Leveling the playing field between owners and contractors

May 5, 2010
One of the riskiest and most unfair practices in construction is the ability of owners to force contractors to front all the cost of extra work, and then make them file claims and lawsuits to be reimbursed.

I met with a client this week who was encountering difficult soil conditions while laying sanitary sewer pipe. What he encountered was very different than what was shown on the soil borings, which had been made part of the contract documents. In fact, he encountered a landfill that he believes is full of old tires, paint cans and contaminated water in all the voids. It will be expensive to move and may involve toxic substances. It will slow down the job, and he worries about nasty fluid leeching onto his jobsite. We discussed the fact that if the owner started working on removing the materials now, there would be less impact on his work, which means less time and cost for all. Although he thought that the owner understood this, we agreed that he should formally put it in writing. He did, citing all the right paragraphs of his contract.

What he got back was a letter from the engineer saying that the owner did not believe that there were such differing materials — or if there were, they were being greatly exaggerated — so the owner wasn't going to address this until he had to. The engineer ordered the contractor to keep track of what was encountered and what was spent, and make a claim later if the contractor wanted to. As a result, my client is going to have to hire geotechnical engineers to do tests to document what it is encountering, advance all the money of dealing with the conditions and then wage a legal battle to get the money back. There is no way my client will come out whole.

One of the riskiest and most unfair practices in construction is the ability of owners to force contractors to front all the cost of extra work, and then make them file claims and lawsuits to be reimbursed. Contractors are not banks, and generally the interest that they have to pay to borrow funds is not recoverable. I have represented many owners, too, and I fully understand their side of it. If they really, in good faith, believe that the work is not "extra," they should not be blackmailed by a contractor into paying for it in order to keep the job from just stopping while the owners, designers and contractors have a trial. Unlike many other industries, time is almost always a critical factor in construction projects.

So, in commercial, industrial and government contracting, the scale seems (at least to me) to generally be tipped in favor of the owner on this issue. Is there any fair way to find middle ground? I don't know of a perfect solution, but some ideas that could help to make things better are as follows:

  • Share the cost of "extra" work: The Design Build Institute of America includes in its general conditions a provision that if the contractor is directed to do work that it maintains is not within its scope, the owner will advance 50% of the "reasonable estimate" of the value of the work, so that the two parties have the same skin in the game, so to speak. The Associated General Contractors ConsensusDOCS contains this same concept. Of course, people can play games with what the "reasonable estimate" should be, and it only gets the contractor half-way, but it at least it is a recognition that the way we've done things in the past is not fair and disincentives an owner from just demanding things without a lot of serious consideration.
  • Retain an arbitrator, review board: In the past, the idea of having an arbitrator "on call" to settle disputes quickly was just a pipedream except on huge, mega-projects such as airports or subways, because it meant that the parties had to acknowledge, up front, that there would likely be enough disputes to warrant it; and it meant that they (or someone) had to pay money to keep a third party up to speed on the job just in case he or she was needed. Obviously, this won't work on small projects, but there is no reason a way can't be fashioned to scale it down. For example, it may be possible to find a retired judge or lawyer or designer who will get copied on documents for a flat fee, and be available to meet with the parties and make a decision on the spot.
  • Pay interest: I am talking about the cost of borrowing funds here — not just the interest on a court judgment. There is no reason that you can't write into a contract that if the contractor has to borrow money (or use its own funds, for that matter) to pay for extra work, that it should be reimbursed for that as part of its costs. The parties could agree on a rate in advance, such as prime plus two or three points.
  • Pay attorney's fees: Some state laws already provide for attorney's fees to be paid to the "prevailing party," but in those that don't you are always free to add this to the contract. It might not prevent owners from ordering you to do extra work, but it often gets you paid faster, because they don't want you running up legal fees that they might have to pay.

None of these ideas will take away the risk of being required to do extra work, but the more level the playing field, the less room there is for abuse by either side.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].

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