that the documents are properly harmonized, all risks are properly flowed down and all liabilities are properly flowed up. Otherwise, it is you that will be left holding the proverbial bag.
Lawsuits related to fatalities or injuries on a jobsite can be financially
catastrophic to a construction company. What advice do you have for
contractors to reduce their risk?
Angela Richie
Partner, Co-Chair of Construction Practice
Gordon Rees Scully Mansukhani
Over the years, I have received many early Monday morning and late Friday afternoon calls from clients reporting a fatality. While employers cannot control every action of each employee or independent contractor, there are some basic steps to mitigate risks:
1. Signed Agreements and Insurance Certificates: Before you start work, make sure you have signed written agreements and proof of insurance certificates, including the Builder’s Risk Certificate. In certain states, an indemnification claim may not be possible without a signed agreement. Additionally, gather all insurance certificates, as owners increasingly fail to purchase and maintain Builder’s Risk policies, placing the burden on your company to provide coverage.
2. Safety Program: Implement a robust safety program that is frequently reviewed with both employees and independent contractors.
3. Inspections and Enforcement: Enforce your safety program through reasonable inspections and a graduated system of enforcement, which you can demonstrate through written records. The standard of care for a controlling
employer is not to be all-knowing to prevent accidents, but you must use reasonable care to detect and prevent violations. Reduce your risk of claims by conducting periodic inspections which are reasonably tailored to the scope of work and your knowledge of the safe practices of your employees and contractors. Take action to enforce your safety rules through verbal or written warnings, as well as suspensions or terminations, based on the seriousness of the violations.
Why is it important for construction contracts to include a price escalation
provision? Absent an escalation clause that addresses unforeseen increases in materials prices, can a contract be amended?
Levi Barrett
Chair—Construction Contracts & Risk Management
Peckar & Abramson PC
A construction contract, like all contracts, is a means of allocating risks and responsibilities. As price volatility continues to present a major issue impacting construction projects, it is very important that construction contracts contemplate a framework to address the risk of price escalation. There is a popular saying among those who negotiate contracts—that a risk is best allocated to the party that can control and mitigate it. Where the risk is unknown or unquantifiable, it is generally unfair and, frankly, not commercially reasonable, for a contractor to hold 100% of that risk. To require a contractor to bear the risk of unknown concealed conditions, for example, without entitlement to an adjustment of time and compensation would, in most cases, be inequitable and commercially unreasonable insofar as the contractor would need to hold a value in the contract for an incalculable risk. The value would likely either represent a windfall to the contractor (if no such conditions were encountered) or it would be woefully insufficient (if a significant condition was encountered). Accordingly, it is almost universally accepted that the owner bears the price and schedule risk of concealed conditions which were unknown at the time the contract was entered into. The same is true with price escalation. Absent a crystal ball, the contractor cannot accurately estimate how pricing may change during the course of a job and, in that respect, it represents an unquantifiable risk. Escalation should not be ignored, and the contractor and owner should have a discussion about how to address escalation early on. Several strategies may be employed (buying/storing materials, allowances, substitutions, contingencies, etc.), but perhaps the best way to address this risk is to negotiate an escalation provision containing clear terms with respect to notice, the materials covered and a means of determining how the escalation value will be calculated. While a contract can certainly be amended to attach escalation terms or on a case-by-case basis via change order, escalation is an issue that is best addressed at the time of contract negotiation before price increases are encountered.
What should contractors consider when looking for an attorney experienced in
construction law?
Robert T. Ferguson Jr.
Partner
Hinckley Allen
There are attorneys of all kinds, and most established contractors will have collaborated with various attorneys in specific matters over the years. However, unlike countless other areas of the law, construction law is particularly unique in both its reach and breadth, encompassing dozens of other related aspects of the law. As a result, it is critical for contractors to engage well-rounded and efficient construction law counsel with an established and valuable network as well as the skill and experience set to see all the pieces of the puzzle, understand how various aspects of the law intersect, provide practical advice and deliver favorable results. A generalist will not suffice. Similarly, contractors should be careful about engaging counsel who is too specialized in too narrow an area of construction law. Effective construction attorneys regularly represent contractor clients on a host of issues, both state and federal: contract drafting/negotiation; procurement and bid protest matters; prequalification and certification requirements; permitting, development and environmental matters; regulatory and compliance matters; corporate formation, governance and planning matters; labor and employment matters; strategic project advice; government and internal investigations as well as crisis management matters, including OSHA matters; insurance recovery; claims, including lien and bond claims; and dispute resolution, including with respect to DRBs, mediations and arbitrations, as well as litigation and administrative and civil appeals, to name a few. Contractors should conduct their due diligence and interview candidates to determine the best fit for their needs.
Allen Estes III
Partner, Co-Chair Construction Practice
Gordon Rees Scully Mansukhani
When hiring a construction attorney, a contractor should consider both their immediate needs and the long-term goals for their company. Their immediate needs may include a solution to a problem—they need a lien filed to protect their
rights, they have been terminated from a project or they have a claim on an active project. Each of these needs requires particular expertise. The number one consideration is whether the attorney is familiar with the problem and has experience successfully resolving the problem—How many liens have they successfully filed and foreclosed, how many termination issues have they favorably resolved or do they regularly advise on claims? It is better to hire an
attorney who has experience resolving the problem from a variety of angles. For example: Does the attorney understand the termination arguments associated with both the contractor’s performance and the owner’s decision to terminate the contractor? If so, then the attorney can provide efficient and effective representation of the contractor which could increase the likelihood of settlement instead of protracted litigation.
With respect to long-term company goals, the contractor should consider whether the lawyer can help the contractor achieve those goals. For example, does the contractor want to expand his/her business to other states? If so, is the lawyer’s firm able to support the contractor’s growth in other states? I am fortunate to practice with construction lawyers who, as a group, are licensed in all 50 states and are trained to identify and resolve problems from all angles so that we can come up with efficient and cost-effective solutions for our clients.
Why should contractors have a knowledgeable attorney involved when entering into a contract to obtain surety bonding?
Joseph R. Young
Partner
Smith Currie Oles LLP
While contractors regularly negotiate construction contract terms, bond forms are often-times overlooked. It is common for contractors to obtain and furnish bonds in whatever form a surety provides without due consideration as to whether the bond form appropriately protects the contractor and its surety’s interests. Bonds vary widely in the construction industry and bond forms contain different terms and conditions that significantly impact the rights and obligations of the contractor and its surety. Bonds are also typically collateralized through a
general agreement of indemnity signed by the principals and individuals controlling the company, who are required to reimburse the surety for any costs incurred. Bond forms typically include specific terms and conditions defining the claimants and bond obligees that are protected by the bond, notice requirements to trigger the surety’s obligations, other conditions that must be satisfied before a surety is obligated to take action under a bond and the types of damages covered by the bond such as delay damages. As a contractor furnishing bonds on a construction project, the bond terms and conditions should be drafted in a manner that maximizes the contractor’s ability to maintain control and complete the project without triggering the surety’s obligations (and the principal’s indemnity obligations). It is imperative that the bond terms and conditions be
closely scrutinized to protect against a surety taking over a contractor’s obligations, after which the contractor loses the ability to control costs and fulfill its contractual obligations to its client.
Can statements made during a mediation process later be used in an arbitration process?
Wm. Cary Wright
Shareholder
Carlton Fields PA
Generally, no. Mediations are intended to be confidential so that parties can lay all their cards on the table without concern that their statements will later be used against them in trial or arbitration. Although the various states treat
mediations a little differently, from east to west, they uniformly uphold this bedrock principle. For example, under section 44.405, Florida Statutes, “All mediation communications shall be confidential. A mediation participant shall not disclose a mediation communication to a person other than another mediation participant or a participant’s counsel.” The statute also outlines civil remedies for improper disclosure, including equitable relief, compensatory damages, attorney’s fees, mediator’s fees and related costs. There are limited exceptions to the mediation privilege. One such exception is when all parties agree to waive the privilege or where mediation communications are used to commit or conceal a crime or threaten violence. There is no exception for arbitrations. California has a similar mediation privilege in section 1119 of its Evidence Code, making all mediation-related communications inadmissible and not subject to discovery. The goal is the same: to foster an atmosphere of trust and cooperation, which is essential for a successful mediation. However, notwithstanding the mediation of privilege, if a party learns of something during a mediation, it is not prohibited from obtaining the same information through the normal discovery process. So, one should still use prudence and common sense in the information it discloses at mediation.
What is the difference between a provision for liquidated damages and a
provision for mitigation of damages? When should each or both be included in a project contract?
William B. “Ben” Westcott
Managing Co-Shareholder
Andrews Myers PC
Liquidated damages are an upfront estimation of the damages that will be caused by a contractor’s failure to complete the project in a timely manner. Mitigation of damages refers to a party’s express or implied obligation to
minimize the losses resulting from a breach of contract (or other wrongful act). Both concepts should be addressed in almost every meaningful construction contract. Why? Liquidated damages when properly scaled and measured serve to give a predictable assessment of the consequences of delays. Important considerations include mapping out, calculating and documenting future/predictable possible delay damages. Other considerations include circumstances where liquidated damages should not be considered the sole remedy, such as when the contractor intentionally abandons and/or refuses to
complete the project and whether or not the owner should retain the right to direct the contractor to accelerate completion efforts to minimize the delays to completion. This acceleration concept folds well into the discussion of mitigation of damages as often times the contractor’s mitigation efforts will minimize the delay damages suffered by the owner. There’s little downside to an owner or a contractor, providing an express obligation to mitigate damages, especially in circumstances where one party is in control of the situation. Examples of this include timely responses to request for information, time extension and change order requests. A more nuanced approach to the mitigation and damages would include inserting the phrase “reasonable and necessary” in connection with any provision that allows one party to recover damages from the other, such as an owner’s right to supplement the contractor’s performance in the event of a default.
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