The ever-increasing demand for healthcare services has brought a boom in construction. These projects, including new hospitals and specialty care centers and expansions of existing facilities and systems, present a distinct mix of operational pressure and legal complexity. These projects often involve complex phasing, tight schedules, demanding specifications, and work that can impact ongoing healthcare operations. The legal risks are not confined to typical construction disputes and handling them effectively requires careful consideration and planning relative to how the contracts are structured and administered.

Based on common issues seen across a variety of healthcare construction projects, the following 10 areas are where an ounce of prevention can yield a pound of cure for owners.

1. Hidden assumptions and clarifications

Contractor proposals frequently include assumptions, clarifications, or exclusions, often in the form of an “Assumptions and Clarifications” list or document. These may be incorporated into the contract, sometimes as exhibits, and can override negotiated contract terms if not carefully reviewed and aligned.

Typical risk areas include: overuse of allowances, including critical scope items; shift of permit or insurance responsibility to the owner; shift of risk for material price increases; allocation of risk for site conditions (e.g., groundwater, dewatering, utility conflicts); and gaps between subcontractor scopes.

Protection strategies include: requiring early review by the full development team, including the owner’s representative; avoiding incorporation of these documents into the contract by reference where possible; and if incorporated, confirming provisions establishing the order of precedence among the various contract documents to match the intended risk allocation.

2. Consequential and liquidated damages

Healthcare projects often involve significant downstream impacts such as loss of use, delayed occupancy, or financing consequences. Most construction contracts include mutual waivers of these sorts of consequential damages, typically accompanied by liquidated damages for delays.  For the owner, the goal is to ensure there are meaningful remedies if the project is delayed.

Key considerations are: identifying what damages are being waived (for both owner and contractor); carefully drafting liquidated damages provisions to ensure enforceability; evaluating whether liquidated damages provide an adequate remedy; and considering carve-outs for insurance, indemnity, and misconduct.

3. Design errors and risk allocation

Design gaps and coordination failures remain common sources of disputes in healthcare construction. When contractors build to owner-provided plans, the owner may effectively bear responsibility for design adequacy. When there are design problems, the owner can end up in the middle of a “two-front” dispute against both the contractor and the designer.

Risk management includes: reviewing liability limitation provisions in design agreements; confirming professional liability insurance coverage and limits; avoiding overly broad owner representations or warranties; and preserving rights against designers early where issues emerge.

4. Delays and force majeure

Force majeure delays — that is, delays outside of either party’s control—are common in construction, and recent issues ranging from supply chain instability to labor shortages have highlighted the importance of carefully negotiating and clearly drafting provisions to address these delays. Ambiguity often causes disputes when projects are disrupted.

Best practices include: limiting relief to schedule extensions (“time, not money”) where appropriate; clearly defining qualifying events to reduce ambiguity; enforcing notice requirements strictly; and using preconstruction to identify long-lead materials and mitigate delay risk.

5. Changes and claims management

Construction contracts anticipate change. Change orders and construction change directives allow work to proceed while pricing and schedule impacts are resolved, but they often generate disputes if not managed carefully. Unresolved changes are a leading driver of claims and cost overruns.

To manage this process effectively: define the method for equitable adjustments during contract negotiation; seek agreement on scope and pricing contemporaneously where possible; require contractors to continue performance despite disputes; and understand that executed change orders may operate as “accord and satisfaction.”

6. Notice and dispute procedures

Contractual notice provisions are critical for keeping owners informed about issues that arise and claims as they develop. They can also be key owner protections, as a contractor’s failure to comply with notice requirements can result in waiver of claims.

To reduce risk: draft practical and clear notice provisions; train project teams on compliance requirements; monitor notice obligations throughout a project’s life cycle; and document any intentional deviations from contractual procedures.

7. Warranty and closeout

Healthcare facilities usually incorporate highly integrated systems and involve extremely sensitive operations, so it’s critical for owners to have warranty protection for both construction work and installed products. Proper handling of warranty obligations and documentation during construction and at project closeout is important.

Key considerations include: negotiating warranty scope and duration carefully; considering the difference between correction-of-work obligations and warranty obligations; ensuring both correction and warranty obligations flow down to subcontractors; requiring full warranty documentation as part of close-out deliverables; and tracking timelines for asserting warranty claims.

8. Liens and payment risk

Contractors, subcontractors, and even designers may assert liens if payment disputes arise. These claims can complicate financing and delay completion. Early attention to lien risk helps prevent escalation into more costly disputes.

Effective risk management includes: requiring lien waivers with each payment application; verifying receipt before releasing funds; considering joint check arrangements; and acting promptly to address invalid or excessive liens.

9. Insurance coverage gaps

Failure to procure required insurance can shift substantial risk back to the owner. To ensure that insurable risks are properly allocated as the parties contemplate, it is important to pay close attention to the insurance requirements. They should be realistic, enforceable, and actively verified.

Best practices include: engaging insurance advisors before finalizing contract requirements; confirming what coverage is commercially available; reviewing certificates, endorsements, and policy terms prior to construction; and following up during the project to ensure ongoing compliance.

10. Cumulative impact claims

Cumulative impact or “ripple effect” claims allege lost productivity resulting from multiple project changes. These claims are often difficult to quantify and can significantly increase project costs. They are best addressed through disciplined project administration and documentation.

To manage exposure: include strong waiver language in change orders; avoid broad reservation-of-rights provisions; maintain active owner involvement throughout the project; and monitor staffing, sequencing and project coordination in real time.

Conclusion

Across healthcare construction projects, legal risk rarely arises from a single issue. Instead, it develops through the interaction of contract language, project execution, and evolving conditions over time. By engaging early and carefully, insisting on clarity in contract documents, and remaining actively involved throughout project delivery, counsel can significantly reduce disputes and improve outcomes.

Evan Brown is a Stoel Rives LLP associate and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7512 or evan.brown@stoel.com.

Bart Reed is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7568 or bart.reed@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither of the authors nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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Most construction contracts include provisions detailing how and when a contractor must provide notice of claims, or events that may lead to future claims, for additional compensation and/or time. These contract provisions are intended to ensure that all project parties have sufficient information to make decisions in the face of unexpected events, conditions, delays, impacts, and the like, and to facilitate the resolution of claims at the project level rather than in the courts or arbitration. But in some cases, they can operate more like a trap for the unwary, and in others they increase the administrative complexity of the project beyond what the parties can practically accommodate. As such, it is critical that all parties to a construction project ensure they are aware of the applicable provisions of their contract(s) and that they are able and ready to comply with those provisions when the unexpected inevitably arises. This is truer now than ever before in the wake of an epidemic and amid price fluctuations and supply chain pressures.

Although modern construction contracts typically include notice and claim provisions of one sort or another, contracts differ with respect to the formality and complexity of the provisions. Some contracts will include complicated, multistep procedures for providing initial notice of an event, condition, delay, or change to the work; following up with a preliminary claim and cost estimate; and then submitting a final claim. Some will require the contractor to formally protest decisions by the owner in writing and follow up with a written claim. The contract may include specific forms and often specify tight time frames for submittals. Often, compliance with the notice and claim procedures is a prerequisite for proceeding to formal dispute resolution, including mediation, arbitration, or litigation, and failure to comply can result in waiver of the claim.

At the project level, pressures to remain on schedule and on budget in the face of unexpected events or changes can create temptation to dispense with or curtail strict compliance with notice and claim procedures. It can be a significant administrative feat for a contractor to provide immediate formal notice of a condition it suspects may cause delay down the road and can be even more difficult to forecast the likely cost impacts. It can be burdensome and awkward to present claim notices for a project that is otherwise proceeding well. But failing to comply with notice and claim provisions can bring significant legal risk and do great damage to the working relationship between a contractor and an owner, particularly if the contractor attempts to make a claim during prosecution of the work or after completion of the project.

In Washington, the perils of noncompliance are particularly severe. For decades, Washington courts have held to the rule that parties must strictly comply with mutually agreed notice and claim provisions. In the pivotal 2003 case Mike M. Johnson, Inc. v. County of Spokane, Washington’s Supreme Court held that even where an owner has actual notice of the basis for a claim, delay, or impact, the contractor must strictly comply with formal notice and claim procedures to preserve its claims.

Courts have repeatedly upheld the rule since the Mike M. Johnson decision. Most recently, Division One of the Washington Court of Appeals issued an unpublished decision in Graham Contracting v. City of Federal Way. In that case, the contractor provided a notice of delay, but the owner decided that no additional time or compensation would be granted. The contract required that the contractor immediately submit a signed, written protest to any decisions by the owner with which it disagreed. However, the contractor waited weeks to respond. The parties attempted to reach a negotiated resolution, but when that failed and litigation ensued, the owner asserted that the contractor had waived the claims. The court held that despite the notice of delay, the protest was not timely and the contractor therefore waived its claims for additional compensation. The case underscores that, especially in Washington, compliance with contractual notice and claim provisions is crucial.

For these reasons, it is important for all parties to take stock of the notice and claim procedures in their contracts and carefully consider what steps need to be followed to ensure strict compliance. Where possible, the parties should negotiate and craft processes that fit the project and the realistic needs of the parties, taking into account the burdens imposed by the requirements. Once the ink dries on the contract, the parties need to make efforts to ensure they are prepared to follow the specified processes. Contractors and owners alike need to ensure they have sufficient administrative capacity and internal procedures in place to do what the contract requires. Too often, parties are caught flat-footed when they encounter a condition, delay, or impactful event and scramble to determine how to proceed under the contract. For all parties, going into a project with eyes wide open as to the applicable notice and claim requirements is key to both preserving and resolving claims.

Evan Brown is a Stoel Rives LLP associate and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7512 or evan.brown@stoel.com.

Bart Reed is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7568 or bart.reed@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post On notice: Why notice and claim procedures in construction contracts matter | Opinion appeared first on Daily Journal of Commerce.